Global Products & Solutions Global Investment Group

Global Products & Solutions Global Investment Group

Transition by Design: Successful Succession of the Privately Held Business New Orleans Estate Planning Council May 15, 2017 Susan P. Rounds Director, Wealth Planning (310) 788-6152 (770) 912-6533 [email protected] Overview 01 A Changing Marketplace 02 Integrated Master Plan Design 03 Strategic Opportunities 04

Changing Paradigms Deutsche Bank Wealth Management Some Legends Never Die Deutsche Bank Wealth Management Used by permission. over of ABA Journal May/June 2007 Vol. 21 No. 3. Art by Max Licht Business Succession Planning. . . and Yogi Berra It's like dj vu all over again! New what ifs" on a fairly consistent basis (NAEPC past president Jordon Rosen's article in NAEPC Journal of Estate and Tax Planning) September 8, 2016 Better to wait and see? When you come to a fork in the road take it! Plan No matter which turn is taken, the path is clear Static documents interpreted in light of dynamic new law FLEXIBILITY Disinherit spouse or other beneficiaries? Youve got to be very careful if you don't know where youre going, because you might not get there!

Wealth in motion will be taxed! GIFT tax Capital gains tax deemed sale / carry over State tax regimes Source: USA Today 50 greatest Yogi Berra quotes Deutsche Bank Wealth Management 4 A Changing Marketplace Wealth Creation in the United States Percentage of Millionaire Households That Own a Private Business by Net Worth Tier 1 100% 90% 88.6% 80% 76.7% 70% 60% 50%

49.4% 40% 30% 20% 10% 0% $1 Million-$10 Million $10 Million-$50 Million > $50 Million (1) Federal Reserve 2013 Survey of Consumer Finances. Shows a 1.6% decrease overall in Holdings of Business Equity Across Tiers since 2005. Deutsche Bank Wealth Management 6 Winds of Change Business Owner Age 65+

55-64 Ownership Transition Under 55 Source: New York Times Are Baby Boomers Ready to Retire? February 11, 2011. Deutsche Bank Wealth Management Third Party Family/Trust/Other Undecided ESOP Management Source: VIP Forum 2010 Survey of Business Owners 7 Mission Critical

Issues of Greatest Importance and Difficulty for Family Businesses Low Importance/ Difficult to Achieve High Importance/ Difficult to Achieve Difficultly of Achieving 12 2 1 11 Resolving conflicts among family members who are in the business 2 Formulating a succession plan 3

Developing a strategic plan 4 Developing a retirement and estate plan 5 Ensuring that the familys core business values are maintained 6 Financial growth plan 7 Compensating family members in the business 3 6 10 9

4 1 5 8 8 9 7 Low Importance/ Easy to Achieve High Importance/ Easy to Achieve 10 11 Importance 12 Bringing family members into the business

Ensuring family members benefit from owning shares Bringing non-family executives into the business Transferring wealth and equity to family members not involved in the business Transferring wealth outside the business Source: Grant Thornton, Results of Family Business Survey Deutsche Bank Wealth Management 8 Challenges Facing Family Businesses 85% of the crises faced by the family business is focused around the issues of succession. 1 According to the Small Business Association:2 90% of Americas businesses are family owned 30% make it to 2nd generation 12% survive to 3rd 3% reach the 4th Primary reason is failure to properly structure a succession plan3 90% agree on importance of exit planning 33% have a business succession plan Only 29% feel their team of advisors is qualified to help (1) Keeping it in the Family: Business Succession Planning; Charles D. Fox IV; A.L.I.-A.B.A. (2011)

(2) Challenges in Managing a Family Owned Business; Small Business Administration (SBA.gov). (3) VIP Forum 2012 Survey of Small Business Owners Deutsche Bank Wealth Management 9 Integrated Master Plan Design Transition by default can be a real juggling act. . . Financing Strategy Competitive Strategy 3rd Party Sale MBO or ESOP Keep in Family Family Legacy

Asset Protection C, S or LLC Income Tax Liquidity & Income Needs Estate Tax Fair vs. Equal Deutsche Bank Wealth Management Management Succession Incentive

Planning 11 . . .with serious consequences Asset Protection Management Succession Keep in Family 3rd Party Sale MBO or ESOP Income Tax Family Legacy Financing Strategy Competitive

Strategy Fair vs. Equal C, S or LLC Estate Tax Liquidity & Income Needs Incentive Planning Deutsche Bank Wealth Management 12 The Drivers Business and Family Dynamics Wealth Creation

Deutsche Bank Wealth Management Wealth Preservation Strategic Vision Strategic Vision Tax, Legal, Finance Tax, Legal, Finance People and Culture People and Culture Reward Reward 13 Strategic Assessment

Business Wealth Creation Strategic Vision Tax, Legal, Finance People and Culture Rewards Business Plan Competitive Analysis Management Succession SWOT and Concentrations

Choice of Entity C, S, LLC Asset Protection and Core Assets Dividend/Profit Payout Policy Financial Statements Demographics Performance, Potential, Readiness Corporate Culture Deutsche Bank Wealth Management Attract and Retain Top Talent Targeted Incentive Exit Strategic Communication

Family Wealth Preservation Strategic Vision Tax, Legal, Finance People and Culture Rewards Legacy Wealth Transfer Philosophy Personal Financial Goals Family Business Council/Board of Advisors

Financial Stability Diversification Asset Protection Estate Tax Rules of Entry Family Participation Policy Compensation Equity/Income Fair vs. Equal Business and Family Alignment Strategic Communication 14 Final Phase: Resolve Conflicting Objectives

The owner of a family business envisions naming his son CEO. The CFOa critical employee and NOT a family memberneither likes nor respects the son. In fact, the CFO, and others, will likely quit if the son is named CEO. Business Family Strategic Vision Tax, Legal, Finance Deutsche Bank Wealth Management Strategic Vision Conflict? Tax, Legal, Finance People and Culture People and Culture Reward

Reward 15 Strategic Opportunities Know Your Numbers Prevailing Factors Amounts/Rates Valuation Options Long-Term Capital Gain Rate 20% Qualified Dividend Rate 20% Top Income Tax Rate 39.6% Annual Gift Exclusion $14,000 (Use it or lose it)

Lifetime/Death/GST Exemption Top Transfer Tax Burden Additional Tax Burden Applicable Federal Rate (AFR) February 2017 Rates Medicare Surcharge Deutsche Bank Wealth Management Strategic-Financial-Estate $5,450,000/$10,900,000 (portable) 40% $66,000/month (per $20 million @7.2%) Low by historical standards Short 1.04%; Mid 2.10%; Long 2.81% 3.8% 17 Evolution of a Business. . . .or De-evolution? Deutsche Bank Wealth Management

Chaos Alignment Start Up Red Tape 18 Strategic Opportunities: All In The Family Create Financial Stability Take some chips off the table Tax-free dividends Diversify Prepare for Management Succession Identify and groom an heir apparent Design incentive to attract/retain/reward top talent Establish Private Business Governance Model Family Business Council Board of Advisors Dividend policy Deutsche Bank Wealth Management

19 Strategic Opportunities: All In The Family Classic Freeze Valuation discounts Low AFR cycle The No Plan plan can result in additional $66,000/month in estate taxes 1! Consolidate Ownership Buy out non-optimal shareholders 3.8% Medicare surcharge Low capital gains (1) For illustrative purposes only. Deutsche Bank Wealth Management 20 Strategic Opportunities: Sale to Third Party Wear Hat of Buyer Curb appeal Assess drivers Talented and likeable managers Audited financials State of the Market

Frothy? Private equity firms now have more than $1 trillion of available capital. Expect more deals at higher prices. Fortune.com Deutsche Bank Wealth Management 21 Strategic Opportunities: Sale to Third Party Whats It Worth? Strategic vs. financial buyers EBITDA vs. adjusted EBIDTA Multiplier Industry specific Growth prospects Firm size Established financial history Earnings stability/volatility Top talent in place Owner participation Concentrations Unique vs generic product/service Strategic Positioning Its not what you get its what you keep Long-term capital gain rate still low (20%).

Bank Core Assets Real Estate Cash Deutsche Wealth Management 22 Strategic Opportunities: The Rest of the Story Other Options Internal management buy-out ESOP IPO Polishing the Apple Knowledge is power! Manage as a dual track process Plan A as chosen with Back-up Plan B Analyze value, cash flow, liquidity and risk Deutsche Bank Wealth Management 23 Changing Paradigms

Valuation Planning The Old Paradigm I know what my business is worth based on the offers I get. The New Paradigm Valuation is an art . . . and a science. Strategic Financial Estate $30 million $25 million $18 million Purpose driven Preserve confidentiality Deutsche Bank Wealth Management 25 Family Business vs. Family Wealth The Old Paradigm My grandparents started this business and I am keeping it for my kids and grandkids. The New Paradigm The business world is more complicated than it used to be. My family wants to do something else.

Control of family wealth is more critical than control of family business Opportunity cost. Would you buy your business at the same price? Deutsche Bank Wealth Management 26 Static Documents vs. Dynamic Objectives The Old Paradigm I own my business 100%, so no need for employment agreement, incentive plan or shareholders agreement. The New Paradigm I have to strategically position the business and wealth. Protect the business, my family and employees. Keep Death, disability and retirement Ownership and management continuity Establish rules of entry and family business governance Market rate vs. birthright Transition to third party Position/protect A-team players Conflicting documents Deutsche Bank Wealth Management

27 Strategic Positioning Next Steps Put Team together AEP is collaboration designation! Understand your options Learn where business and family goals are at cross-purposeand align Establish legacy for future generations Plan and fund away the estate tax obligation Deutsche Bank Wealth Management 28 Freedom of Choice More dollars to Your Businesses Deutsche Bank Wealth Management Your Family

Your Community 29 Important information As a New York State-chartered bank, Deutsche Bank Trust Company Americas is required by law, under penalty of sanctions, to ensure that securities held by it as a custodian are segregated on its books and records from the Banks own assets. In addition, internal control procedures are in place to prevent clients securities from being commingled with the Banks own assets. As an additional safeguard, the information systems that record and account for clients custodied securities are independent from the systems within the Bank which track and control the Banks proprietary assets. These segregation requirements required by law are intended to protect securities of custody clients against claims of creditors of a bank. In the event that there are cash deposits in a clients custody account, i.e. a money market deposit account, and such deposits are held within the Bank, then those deposits would be entitled to deposit insurance provided by the FDIC, subject to the limitations provided by federal law. This document is for information/discussion purposes only and does not constitute an offer, recommendation or solicitation to conclude a transaction and should not be treated as giving investment advice. The document is addressed to qualified investors only. The information contained herein is confidential and may not be reproduced or used or distributed in whole or in part without the prior written consent. The past performance of securities or other instruments does not necessarily indicate or predict future performance. Since the value of investments and income arising therefrom can fall as well as rise, the investor may get back less than was invested and no assurance can be given that any portfolio or investment described herein would yield favorable investment results. Any products mentioned herein are not FDIC insured and are not obligations of nor guaranteed by Deutsche Bank AG or its affiliates unless otherwise specified. Deutsche Bank AG, including its subsidiaries and affiliates, does not provide legal, tax or accounting advice. This communication was prepared solely in connection with the promotion or marketing, to the extent permitted by applicable law, of the transaction or matter addressed herein, and was not intended or written to be used, and cannot be relied upon, by any taxpayer for the purposes of avoiding any U.S. federal tax penalties. The recipient of this communication should seek advice from an independent tax advisor regarding any tax matters addressed herein based on its particular circumstances. This document may not be reproduced or circulated without our written authority. The manner of circulation and distribution of this document may be restricted by law or regulation in certain countries, including the United States. Persons into whose possession this document may come are required to inform themselves of, and to observe, such restrictions.

"Deutsche Bank" means Deutsche Bank AG and its affiliated companies. Deutsche Bank Wealth Management represents the wealth management activities conducted by Deutsche Bank AG or its subsidiaries. Brokerage services are offered through Deutsche Bank Securities Inc., a broker-dealer and registered investment adviser, which conducts securities activities in the United States. Deutsche Bank Securities Inc. is a member of FINRA, NYSE and SIPC. Discretionary portfolio management, banking and lending services are offered through Deutsche Bank Trust Company Americas, member FDIC, and other members of the Deutsche Bank Group. Trust and estate and wealth planning services are provided through Deutsche Bank Trust Company, N.A., Deutsche Bank Trust Company Delaware and Deutsche Bank National Trust Company. 2017 Deutsche Bank AG. All rights reserved.

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