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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
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