transition your life transition your business...rollover of company plan (403(b), 401(k), etc.) into...
TRANSCRIPT
TRANSITION YOUR LIFETRANSITION YOUR BUSINESS
TODAY’S AGENDA
OverviewFrank O’Shea, BerryDunn
Assessing Transition Readiness
• Financial ReadinessStephen Tall and Lauren Epstein, Acadia Trust
• Mental ReadinessFrank O’Shea, BerryDunn
• Business ReadinessGeorge Eaton, Rudman Winchell
• FinancingJay Muth, Camden National Bank
Panel Discussion: Options for Transition
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THE OWNERSHIP TRANSITION
MAKING AN IMPORTANT DECISION
For most owners, the transition of their business is a once-in-a-lifetime event
The proceeds from the transition of the business are important to most owner’s retirement plans
Demographics suggest that there will be more sellers than buyers in the marketplace
A written transition plan can:
Improve financial stability and increase business value
Provide for development of successor owners
Maintain employee and family harmony
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MAKING AN OWNERSHIP TRANSITION DECISION
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ROCG 2007 Study of 502 Companies
MAKING AN OWNERSHIP TRANSITION DECISION
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ROCG 2007 Study of 502 Companies
MAKING AN OWNERSHIP TRANSITION DECISION
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ROCG 2007 Study of 502 Companies
MAKING AN OWNERSHIP TRANSITION DECISION
6 STEPS
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Establish Exit Goals
Measure Financial Readiness
Identify the Type of Exiting Owner You Resemble
Measure Mental Readiness
Learn and Choose Your Exit Option
Understand the Value of the Option You ChooseUnderstand the Value of the Option You Choose
Execute Your Exit Strategy PlanExecute Your Exit Strategy Plan
ESTABLISH EXIT GOALS
START BY ASKING YOURSELF:
What do I want to achieve with my business transition?
What do I want my legacy to be?
How will the transition affect:
Employees, Customers, the Community?
How long will I continue to own the business and what role do I want to play?
How will I spend my time away from the business after I transition?
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FINANCIAL READINESS
What assets have I accumulated outside the business to support my post exit lifestyle?
What will my post exit lifestyle require in terms of financial resources?
What percentage of my total net worth is currently tied up in the business?
What is the financial gap to be filled from the disposition of my ownership in the business?
Will the gap be filled by my desired exit option?
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MENTAL READINESS
AM I READY TO LEAVE?
How involved am I in the day-to-day running of the business?
Do I have a plan on how I will spend my leisure time away from the business?
Do I view the business as providing a good return on invested capital, or am I more interested in the lifestyle that the business provides?
Will I be able to think clearly throughout the transition process and make clear and objective decisions?
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TYPES OF EXITING OWNER
FinancialReadiness
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Low High
Low
HighWell-off but
choose to work
Stay & Grow
Rich & Ready to Go
Get me out atHighest Price
Mental Readiness© Copyright 2012, Pinnacle Equity Solutions, Inc.
Lauren Epstein, Esq.Stephen Tall
Americans live for an average of 18.7 years after age 65 Inflation cuts the value of your money in half every 22 years. The average Social Security retirement payment is just
$1,220 a month. 46% of Americans have less than $10,000 saved for
retirement. (Employment Benefit Research Institute) 40% of baby boomers now plan to work until they die.
(AARP) There is sometimes an assumption that expenses go down
in retirement – not always true.
Early planning provides enhanced benefits
Establishing a goal with concrete action steps is important
As retirement nears, consider a three-part focus:◦ Budgeting for Retirement◦ Investments in Retirement◦ Estate and Incapacity Planning
Estimate post-Retirement Income (from all sources)◦ Social Security◦ Spousal survivor income from SS or pensions◦ Annuities◦ Cash flow from sale of business interest◦ Interest and dividends from investments◦ Pensions/IRAs ◦ Part-time employment
Estimated post-Retirement Expenses◦ Difficult to accurately forecast◦ Best Approach – detailed budget with periodic revisions◦ Rule of Thumb – about as much as you spend before retirement
Creating a Personal Balance Sheet, Income Statement and Statement of Cash Flows
Include both ordinary and necessary expenses, as well as all anticipated discretionary expenses (Trips, Activities, Hobbies, etc.)
Medical and Dental Expenses Assistance to Family Members Replacement Costs - Roof, Furnace, House Painting,
Automobiles Downsizing Costs Taxes on Retirement Distributions Long-Term Care Expenses
Impact of Spending on Investment Assets◦ A plan to maintain principal◦ Income Generation versus Total Return◦ Determination of wealth accumulation for retirement
Commonsense Ideas to Stretch Retirement Dollars◦ Reevaluate ongoing expenses to find potential savings◦ If your financial outlook is constrained, it pays to be frugal◦ Periodically maintain and update your budget – promptly
address variances, and explore ways to reduce expenses
After selling your business, keep in mind that you may have additional personal expenses. You also may lose eligibility for certain tax deductions. These expenses will need to be factored into your budget. For example:◦ Increased out-of-pocket Health Insurance costs◦ Automobile payments/insurance for vehicle that was
previously used primarily for business purposes◦ No Home Office tax deduction
Understand your goals & create a realistic plan Reevaluate current investment strategy &
understanding your options Rollover of company plan (403(b), 401(k), etc.) into
IRA (Understanding retirement distribution rules)
Social Security planning Tax planning Importance of Monitoring Simplification Investment vehicles & options
Investing to Meet Goals & Spending Requirements (Budget)
Tax Deferred vs. Tax Exempt vs. Taxable Accounts Types of Investments◦ Stocks◦ Bonds◦ Mutual Funds◦ Exchange Traded Funds◦ Alternative Investments◦ Annuities◦ Bank Products (Money Market Funds and Certificates of
Deposit)
Source: Investopedia.com
Investment decisions and strategies are based on the individual investor’s risk profile
There is no one-size-fits-all investment strategy Diversification of asset classes Risk tolerance is a personal decision, and may be based on
a variety of factors, including:◦ Age◦ Overall net worth◦ Foreseeable (and unforeseeable) needs◦ Market conditions ◦ Investing experience
Your investment strategy should not cause you anxiety or sleepless nights!
Insurance is a very effective tool to mitigate potential risk factors and decrease your personal liability for unanticipated expenses.
Measuring the type of risks that can potentially wipe you out financially:
“The greater the result of the formula, the less able an individual is to assume any given risk and the more he or she needs to insure the risk.”
Personal Financial Planning, Seventh Edition
Total amount at stake or potential liabilityRelative value of risk =
Total Wealth
A comprehensive estate plan allows you to accomplish several goals during your lifetime and after your death: Name agents to help with financial matters in the
event of your incapacity Communicate your health-care wishes Transfer your assets at death to your family, friends,
and charitable organizations in accordance with your wishes
Potentially reduce or eliminate estate taxes
Durable Financial Power of Attorney
Advance Health Care Directive
Trusts
Last Will & Testament
A financial power of attorney allows you to name an agent who has the legal authority to manage your finances and assets in the event that you are unable to do so.
An advance health care directive (medical power of attorney) allows you to name an agent who will be responsible for making health care decisions as well as ensure that your wishes are carried out regarding a variety of medical decisions, such as artificial nutrition and hydration, funeral arrangements, life support, etc.
If you do not have a Will, any assets held in your name alone will be distributed in accordance with the Maine laws of intestacy. This may or may not reflect your wishes. There are many benefits to having a Will, including: Directing the distribution of probate assets. Allowing you to make charitable gifts or other bequests. Nominating a guardian and/or conservator for a disabled
or minor child. Nominating a personal representative in the Will who will
be responsible for administering your estate.
What is a Trust?A trust is a legal arrangement where a fiduciary (Trustee) holds and administers assets for the benefit of beneficiaries. Like a person, a trust can own property such as real estate, a bank account, or investments.• Settlor/Grantor: the person who establishes and funds the trust• Trustee: the person or entity that manages and administers the
trust assets and makes distributions in accordance with the terms of the trust
• Beneficiary: the person or entity that is entitled to receive a something from the trust in accordance with its terms (e.g. receiving distributions of income/principal or using the trust assets)
What is the Purpose of a Trust?• To minimize estate tax liability• To plan for incapacity• To provide for loved ones long after your death• To protect the inheritance of a beneficiary from his or her
creditors• To provide for elderly or incapacitated beneficiaries• To carry out charitable wishes• To protect and manage real estate or other assets for
many generations
Revocable Living Trusts Testamentary Trusts Minors’ Trusts Generation-Skipping Trusts Irrevocable Life Insurance Trusts Realty (“Camp”) Trusts Supplemental Needs Trusts Charitable Remainder Trusts
Most common type of trust for married couples who have taxable estates.
During Settlor’s lifetime and capacity, revocable and amendable.
After Settlor’s death, living trust generally divides into subtrusts, usually based on estate tax law in effect at that time.
Subtrusts can be for the benefit of the surviving spouse (marital trust), and/or children (family trust).
After a “triggering event” (e.g. death of surviving spouse, children attaining a certain age) subtrust can terminate and be distributed in accordance with its terms.
Federal Estate Tax - American Taxpayer Relief Act
◦ Lifetime Gift and Estate Tax Exclusion set at $5,250,000 per person (or $10,500,000 per couple) for 2013
◦ Annually Increased for Inflation◦ Amount over the exclusion taxed at 40%◦ Allows for “Portability”◦ Permanent (allegedly?)
Maine is one of 21 states that has a separate estate/inheritance tax
In 2013, the Maine estate tax exclusion amount was increased to $2,000,000
The calculation of estate tax has also changed Maine imposes an estate tax on both residents and
non-residents of the State of Maine
Create a realistic budget for now and post-retirement. Consider all sources of income and your anticipated (and unanticipated) expenses.
Pay down debt before retirement, such as mortgages, loans, credit card debt, medical debt, etc. to reduce your expenses.
Meet with a financial advisor to discuss your long-term and short-term financial needs. Discuss your risk tolerance to develop a comprehensive financial strategy.
Meet with an insurance professional to review your property, life and health insurance needs and increase (or decrease) coverage where necessary.
Meet with an estate planning attorney who can review your current estate planning documents and suggest updates or planning opportunities.
Acadia Trust, N.A. is a national banking association chartered under the laws of the United States with a limited purpose trust charter, a wholly owned subsidiary of Camden National Corporation, and an affiliate of Camden National Bank and Camden FinancialConsultants, located at Camden National Bank. The Company does not affect transactions in securities or render personalized investment advice via this presentation or the Company’s website. Past performance may not be indicative of future results. Therefore, no current or prospective client should assume that the future performance of any specific investment, investment strategy (including the investments and/or investment strategies recommended and/or purchased by advisor), or product made reference to directly or indirectly in this presentation, will be profitable or equal to corresponding indicated performance levels.
The information in this material has been obtained from sources believed to be reliable, but its accuracy and completeness are not guaranteed. The opinions, estimates, and projections constitute the judgment of Acadia Trust and are subject to change without notice. This commentary is for information purposes only and is not intended as an offer or solicitation for the sale of any financial product or service or a recommendation or determination by Acadia Trust that any investment strategy is suitable for a specific investor. Different types of investment involve varying degrees of risk, and there can be no assurance that any specific investment will either be suitable or profitable for a client’s investment portfolio. No client or prospective client should assume that any information presented and/or made available in this presentation serves as the receipt of, or a substitute for, personalized individual advice from the advisor or any other investment professional.
Any charts, graphs or tables used in this letter are for illustrative purposes only and should not be construed as providing investment advice.
Indices are not available for direct investment. Any investment in a strategy or security designed to mimic the performance of an index will incur fees, such as management fees and transaction costs that will reduce returns. Investing involves risk and you may incur a profit or a loss. Past performance is no guarantee of future results. Diversification does not ensure a profit or guarantee against a loss. There is no assurance that any investment strategy will be successful.
Any products discussed in this presentation are not insured by the FDIC or any other governmental agency, are not deposits of orother obligations of or guaranteed by Camden National Bank, Acadia Trust, or any other bank or entity, and are subject to risks,including a possible loss of the principal amount invested. Some investment products may be available only to certain qualified investors - that is, investors who meet certain income and/or investable assets thresholds.
Third-party trademarks and brands are the property of their respective owners.
OWNERSHIP TRANSITION STRATEGIES
EXTERNAL SALE ALTERNATIVES Sell The Entire Company
“Strategic” and “Financial” buyers
INTERNAL SALE ALTERNATIVES (ALL OR PARTIAL) Leveraged Recapitalization
LBO, MBO, Recap, Stock Redemption
Gifting to Family
Employee Stock Ownership PlanTax-favored MBO/LBO
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CHOOSE YOUR EXIT OPTION
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Low High
Low
HighMBO, Gift,
ESOP
PEG Recap,ESOP, Grow Bus.,Increase Savings
Gift, Charity,ESOP, Sell
Sell Business for ‘Highest Price’
Mental Readiness
FinancialReadiness
WHAT IS VALUE?
• Benefit Stream / Rate of Return = Value
• Benefit Stream x Multiple = ValueMultiples are the inverse of a rate of return
Risk
Value
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WHAT IS BEING SOLD?
THE FORM OF THE TRANSACTION IMPACTS VALUATION
• Assets
• Equity
• 100%
• Controlling stake
• Minority stake
Net Fixed Assets Other
Liabilities
Equity
Current Assets
Other Assets
Current Liabilities
Long Term Debt
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WHAT IS BEING VALUED?
DEPENDING ON WHAT IS BEING SOLD
• Enterprise Value
• Equity Value
• Some portion of the assets
Net Fixed Assets Other
Liabilities
Equity
Current Assets
Other Assets
Current Liabilities
Long Term Debt
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APPROACHES TO VALUE
INCOME APPROACH
• Based on Company’s forecast and historic performance
• Relies on developing the appropriate rate of return
MARKET APPROACH
• Compares Company to similar sales in industry
• Relies on multiples as a proxy for risk
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LEVELS OF VALUE
Strategic Value
Financial Value, control
Synergies
Assumes control
Financial Value, minority
FinancialControlPremium
Discount forLack of Control
Nonmarketable Minority Value
Discount forLack of Marketability
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INTERESTED IN MORE?
Contact Frank O’Shea, a Principal in BerryDunn’s Tax Consulting and Compliance Group, to learn more.
[email protected] 207.541.2342Website berrydunn.comBlog berrydunn.com/firmfooting
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