Planning for Succession

1. Remodelers Advantage Planning for Succession H. Glenn Henderson CPA/CVA, ABV, AEP Henderson Edwards Wilson, LLP Certified Public Accountants

2. What is a Succession Plan? It is a plan to structure your business in such a fashion that ownership of it can be easily transferred to: a. Children/heirs b. Key employees/ESOP plans c. Third-party buyers

3. Implement plan now You can either plan to succeed or if you fail to plan you have planned to minimize the value of your business. No hurry, can implement your exit strategy in stages over 3 to 5 years and have your business and plan in good shape. But start now.

4. What type of entity are you? • C Corporation • S Corporation • Limited Liability Company • General Partnership • Limited Partnership • Proprietorship

5. C Corp • Looming double tax • Sale of assets v. sale of stock • Personal goodwill S Corp • How long? Built-in gains tax. • Sale of assets v. sale of stock • Personal goodwill

6. Separate Out Real Estate. Form LLC/Limited Partnership to own real estate • Maximize the value of your real estate • Easier to sell just the business • Establish value of lease from real estate to your business • Flexibility! Keep the real estate or leave it to child(ren) and business to other child(ren)

7. Records/Documentation. Formalize all transactions, records and update all documentation. Meeting minutes? Employment agreements? Key man coverage? Employee policy manuals? Upgrade Benefits. Copy Industry Standards for Pensions, IRA’s, benefits.

8. Banking Relationships. Establish Good Banking Relationships for yourself and potential purchasers who are key employees/heirs.

9. Systematize Operations • Establish Employee Manuals, Sales Manuals, Operation Manuals/Procedures on how to conduct every aspect of your business • This is the most important thing you can do to maximize the value of your company • Equally as important, free you up!

10. Retirement Plan Select goals for retirement and then focus on succession plan Estate Plan Design or update Estate Plan to coordinate with Retirement Plan and Succession Plan.

11. Family Businesses

12. Family Businesses • Average family business lasts 24 years • Only three out ten family businesses will last two generations! • Only one out of ten family businesses last three generations!

13. Successful Family Business Strategy “Run it like a real business” Trust among family members – essential Plan for non-participants Focus on results – job performance, achievement Neutral, non-family directors Family mission statement Step up communication inside and out Retirement planning Conflict resolution process Monitor and revise Pruning the trees Simplify – complex plans are difficult to implement

14. Plan for Retirement First, determine your retirement goal. Prepare plan to accomplish goal. Die at the helm?

15. Sell/Give to Children • Prepare children to take over • Resolve family business issues • Arms’ length transaction • Gifts • Outright sale • Cash payment or terms • Installment sale • Private annuity • Separate the buckets • Set up shareholder agreements, documents • Don’t let us destroy the deal!

16. Sell to Key Employees • Prepare key employees to take over • Provide way for key employees to purchase • Resolve family business issues • Arms’ length transaction • Outright sale • Cash payment or terms • Installment sale • Private annuity • Separate the buckets • Set up shareholder agreements, documents

17. Sell to company ESOP • Can be most advantageous way to sell company • Set up ESOP and other benefits for employees • Retain control

18. Sell to Third Party • Prepare key employees • Resolve family business issues • Outright sale • Cash payment or terms • Installment sale • Separate the buckets • Maximize price by correctly structuring and operating the same business you now have • Set up shareholder agreements, documents

19. Valuation of Your Business

20. Valuation Example Weighted Average Net Income $500,000 Gross Value Capitalization Rate 22% Gross Value $2,272,728 Marketability Discount 47.5% Fair Market Value $1,193,182

21. Marketability Discounts Closely-Held Business 15 % Business Systems 10 % Key Man/Employment Agreements 10 % Succession Plan 7.5% Financial Records 5 % Total Marketability Discount 47.5%

22. Case Study

24. Asset Protection Planning

25. Planning Scenario • Operating Business, Closely-Held • Texas Limited Partnership • S Corporation general partner • Significant appreciation potential • $3mm annual taxable income • 50/50 owners - unrelated • Age 40 • Objectives – asset protection, tax savings, succession to partner

26. Visual of Planning Scenario Operating Business 2% GP S Corp 49% LP Individual 49% LP Individual • Current Value of Business = $10 mm • Future Value = $100 mm

27. Asset Protection Planning Using Trusts Asset Protection Trusts • Asset Protection • Funded with $3mm each

28. International Planning Using Trusts and VUL Contracts Asset Protection Trust VUL Contract • Each funded $3mm • Tax deferral on investment income Nevis LLC $3mm

29. International Planning Using Trusts, VUL Contracts and BRP Asset Protection Trust Business Risk Policy VUL Contract • Asset Protection $6mm total • Tax deferral inside VUL • $1.5mm tax deduction Nevis LLC

30. International Planning Using Private Annuities 49% Limited Partner Interest Nevis LLC • Discount to FMV 40% - $3MM each • Cross-purchase of interests • Buy/sell with insurance policies • General partner interests assigned to LLC • Separate management agreement

31. Henderson Edwards Wilson, LLPCertified Public Accountants Henderson Edwards Wilson, LLP (HEW) is a Dallas-based certified public accounting firm. The firm began in September of 1987. The firm currently has three partners and eight professionals to support a dedication to quality service. HEW provides traditional services, including financial statement preparation, and tax planning and compliance. The firm also provides support in non-traditional areas such as Internal Revenue Service representation, estate planning and valuation services. Partners of the firm have been active in estate planning and compliance for over twenty-five years. As part of estate planning and compliance, the firm began to value closely-held and family-owned businesses and assets. In 1995, HEW established a separate practice area - the Valuation Consulting Division - to provide valuation services for estates and estate planning, as well as for buy/sell agreements, ESOP’s, business reorganizations and litigation support. The valuation consulting division has generated hundreds of valuations of estates, businesses and limited partnerships. The firm, through its partners, is affiliated with the American Institute of Certified Public Accountants, the National Association of Estate Planning Councils and Planners, the National Association of Certified Valuation Analysts, the American Society of Appraisers and the Institute of Business Appraisers, providing business valuation for family-owned and closely-held businesses. Engagements include such industries as manufacturing, construction, real estate, professional service, farming and ranching, and retail sales. The types of businesses valued include proprietorships, corporations and partnerships. The tax professionals of HEW will support the Valuation Consulting Division, if needed, before the Internal Revenue Service. 16660 Dallas Parkway, Suite 2400 Dallas, Texas 75248 (972)250-9959; fax (972)250-9966; www.hendersonedwardswilson.com