The Exit Planning Executive Briefing Presented by Geoffrey S. Gallo, ChFC, CExP TR Moore & Company, PC Member of Business Enterprise Institute’s Network Of Exit Planning Professionals™ Story
Agenda • Exit Planning Collaboration – Financial Planners & TR Moore & Company • Overview of TR Moore & Company and our unique approach • Outline The Seven Step Exit Planning Process™. • Illustrate what you can be doing now to help your clients exit in style. • Next Steps together About TR Moore & Company • Hindsight is not a performance strategy! • Much more than a historical financial perspective, we play an integral role in our clients’ goals and dreams, helping them understand the state of their business and to more effectively manage it, while introducing opportunities for growth and wealth. • Said simply, we promise our clients Insight , Oversight and Foresight , while other firms continue to provide rearview-mirror hindsight.
About TR Moore & Company • Founded 1984 – Top 25 Firm – “Inside Public Accounting” Magazine • Effective July, 12, 2010 – merged with Doeren Mayhew of Troy, MI (Top 80 US CPA firm) • Provide business management, tax and accounting solutions to more than 200 companies • Industries represented among our clients include manufacturing, energy, construction, service, transportation, real estate, wholesale and retail • 45-person team in Houston, supported by 250 professionals in MI with international, national and regional business experience Affiliations – International Resources MOORE STEPHENS INTERNATIONAL • One of the world's major accounting and consulting networks with 351 independent firms and 630 offices in 98 countries. • Moore Stephens International maintains a cohesive network to ensure modern and comprehensive global services that meet standards of professionalism and deliver value in each country
Question: Which business would you buy? Company A Example : • EBITDA grows to $1 million. – Owner runs the business, systems and processes to create growth. • No real management team in place. – Sales are generated by owner. • Owner is both CEO and CFO. Company B Example : • EBITDA grows to $1 million. – Management team runs the business, systems and processes. – Management team creates efficiencies within the business. • Owner vacations four months a year. Why Exit Planning? • How much more would you pay for a business with Value Drivers, such as a strong management team, in place? • “Without a strong management team in place, sellers reduce their buyer market by at least 85%.” – Kevin Short, Managing Partner, Clayton Capital Partners (Investment Bankers) • “Without a strong management team in place, sellers can’t sell to insiders – period.” – John H. Brown, President, Business Enterprise Institute, Inc.
Planning to Maximize Goals Why don’t owners plan an orderly exit to maximize goals? • No plan to leave the business. – Owners don’t think of starting to plan to leave their businesses until “Thursday.” • Don’t know what to do. • “I’m too busy.” – If too busy to develop and implement a plan to grow, protect and preserve business value, and to develop and implement a plan to convert your life’s work into cash – – You will end up exiting on Friday disappointed. Planning to Maximize Goals • How long does it take an owner to plan and implement a plan to leave the business? • It depends on: – Owner’s Exit Objectives (what he or she wants) – Owner’s Personal and Financial Resources (what he or she has)
Planning to Maximize Goals Case #1 Case #2 • Exit Objectives: • Exit Objectives: – Exit in two years with – Exit in two years with $500K annual income. $500k annual income. • Sell the business to anyone • Sell the business to a third party • Personal and Financial • Personal and Financial Resources: Resources: – Business valued at $3 million. – Business valued at $10 million. – A strong management team – No management team exists. exists. – Cash flow is relatively flat. – Focus on growing value of the – Owner has little in non- business through Value Drivers. business investments – The M & A cycle is peaking. – Owner has $3 million in non- business investments Why Exit Planning? Exit Planning focuses value/business efforts on value that is convertible, into money.
Why Exit Planning? How Do You Get Started? • Determine where the owner is now, in relation to his or her Exit Objectives and Personal and Financial Resources. • Create a plan based on what needs to be done to achieve the stated goals. – This gives a good sense of how long the planning and implementation will take. • Implement the planning recommendations. My Client Representation Process
Ingredients of a Successful Exit • A written Exit Plan based on your objectives. • An experienced team of advisors to design and implement the plan. • Cash flow and a quantified business value. • A strong management team in place. • Time The Seven Step Exit Planning Process™ Step 1 – Identify Exit Objectives Step 2 – Quantify Business and Personal Financial Resources Step 3 – Maximize and Protect Business Value Step 4 – Ownership Transfer to Third Parties Step 5 – Ownership Transfer to Insiders Step 6 – Business Continuity Step 7 – Personal Wealth and Estate Planning
Step 1: Identify Exit Objectives “When a man does not know which harbor he is heading for, no wind is the right wind.” - Seneca
Assessment Tools • Exit Planning: 1. Owner Objectives & Financial Resources 2. Maximizing Business Value 3. Ownership Transfer 4. Business Continuity & Estate Planning • Turbulent Times: 1. Strategic Objectives 2. Maximizing & Projecting Cash Flow 3. Preserving & Protecting Value 4. Creating & Maximizing Business Value Assessment Tools
Assessment Tools
Step 1: Identify Exit Objectives Universal Objectives • How much longer do you want to work in the business before retiring or moving on? ________ years • What annual after-tax income do you want during retirement (in today’s dollars)? $________ • To whom do you want to transfer the business? – Family? – Co-Owner? – Key Employee(s)? – Outside party? – ESOP? Step 1: Identify Exit Objectives Assembling a Team of Advisors • Who is on the team? • Why is a team necessary? • How do team members work to minimize fees and costs?
Step 1: Identify Exit Objectives Role of the Insurance/Financial Advisor • Suggest appropriate type of valuation and explain high vs. low value objectives. • Participate in selection of client’s valuation advisor depending on owner's objective. • Discuss methods of reducing business value (e.g., Unfunded Non-Qualified Deferred Compensation Plan). • Opportunities: – Develop Advisory Team relationship with owner's CPA and other professionals. – Create expectation of continuous involvement as a result of meaningful input during initial meetings. Step 2: Quantify Business & Financial Resources “Beauty is in the eye of the buyer.”
Determining Value Too many business owners don’t plan, or plan without a clear understanding of the company’s value or its value drivers. The Result = Minimized Sales Price Upon Exit TR Moore & Company helps business owners calculate the estimated value of their businesses and identify opportunities to increase that value prior to exit. The Goal = Maximized Sales Price Upon Exit Determining Value
Building Value Determine After ‐ Tax Proceeds From Sales at Current Value Estimate Sufficient Proceeds for Owner/Family ? No Yes Marketing the Business for Sale Focus on Building Business Value Business Value Do owners who transfer their business to “insiders” want to receive maximum value or minimum value for their ownership interests?
Business Value That’s right... Minimum Value Case Study: Golf Unlimited, Inc. Sale of Business for Maximum Value Fair Market Value = $1,000,000 Cash Flow = $1,700,000 Buyer Seller Available Cash Flow $1,700,000 Buyer’s Purchase $1,000,000 Income Tax Payment - $700,000 Capital Gains Tax - $200,000 Total for Purchase $1,000,000 Payment for Business $800,000
Case Study: Golf Unlimited, Inc. Sale of Business for Minimum Value Fair Market Value = $300,000 Buyer Cash Flow $450,000 Income Tax - $150,000 Seller $300,000 $300,000 Cash Flow $835,000 Capital Gains Tax - $60,000 Income Tax -$275,000 Payment for Business $800,000 Case Study: Golf Unlimited, Inc. How Valuation Methods Impact Cash Needs MAXIMIZE Value MINIMIZE Value Sale for $1,000,000 Sale for $300,000 Required Cash Flow $1,700,000 Required Cash Flow $450,000 Deductible Cash from Biz $835,000 Total Cash Flow Needed $1,285,000
Step 2: Quantify Business & Financial Resources Role of the Insurance/Financial Advisor • Explain appropriate type of valuation. • Help select valuation advisor depending on owner's objective (sale to third party or transfer to insider). • Discuss methods of reducing business value (e.g., Unfunded Non-Qualified Deferred Compensation Plan). • Opportunity: – Create Preliminary Exit Plan based on first two Steps (for a fee $5,000 - $10,000). Step 3: Maximize & Protect Business Value “Making a silk purse from a sow’s ear.”
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