Business Valuation

Ameriprise Financial
Daniel J. Lensing, CRPC®
Financial Advisor
14755 No. Outer Forty
Chesterfield, MO 63017
636-534-2097
daniel.j.lensing@ampf.com
Business Valuation

September 17, 2009

Ameriprise Financial Page 2 of 20

Table of Contents
Determining the Value of Your Business .......................................................................................................... 4

What is valuation? ....................................................................................................................................4

What is the importance of determining taxable value? ............................................................................ 4

Why a valuation might be needed ............................................................................................................4

Valuation issues ....................................................................................................................................... 5

Different definitions of value .....................................................................................................................6

How do you determine the taxable value of your business? ....................................................................7

Asset Approach Valuation .................................................................................................................................9

What is it? ................................................................................................................................................ 9

When is it used? .......................................................................................................................................9

How is it used? .........................................................................................................................................9

Income Approach Valuation .............................................................................................................................. 10

What is it? ................................................................................................................................................ 10

When is it used? .......................................................................................................................................10

How is it used? .........................................................................................................................................10

Market Approach Valuation ...............................................................................................................................11

Definition .................................................................................................................................................. 11

When is it used? .......................................................................................................................................11

Comparisons can be difficult .................................................................................................................... 11

How is it used? .........................................................................................................................................12

Business Valuation Diagram ............................................................................................................................. 13

Planning for Succession of a Business Interest ................................................................................................ 14

Business succession planning--what is it? ...............................................................................................14

Transferring your business interest with a buy-sell agreement ................................................................14

Sell your business interest ....................................................................................................................... 14

Transfer your business interest through lifetime gifts ...............................................................................15

Transfer your business interest at death through your will or trust .......................................................... 16

See disclaimer on final page
September 17, 2009

Choosing the right type of succession plan ..............................................................................................16

Planning for Business Succession Checklist .................................................................................................... 17

September 17, 2009


Determining the Value of Your Business

What is valuation?
Assignment of price or dollar value

The basic concept of valuation is to determine a justifiable dollar value or price for a total or partial interest in your
closely held business. It is the process of answering the question, " How much is your closely held business
worth? " Business valuation plays a critical role in determining gift and estate tax liability and/or the appropriate
selling price for an interest. Because valuing a business is so important, you should be very careful when
selecting an appraiser.

What is the importance of determining taxable value?
Business valuation key component to estate or succession planning

Business valuation is a critical component to your estate or business succession planning. Your business may be
your largest asset, and if you plan to engage in either one of these types of planning, at some point you will need
to determine the taxable value of your business interest. An incorrect value (i.e., one that is underestimated)
could cause you to miss out on tax-saving strategies, while a value that is inflated could result in an investment of
time and money in unnecessary planning.

The IRS is very interested in taxable value

Perhaps a key reason to be concerned about the taxable value of your business is the Internal Revenue Service
(IRS), which is always on the lookout for sales at below and even above fair market value. If you sell something
for less than fair market value, the IRS could deem the transaction a combination sale and gift and charge you
gift tax on the difference between the value you received and the value the IRS calculated. Likewise, a sale at
above fair market value could be deemed a gift (subject to gift tax) from the buyer to you.

Your tax liability depends on it

The value applied to your business bears an important and direct relationship to the amount of tax you will owe,
whether it be capital gains tax resulting from a sale, gift tax on shares you have given away, or estate tax on
property you own at your death. If the value determined by the IRS is different than the value your tax was
calculated on, you (or your estate) could be liable for additional tax.

Why a valuation might be needed
May be no active market to set price

The valuation of large, publicly traded companies such as those found on the New York or the American Stock
Exchanges is usually set by the buyers and sellers in the market through active trading. This price is generally
accepted as the fair market value. With a closely held business, however, there isn't an active market for the
stock, so valuation becomes much more challenging. A determination of the value of your business should be
conducted for gift or estate tax purposes or to engage in the sale of your business.

Determine capital gain

When you sell your business, the difference between your basis and the price you receive is your capital gain.
Your gain must be reported and is subject to capital gain tax. A properly conducted business valuation can
ensure that the price at which your interest is sold represents fair market value and that your tax liability is
correct.

September 17, 2009


Sale of business to family member

You may be selling your business interest to a family member. You should be aware that the IRS tends to
carefully examine this type of sale in search of disguised gifts. If the IRS determines a higher value for your
business than the sale price you used, you might very well be liable for gift tax on the difference between the two
values. Further, it usually takes a couple of years before the IRS challenges the value, and your additional tax
liability may be compounded by accrued interest and penalties. A valuation by a qualified appraiser could avoid
this potential problem.

Sale of business to outsider

If you are planning to sell your business to a nonfamily party, you may want to receive the highest amount
possible. An independent evaluation may help you to achieve this objective while at the same time assuring the
buyer that the price being paid is fair. Without a valuation from an independent, qualified appraiser, it might be
harder to attract buyers due to the perception that the business is being overvalued by the seller. The timing and
circumstances of the sale will also have an impact on the value. A forced liquidation or sale (one where the
money is needed fast) will generally result in a lower valuation and price received.

Transfer of business under buy-sell agreement

If you have a buy-sell agreement for your business, you already have a buyer for your interest upon the
occurrence of certain events. If correctly done, your buy-sell may have been specially drafted to establish taxable
value. The terms of your buy-sell may require a periodic valuation of the business. When an interest changes
hands under the agreement, a valuation is needed for the price exchanging hands, which sets the tax basis for
the buyer and the capital gain of the seller.

Transfer of interest by gift

Part of your estate planning strategy may be to transfer your business interest by gift. Gifts of a certain size are
not subject to gift tax. In order to determine if you must pay gift tax (and, if so, how much), you need to know the
value of the gift. Any time a business interest is transferred by gift, a valuation should be conducted to document
the gift tax value and reduce the risk of the IRS changing the value of the gift upon a later audit.

Tip: Do the valuation as closely as possible to the date of the gift.

Estate tax purposes

A business valuation may be required when an owner dies. A valuation at this point can ensure that all applicable
discounts are reflected in the value. It is also of major importance in determining the estate tax liability. The last
thing your estate needs is to be subjected to an IRS audit and have poor (or no) documentation of the business
valuation used in the estate tax return. If the business has a buy-sell agreement, a valuation may be needed to
calculate the price at which the interest will be sold to the buyer named in the agreement.

Valuation issues
Appraisal versus value

An appraisal is the process of determining value and represents an opinion. The result of the appraisal analysis is
the assignment of a value based on a specific point in time. There is no one process and generally no one
definitive value for a business. It is possible for a business to have different values, depending on the purpose of
the evaluation and the interpretation of the criteria examined. Because there is no single method or definition, it is
important that the appraisal report contain a specific definition of value and the assumptions used in the analysis.

Multiple approaches to determining value

There is more than one way to approach a business valuation. The nature of the business itself may indicate that
one way is more appropriate than another, and while there are general rules, it is still more art than science.

September 17, 2009

Furthermore, appraisers are at their own discretion in determining if intangibles, fair market values or liquidation
values will be used. Appraisers using the same named approaches may use different techniques to determine the
value. As a result, sometimes multiple, independent valuations are conducted, and an average result is used. The
table below shows three common valuation methods:

Method Methodology
Income approach Value is based on expected income generation
Asset approach Value is determined on basis of business assets
Market approach Value is based on past sales of shares of this or a similar business

Valuation may be discounted

The value of certain ownership interests may be discounted (reduced), depending on certain conditions.
Sometimes, a minority stock interest in a closely held corporation is granted a discount for estate tax purposes
when it is included in the owner's gross estate. The discount is granted because the minority interest itself carries
no ability to influence corporate decisions or policy, which in turn reduces its marketability to anyone but the
controlling shareholders.

A minority interest that cannot influence policy but is large enough to represent a swing vote could have a
valuation discount disputed by the IRS.

Valuation can be disputed

A lot of factors can affect the value of a business. Disputes between taxpayers and the IRS involving the
valuation of property occur relatively frequently. To complicate things, even the IRS acknowledges that there is
no one, true, fair market value for a closely held business, so the area is open to interpretation. Moreover, not
only might the valuation be subject to dispute, but inaccurate valuations for tax purposes could be subject to civil
and criminal penalties.

Timing is important

Transactions are valued by the IRS on the date of the transfer. To reduce the chance of the IRS calculating a
value that differs greatly from the value you paid tax on, your valuation should be determined (and documented)
as closely to the transaction date as possible.

Event Valuation Date Type of Tax
Gift Date of completion of gift transfer Gift tax
Sale Date of sale Capital gains tax
Death Date of death OR alternate valuation date six months after death Estate tax

Tip: It is important to get an accurate appraisal of the value of a business interest any time the
business is transferred as a result of lifetime gift, sale, or bequest.

Different definitions of value
Fair market value

Fair market value (FMV) is the price at which property would change hands between a willing buyer and a willing
seller (who are independent, nonfamily members), where both parties have reasonable knowledge of the relevant
facts, and neither party is under any compulsion to buy or sell. This is the definition frequently used by the IRS.

September 17, 2009


Fair value

Fair value is different from fair market value, and as used here, it is different from the accounting definition. In
business valuation, fair value is a statutory standard generally applied in cases involving dissenting shareholders
and sometimes in suits involving corporate dissolution, merger, sale, or auction. The determination of fair value is
usually applied to minority interests when the minority shareholders believe they won't receive full consideration
for their shares under the merger, sale, or dissolution. The minority shareholders have their shares appraised and
receive an amount of cash equal to the fair value in exchange for the shares.

Investment value

Investment value is specific to an owner (or prospective owner) and includes consideration of factors such as the
owner's knowledge, abilities, related business interests, and expectation of earning potential and risk. A business
will likely have different investment values to different people, depending on specific factors (i.e., the value is in
the eyes of the beholder).

Intrinsic or fundamental value

Intrinsic value is a term that carries different meanings to different professionals. In some cases, it is used to refer
to fair market value, fair value, investment value, or even some other type of value. Sometimes it is used to refer
to the analysis of an investment banker, security analyst, or financial manager or analyst. The point is, this term
has several meanings and interpretations, so it is very important that any valuation including this term have a very
specific definition of its usage.

Going concern value

A going concern value considers factors specific to the business, both physical and intangible. Consideration is
given to the existing infrastructure, goodwill, reputation, trained workforce, licensing, and/or plant capabilities of
the business. The valuation is based on the assumption that the business will continue to be a viable operating
entity and as such should bear a higher value than the sum of the values of its collective assets.

Liquidation or breakup value

Liquidation value is a determination of the proceeds (net of selling costs) realized if a company ceased operating
and sold off the assets. There are two types of liquidation, and the specific situation will affect the valuation. An
orderly liquidation involves the sale of assets over a period of time to maximize proceeds. A forced liquidation, on
the other hand, means selling the assets as quickly as possible (often by auction) and often at a lower value than
might otherwise be achieved if more time were available.

Book value

Book value is an accounting term that can apply to a specific asset or an entire company. An asset's book value
equals the historical cost minus any allowances for depreciation, amortization, or unrealized losses. The book
value for a company is the shareholders' equity, calculated from the balance sheet as the excess of total assets
over total liabilities.

How do you determine the taxable value of your business?
Find a qualified appraiser

Determining the value of your business is not something you should attempt on your own, especially in light of the
fact that the IRS could challenge your valuation. There are appraisers who specialize in determining the value of
businesses. Your CPA may even be one of these specialists or know someone who is.

September 17, 2009


Don't use an old appraisal

You may have had your business appraised in the past for another purpose. As tempting as it might be, don't use
an old appraisal now. The purpose of the appraisal can affect the valuation assigned, and time can change the
factors that go into the appraisal calculation.

September 17, 2009


Asset Approach Valuation

What is it?
Under the asset approach, the fair market value for the closely held business is determined based on the value of
its assets.

When is it used?
Sometimes a business is only worth what it owns. The asset approach is used for such businesses. Generally,
these would include:

• Businesses that don't engage in significant activities, like investment or holding companies

• Businesses that are generating losses

• Businesses that are in (or will be in) liquidation

The asset approach generally isn't appropriate for an active business because the business is probably worth
more than just its assets. However, some appraisers would argue that the asset approach is appropriate where
an active business isn't using its assets to their full potential and the business would be worth more if liquidated.

How is it used?
An appraiser using the asset approach in its simplest form determines the value of the assets that the business
owns, subtracts outstanding liabilities, and concludes that the remainder is what the business is worth. Appraisers
are at their discretion in determining if intangibles, fair market values, or liquidation values will be used.
Appraisers using the same named approach may use different techniques to determine the value.

Technical Note: While there are no set definitions for the asset approach, there are some general
methods that your appraiser might use:

• Adjusted net assets method: Determine value of assets and subtract liabilities

• Adjusted book value method: Determine book value of assets, then add value of intangible assets

• Liquidation value: Determine value that assets could be sold for in a liquidation sale

September 17, 2009


Income Approach Valuation

What is it?
Under the income approach valuation, the fair market value of a closely held business is determined based on
how much income the business is expected to generate in the future.

The appraiser thinks of the business as a goose that lays golden eggs. How much would you pay for the goose?
Find out how many golden eggs the goose lays, consider the chances that the goose will stop laying eggs, and
make a valuation decision.

When is it used?
In most cases, the income a business generates is the best way of determining what the business is worth. The
income method is therefore probably the most common valuation approach, especially in valuing small, operating
businesses. Specifically, this approach is used on service businesses or other noncapital-dependent businesses.

Generally, the primary alternative to the income approach is the market approach. Some appraisers believe that
the Internal Revenue Service (IRS) prefers the market approach, especially if the business is comparable in
some way to a publicly traded business. The preference for the market approach may be motivated by the fact
that the market approach often results in a higher value.

How is it used?
In general terms, the appraiser will consider how much income the business generates now, consider the odds
that the business will continue to generate that much income in the future, and then decide how much such an
income stream is worth. Appraisers use discretion in determining which factors will be used. Appraisers using the
same named approach may use different techniques to determine the value.

Technical Note: While there are no set definitions for the income approach, there are some
general methods that your appraiser might use:

• The capitalization of earnings or discounted earnings method: Determine earnings, then capitalize
those earnings--calculating how much an investor would expect to earn on such an investment.

• The capitalization of income method: Determine some income number (possibly before-tax income,
after-tax income, net income, gross income, or operating income), multiply that amount by a
percentage that accurately anticipates growth, then determine how much money a rational investor
would invest to get that return.

• The discounted cash flow or discounted income method: Determine how much money the business will
generate in the future and discount that to its present value.

Caution: You and the IRS are most likely to disagree on the capitalization or discount rate that is
applied. This is probably because a small shift in the rate can have a dramatic difference in the fair
market value. Since there is no objectively correct rate, the best you can do is carefully select an
appraiser to decide the rate you will use.

September 17, 2009


Market Approach Valuation

Definition
Under the market approach valuation, the fair market value of the business is determined based on what people
have paid for shares of this business in the past or for shares of comparable businesses.

The appraiser tries to determine what investors in the stock market would pay for this business, based on what
they actually have paid for shares of this or a comparable company.

When is it used?
The market approach can be used for any type of business, but it will usually be appropriate only if the appraiser
can find a comparable sale. There are generally only comparable sales in two situations:

There have been recent sales of shares in the business

If shares in your company have been sold in the past, that sale might be evidence of what the business is worth.

For instance, if you bought your business last year for $500,000, it is probably logical to conclude that it is worth
around $500,000 now. Similarly, if your partner sold his one-third share of the business for $1.2 million, that is
strong evidence that your one-sixth share of the business is worth $600,000. This assumes, of course, that the
original transactions were at arm's length.

Your business is comparable to a publicly traded business

If your company has enough similarity to a company that has been sold (either in parts, in stock sales, or as a
whole in a merger or acquisition), an appraiser might conclude that the value of that company is evidence of what
your company is worth.

The market approach is very similar to the approach used to value houses. If a three-bedroom, 2,000-square-foot
house next door sells for $300,000, and a three-bedroom, 2,150-square-foot house down the block sells for
$310,000, an appraiser will logically conclude that your 2,100-square-foot three-bedroom house has a fair market
value near $310,000.

Comparisons can be difficult
The problem, of course, is that there are more differences between closely held businesses than houses. Is one
700-square-foot hamburger restaurant (Billy's Burger Barn) worth about the same as another? Is one hamburger
franchise worth about the same as another? Most experts would agree that the market approach works best with
larger closely held businesses that have the characteristics (like size and marketability) of a public company.

The difficulty in finding a public company that is comparable to a closely held company is even more pronounced,
based on several factors:

• Few public companies are as small as the average closely held business

• Taking a public company as a representative sample is probably not statistically accurate, since there
are many more (perhaps 100 times more) closely held businesses than public companies

• Many closely held businesses don't have a comparable public counterpart

• Closely held businesses aren't as diversified as public companies (which significantly increases the
risk inherent in a closely held business)

September 17, 2009

• Public companies generally don't have one majority shareholder, which is often one of the most
significant elements of a closely held business

The value of the shares of a public company may be affected by market factors not relevant to a closely held
business.

How is it used?
The guideline company method

Identify a comparable company and then use a formula (like multiple of earnings or percentage of book value) to
adjust its value to the value of the business in question. This involves discovering the guideline company's
price-to-net earnings ratio, price-to-cash flow ratio, price-to-sales ratio, and price-to-book value ratio, and using
those to determine your price. This information probably isn't available from private companies, so comparison is
usually made to public companies.

For instance, if a publicly traded clothing retailer is worth $100 million, and that amount is seven times its cash
flow, then a comparable closely held business with $100,000 in cash flow would have a value of $700,000.

The value will also have to be adjusted to take other variations, like a lack of marketability for a closely held
business, into account.

The industry method

In certain industries, experts have concluded that the value of any company in that business can be determined
by looking at a standard ratio.

For example, an expert concludes that your radio station is worth five times its annual advertising revenue. Your
radio station is therefore worth five times its $200,000 advertising revenue, or $1 million.

Actual sales

Look at recent sales of interests in a guideline business and adjust. However, the fact that most such transactions
are between family members probably makes this method unacceptable.

September 17, 2009

Business Valuation Diagram

September 17, 2009


Planning for Succession of a Business Interest

Business succession planning--what is it?
One of the important decisions a business owner must face is when and how to step out of the business--in other
words, business succession planning. Do you expect to retire from your business? Do you have a plan in place?
What would happen to your business if you were to die today? Do you have children you hope to bring into the
business? These are questions only you can answer, and your answers will lead you and your financial and legal
advisors to a course of action. When you develop a succession plan for your business you have two basic
choices: you can sell your business, or you can give it away. Once you choose to either sell or gift, you can
structure your plan to go into effect during your lifetime or at your death.

Transferring your business interest with a buy-sell agreement
You can transfer your business interest with a buy-sell agreement, a legal contract that prearranges the sale of
your business interest. It allows you to keep control of your interest until the occurrence of an event specified in
the agreement, such as your death, disability, or retirement. A buy-sell agreement can help you to solve the
problems inherent in attempting to sell a closely held business. When you structure your agreement, you can
tailor it to your needs.

With a buy-sell agreement, you choose the events requiring a sale

When you draft your buy-sell agreement, you establish the triggering events, meaning those events under which
the sale can or must happen. Common triggering events include death, disability, or retirement. Other events like
divorce or bankruptcy can also be included as triggering events under a buy-sell agreement.

A buy-sell agreement provides a ready buyer for your interest

At the occurrence of the triggering event, the buyer is obligated to buy your interest from you or your estate. The
buyer can be a person, a group (such as co-owners), the business itself, or a combination. You (or your family or
estate) are spared the task of trying to find a buyer when you are ready to sell.

Price and sale terms are prearranged

A major function of the buy-sell agreement is the establishment of the pricing mechanism for the sale of the
business interest. The payment method is typically also determined at the time the agreement is drafted. The
major sale negotiation is conducted at a time when there is no pressure to sell. This eliminates the need for a fire
sale when you retire, become ill, or die; and it may result in greater overall fairness in the deal.

A buy-sell agreement can interfere with other estate planning

Once you are bound under a buy-sell agreement, you can't sell or give your business to anyone except the buyer
named in the agreement without the buyer's consent. This could restrict your ability to reduce the size of your
estate through lifetime gifts of your business interest, unless you carefully consider and coordinate your estate
planning goals with the terms of your buy-sell agreement.

Sell your business interest
The major benefits when you sell your business interest are control and cash: you keep control of your interest or
business assets until you are ready to let go, and you decide how much or how little you want to sell.

September 17, 2009


Selling allows you to receive cash (or convertible assets) and choose the timing

When you sell your business interest or assets, you receive cash (or assets you can convert to cash) that can be
used to maintain your lifestyle or pay your estate expenses. You can choose when you want to sell--now, at your
retirement, at your death, or at some point in-between. You can sell your interest during your lifetime, and receive
cash to use for your retirement, a new business venture, or that trip around the world you've been putting off.
When done at your death, an asset sale can provide cash for your estate to use in paying your final expenses or
for distribution to your beneficiaries.

A limited market means a sale could be difficult

There is often no market for the sale of a closely held business, which could make finding a buyer for your
interest difficult. Some assets, such as equipment, may have a specialized use or a short time frame of
technological usefulness. If your business is a service business, it may be hard to find a buyer for intangible
assets such as your customer list. The level of competition in your geographic area or business field could also
affect your ability to find a buyer. When the sale occurs after your death, your family or estate may be at a distinct
disadvantage when negotiating with a potential buyer. The interested buyer can be expected to try to take
advantage of your family's need for cash to settle your estate expenses and offer a price that is below a fair
market value. A buy-sell agreement might be the solution to prevent this from happening, because it guarantees
a buyer for your interest.

Size of business interest, estate could make sale difficult

The larger the size of your business interest, the more difficult it may be to find a buyer with access to sufficient
cash or credit on short notice. In addition, the larger the size of your business relative to your entire estate, the
greater the need for cash to settle your estate expenses. Again, transferring your business interest with a buy-sell
agreement might help you to solve these potential problems. Smaller business interests are not without their own
problems. Buyers may be reluctant to purchase a minority interest because such an interest doesn't carry with it
the ability to control the business.

Transfer your business interest through lifetime gifts
You can transfer your business interest through lifetime gifts by doing just that--making gifts during your lifetime.
You can choose to make smaller gifts of portions of your business interest over a period of time or make a gift in
total at your retirement.

Lifetime gifting reduces the value of your estate and could lower your estate taxes

A lifetime gifting program removes the value of the business from your estate as you make gifts to the recipient.
The benefit to you is a reduction in the value of your total estate, thus the possibility of lower estate taxes at your
death. Not only do you remove the value of the gift itself from your estate, but you also remove the future
appreciation on the gift and taxes that would be associated with the gain.

Lifetime gifting allows you to take advantage of the annual gift tax exclusion, which may help you
reduce total gift and estate taxes

You could make gifts of unrestricted stock over a period of time by arranging the gifting program to maximize the
annual gift tax exclusion, which allows you to gift up to $13,000 (2009 figure, up from $12,000 in 2008) per donee
per year without incurring federal gift tax (although you may have to pay state gift tax). The benefit to you is a
tax-free, systematic reduction in the size of your estate. When you make gifts of portions of your stock, you
ultimately pay less total gift tax than if you made one large gift, thanks to the valuation discount.

Lifetime gifting requires you to give up part or all of your business

As you make gifts of your business interest, you might also be giving up some of your ownership control over the
business, while the recipient of the gift gains control. If you have co-owners, your relative percentage of control
will diminish. If you are the majority stockholder, it might take a long time before you are in a position of

September 17, 2009

significantly less control. If you hold equal ownership with co-owners, it may not take long before you become a
minority shareholder.

Transfer your business interest at death through your will or trust
If you wish to keep control of your business until your death and transfer your interest to someone at that time,
you could transfer your business interest at death through your will or trust. This method of business succession
can be effective when the intended receiver of your bequest is currently active in your business and would be
able to carry on the business activities.

Will provisions can authorize the continuation of your business

A will provision can direct the executor of your estate to continue your business for a specified period of time or
purpose, thus granting permission to carry out activities that otherwise may not be allowed. If the business is
continued, the executor may be held personally liable for losses of the business. Caution should be taken by
authorizing the executor to incorporate the business, which may limit liability to the activities of the continued
business. After your death, the business can be maintained until your family can take control and continued
income from your business can be provided to your family and heirs.

With a living trust, you can see your continuation plan in action

A living trust would allow you to make a revocable transfer of your business interest, providing you with the
opportunity to see your continuation plan in action while you are alive. You can see your successor management
operating the business while you are afforded continued control and input. This gives you the chance to be
completely satisfied with your decision before it becomes irrevocable at your death.

A living trust can provide income to you or your heirs

Depending upon the structure of your living trust, you may receive an income from the trust during your
retirement until your death. At your death, the business may provide income to your family or heirs or the
business can be maintained until your family or heirs can take over.

Use of a trust can be efficient and private

When you establish a living trust, it requires you to organize your property during your lifetime. In doing so, your
assets are transferred at death in an orderly fashion as you intended and not at the discretion of the court. The
use of a trust will be less expensive overall, because your assets pass from the trust directly to the people you
designate to receive them, avoiding the costly probate court process. This would be considered a private
transaction, keeping the transfer free of any publicity.

Choosing the right type of succession plan
The various succession strategies can be used to achieve specific goals for your business interest. Depending
upon your particular situation, one or more of these tools may be appropriate for you. The tricky part is, how do
you decide? Take a look at our decision tools which were created to help you analyze and compare the various
business succession strategies. Once you have narrowed down your choices, meet with your attorney and tax or
financial planner to develop your personal business succession plan.

September 17, 2009

Planning for Business Succession Checklist

General information Yes No N/A

1. Has relevant personal information been gathered?
• Personal details
• Family details
• Name of other participants in the business

2. Has personal financial situation been assessed?
• Income
• Expenses
• Assets
• Liabilities

3. If business is a separate entity, has its financial situation been
assessed?
• Type of entity (e.g., corporation, partnership)
• Income
• Expenses
• Assets
• Liabilities
• Owners' equity

4. Has professional team been assembled?
• Accountant
• Attorney
• Insurance professional

Notes:

Business succession planning basics Yes No N/A

1. Are there other owners of the business?

2. Is there a legal, written business succession plan in place?

3. Has a short-term contingency plan been prepared that maps out
procedure for the continuation of business operations?

4. Has a successor management team been chosen?

5. Have methods of retaining key employees during transition been
discussed?

6. Has plan been discussed with family members and key employees?

7. Has equalizing estate distributions to children been discussed?

8. If no business succession plan is in place, have various strategies and
goals been discussed?

September 17, 2009

Notes:

Selling a business interest Yes No N/A

1. Is selling the business to family an option?

2. If selling the business to family is an option, have financing options
been considered?
• Private annuity
• Installment sale
• Self-canceling installment note
• Buy-sell agreement
• Coordinate sale with gifts
• Family limited partnership

3. Is selling the business to nonfamily an option?
• Selling shares or assets
• Using a buy-sell agreement to sell to nonfamily
• Selling to another corporation
• Selling to an employee stock ownership plan (ESOP)

Notes:

Lifetime gifting Yes No N/A

1. Has transferring the business with lifetime gifts been considered?
• Outright gifts
• Trusts
• Charitable remainder trusts
• Transfer using another entity

Notes:

Other strategies Yes No N/A

1. Have other transfer strategies been discussed?
• Grantor retained trusts
• Retained interest

September 17, 2009

Notes:

Buy-sell agreements Yes No N/A

1. Is a buy-sell agreement an option?
• Entity purchase
• Cross purchase
• Wait and see
• Section 302 stock redemption
• Section 303 stock redemption
• One-way
• Trusteed cross purchase

2. If a buy-sell agreement is an option, have ways to fund the agreement
been discussed?
• Life insurance
• Disability insurance
• Cash
• Borrowings

Notes:

September 17, 2009

of 20

Ameriprise Financial The information contained in this material is being provided for general education
Daniel J. Lensing, CRPC® purposes and with the understanding that it is not intended to be used or interpreted
Financial Advisor as specific legal, tax or investment advice. It does not address or account for your
14755 No. Outer Forty individual investor circumstances. Investment decisions should always be made
based on your specific financial needs and objectives, goals, time horizon and risk
Chesterfield, MO 63017 tolerance.
636-534-2097
daniel.j.lensing@ampf.com The information contained in this communication, including attachments, may be
provided to support the marketing of a particular product or service. You cannot rely
on this to avoid tax penalties that may be imposed under the Internal Revenue
Code. Consult your tax advisor or attorney regarding tax issues specific to your
circumstances.

Neither Ameriprise Financial Services, Inc. nor any of its employees or
representatives are authorized to give legal or tax advice. You are encouraged to
seek the guidance of your own personal legal or tax counsel. Ameriprise Financial
Services, Inc. Member FINRA and SIPC.

The information in this document is provided by a third party and has been obtained
from sources believed to be reliable, but accuracy and completeness cannot be
guaranteed by Ameriprise Financial Services, Inc. While the publisher has been
diligent in attempting to provide accurate information, the accuracy of the information
cannot be guaranteed. Laws and regulations change frequently, and are subject to
differing legal interpretations. Accordingly, neither the publisher nor any of its
licensees or their distributees shall be liable for any loss or damage caused, or
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