Succession Planning and Business Valuation Post-Recession

suc·ces·sion

the process by which this happens:

the act of getting a title or right after the person who had
that title or right before they died or is no longer able or
allowed to have it

to make or cause to last indeﬁnitely.

per·pet·u·ate

Why does
this matter?
at some point the ownership is going to change to
somebody …

There’s cash
Buyers out there

You’re more conﬁdent
your future

But why does it have to
be so hard?

wicked[ real ]ONLY PROBLEMS ARE
4
PROBLEMS

•  It’s emotional
•  It’s private
•  It’s change
•  It’s risky
•  It’s scary
Opportunity
Exciting
Rewarding

What would you like to
get out of today?

SUCCESSION PLANNING &
BUSINESS VALUATION
POST RECESSION
2014

HOUSEKEEPING
• Slide deck will be posted on hni.com
• Moderated Q&A at the end, but feel free to ask questions
throughout
• Tweet @HNIRisk or using the
hashtag #hniu to win some HNI swag!

GUEST SPEAKERS
JOHN SIKORA
Partner at Weiss
Berzowski Brady LLP
TOM BAYER
Partner at
Sikich LLP
CATHY DURHAM
Shareholder at Capitol
Valuation Group

In Sheboygan:
(920) 452-8250
In Green Bay:
(920) 437-3702
6
In Madison:
(608) 257-2757
Succession Planning & Business
Planning Post-Recession
--Understanding and Increasing Business Value--
Cathy J. Durham, ASA
HNI
June 16, 2014

In Sheboygan:
(920) 452-8250
In Green Bay:
(920) 437-3702
7
In Madison:
(608) 257-2757
Just Thinking……
• Baby Boomers—1946 to 1964
• Business Owner’s Thoughts on Business
Value
• Consider employment but not investment
• Value typically overstated
• Opportunity to impact value
• Not driven by outside data

In Sheboygan:
(920) 452-8250
In Green Bay:
(920) 437-3702
8
In Madison:
(608) 257-2757
Is it Transferrable?
vs.
Year 1 Year 15

In Sheboygan:
(920) 452-8250
In Green Bay:
(920) 437-3702
9
In Madison:
(608) 257-2757
The Transferable Business
Has Two Key Characteristics
• It is not dependent on a specific individual
with skills or relationships that cannot be
transferred.
• The business generates sufficient cash
flow for BOTH market compensation and
return on investment.

In Sheboygan:
(920) 452-8250
In Green Bay:
(920) 437-3702
10
In Madison:
(608) 257-2757
S So….what’s my value?
Every business has more than one
value based on:
– Valuation Date
– Valuation Purpose
– Characterization of the Buyer

In Sheboygan:
(920) 452-8250
In Green Bay:
(920) 437-3702
11
In Madison:
(608) 257-2757
Prospect Ranking Chart
Buyers of a Business Enterprise
Highest Enterprise Value
9 Strategically Positioned Businesses
8 Diversifying Businesses
7 Competing Businesses
6 ESOPs
5 Outside Investors/Managers
4 Insider Management Group
3 Diversified Passive Investors
2 Investor/Job Seeker
1 Undiversified Passive Investors
Lowest Enterprise Value

In Sheboygan:
(920) 452-8250
In Green Bay:
(920) 437-3702
12
In Madison:
(608) 257-2757
What about……
• Those handy rules of
thumb?
–Multiple of Revenue?
–Multiple of EBIT?
–Multiple of EBITDA?

In Sheboygan:
(920) 452-8250
In Green Bay:
(920) 437-3702
13
In Madison:
(608) 257-2757
ABC v. XYZ Company
4.35 x EBITDA
• ABC Company
– High employee turnover
– 26% of revenues from one
customer
– No contracts for future
work
– Facilities at capacity
– Contracts do not allow for
surcharges
– New competitor just came
to town
• XYZ Company
– Low-no employee turnover
– 4% of revenues from one
customer
– Contracts in place for
future work
– Facilities at 60% of
capacity
– Contracts do allow for
surcharges
– Competitive landscape
unchanged

In Sheboygan:
(920) 452-8250
In Green Bay:
(920) 437-3702
14
In Madison:
(608) 257-2757
What is “value”?
Value today is the present value of
future economic benefits
 Need history and current business plan to project future
cash flows
 Need to understand risks and opportunities the business
faces Discount rate
 Cash flows are converted to present value using
capitalization rate or discount rate

In Sheboygan:
(920) 452-8250
In Green Bay:
(920) 437-3702
15
In Madison:
(608) 257-2757
Analyzing the
Business Enterprise

In Sheboygan:
(920) 452-8250
In Green Bay:
(920) 437-3702
16
In Madison:
(608) 257-2757
Business Valuation
Approaches
Income
Approach
Market
Approach
Asset
Approach

In Sheboygan:
(920) 452-8250
In Green Bay:
(920) 437-3702
17
In Madison:
(608) 257-2757
Balance Sheet Adjustment To Restated
As Reported Market Value Balance Sheet
Cash 50,000$ 50,000$
Accounts Receivable 200,000 (25,000) 175,000
Inventory 450,000 (50,000) 400,000
Plant & Equipment 750,000 1,000,000 1,750,000
Land 250,000 1,000,000 1,250,000
TOTAL ASSETS 1,700,000 1,925,000 3,625,000
Accounts Payable 100,000 100,000
Interest-Bearing Debt 500,000 500,000
Built-In Capital Gain Tax 350,000 350,000
-
TOTAL LIABILITIES 600,000 950,000
-
NET EQUITY 1,100,000$ 1,575,000$ 2,675,000$
Asset Approach to ValueAsset Approach to Value

In Sheboygan:
(920) 452-8250
In Green Bay:
(920) 437-3702
18
In Madison:
(608) 257-2757
Market Approach
Are there any comparable transactions whose data
we could apply to our subject company?
 Guideline public companies
 Comparable private transactions
 Prior transactions in the subject company

In Sheboygan:
(920) 452-8250
In Green Bay:
(920) 437-3702
19
In Madison:
(608) 257-2757
Income Approach
Two methods—
• Capitalization of earnings—only if future
will look like most recent year(s)
• Discounted future cash flows—most
detailed method for reflecting the specific
company’s expected future

In Sheboygan:
(920) 452-8250
In Green Bay:
(920) 437-3702
20
In Madison:
(608) 257-2757
Income Approach
Capitalization of Earnings
• Involves a numerator
– A single number intended to represent the future economic
benefit
• Involves a denominator
– Represents the rate of return required by the investor

In Sheboygan:
(920) 452-8250
In Green Bay:
(920) 437-3702
21
Step 1
• Identify the numerator….
ONE number that represents
the future economic benefit for
a business
In Madison:
(608) 257-2757

In Sheboygan:
(920) 452-8250
In Green Bay:
(920) 437-3702
22
In Madison:
(608) 257-2757
Normalizing the Income
Statement
As Reported Adjustments Normalized
Revenues 7,600,000$ 7,600,000$
Cost of Goods Sold 6,080,000 6,080,000
Gross Profit 1,520,000 1,520,000
Operating Expenses
Payroll 860,000 (100,000) 760,000
Payroll Taxes 77,400 (9,000) 68,400
Rent 68,000 (30,000) 38,000
Utilities 12,000 12,000
Telephone 12,000 12,000
Professional Fees 62,000 (28,000) 34,000
Interest Expense 12,000 12,000
Depreciation 24,000 24,000
Total Operating Expenses 1,127,400 (167,000) 960,400
Net Income 392,600$ 559,600$
EBITDA 428,600$ 595,600$

In Sheboygan:
(920) 452-8250
In Green Bay:
(920) 437-3702
23
Step 2
• Determine the denominator….
Represents rate of return
required by the investor for
the particular investment
In Madison:
(608) 257-2757

In Sheboygan:
(920) 452-8250
In Green Bay:
(920) 437-3702
24
Developing Equity Capitalization
Rate
Risk Free Rate 3.00
Equity Risk Premium 5.73
Industry Risk Premium .59
Size Premium 9.53
Specific Company Risk 4.00
Total Expected Return 22.85
Less long-term growth (3.00)
Capitalization Rate 19.85
In Madison:
(608) 257-2757

In Sheboygan:
(920) 452-8250
In Green Bay:
(920) 437-3702
25
In Madison:
(608) 257-2757
Capitalizing Historical
Earnings
As Reported Adjustments Normalized
Revenues 7,600,000$ 7,600,000$
Cost of Goods Sold 6,080,000 6,080,000
Gross Profit 1,520,000 1,520,000
Operating Expenses
Payroll 860,000 (100,000) 760,000
Payroll Taxes 77,400 (9,000) 68,400
Rent 68,000 (30,000) 38,000
Utilities 12,000 12,000
Telephone 12,000 12,000
Professional Fees 62,000 (28,000) 34,000
Interest Expense 12,000 12,000
Depreciation 24,000 24,000
Total Operating Expenses 1,127,400 (167,000) 960,400
Net Income 392,600$ 559,600$
EBITDA 428,600$ 595,600$
Capitalization of Net Income
Adjusted Net Income 559,600$
Divided by Capitalization Rate 19.85%
Equity Value 2,819,144$

In Sheboygan:
(920) 452-8250
In Green Bay:
(920) 437-3702
26
Discounted Cash Flow Method
Where the rubber meets the
road in business valuation
In Madison:
(608) 257-2757

In Sheboygan:
(920) 452-8250
In Green Bay:
(920) 437-3702
27
In Madison:
(608) 257-2757
Discounted Cash Flow Projections
Projections
Normalized Year 1 Year 2 Year 3
Base
Revenues 7,600,000$ 7,828,000 8,162,840 8,407,725
Cost of Goods Sold 6,080,000 6,262,400 6,450,272 6,643,780
Gross Profit 1,520,000 1,565,600 1,712,568 1,763,945
Operating Expenses
Payroll 760,000 782,800 856,284 881,973
Payroll Taxes 68,400 70,452 77,066 79,378
Rent 38,000 39,140 40,314 61,524
Utilities 12,000 12,360 12,731 13,113
Telephone 12,000 12,360 12,731 13,113
Professional Fees 34,000 35,020 36,071 37,153
Interest Expense 12,000 12,360 12,731 13,113
Depreciation 24,000 24,720 25,462 26,225
Total Operating Expenses 960,400 989,212 1,073,388 1,125,590
Net Income 559,600$ 576,388$ 639,180$ 638,355$
Change from Prior Year 3.00% 10.89% -0.13%
EBIT 571,600$ 588,748$ 651,910$ 651,468$

In Sheboygan:
(920) 452-8250
In Green Bay:
(920) 437-3702
28
In Madison:
(608) 257-2757
The Conclusion: Discounted
Cash Flow Projections
Projections
Year 1 Year 2 Year 3
Calculation of Cash Flow
EBIT 588,748 651,910 651,468
Plus Depreciation 24,720 25,462 26,225
Change in Working Cap. (35,000) (35,000) (35,000)
Cash Flows from Operations 578,468 642,372 642,693
Capital Expenditures (20,000) (20,000) (20,000)
Cash Flow to Investors 558,468 622,372 622,693
Change 11.4%
WACC 16.51%
479,331$ 458,483$ 393,717$
PV of CF to D&E Investors 1,331,531$
Perpetuity 4,747,402
Present Value of Perpetuity 3,001,694
Total PV of Invested Capital 4,333,225
Less Interest Bearing Debt ( 900,000)
Equity Value 3,433,225$

In Sheboygan:
(920) 452-8250
In Green Bay:
(920) 437-3702
29
In Madison:
(608) 257-2757
So Why Doesn’t…..
Value = Price???

In Sheboygan:
(920) 452-8250
In Green Bay:
(920) 437-3702
30
In Madison:
(608) 257-2757
Bargaining Position:
The Fulcrum of Price
• Value does not equal price
• What is the motivation of the buyer?
• What is the motivation of the seller?

In Sheboygan:
(920) 452-8250
In Green Bay:
(920) 437-3702
31
How You’ll Leave Your Business
1. Transfer the company to a family member
2. Sell the business to one or more key employees
3. Sell to key employees using an Employee Stock Ownership Plan (ESOP)
4. Sell the business to one or more co-owners
5. Sell to an outside third party
6. Engage in an Initial Public Offering
7. Retain ownership but become a passive owner
8. Liquidate
In Madison:
(608) 257-2757

In Sheboygan:
(920) 452-8250
In Green Bay:
(920) 437-3702
32
Increasing Value
Must Either….
»increase cash flows
»decrease risk
»increase future
opportunity
In Madison:
(608) 257-2757

In Sheboygan:
(920) 452-8250
In Green Bay:
(920) 437-3702
33
Pay Attention to Gross Profit Margin
• Impact of 1% improvement in Gross Profit
• Understanding why the margin is changing and manage
to protect margin:
• Increased material costs?
• Change in company’s product mix?
• Changing labor expense?
• Changing freight expense?
• Negotiated lower costs (or favorable terms) for products?
In Madison:
(608) 257-2757

In Sheboygan:
(920) 452-8250
In Green Bay:
(920) 437-3702
34
Credible and Consistent Financial
Statements
Buyers need to have confidence in the company’s financial reporting
• Settle on a chart of accounts and keep it consistent for 3-5 years
• Market Rent and Market Compensation
• Hire an outside accounting firm—compiled, reviewed, audited
• Income Statement provides evidence of a company’s ongoing flow
of business
• Balance Sheet is the foundation upon which most companies stand
– it should be solid (no Non-Operating Assets)
In Madison:
(608) 257-2757

In Sheboygan:
(920) 452-8250
In Green Bay:
(920) 437-3702
35
Top 10 Items NOT to have on a
Balance Sheet
1. The Family Farm
2. Timberlands & Wetlands
3. Unrelated Businesses
4. Private Equity Investments
5. Vacation Homes
6. Historical Resorts
7. Rental Houses
8. Apartment buildings, Strip Shopping Centers and Office Buildings
9. Art
10.Loans to Shareholders
In Madison:
(608) 257-2757

In Sheboygan:
(920) 452-8250
In Green Bay:
(920) 437-3702
36
Get Problems Resolved
• Litigation
• Problem Projects/Jobs
• Environmental Concerns
• Employee Issues
In Madison:
(608) 257-2757

In Sheboygan:
(920) 452-8250
In Green Bay:
(920) 437-3702
37
Stop Tax Planning
• Report all revenues and expenses when they
occur
• Business vs. Personal Expenses
»Tax experts estimate you will lose $3-6 in a
sale for every dollar claimed as a Business
Expense
• Eliminate owner perks
In Madison:
(608) 257-2757

In Sheboygan:
(920) 452-8250
In Green Bay:
(920) 437-3702
38
Workforce Development
Buyers look for companies where employees are knowledgeable and
committed to the strategic direction outlined by management
• Hire the best talent
• Train, document, train
• Delegate, delegate, delegate
• Determine what that talent wants
• Healthy culture – the intangible asset of “good attitudes” can be
surprisingly valuable
• Put verbal contracts with key employees in writing
In Madison:
(608) 257-2757

In Sheboygan:
(920) 452-8250
In Green Bay:
(920) 437-3702
39
Keep Re-investing
• Invest in R&D to continually update and improve product and service
lines (to gain additional or new markets share)
• Invest in Technology
• Invest in Capital Expenditures
• Consumable products – possible repeat customers
• Extending/Continuing existing customer relationships—extending
maintenance contracts/warranty
In Madison:
(608) 257-2757

In Sheboygan:
(920) 452-8250
In Green Bay:
(920) 437-3702
40
Owner’s Exit Exam
1. Are the company’s processes documented?
2. What is the quality of the company’s books and
records?
3. What is the condition of the company’s
facilities?
4. Has the company’s strategic vision been
adopted by staff?
5. Does the company have customer or supplier
concentrations?
In Madison:
(608) 257-2757

In Sheboygan:
(920) 452-8250
In Green Bay:
(920) 437-3702
41
In Madison:
(608) 257-2757
“If you don’t know the
value of your company,
I’ll steal it from you and
it will be ethical, legal and moral.
If you know the value of your
company and can justify it, I’ll be
perfectly happy to pay every nickel of
it.”
--Warren Buffett

In Sheboygan:
(920) 452-8250
In Green Bay:
(920) 437-3702
42
Cathy J. Durham
President
Capital Valuation Group, Inc.
cdurham@capvalgroup.com
608-257-2757
Website: www.capvalgroup.com
In Madison:
(608) 257-2757

Identifying and Vetting Buyers
for Your Business
Presented By Tom Bayer, CPA, CExP
Partner, Springfield, Illinois Office

4 Topics Today
» Selling to Internal Management Group
» Transitioning Away From Family Ownership
» Pros and Cons of an ESOP
» Loss of a Key Employee

Selling to an Internal Management Group
»An “insider” sale answers one of the Big
3 questions we always ask:
1. Who – who is the Buyer?
2. How Much – How much do you need
in retirement?
3. When – What is your timeframe?

»General attributes of an internal
management group
»Lack financial resources
»Lack understanding of risk
»Lack understanding of cash flow
»Expect more

» General attributes of current ownership
»Quality of life is increasingly more important
»Standard of living is high
»Significant portion of their current cash flow is
from business assets
»Significant portion of their personal wealth is
tied up in business assets
»They have taken a lot of risk

» Software sales – represented technology used in professional
services, government
» 3 key employees given opportunity to own business
» Owner Age 65
STRATEGY EMPLOYED:
» 3 key employees offered deferred compensation plans with rolling
vesting.
» Convertible to equity after 5 years.
» Growth in deferred comp based on increase in value – determined
by formula
» Corporate Owned Life Insurance (COLI) purchased as a funding
mechanism for deferred comp as well as to create liquidity for family
in event of death
Selling to an Internal Management
Group – Case Study

– 5 keys to success
» Sustainable revenue stream for exiting owners
» Necessary skill sets must remain
» Legal protections – noncompetes, compensation
agreements, real estate leases
» New owners must be financially responsible and credit
worthy for vendors, bank, other stakeholders
» Tax efficiency – find ways to make purchase price tax
deductible for both parties

Transitioning Away from Family
Ownership – Case Study
» Large Construction Company
» 3 key employees purchased some ownership – nonvoting
stock
» Current majority owners both had different ideas for their
children’s involvement – discovered during our initial
assessment process
» Key employees expected to eventually have majority
ownership and control – family members were not part of
majority
» Nepotism issue became front and center and has now
altered the path.

Ownership – common issues
» Family ownership includes both active family members and
inactive family members
» Family legacy interferes with sound business decision making
» Next generation has enjoyed the spoils without the sweat –
impacts their level of engagement in many cases
» Unwillingness to hire outside management team with
appropriate qualifications
» Board of Directors is not separate from Family Council –
these 2 entities are combined

Ownership – case study
» Large Agribusiness – services and products to agriculture producers
in Iowa and Illinois
» Family owners – 1st generation owners split the business 5 ways –
each brother and sister owned 20%.
» Each family unit would pass ownership down to next generation
» No plan for consolidating ownership.
» S Corp dividends of $3 mm per year
» 2nd generation – 21. 3rd generation – 70.
» Patriarch was content with status quo and assumed next generation
would
» Son of patriarch believed that sale of the business would be his exit
path, but didn’t want that legacy.

Transitioning away from family
business - takeaway points
» Develop a process to educate next generation on
protecting family wealth
» Seriously consider ceding management control through legal
agreement, or, selling business
» Always segregate inactive family members from having voting
control or indirect control through other legal agreement such
as real estate lease or debt agreements
» Protect key non-family employees with golden parachute or
other compensatory agreements

Pros and Cons of Employee
Stock Ownership Plans
» ESOP basics
» Qualified Plan under ERISA – 401k plans are also
Qualified Plans
» Investments within ESOP are primarily employer
securities
» ESOP Trust purchase stock from stockholders – cash
proceeds to shareholders financed from business or
debt
» Tax benefits exist for owner and Company

Why do an ESOP – pros?
» In certain fact pattern, ownership can transfer tax-free by following
rules
» ESOP can provide additional rewards to employees and serve as a
retention and recruitment tool
» Employee owners are more conscientious and focused on
increasing company value
» Many studies have been done to prove that ESOP owned
companies are more profitable and increase in value at a faster
rate
» Market for company stock created
» Keeps ownership local
» Fits best where revenue stream is consistent and there is not a lot of
volatility in business
» S Corp owned by ESOP can be very powerful

» Percent of company owned by ESOP creates a permanent liability
» Eg: Company with value of $10mm is 40% ESOP owned.
ESOP value is $4,000,000. Shares in ESOP are redeemed by
retiring employees and recycled. ESOP continues to own 40%.
As Company value grows, obligation of ESOP grows.
» Complex rules and laws create administrative costs and risk
» Year end administration and valuation
» Business volatility creates value fluctuation which can impact morale
» Retiring employees may suffer significant wealth loss if timing of
retirement is in a time of economic downturn
» ESOP contributions can be burdensome on cash flow
» Bankers and investment bankers are generally leery of ESOPs
» Does not solve leadership issues – purely a financial strategy.
Why not an ESOP - cons?

Managing the Loss
of a Key Person
» What is the reason for the loss?
» Death of key employee
» Disability or other event that precludes them from working
(arrest, other health event, etc.)
» Termination for whatever reason
» Resignation
» What key skills or relationships need to be fulfilled?
» In the case of an owner, is their a financial burden to the family?
» In the case of an owner, are their vendors or customers or
financial backers such as banks or bonding companies that will
be at risk?
» In the case of a key skill set that cannot be replaced internally, is
there a contingency plan in place?

Managing the Loss of a Key Person
» In the case of a resignation, understanding the Why
» Is there recognition that key employees need to be compensated
for current efforts but also for future retirement security?
» Are there family business issues?
» Case Study:
» Construction Company
» $10mm in Revenue
» Well compensated family members left business and started
up their own construction company using year-end bonuses
to capitalize startup
» Orchestrated exit over the course of 3 months and took
customers and jobs with them.
» Why – family resentment for owner who was taking longer
vacations in winter; belief they could earn more on their own

Managing the Loss
of a Key Person
» Planning issues to consider for key employees
» Compensation plans that include long-term compensation with
vesting schedules to encourage retention
» Legal agreements to protect trade secrets, customers,
employees in the case of a hostile exit
» Legal agreements to define other issues such as repurchase of
stock or other property from key employee
» Consider financial burdens of various scenarios such as death,
disability and the need to repurchase stock, pay final settlements
on deferred comp plans, or fund replacement costs such as
search fees or signing bonuses for replacement employees
» Consider funding stay bonuses or other costs related to
protecting the business value in time of transition

Summary – Identifying and
Vetting Buyers for Your Business
» Remember we are focused on the “Who” – who is your Buyer?
» General rules of thumb I have found
» Businesses need to review the risks around key employees and
ensure they protect themselves to retain key employees
» Larger businesses – measured in terms of transaction size – will
generally need outside investment to allow for an internal
transfer in a reasonable timeframe.
» ESOPs need to be carefully vetted – get a feasibility study and
find competent advisors that will provide the true pros and cons
» Family businesses need to develop transparency about their
succession plans and build protections to ensure family issues
do not interfere with sound business practices
» Succession planning is a process that requires periodic review
and adjustment!

Thomas E. Bayer, CPA, CExP, CSPM
Partner, Sikich LLP
3201 West White Oaks Drive, Suite 102
Springfield, Illinois 62704
Phone: 217-862-1704
Email: tbayer@sikich.com

Succession Planning & Business Valuation
Post-Recession
John A. Sikora
HNI University
June 16, 2014

Identifying Buyers for Your Business-
The Buy-Sell Agreement
• What is it?
• Agreement that controls the transfer of ownership
interests upon the occurrence of potential, uncertain
events affecting or relating to a member of the
ownership group, although on occasion the applicable
event might be one affecting or relating to others
• Sometimes referred to as redemption or cross-purchase
agreement, which is descriptive of type
66

• “Triggering events”; common examples:
• Owner desire to sell
• Death
• Disability
• Retirement
• Termination of employment
• Tailored
• So, agreement identifies potential or actual buyer for
business interests in (for the most part) “unplanned”
situations
67

• Big picture
• Closely held environment – important part of any
succession plan
• Key – It is an agreement
• Thus, as among significant owners, its typically
negotiated; for new owners, often not, and becoming
a party is frequently a condition of invitation to
ownership
• Like a will or other personal succession instrument,
buy-sell agreement requires periodic attention, and
potential modification in light of changing
circumstances
68

• “Watch outs”; Buy-sell terms residing in:
• Organizational documents
• Bylaws or like documents
• Minutes
• Title instruments
• Employment agreements
• Subscription agreements
• Other documents/statutory provisions
69

• Importance/purpose of buy-sell agreement – to
“protect”:
• Triggering event owner and his/her/its successors
• Other owners
• Business
• All of the above
• Valuable ancillary benefit of process can be to bring
focus to long term goals and objectives of owners and
prompt business planning discussions
70

• Protects the “triggering event” owner and his/her/its
successors - continued
• Provides equitable outcome for owner or
successor at time at which leverage likely lacking
• Creates market for ownership interest
▫ There is usually no ready market for the
closely held business interest
▫ Even if such a market exists, the occurrence of
the applicable triggering event may adversely
affect the ability or leverage to sell or to sell at
acceptable price
71

• Provides certainty
▫ Imposes contractual obligations to sell and to
purchase
▫ Imposes contractual conditions to sale and time
parameters for sale
▫ Establishes price or mechanism for establishing
price
▫ Establishes payment terms
▫ Provides instruments under which closing of
transaction will occur
72

• Promotes fairness and perception of fairness
▫ Triggering event owner will have been party
to negotiation resulting in buy-sell agreement
▫ Such negotiation will have occurred when
parties not adverse (or at least not as adverse
as at time of a triggering event)
▫ Such negotiation will have been “deliberate”
73

• Protects triggering event owner and his/her/its
• Provides opportunity to educate successors
regarding financial expectations/burdens
• Provides opportunity for planning regarding tax
treatment of buy out
74

• Protects the other owners
• Provides obstacle to potentially “unwanted”
ownership
▫ Strangers
▫ Successors (e.g., family members; estates;
trusts)
▫ “Disqualifiers” (e.g., parties that cannot be
owners with respect to certain entities)
▫ Other
75

• Protects the other owners – continued
• Promotes perception of fairness/confidence in
organization/retention
▫ Direct or indirect purchaser will have been
party to “non-adverse” negotiation resulting
in buy-sell obligations arising upon triggering
event
▫ Or, if not party to negotiations, because
owner is newer owner, he/she/it had
opportunity to evaluate buy-sell agreement at
the time he/she/it acquired interests
76

• Protects the other owners - continued
• Provides certainty
▫ Imposes contractual obligations to sell and to
purchase
▫ Imposes contractual conditions to sale and
time parameters for sale
▫ Establishes price or mechanism for
establishing price
▫ Establishes payment terms
▫ Provides instruments under which closing of
transaction will occur
▫ Provides contractual enforcement mechanism
77

• Protects the other owners – continued
• Promotes planning by others with respect to buy
out of ownership interests, with respect to:
▫ Cash needs
▫ Potential insurance
▫ Banking/restrictive covenants/other
documents to which potential parties are
bound
▫ Tax treatment of buy out
▫ Other
78

• Promotes the business or enterprise
• At the front end, satisfactory agreement is a
factor that facilitates business acquisitions and
combinations
• Example - deals in which seller leaves part of its
equity in the enterprise are not uncommon; such
sellers, having lost control of business enterprise,
want buy-sell protection
• Example – constituents participating in
formation of new enterprise by contribution of
property or services typically want buy-sell
protection
79

• Protects the business
• Reduces risk of “forced” sale
• Promotes orderly disposition/discourages
disruption at potentially difficult time
• Promotes planning regarding “mechanics” of
potential purchase transactions – e.g., funding,
including insurance arrangements; tax treatment
• Promotes management continuity, succession
planning
80

• Protects some or all of the above; agreements may
include other provisions such as:
• Solomon’s choice trigger
• Come along rights
• Bring along rights
• Inclusion of governance provisions
• Modification of statutory provisions
• Distribution rights
• Other
81

• Protects some or all of the above – continued
• Often vehicle that promotes business planning
discussion among owners regarding related and
unrelated issues
• Because consideration of triggering events
promotes wearing hat of business seller or buyer;
promotes looking at future; promotes
consideration of variety of things that may follow
if any of the triggering events occurs; promotes
examination of goals and objectives
82

• Some common issues relating to sale/purchase
provisions - continued
• Should the buy out be mandatory or optional?; if
optional, in favor of which party?
• Death usually mandatory
• Others typically negotiable
83

provisions – continued
• Purchase price
▫ Book value
▫ Book value with adjustments
▫ Formula
▫ Annual agreement (with appraisal or other
method if no agreement)
▫ Appraisal
▫ Adjustments/hybrids, perhaps based on trigger
▫ Other
84

• Appraisal provision
• Selection terms
• Guidance
▫ Meaning of fair market value
▫ Share of enterprise value?
▫ Discounts, premiums, adjustments?
85

• Valuation date
• End of a year
• End of a month
• Date of triggering event
• Other
• Interim income/interim distribution rights
86

• Tax treatment of payments (typically pass throughs)
• Pass through entity cut offs
• Pass through entity tax treatment
87

• Often overlooked issue, or not adequately addressed
- dealing with multiple entity structure or non-entity
ownership of business assets
• Horizontal entity structures/various asset ownership
situations common
• Should interest in all entities be purchased upon
trigger?; if so, should basis for terms be same or
different?; should options, other agreements be in
effect?
88

• Parties – less than all an option?
• Non buy-sell matters may reside in documents
▫ Governance
▫ Employment/effort related matters
▫ Noncompetition/confidentiality matters
▫ Other
89

• Summary
• It is an important part of any succession plan in the
closely held environment
• It is an agreement
• Its purpose may be to protect the interests of selling
owners, buying owners, the entity, the business or
some or all of the above
• It should receive periodic attention
90

What if business isn’t transferable?/
finding external buyers
• Sale to external buyer – desired exit strategy for some
• Particularly when there is:
• No natural (co-owner, employee, etc.) successor
• Or, lack of confidence in natural successor
• Or, lack of sufficient investment capital held by natural
successor
• Or, desire to diversify investments
• Or, desire to otherwise reduce risk
• Or, desire to liquidate investment
• Or, desire to relocate
• Or, …
91

• Isn’t any business “transferable”?; are those that are not
common?
• Aside from the unique personal service provider
enterprise, businesses in which property, rights, seller
promises or capital is or could be an income producing
factor will be transferable, at some price, in some
“structure” and on some terms
• Question will be whether that price, that structure and
those terms are acceptable
92

• What can be done to make a truly “nontransferable”
business “transferable”?
• Little or some
• Depends on whether the unique service provider
is willing to be employed by the buyer
• Does an owner of such a business really expect to
make is transferable?
93

• Finding external buyers requires evaluation of the
business with respect to areas, issues and factors that
affect buyer interest
• Helpful to discuss those areas, issues and factors in the
context of the common characterization of buyers as
either financial buyers or strategic ones (though the line
often blurs)
• The matters all potential buyers consider overlap, but
the points of emphasis of these two categories of buyers
differ
94

• For the financial buyer, its about earnings and
projections
• What do the historical financials look like?
• What do projections look like?
• What can buyer do or cause to positively affect
financial performance of the business, and improve
projected return?
• Can that be accomplished in a relatively short
period of time?
95

• And, for it, can the business operate on its own to meet
those objectives?; how strong are:
• Management team
• Sales, customer service and related functions
• Support functions
• Production abilities
• Other
96

• And, for it, what factors make achieving those objectives possible
or a risk? E.g.:
• Industry outlook
• Regional outlook
• Whether business enjoys competitive advantages in its
industry, whether those will continue and whether those can
be enhanced
• Customer issues (concentration, customer contracts, etc.)
• Supplier/vendor issues
• Employee issues
• Other
97

In Sheboygan:
(920) 452-8250
In Green Bay:
(920) 437-3702
98
In Madison:
(608) 257-2757
STOP
Is the business actually a transferable entity,
or is it a career with the
“tools of the trade”?

• Private equity
• Purchase of entire business
• Transaction in which it becomes majority owner of
business
• Common structures
• The debt issue
• What the future may hold for those who remain
involved in business after closing
99

• For the strategic buyer, the analysis asks how the target will
integrate into and improve its current company/business; its
about “synergies”; will the acquisition:
• Provide product or service lines that would be attractive
to buyer’s customers?
• Provide access to additional customers for buyer’s
products and services?
• Provide entry to new regions?
• Provide increased production capabilities?; produce
production or other economies of scale?; allow use of
buyer excess capacity?
100

• For the strategic buyer, the analysis asks how the target
will integrate into and improve its current
company/business; its all about “synergies”; will the
acquisition:
• Provide access to desirable IP?
• Eliminate or inhibit competition?
• Provide easier access to needed, desirable labor
pool?
• Bring some function “in house”?
101

• Strategic buyer somewhat less concerned than financial
buyer regarding:
• What the historical financials look like
• What seller projections look like
• Whether the business can effectively operate as a
stand alone, as some part of various functions likely
to be eliminated upon or shortly after closing
102

• Strategic buyers may include:
• Competitors
• Same industry participants
• Related industry participants
• Customers
• Suppliers/vendors
103

• Nature of potential buyers matter when planning for the
potential sale of the business and solicitation of potential
buyers
• Because it affects current behavior if external sale is
objective
• Examples/how will the following affect sale
opportunities:
• New product development/R&D expenditures
• Equipment and other purchases
• Hiring plans and decisions
• Expansion
• Other
104

• What will all potential buyers examine (each of which has
important implications for sale planning)?
• Financial statements; and “trustworthiness” of F/S;
accounting methods and practices
• Organizational and governance instruments; compliance with
same
• Legal qualifications to conduct the business
• Service/vendor contracts; length, dollar amount, benefit,
market competitiveness, assignability, enforceability
• Customer contracts; length, dollar amount, benefit, market
competitiveness, assignability, enforceability
• Working capital requirements
105

• Applicable laws/permits/compliance with laws
• Litigation/potential litigation/potential disputes
• Product or service warranties/product liability issues
• Insurance coverages/sufficiency/survival
• Employee benefits/legal compliance
• Environmental laws/compliance
• Regulatory environment/compliance
• Intellectual property/compliance/potential disputes
106

• Tax matters/compliance/surviving and successor
liabilities
• Intellectual property/compliance/potential disputes
• Ownership of property
• Sufficiency of assets for business operation
• IP/ownership/rights
• Related party arrangements/contracts
107

• What will all potential buyers examine (each of which
has important implications for sale planning)?
• Control of essential business assets/licenses/leases
• Inventory/levels/condition
• Equipment/condition
• Customer/identity/concentration/contracts
• Supplier/vendor matters
• Other
108

• “Preparation” for potential external sale should start early;
sometimes influences business judgment in period long
before transaction; E.g.:
• What contract terms should we be willing to accept?
• How should we handle controversies?
• How should our financial statements be prepared?
• What employee benefits should we provide?
• Should we expand?; add employees?
• What steps should we take to protect our IP and trade
secrets?
• What tax elections should we make?
• Other
109

• Expectation of external sale and desired time also has
implications regarding decisions such as:
• Invitations to ownership
• Buy-sell agreement terms
• Lending matters
• Entity form – new products/new assets
• Tax affected “decisions”
▫ Entity form
▫ S elections
▫ Residency
• Other
110

• If sale to external buyer is potential, wearing the
potential buyer’s “hat” and considering matters buyers
will find of interest puts business in better position to
address/capitalize on unanticipated/surprise event or
opportunity; E.g.:
• Ownership death, disability, etc.
• Unsolicited merger, acquisition (sale), acquisition
(purchase), expansion opportunity
• Investor/lender situations
• Other
111

• Selling the business in parts or selling part of the
business
• Sometimes best solution
• Sometimes only solution
• Sometimes effective part of long term succession
plan
112

• Sources of sale opportunities/external parties:
• Competitor interactions
• Industry interactions
• Supplier/customer interactions
• Business broker community
• Other advisor “disciplines”
• Other
• Process
• Strategic buyers
• Taking the business to market
113

John A. Sikora
Weiss Berzowski Brady LLP
400 Genesee Street, Delafield, WI 53018
700 North Water Street, Milwaukee, WI 53202
262-646-1528 (direct dial)
jas@wbb-law.com
114

Q&A PANEL
JOHN SIKORA
Partner at Weiss
Berzowski Brady LLP
TOM BAYER
Partner at
Sikich LLP
CATHY DURHAM
Shareholder at Capitol
Valuation Group

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Succession Planning and Business Valuation Post-Recession

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