10 MISTAKESBUSINESS OWNERS MAKEin Planning for TransitionPresented byJim KirlinTHE BENCHMARK GROUP, INC. NGA Convention January 2007

3 GoalsHELP YOU: Avoid the Common Mistakes

Manage & Protect Wealth

Create A Master Plan

BUSINESS TRANSITION1.The Integration of Lifetime Objectives with your Estate Plan.

2. Managing Value

BUSINESS TRANSITIONYOU WANT: Create a Family LegacyProtect the Family Legacy Continue the BusinessEmpower EmployeesGet Equity OutChange LifestyleGive To Charity

RESEARCH80% No Strategic Plan (N.G.A.)

60%No Succession Plan (N.G.A).

72% No Business Continuation Plan (Gallup)

68%No Strategic Plan (F.B.I.)

RISK !

30%NEXT GENERATION

12%THIRD GENERATION

BENEFITS FOR YOUMaximize Value

Minimize Taxes

3. Reduce Uncertainty

4. Preserve Family Harmony5.Ensure Survival of the Business

Control

7. Creates Options

8. Achieve your Goals

COSTS TO YOUPay Too Much in Taxes.Lose Control - Results.Risk Losing Value and Wealth.Pay Too Much in Legal Expenses.Risk Losing Valuable EEFail to Realize Goals.Impacts Generations

OBSTACLESI Have Been to My Lawyer And I Have it all Done

Illusion of a Plan

CLASSIC MISTAKES

MISTAKE #1

NO EXIT STRATEGY

CLASSIC MISTAKESEXIT STRATEGY

Key Issue:Keep or Sell?

How Do You Finance Your Exit?Impact On Value?Financial Independence Plan?

CLASSIC MISTAKESMISTAKE #2NO COMMUNICATION

Planning in a Vacuum!

No Communication

What Happens When They Return From the Funeral ?

(Does any body know what to do?)

CLASSIC MISTAKESMISTAKE #3LEAVING THE BUSINESS TO MOM

Improper Title of Assets

CLASSIC MISTAKESLeaving all to your spouse!

Can Waste $2mm Unified Credit Who gets the business? How?Conflict with Marital TrustIncrease Estate Tax

CLASSIC MISTAKESMISTAKE #4

Improperly Structured Shareholder Agreements

Classic MistakesSHAREHOLDER AGREEMENTSValuation Issues

Tax Inefficient

Russian Roulette

Terms

CLASSIC MISTAKESMistake #5

FAILURE TO PLAN FORSUCCESSION

The Ultimate Test

CLASSIC MISTAKESSuccession is a Process

Equal vs. Fair

Active & Inactive

CLASSIC MISTAKESMISTAKE #6

No Valuation Strategy

Failure to Stabilize Value

CLASSIC MISTAKESWhat is your business worth?Is it stable?The value is Relative to the Purpose

CLASSIC MISTAKESMistake #7OUTDATEDWILLS & TRUSTS

Not Executed

CLASSIC MISTAKESTax Laws &Your Business Change!

Failure To Execute:UnsignedTransfers not Completed

CLASSIC MISTAKESMistake #8Improper Ownership & Management of Life Insurance

CLASSIC MISTAKESMistake #9Lack of Liquidity& Capital

CLASSIC MISTAKESHow do you get your risk off the table?

What are your contingent liabilities?

CLASSIC MISTAKESMistake #10

NO GAME PLAN

CLASSIC MISTAKESNo master plan

Not using the tools available

Not doing enough

CLASSIC MISTAKESCASE STUDYSam Walton

Malcolm Forbes

Joe Robbie

ESTATE TAX$10 Million Estate

$3,800,000 Federal and State Tax

What will it cost you in 10 to 20 years?

MASTER PLAN 2 DecisionsWHAT IS MOST IMPORTANT TO YOU?

ELIMINATE STATUS QOU!

MASTER PLAN TEAMAttorneyAccountantFamilyManagementStrategic Advisor (QB)

MASTER PLAN #14 Basic QuestionsHow much do wealth do you want?

How much do you want the kids to have ?What tools to minimize the taxes and costs of transfer are available?Keep or Sell?

EXIT STRATEGY #2

Personal Financial Plan (Independence)

Owners Benefits ( Maximize)

BEGIN EARLY!

MASTER PLAN #3KEEP or SELL?

SUCCESSION

MANAGEMENTRetentionStrategies

MASTER PLAN #4VALUATION STRATEGYGIFT/ESTATE

SHAREHOLDERS

SALE/RECAP

MASTER PLAN #5Know Your OptionsFamilyShareholdersManagementESOPThird Party SaleCharitable Trust

MASTER PLAN #6ESTATE PLANVOLUNTARY TAX !!!!!

DEFENSIVE vs. OFFENSIVE

LIFETIME vs. DEATH

ESTATE PLANEQUITY IS A LIABILITYCoordinate with Succession Plan

Legal with the Financial

Gift $1 Million Lifetime

MASTER PLAN #7SECRET TOOLS !SHIFTDIVIDEDISCOUNTFREEZECREATEELIMINATE

SECRETSSHIFT EQUITY & RETAIN INCOME

Voting & Non Voting Shares

Sale to Trust

MASTER PLAN SECRETSGRAT

Growth to Heirs (Corp., RE)

Income to You(2, 5, 10 yrs)

No Gift Tax!!!

MASTER PLANSHIRTSLEEVES TO SHIRTSLEEVES IN THREE GENERATIONS(Proverb)

FINAL TESTCAN A FAMILY PRESERVE A BUSINESS & WEALTH FOR MORE THAN 100 YEARS?

STEPSCOORDINATE

Business Strategic Plan

Transition & Exit Strategy

Family Wealth Strategy

The Benchmark Group

The Benchmark Group, Inc.The Benchmark Group, Inc. was created explicitly to cater to the unique needs of privately-owned and family businesses.

Our mission is to help the shareholders preserve and protect the assets that they have built.

Benchmark's capabilities, experience, and services are designed to address the following areas:

Business Transfer and Succession Planning; Estate Conservation and Family Legacy Planning; and Investment Banking.

The Benchmark Group, Inc.We specialize in Business Transition for middle market companies a robust and increasingly underserved market.Private CompaniesFamily Businesses

We are committed to providing the highest quality advice and execution to clients seeking.M&A AdviceBusiness Transition StrategiesEstate Planning Services

We have unique and years of dedicated experience.The principals helped to build and manage a national Business Transition / Investment Banking firm.

The Benchmark Group, Inc.James J. Kirlin, Senior Vice PresidentJim has over 20 years of experience in providing financial services to the owners of privately held and family owned enterprises. Prior to joining The Benchmark Group Inc., he was a Senior Vice President with First Business Advisors, the investment banking arm of First Union Securities, where he was involved in investment banking and business transition consulting services and working with the owners of large privately held companies to help them with their planning. Early in his career, was one of the founding members of the Mid-Atlantic Companies, Ltd. and a Senior Vice President, where he was instrumental in the development of the investment banking and financial planning services that helped to propel Mid-Atlantic into a national prominence as a financial services firm. Jim has written articles on business transition issues and conducted numerous workshops including national seminars for the Center for Family Business at the National Grocers Association. He also serves as an advisor and faculty member of the Entrepreneurial Institute.Since graduating from the University of Maryland he has completed advanced course work in financial and estate planning for business owners at the American College. Jim is registered representative with Ameritas Investment Corp. and registered with the NASD. He holds a series 7 and a 63 securities license.He is a member of the Alliance for Corporate Wealth, the Philadelphia Vietnam Veterans Memorial Society and the US Marine Corps Scholarship Foundation.He has served in other community and charity organizations.

In the next 10 15 years there will be a transfer of enormous wealth. According to a Cornell Univ study over 10 trillion dollars of wealth will be transferred and the vast majority of that wealth is tied up in over 12 million privately held businesses. 70 % of those companies will be sold or transferred to the next generationToday we will be looking at 10 mistakes that we have seen many business owners make in planning /or not properly planning for the eventual transfer. I have 3 goals and only 3 goals today that is to help you (3 Goals)If I have done my job properly today, when you leave you will have some ideas on what issues you need to evaluate and have a clear roadmap on how to create a master plan that will meet your objectives and protect your family and protect the value of your business and wealth.At the end of today I want you to take away three things.Learn the mistakes that impact your family business and how you can lose wealth.Ideas to challenge your thinking and motivate you to review every aspect of your planning. Help you understand how to build a master plan to transfer and protect your wealth.First lets define Business TransitionWhat is itAll businesses are in transition. Someday you will decide to either keep or sell your business. The challenge is what is the best way to exit or transfer your business if you keep or sell?There are two major objectives. Integration of your lifetime plan & Managing Value so you dont lose your wealth.3 Components. Managing the business strategic plan, Succession, Exit & Transfer and the family wealth plan.Business Transition Planning is a process. It is the Integration of your lifetime objectives with your estate plan. It is about you and how you want to exit the business. The focus is on you rather than the succession or the continuation of the business or your estate plan. It is a lifetime plan

All businesses are in transition. Someday you will decide to either keep or sell your business.Business Transition Planning is a process. It is the Integration of your lifetime objectives with your estate plan. It is about you and how you want to exit the business. The focus is on you rather than the succession or the continuation of the business or your estate plan. It is a lifetime plan

Studies conducted on Family business report similar results. For example (NGA, FBI Gallup) show very consistent stats.What this tell us is there is a huge difference from what you think you have and the results you expect and what you actually have in place.The bottom line is you have a greater than average risk that your planning is not up to date and will not work as you expect.I do not care what planning you have in place today you have exposure to RISK!!!!!Thats the truth!!!!!!

Here are the typical results. There are many many reasons for these results however it is clear no matter who you are if you own a business you have to be aware of these challenges and results and you are risking the continuation of your business or potentially diminishing the value of your wealth over generations.

Transition planning is a Win Win Deal. A well designed Transition plan is a powerful and valuable business and personal planning tool. In enables you to receive the following benefits(describe each benefit)However, the failure to have a well thought out plan results in real costs to you

These are the major challenges facing business owners. Each of these overlap. Overtime they need to be coordinated with the ownership objectives and objectives of the family.Surveys tell us that most business owners have planning, Wills, trusts, agreements, bank financing etc. The question is why doesnt a family business make it to the next generation. Too many issues to discuss here but these are the key challenges they are facing.These challenges that transition and exit planning involve emotional, psychological and many complex issues. So today I have highlighted what I have found to be 10 critical mistakes that you as a business owner may be making in planning for the transition of your business

Transition planning is a Win Win Deal. A well designed Transition plan is a powerful and valuable business and personal planning tool. In enables you to receive the following benefits(describe each benefit)However, as I said there are risks. Failure to have a well thought out plan results in real costs to you.Experience has shown that business owners who plan to sell their business without a transition plan sell for less value.Worse yet, if they keep the business and do nothing and they die the value of the business falls dramatically. This can cause unexpected problems for the survivors.That is not the legacy business owners want to leave behind.

These are the major challenges facing business owners. Each of these overlap. Overtime they need to be coordinated with the ownership objectives and objectives of the family.Surveys tell us that most business owners have planning, Wills, trusts, agreements, bank financing etc. The question is why doesnt a family business make it to the next generation. Too many issues to discuss here but these are the key challenges they are facing.These challenges that transition and exit planning involve emotional, psychological and many complex issues. So today I have highlighted what I have found to be 10 critical mistakes that you as a business owner may be making in planning for the transition of your business

When asked about a family business plan for transition most owners will tell to they have it all done. Most of us do not want to talk about the end of your business career, leaving or retiring from our business. For sure most do not like to discuss what happens if we die. Do they really have it all done.? University of Conn Study of 800 family businesses found reason they did not survive was inadequate planning.However this is something many advisor and the clients families hear over and over Often we find they feel a will , a trust and some life insurance will fix their planning. Nothing could be further from the truth. While there are some truly gifted family business planning attorneys most plans are built around a will and trusts that may not fit the financial plan of the business or your personal estate. They ignore other issues such as contingencies for divorce, the financial planning for the owner and your spouse, the continuation plan of the business and much moreIt ignores all of the changes that are occurring or the mistakes that could have been made with your current plan.The concepts we are about to cover are not pie in the sky. They are lessons and strategies we have learned not only from our work with many family businesses but learned from successful family businesses such as the Dupont's, Forbes, Walton's who have invested thousands in legal and to her fees with the very best advisors to save them millions and in some cases Billions. The m mistakes are classic and the strategies are ideas that are based upon dozens of court cases where the tax payer won and the IRS lost.

Lets take a minute before we look at the solutions to examine these classic mistakes. The 10 mistakes I find even highly successful people like you make over and over.The first mistake is not having an exit strategy.Business owners sometimes build traps by not having an exit strategy for their business. They feel invincible and procrastinate on making decisions or a plan .The best time to develop an exit strategy is in your late 50s to early 60s. Having an exit strategy does not always mean retirement. If you are like most of my clients you are thinking about how to stay productive; maybe do some other things that will permit you to work on the business instead of in the business. However, we are talking her about having a plan to deal with family and financial issuesThe concepts we are about to cover are not pie in the sky. They are lessons and strategies we have learned not only from our work with many family businesses but learned from successful family businesses such as the Dupont's, Forbes, Walton's who have invested thousands in legal and to her fees with the very best advisors to save them millions and in some cases Billions. The m mistakes are classic and the strategies are ideas that are based upon dozens of court cases where the tax payer won and the IRS lost.

Lets take a minute before we look at the solutions to examine these classic mistakes. The 10 mistakes I find even highly successful people like you make over and over.The first mistake is not having an exit strategy.Business owners sometimes build traps by not having an exit strategy for their business. They feel invincible and procrastinate on making decisions or a plan .The best time to develop an exit strategy is in your late 50s to early 60s. Having an exit strategy does not always mean retirement. If you are like most of my clients you are thinking about how to stay productive; maybe do some other things that will permit you to work on the business instead of in the business. However, we are talking her about having a plan to deal with family and financial issuesOver and over studies have shown that most difficulties in planning can be traced to a lack of communication. Most of you have firm ideas about how your business operates and who is capable of managing the business or who or how the ownership should be divided.In complex businesses like your more people have to know and understand how things should be done if your not here. They should also know your plans for succession, and your decisions to keep or sell your business under a variety of contingencies.Think about your business. What would happen today..if your not here. Very often we find the plans and goals were never shared on the goals for the business, who is to get the business, where the information is located. So the family is really often in the dark. So it becomes a hunt for information.Let me give you a project. Go home a try to gather all of your data in a day or week? Do you know he details of your planning. How the company is to be owned,management. Need two plansContingency and a lifetime plan. Your will is not enough. What strategies do you have in place that will make sure the banker will continue to finance? How will your wife get incomeMistake # 2 Not Sharing information/No Communication.Most estate plans leave the stock outright or in trust to the spouse, usually the wife. This is standard planning because of the unlimited marital deduction. Dad agrees because he wants hiswife to have the income and security of owning the company. Problems: This is a power issue How control is transferred is critical 1. how do they get the business to the children 2. They have transferred the equity and growth----if the business grows in value they have exposed the estate to estate taxes . This is a defensive plan and will cost you moneyFinally Joint property is a common problem. They may not work . You may have too much in joint title and that is not estate tax efficient.This is complex stuff. There are two major issues. By giving the business to your wife 100% you may lose benefit of the unified Credit of $2mm. That cost you $900,000. At your death.Then you get a second wallop if your spouse dies. You have loaded the estate for the estate tax. How power and control is transferred is critical.A Martial Trust sometime has language that requires the stock in the marital trust to provide income or it will not qualify Third, how will your children get the business? If she has to sell will she be in a position to vote the shares and get the deal done?Using a series of trusts.that by formula allocate wealth in a manner that takes advantage of this growing exemption you can save your heirs about $500,000 not including what you can save in estate tax.What happens if a partner/shareholder active or inactive wants to force the company to redeem their shares or wants to retire?What do you do you have 2 or 3 families that own the business. Should they be bought out at the death of an owner? How do they keep their stock in the family? What happens if a shareholder dies? What if his stock goes to his wife? Will she be entitled to S Distributions or a salary? What do you do if she wants to work in the company? Improperly drafted agreements are a major problem. Agreements we review are not well thought out. Many are canned..not custom. Valuations in the agreement can be very expensive. A high valuation can inflate the value of the estate. The purchase of stock is an after tax expense.Often they dont take advantage of discounts. Over inflated valuation may cost more to redeem by he company or individual.There are more creative methods to structure and fund agreements.So that is mistake # 4Succession is the ultimate test for the survival of the business. Parents may have children in management but power sometimes is not transferred until death. Once the transfer is made the business becomes a part of the family legacy. It then is an engine to generate wealth through generations. What they do to manage and control the business is criticalIt is not an event but a process. The sooner you begin the better it is. It involves transfer of ownership and management. Do you have a plan to cover the contingency. However, today there are a variety of options available for a family to keep the business. Is the next generation capable? Do they have the skills sets and the desire to continue the business. What about your management team.However, waiting too long to begin the process is a mistake. So that is mistake # 5 Waiting too long and failing to plan for succession

Succession is the ultimate test for the survival of the business. Parents may have children in management but power sometimes is not transferred until death. Once the transfer is made the business becomes a part of the family legacy. It then is an engine to generate wealth through generations. What they do to manage and control the business is critcalIt is not an event but a process. The sooner you begin the better it is. It involves transfer of ownership and management. Do you have a plan to cover the contingency. However, today there are a variety of options available for a family to keep the business. Is the next generation capable? Do they have the skills sets and the desire to continue the business. What about your management team.Equal distribution & transfer to inactive children/family are usually a proble. The inactives want to knw where their income is from the business. They are not interested in what the business needs for growth.However, waiting too long to begin the process is a mistake. So that is mistake # 5 Waiting too long and failing to plan for succession

Valuaation is critical to your planning. Value drives all of your decisions.You can choose the range of values in which you want you business to transfer. However, you need to understand the purpose of your valuation. You must be careful. There is no one right answer.Without a clear understanding of each potential value of your business you are jeopardizing a lot of your planning.Is it Stable? What is it worth if you die or become disabled or key management leave? What have you done to protect its value to keep them, make sure they do not leave if your son or daughter takes over the business.The point is it is impossible to make informed decision relative to estate planning, gifting, estate tax or an exit plan without understanding value.For example what is the tax cost of gifting the shares to my children?What should the value be for a shareholders agreement?If you had to sell how much is he business worth? So not understanding your value options is a fundamental mistake. This should be a cornerstone of your planning.Family, Business and tax laws change. We find many clients have not updated their Wills or that their documents are not current with their business or personal situation. Very often the documents have not been properly executed.This is a very common mistake unsigned documents, or outdated documents that do not take advantage of the current tax law. I have seen ex spouses in documents or the wrong trustees such as an attorney or a bank who they no longer have a relationship withHow many of you have not updated their wills within the last 3 years? If they have not they may not be tax or family smart. In the NGA Survey we found many of you did not understand how the trusts workin your documents.Poorly drafted documents and outdated documents can cost you money and increase your exposure to conflicts within the family or increased estate taxesFamily, Business and tax laws change. We find many clients have not updated their Wills or that their documents are not current with their business or personal situation. Very often the documents have not been properly executed.This is a very common mistake unsigned documents, or outdated documents that do not take advantage of the current tax law. I have seen ex spouses in documents or the wrong trustees such as an attorney or a bank who they no longer have a relationship withHow many of you have not updated their wills within the last 3 years? If they have not they may not be tax or family smart. In the NGA Survey we found many of you did not understand how the trusts workin your documents.Poorly drafted documents and outdated documents can cost you money and increase your exposure to conflicts within the family or increased estate taxesThis is an issue that has become more complex in the last few years. Corporate owned life insurance such as key men is usually not a good method of ownership. Why? It inflates the value of the business and is in effect trapped in the company if an owner dies. Also, Life Insurance proceeds are estate taxable. We find older policies with incorrect owners or policies owned by the spouse, that can be included in the estate. Many of you may have Trust owned life insurance where you are not following the proper procedures to make sure the policy remains outside the estate. Also, older policies may not be performing as well as when you purchased them.If you or your corporation own a policy its not owned properly. Finally, we will tell you this is not a dormant asset anymore. The new policies are structured in such a way as they need to be managed to make sure they perform and they need to be properly coordinated with your legal planning or else it will cost you money.There are many issues regarding this most common mistake.

You are in a competitive, capital intensive business. From time you are probably constrianed by a lack of capital and do not have the resources to address new business opportunities or react to a changing competitive environment. You also have to concern yourself with the impact if you or a shareholder were to die or become severely disabled. Also, planning long term the estate tax can be a problem. The point is there will always be a conflict between capital and liquidity and they have to be planned for!!!!

Any of these can impact the the business and cause the value of the business to decline.Therefore you need to think through your strategic options for the growth of the business.Strategic planning is critical.So that is mistake # 9You are in a competitive, capital intensive business. From time you are probably constrianed by a lack of capital and do not have the resources to address new business opportunities or react to a changing competitive environment. You also have to concern yourself with the impact if you or a shareholder were to die or become severely disabled. Also, planning long term the estate tax can be a problem. The point is there will always be a conflict between capital and liquidity and they have to be planned for!!!!

Any of these can impact the the business and cause the value of the business to decline.Therefore you need to think through your strategic options for the growth of the business.Strategic planning is critical.So that is mistake # 9The last mistake is that many business owners do not have a master plan so they really never know the most effective way to get there. We see this because our business is predicated on find opportunities you are missing. In every case we review we find missed opportunities and mistakes.Most of you are not doing enough. So thats Mistake #10 No Game plan and not doing enough. Your not alone either . Let look at an example of a big mistakeNext SlideThe last mistake is that many business owners do not have a master plan so they really never know the most effective way to get there. We see this because our business is predicated on find opportunities you are missing. In every case we review we find missed opportunities and mistakes.Most of you are not doing enough. So thats Mistake #10 No Game plan and not doing enough. Your not alone either . Let look at an example of a big mistakeNext SlideWhat questions do you have at this pointNow that you understand the problems Lets take a quick look at a master plan strategy and some of the tools and techniques available to you. Due to time limits I am going to highlight the ideas. How much stress is coming from having to let go or eventually transfer your business. How much better would you sleep and operate your business knowing you had a plan in place that takes care of the people you care about? So to begin you have to make 2 important decisions1.Decide on what you want?2. Make a commitment to change. Look at what's possible and start evaluating your planning. Seek ideas and opportunities for improvementObjectives are critical. Not easy to do but you must begin with your objectives. What is important to you?What concerns you? How much do you need for your security?Do you want to Keep or SellHow much stress is coming from having to let go or eventually transfer your business. How much better would you sleep and operate your business knowing you had a plan in place that takes care of the people you care about? Do you have all of your bases covered with asset protection and estate planning?Choosing a successor is more art than science. Key is to begin the process early. When it comes to protecting the value of your business business owners forget the biggest assets are not on the financial statement.Key employees leave if they feel they or overlooked or if there is a management change they cannot live with.For this reason finding a way to keep them is critical for your plan.Objectives are critical. Not easy to do but you must begin with your objectives. What is important to you?Valuation; What is the business really worth. Understanding value is important because your personal and business plan are linked. Without understanding the value it is impossible to know if your objectives can be accomplished.Valuation plays a role buy sell agreements, gifting,litigation divorces etc.. What are your option? To be effective a good succession plan should include an analysis of your options.the pros and cons of every option. Three are internal & External Channels Even though you may want to daughter to own the business, we will tell you to have a contingency plan narrowed down to you best options.Shareholders buy /sell agreements.

Management may be viable /Do they have the money. You can look @ Phantom stock, deferred comp arrangements.ESOP may be an excellent tool but can be costly because of the liability. The company has to be profitable.Sale may be an option. All of these options have to be part of your plan and carefully coordinated with your estate planYou can design the amount of estate tax you wish to pay; Going forward. There are many strategies the Duponts, Waltons, MalcomForbes and others of great wealth have paid to discover. These secrets are available to you. If you take the time to explore them. These are the ToolsI will highlight some of them a go through the steps you can take to create your master plan.

Family Wealth is not self perpetuating. Without careful planning all of your hard work can easily be gone within a generation or two.The purpose of business succession is to continue a business into the next generation. The purpose of Strategic Transition plan is to manage and perpetuate wealth into the next generation and beyond. The idea is to begin a process to merge the ownership and wealth strategies with the business strategy and family objectives.It may involve the decision to keep or sell your business. It is a process of managing change!!!!Transferring the business maybe easy in some cases, what is not easy is having success beyond the transfer. The process should go along way to helping you.Each of these steps overlap. Helping a business through a transition is a multi-disciplinary process. No one person or discipline has all the answers necessary to solve the complex problems associated with the strategic transition needs of a privately owned business. Rather then piecemeal planning, we believe in comprehensively addressing the transitional issues that will impact a family or privately held businessWe are focused on providing pre-eminent service to our clients.