king & king business advisors ® presents: business brokers merger & acquisition advisors...

King & King Business AdvisorsKing & King Business Advisors®

Presents:

Business Brokers ◘ Merger & Acquisition Advisors ◘ Management Buyout Consultants

King & King’s Professional Practice Transaction Group

In partnership with:

LWBJ, LLP4200 University Avenue, Suite 410West Des Moines, IA 50266

First American Bank12333 University AvenueClive, Iowa 50325

EquityAccess Solutions

Presented by: James M. King, CBI, President

Leo Vidal, JD, CPA, Director “PPTG”

2

King & King Business AdvisorsKing & King Business Advisors®®

3


Equity Access

Equity Access is a unique financial program designed to address four problems facing successful business owners wishing to plan their retirement.

Access to financing business ownership transitions without limiting the new owner’s ability to finance ongoing working capital needs

Secure assets for retirement and estate planning

Economic inefficiencies in transitioning business ownership

Limited financing and tax options for acquiring a business

4


CASE STUDY

5


UNDERSTANDING RISK

There are many challenges facing successful business owners in meeting their long-term planning objectives. Business succession planning becomes an essential part of the process to assure future continued growth.

50% of all successful business owners are over the age of 501

40% of all U.S. businesses are facing a transfer of ownership issue and many business owners are depending on the value of their business to fund their retirement2

Only 26% of small business owners have a type of succession plan in place3

1, 2 National Small Business Association

3 LIMRA International, Small Business Owners 2005 Report

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PROGRAM BENEFITS

*Please consult your tax advisor regarding deductibility of loan interest for your situation.

**Please consult with your legal advisor to determine if life insurance and/or annuity is an exempt asset under your state law.

Lowers the tax cost to an owner transitioning out of the business

Provides necessary financing to fund owner’s post-retirement needs

Supplements retirement planning on a tax-preferential basis

Provides business owners with tax-free death benefits for their family

Loan proceeds paid into life insurance or annuities may grow tax deferred

In certain circumstances, interest payments on loan may be tax deductible *

Life insurance purchased with loan proceeds may be an exempt asset under state law **

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EXECUTIVE SUMMARYBusiness Assumptions

Name of Business:Tax Structure of Entity:

State(s) in Which Business is Located:Value of Business:

Access ConsultingLLCIA$5,600,000

Business Owner Assumptions

Owner’s Name:Age:

Percentage Interest in Business:Value of Owner’s Interest:

Age at Sale of Business:Expected Retirement Age:

Term of Post-Retirement Income (yrs):

Charles Smith5025%$1,400,000556521

Traditional Exit StrategyLump Sum Assumptions

Alternative Investment Rate of Return (pre-tax):Alternative Investment Rate of Return (after-tax):

Term of Post-Retirement Income:Annual Retirement Distribution:

Total Distributions:

7.00%4.55%21$101,778$2,137,332

Traditional Exit StrategyInstallment Assumptions

Term of Installments (yrs):Installment Note Interest Rate:


Cash Provided Year 1:Cash Installments Years 2-6:

Installment Note amount:Annual Retirement Distribution:


58.25%7.00%4.55%$100,000$60,000$1,000,000$122,329$2,568,908

Equity Access Assumptions

Insurance Premium Financed:Loan Interest Rate:

# of Years Interest Only:Term of P&I Payments (yrs):

Hypothetical Investment Rate of Return:Deposit Account Crediting Rate:

Pre-Retirement Death Benefit:Post Retirement Death Benefit:

Annual Retirement Distribution:Total Distributions:

$1,000,0007.00%5109.00%3.00%$3,250,000$359,968$241,716$5,076,030

$2,137,332

$2,568,908

$5,076,030

Tax AssumptionsOrdinary Income tax rate:

Capital Gain Rate:35%15%

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TRADITIONAL EXIT STRATEGY

Lump Sum

Ordinary Income Tax Rate

Value of Interest

Less: Taxes

Net

35%

$ 1,400,000

$ (490,000)

$ 910,000

Age Alternative 7% 35% Alternative PostInvestment Beg. Earnings Taxes on Investment End RetirementAccount Value Pre-tax Earnings Account Value Income

51 -$ 52 -$ 53 -$ 54 -$ 55 -$ 910,000$ 56 910,000$ 63,700$ (22,295)$ 951,405$ 57 951,405$ 66,598$ (23,309)$ 994,694$ 58 994,694$ 69,629$ (24,370)$ 1,039,953$ 59 1,039,953$ 72,797$ (25,479)$ 1,087,270$ 60 1,087,270$ 76,109$ (26,638)$ 1,136,741$ 61 1,136,741$ 79,572$ (27,850)$ 1,188,463$ 62 1,188,463$ 83,192$ (29,117)$ 1,242,538$ 63 1,242,538$ 86,978$ (30,442)$ 1,299,073$ 64 1,299,073$ 90,935$ (31,827)$ 1,358,181$ 65 1,358,181$ 95,073$ (33,275)$ 1,318,201$ $101,77866 1,318,201$ 92,274$ (32,296)$ 1,276,401$ $101,77867 1,276,401$ 89,348$ (31,272)$ 1,232,700$ $101,77868 1,232,700$ 86,289$ (30,201)$ 1,187,010$ $101,77869 1,187,010$ 83,091$ (29,082)$ 1,139,241$ $101,77870 1,139,241$ 79,747$ (27,911)$ 1,089,299$ $101,77871 1,089,299$ 76,251$ (26,688)$ 1,037,084$ $101,77872 1,037,084$ 72,596$ (25,409)$ 982,494$ $101,77873 982,494$ 68,775$ (24,071)$ 925,420$ $101,77874 925,420$ 64,779$ (22,673)$ 865,748$ $101,77875 865,748$ 60,602$ (21,211)$ 803,362$ $101,77876 803,362$ 56,235$ (19,682)$ 738,137$ $101,77877 738,137$ 51,670$ (18,084)$ 669,945$ $101,77878 669,945$ 46,896$ (16,414)$ 598,650$ $101,77879 598,650$ 41,905$ (14,667)$ 524,111$ $101,77880 524,111$ 36,688$ (12,841)$ 446,180$ $101,77881 446,180$ 31,233$ (10,931)$ 364,703$ $101,77882 364,703$ 25,529$ (8,935)$ 279,520$ $101,77883 279,520$ 19,566$ (6,848)$ 190,460$ $101,77884 190,460$ 13,332$ (4,666)$ 97,348$ $101,77885 97,348$ 6,814$ (2,385)$ 0$ $101,778

$2,137,332

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Owner’s Name:Age:




Charles Smith5025%$1,400,000556521





7.00%4.55%21$101,778$2,137,332







58.25%7.00%4.55%$100,000$60,000$1,000,000$122,329$2,568,908







$1,000,0007.00%5109.00%3.00%$3,250,000$359,968$241,716$5,076,030

$2,137,332

$2,568,908

$5,076,030



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TRADITIONAL EXIT STRATEGY

Installments

Owner receives cash 1st yr $ 100,000Owner receives consulting payment 2nd yr $ 60,000Owner receives consulting payment 3rd yr $ 60,000Owner receives consulting payment 4th yr $ 60,000Owner receives consulting payment 5th yr $ 60,000Owner receives consulting payment 6th yr $ 60,000Owner receives 5-yr installment note $1,000,000$$ Value of Your Interest $1,400,000

Owner’s installment note $1,000,000Installment note interest rate 8.25%Installments with interest $ 252,109

Age Alternative Payment 7% 35% Alternative PostInvestment Beg Net After Tax Alternative Investment Taxes on Investment End RetirementAccount Value 35% Earnings Pre-tax Earnings Account Value Income

51 -$ 52 -$ 53 -$ 54 -$ 55 -$ 65,000$ 4,550$ (1,593)$ 67,958$ 56 67,958$ 92,625$ 11,241$ (3,934)$ 167,889$ 57 167,889$ 92,625$ 18,236$ (6,383)$ 272,367$ 58 272,367$ 92,625$ 25,549$ (8,942)$ 381,600$ 59 381,600$ 92,625$ 33,196$ (11,619)$ 495,802$ 60 495,802$ 92,625$ 41,190$ (14,416)$ 615,200$ 61 615,200$ 163,871$ 54,535$ (19,087)$ 814,519$ 62 814,519$ 163,871$ 68,487$ (23,971)$ 1,022,906$ 63 1,022,906$ 163,871$ 83,074$ (29,076)$ 1,240,776$ 64 1,240,776$ 163,871$ 98,325$ (34,414)$ 1,468,558$ 65 1,468,558$ 163,871$ 114,270$ (39,995)$ 1,584,376$ $122,32966 1,584,376$ 110,906$ (38,817)$ 1,534,136$ $122,32967 1,534,136$ 107,389$ (37,586)$ 1,481,610$ $122,32968 1,481,610$ 103,713$ (36,299)$ 1,426,694$ $122,32969 1,426,694$ 99,869$ (34,954)$ 1,369,280$ $122,32970 1,369,280$ 95,850$ (33,547)$ 1,309,253$ $122,32971 1,309,253$ 91,648$ (32,077)$ 1,246,495$ $122,32972 1,246,495$ 87,255$ (30,539)$ 1,180,882$ $122,32973 1,180,882$ 82,662$ (28,932)$ 1,112,283$ $122,32974 1,112,283$ 77,860$ (27,251)$ 1,040,563$ $122,32975 1,040,563$ 72,839$ (25,494)$ 965,579$ $122,32976 965,579$ 67,591$ (23,657)$ 887,184$ $122,32977 887,184$ 62,103$ (21,736)$ 805,222$ $122,32978 805,222$ 56,366$ (19,728)$ 719,531$ $122,32979 719,531$ 50,367$ (17,629)$ 629,941$ $122,32980 629,941$ 44,096$ (15,434)$ 536,274$ $122,32981 536,274$ 37,539$ (13,139)$ 438,345$ $122,32982 438,345$ 30,684$ (10,739)$ 335,961$ $122,32983 335,961$ 23,517$ (8,231)$ 228,918$ $122,32984 228,918$ 16,024$ (5,609)$ 117,005$ $122,32985 117,005$ 8,190$ (2,867)$ 0$ $122,329

2,568,908

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Owner’s Name:Age:




Charles Smith5025%$1,400,000556521





7.00%4.55%21$101,778$2,137,332







58.25%7.00%4.55%$100,000$60,000$1,000,000$122,329$2,568,908







$1,000,0007.00%5109.00%3.00%$3,250,000$359,968$241,716$5,076,030

$2,137,332

$2,568,908

$5,076,030



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EQUITY ACCESS

Owner receives cash 5th yr $ 100,000Owner receives payment 6th yr $ 60,000Owner receives payment 7th yr $ 60,000Owner receives payment 8th yr $ 60,000Owner receives payment 9th yr $ 60,000 Owner receives payment 10th yr $ 60,000Downpayment $ 400,000

• $400,000 taxed as goodwill so capital gain

• CSV life insurance considered property so no taxation

Estate BenefitsIncome

Alternative Payment 7% 35% Alternative Post Net Investment Beg Net After Tax Earnings Taxes on Investment End Retirement Total Value of Required Death Benefit

Age Account Value 15% Pre-tax Earnings Account Value Income Policy Loans Account Collateral After Policy Loans51 -$ -$ -$ -$ -$ -$ 1,010,327$ 1,000,000$ 3,250,000$ 52 -$ -$ -$ -$ -$ -$ 1,015,711$ 1,000,000$ 3,250,000$ 53 -$ -$ -$ -$ -$ -$ 1,017,007$ 1,000,000$ 3,250,000$ 54 -$ -$ -$ -$ -$ -$ 1,014,145$ 1,000,000$ 3,250,000$ 55 -$ 85,000$ 5,950$ (2,083)$ 88,868$ -$ -$ 1,040,243$ 1,000,000$ 3,250,000$ 56 88,868$ 51,000$ 9,791$ (3,427)$ 146,231$ -$ -$ 1,085,111$ 900,000$ 3,250,000$ 57 146,231$ 51,000$ 13,806$ (4,832)$ 206,206$ -$ -$ 1,130,399$ 800,000$ 3,250,000$ 58 206,206$ 51,000$ 18,004$ (6,302)$ 268,908$ -$ -$ 1,205,932$ 700,000$ 3,250,000$ 59 268,908$ 51,000$ 22,394$ (7,838)$ 334,464$ -$ -$ 1,274,695$ 600,000$ 3,250,000$ 60 334,464$ 51,000$ 26,982$ (9,444)$ 403,003$ -$ -$ 1,365,144$ 500,000$ 3,250,000$ 61 403,003$ 28,210$ (9,874)$ 421,339$ -$ -$ 1,491,088$ 400,000$ 3,250,000$ 62 421,339$ 29,494$ (10,323)$ 440,510$ -$ -$ 1,619,773$ 300,000$ 3,250,000$ 63 440,510$ 30,836$ (10,793)$ 460,554$ -$ -$ 1,748,454$ 200,000$ 3,250,000$ 64 460,554$ 32,239$ (11,284)$ 481,509$ -$ -$ 1,880,194$ 100,000$ 3,250,000$ 65 481,509$ 33,706$ (11,797)$ 467,335$ $36,083 205,633$ 1,846,999$ -$ 3,044,367$ 66 467,335$ 32,713$ (11,450)$ 452,516$ $36,083 205,633$ 1,838,687$ 2,206,424$ 67 452,516$ 31,676$ (11,087)$ 437,022$ $36,083 205,633$ 1,830,018$ 2,177,721$ 68 437,022$ 30,592$ (10,707)$ 420,824$ $36,083 205,633$ 1,815,688$ 2,142,512$ 69 420,824$ 29,458$ (10,310)$ 403,889$ $36,083 205,633$ 1,712,098$ 2,003,155$ 70 403,889$ 28,272$ (9,895)$ 386,183$ $36,083 205,633$ 1,672,846$ 1,968,998$ 71 386,183$ 27,033$ (9,461)$ 367,672$ $36,083 205,633$ 1,647,862$ 1,954,362$ 72 367,672$ 25,737$ (9,008)$ 348,318$ $36,083 205,633$ 1,611,629$ 1,901,658$ 73 348,318$ 24,382$ (8,534)$ 328,084$ $36,083 205,633$ 1,554,819$ 1,819,347$ 74 328,084$ 22,966$ (8,038)$ 306,929$ $36,083 205,633$ 1,439,367$ 1,666,787$ 75 306,929$ 21,485$ (7,520)$ 284,812$ $36,083 205,633$ 1,388,419$ 1,578,862$ 76 284,812$ 19,937$ (6,978)$ 261,688$ $36,083 205,633$ 1,339,872$ 1,486,076$ 77 261,688$ 18,318$ (6,411)$ 237,512$ $36,083 205,633$ 1,271,835$ 1,427,616$ 78 237,512$ 16,626$ (5,819)$ 212,236$ $36,083 205,633$ 1,179,530$ 1,344,064$ 79 212,236$ 14,857$ (5,200)$ 185,810$ $36,083 205,633$ 1,039,196$ 1,210,484$ 80 185,810$ 13,007$ (4,552)$ 158,182$ $36,083 205,633$ 935,239$ 1,115,511$ 81 158,182$ 11,073$ (3,875)$ 129,296$ $36,083 205,633$ 822,687$ 1,011,941$ 82 129,296$ 9,051$ (3,168)$ 99,097$ $36,083 205,633$ 688,311$ 885,894$ 83 99,097$ 6,937$ (2,428)$ 67,523$ $36,083 205,633$ 530,517$ 735,710$ 84 67,523$ 4,727$ (1,654)$ 34,512$ $36,083 205,633$ 341,469$ 553,174$ 85 34,512$ 2,416$ (846)$ 0$ $36,083 205,633$ 152,227$ 370,914$ 86 159,790$ 385,202$ 87 157,109$ 388,926$ 88 146,245$ 384,254$ 89 129,611$ 373,728$ 90 109,700$ 359,968$

757,737$ 4,318,293$

Collateral ImplicationsRetirementAlternative Investment Account

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LLC CASH FLOW: Equity Access SolutionPAYMENT FOR 7% 35% NET CASH

YEAR GOODWILL PRINCIPAL2INTEREST TAX DEDUCTION FLOW

1 (70,000)$ (70,000)$ 2 (70,000)$ (70,000)$ 3 (70,000)$ (70,000)$ 4 (70,000)$ (70,000)$ 5 (100,000)$ (70,000)$ 59,500$ (110,500)$ 6 (60,000)$ (100,000)$ (70,000)$ 80,500$ (149,500)$ 7 (60,000)$ (100,000)$ (63,000)$ 78,050$ (144,950)$ 8 (60,000)$ (100,000)$ (56,000)$ 75,600$ (140,400)$ 9 (60,000)$ (100,000)$ (49,000)$ 73,150$ (135,850)$

10 (60,000)$ (100,000)$ (42,000)$ 70,700$ (131,300)$ 11 (100,000)$ (35,000)$ 47,250$ (87,750)$ 12 (100,000)$ (28,000)$ 44,800$ (83,200)$ 13 (100,000)$ (21,000)$ 42,350$ (78,650)$ 14 (100,000)$ (14,000)$ 39,900$ (74,100)$ 15 (100,000)$ (7,000)$ 37,450$ (69,550)$

(400,000)$ (1,000,000)$ (735,000)$ 649,250$ (1,485,750)$

LLC CASH FLOW: Traditional Lump Sum8.25% 35% NET CASH

YEAR LOAN PRINCIPAL1 INTEREST TAX DEDUCTION FLOW123456 1,400,000 (95,500) (115,500) 73,850 (137,150)7 (103,379) (107,621) 73,850 (137,150)8 (111,908) (99,093) 73,850 (137,150)9 (121,140) (89,860) 73,850 (137,150)10 (131,134) (79,866) 73,850 (137,150)11 (141,952) (69,048) 73,850 (137,150)12 (153,664) (57,336) 73,850 (137,150)13 (166,341) (44,659) 73,850 (137,150)14 (180,064) (30,936) 73,850 (137,150)15 (194,919) (16,081) 73,850 (137,150)

(1,400,000) (710,000) 738,500 (1,371,500)

Buyer Summary – Net Cash Flow

Traditional Lump Sum: $1,371,500

Traditional Installments: $1,347,480

Equity Access: $1,485,750

1. The payments of principal are treated as guaranteed payments made in liquidation of a partner’s interest and are taxable as ordinary income to the recipient and are deductible by the Partnership.

2. The buyer in the Equity Access Solution will receive a step-up in basis in the remaining partnership property provided that a §754 election is in effect. Depending on the type of property within the partnership, the buyer may be allowed to deduct this stepped-up basis through additional depreciation or amortization.

BUYER ANALYSISLLC CASH FLOW: Traditional Installments

CONSULTING 8.25% 35% NET CASH

YEAR PAYMENT PRINCIPAL1 INTEREST TAX DEDUCTION FLOW12345 (100,000)$ 35,000$ (65,000)$ 6 (60,000)$ (82,500)$ 49,875$ (92,625)$ 7 (60,000)$ (82,500)$ 49,875$ (92,625)$ 8 (60,000)$ (82,500)$ 49,875$ (92,625)$ 9 (60,000)$ (82,500)$ 49,875$ (92,625)$

10 (60,000)$ (82,500)$ 49,875$ (92,625)$ 11 (169,609)$ (82,500)$ 88,238$ (163,871)$ 12 (183,602)$ (68,507)$ 88,238$ (163,871)$ 13 (198,749)$ (53,360)$ 88,238$ (163,871)$ 14 (215,146)$ (36,963)$ 88,238$ (163,871)$ 15 (232,895)$ (19,214)$ 88,238$ (163,871)$

(400,000)$ (1,000,000)$ (673,045)$ 725,566$ (1,347,479)$

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Transaction at a glance…

Lender Loan

STEP - 1: Lender loans money to business against business assets.

STEP - 2: Business puts money into life insurance policy and lender files UCC-1 lien against policy.

STEP - 3: Policy is distributed from business to owner in tax preferred manner.

STEP - 4: Business makes payments on loan until repaid.

InsurancePolicy

Owners

Business

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