Ownership Transitions for the Private Business Owner
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WEBINAR Ownership Transitions for the Private Business Owner Tuesday, November 19, 2019 2 p.m. ET | 11 a.m. PT The audio portion of this webinar will stream through your computer. If you are not hearing sound, please check the speaker volumes on your computer. If you are still experiencing a problem, press the pause button under the image on the left of your screen and then press the arrow/play buttons.
Agenda
Introduction by April Hall, senior editor, Family
Business Magazine
Time for questions (enter them from your
computer) during and after the presentation
60 minutes
Presentation and supporting material will be
emailed to all participants after the webinar
1
Today’s Speakers
JOE FAHEY BILL WATKINS
Sr. VP & National Director Managing Director
Business Succession Planning Harris Williams
PNC
MARK BUXTON JULIE WILLIAMS
Sr. VP & Regional Director Managing Director & National
Wealth Strategy Director, ESOP Solutions
PNC PNC
2
M&A Market Backdrop
The U.S. economy grew at a rate of 2.1% in Q2 2019 and has grown for 21 consecutive quarters.
July 2019 marked the 10th year of expansion since the global financial crisis, generating concerns
Economic around the length of this cycle and that a slowdown could be on the horizon.
Outlook Although growing at a decelerating pace, the U.S. economy remains preeminent relative to other
world economies, as many countries experience market volatility, global trade uncertainties, currency
risks, and minimal or no growth.
Private equity dry powder hovers over $1 trillion in 2019, which continues to put pressure on investors
to aggressively pursue assets of interest.
Available 2018 was a strong year for private equity fundraising, with 900+ funds securing $450B+ in
commitments. With the number of successful exits in recent years, it is difficult for limited partners to
Capital stay fully allocated to this attractive asset class.
Even with equity market volatility, corporate cash levels remain strong, and strategic buyers are
selectively paying up for innovative capabilities and new areas of growth.
The Federal Reserve, pressured by an increasing amount of negative sovereign bond yields around
the world, and subsequently a strong dollar, could be forced to lower key interest rates multiple times
in 2019 and 2020.
Financing Robust leverage levels in M&A deals, supported primarily by non-bank lenders in the middle market,
Market should continue to keep valuations high. These alternative lenders are hyper-focused on serving the
private equity community and sponsor-backed deals.
The pressure on both equity and debt investors to deploy capital in the private markets should keep
valuations near all-time highs.
The M&A market was robust in 2018 and Harris Williams had a record year. The firm is on pace for a
strong finish to 2019.
M&A The 2019/2020 outlook for M&A activity remains positive due to slowing opportunities for pure organic
growth, relatively strong corporate balance sheets, and an insatiable amount of private equity
Market demand to invest in quality private businesses.
While the late-stage nature of the cycle is top-of-mind for investors, expect marquee assets with
resilient business models to continue to command premium prices in competitive processes.
3
M&A Transaction Volume
While total M&A transaction volume has declined recently after peaking in 2017,
current market conditions remain positive.
2018 was a record year for the number of private equity M&A deals completed.
For most high-quality companies, investors have gotten even more aggressive and are moving faster to get deals done.
M&A transaction activity in the lower middle market has slowed, which makes up the vast majority of the number of
transactions (
Healthy Multiples Across the Board
M&A valuations remained elevated in 2018 and through YTD 2019.
While multiples remained in-line with 2017 for most of 2018, fourth quarter volatility in both the equity and debt
capital markets contributed to tempered M&A valuations near the end of the year.
In addition to industry-specific factors and underlying growth rates, purchase price multiples continue to show
disparity based on transaction size.
Global EV / LTM EBITDA Multiples1 EV / LTM EBITDA Multiples by Transaction Size1
For the Years Ended December 31, 2005 - 2018 For the Years Ended December 31, 2015 - 2018
16.0x
12.0x
13.7x
11.1x 14.0x
11.0x 12.8x
12.1x 12.3x
10.5x 10.6x 12.3x
12.0x 11.6x 11.8x
10.3x 10.3x 10.2x 11.0x 11.2x
10.1x 10.2x 10.1x 11.2x
10.0x 10.5x 10.6x 10.3x
10.0x 9.8x 10.0x 10.2x
9.6x 10.0x 9.4x
9.2x 9.2x
9.2x 9.3x 8.6x 8.5x
9.0x 8.7x 8.0x
6.9x 7.0x
6.4x 6.2x
6.0x
8.0x
4.0x
7.0x
2.0x
6.0x 0.0x
2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 YTD 2015 2016 2017 2018
2019
Private Equity Continues to be Active
Average purchase price multiples continue to be robust, with high-quality, middle
market assets receiving significant buyer attention.
Sponsor backed deal multiples reflect the increasingly competitive environment private equity firms face and their
continued efforts to deploy capital.
With North American and European private equity funds sitting on record levels of capital, most coming from 2015 –
2017 vintage funds, pressure to close on platform acquisitions continues to mount.
The convergence between the number of public versus private equity-backed companies persists, as private equity
continues to grow as an asset class.
Average Purchase Price Breakdown by Financial Sponsors1 North American and European Companies by Ownership2
For the Years Ended Dec. 31, 2003 – 2Q 2019 For the Years Ended Dec. 31, 2008 – 2018
(# of companies)
14.0x
25,000
12.0x 11.3x
10.6x10.6x
10.3x10.0x
10.0x 9.7x 9.7x 20,000
9.1x
8.4x 8.4x 8.5x 8.8x 8.7x 8.8x
5.3x 15,067
8.0x 7.7x 4.9x 4.8x 14,393
7.1x 7.3x 3.5x 3.9x 4.5x 4.5x 15,000
3.0x 3.1x 4.0x 3.5x 3.4x
3.8x 3.7x
6.0x 2.6x 10,440
2.8x 3.8x 10,007
10,000
4.0x
5.8x 5.9x
5.5x 5.2x 5.7x 5.5x 5.3x 5.7x 5,000
4.4x 4.5x 4.1x 4.6x 4.9x PE-Backed Public
2.0x 3.4x
4.0x
2.8x 3.0x
0.0x 0
'0 3 '0 4 '0 5 '0 6 '0 7 '0 8 '0 9 '10 '11 '12 '13 '14 '15 '16 '17 '18 3Q19 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017
Senior Debt / EBITDA Sub Debt / EBITDA Equity / EBITDA Other
1. S&P Global.
2. PitchBook. 6
Private Investments Really Stand Tall
U.S. Private Equity: Periodic Rates of Return
23.5%
21.5% 21.7%
19.9%
16.8% 17.0%
15.9%
15.4%
14.0% 14.0%
13.5%
12.9%
10.9%
8.6%
8.0%
7.1%
15-Year 10-Year 5-Year 3-Year
CA U.S. Private Equity (Top Two Quartiles) CA U.S. Private Equity Index S&P 500 Russell 2000
Sources: Cambridge Associates LLC, Frank Russell Company, Standard & Poor’s, Thomson Reuters Datastream.
Note: Private equity includes buyouts and growth equity. 7Strategic Buyers are Seeking to Enhance Organic
Growth
Corporate buyers are aggressively looking to utilize their balance sheets and
acquire growth through differentiated, middle market businesses.
Large strategics have been stock piling cash reserves since the downturn and have spending firepower:
− Along with cash positions at record levels, most large corporations boast healthy balance sheets with the potential for
incremental leverage
− Boards and activist shareholders have increasingly scrutinized balance sheet management and cash utilization
High-growth, middle market companies can garner significant interest from strategic buyers:
− Not simply buying the target’s current P&L – can add capabilities and supplement strategic gaps, rendering the
“multiples” strategics are willing to pay less relevant
− Corporate buyers are forced to compete aggressively with private equity funds for top opportunities
Key Strategic Drivers for M&A S&P 500 –Net Debt to LTM EBITDA1
For LTM Period December 31, 2005 – 2018
2.5x
2.0x Q3 2019 S&P 500 Net
Debt / LTM EBITDA: 1.5x
Technology Expand Diversify
Acquisition Customer Base Products/Services
1.5x
1.0x
Digital Talent 0.5x
Strategy Acquisition 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018
1. CapitalIQ. 8Setting the Stage for a Robust M&A Process
3 Keys to Evaluating Strategic
Alternatives
SHAREHOLDERS BUSINESS MARKET
What are the personal desires of the Where does the business stand in its evolution What is the general global and domestic
shareholders (timing, liquidity, legacy, etc.)? or life cycle? macroeconomic environment?
Are there any tax issues for the shareholders? Are there any growth opportunities that require What is the general state and outlook of the
significant capital investments? M&A market?
Has the ownership group considered its
succession plan? What is the timing and likelihood of growth How can the current capital markets affect a
prospects, both organic and acquisition company’s “baseline” valuation?
What processes are in place to ensure the opportunities?
business survives the next generation? How is the availability of external debt and
Does the company have any need for growth equity capital?
Are there any family dynamics at play financing beyond traditional senior debt?
regarding the future strategy of the business? Has there been consolidation and/or an
Has the business evaluated competitive increase in private equity interest and
Are there any conflicts with the management threats to future business performance? investments in the industry?
team’s and the ownership group’s future
desires for the business? Can the management team execute Are strategic buyers in the industry healthy and
acquisitions without the assistance of a team displaying a strong appetite for acquisitions?
Does the ownership group have an of transaction professionals.
understanding for the current valuation of the What is the current perception of the
business? company’s industry?
What role do the ownership group and the
management team want to have with the
company going forward?
9How do I Prepare for an Eventual M&A Transaction?
Most businesses will go through some type of equity transaction at a point during
their life cycles. It is never too early to consider executing on value-enhancing
initiatives.
Be targeted and realistic in what will be
Decide if any key hires need to be made. included in projections.
Illustrate team’s depth and minimize “key man” Develop and quantify key components of the
concerns. company’s 1, 3, and 5-year plan.
MANAGEMENT Understand team’s post-transaction goals. GROWTH Develop an M&A pipeline and begin the
& HR PLAN conversation with potential targets early.
Consider succession planning.
Collate all KPI data (i.e., business segment
Create case studies of recent sales wins. performance, revenue per customer, revenue
retention, customer retention).
Ensure website is consistent with strategy and
message. Begin difficult and time-consuming task of
integration early.
SALES AND Utilize customer-level data to display depth and OPERATIONS
MARKETING strength of relationships. Remember that buyers may have access to
monthly board packs during a process.
Bridge management accounts to audits.
Make sure all records, contracts, and
Identify any potential “add-backs” . agreements are organized and up to date.
Ensure ERP system is capable of supporting Ensure all leases and other property information
ACCOUNTING projected growth of the business. are readily available.
LEGAL
AND TAX Prepare for a Sell-Side Quality of Earnings Address any contingent liabilities early.
report, which is vital in today’s M&A market.
Elevate the business’s profile by responding to
Build an acquisition track record, proving to inbounds and educating key buyers.
potential buyers that acquisitions are a viable
growth strategy. Allow select investors / strategics to build internal
support ahead of a process.
Maximize the likelihood of buyers underwriting
ACQUISITIONS
future inorganic growth through strategically AWARENESS Leverage consultant expertise during
beneficial acquisitions. ownership rather than immediately prior to
launching a sale process.
10What Can I Expect in a Typical M&A Process?
MONTH 1 MONTH 2 MONTH 3 MONTH 4 MONTH 5 MONTH 6
Initial Diligence
Draft Targeted Buyers List
Third-Party Work
(QofE and Industry Study)
Draft Marketing Materials
Prepare Key Analyses and Build
the Virtual Data Room
Pre-Marketing Period
Contact Buyers &
Distribute Marketing Materials
Receive and Evaluate IOIs IOIs
Conduct Management Visits
Open Data Room, Distribute
SPA, Buyer Due Diligence
Evaluate Final Bids Final Bids
Complete Final Confirmatory
Diligence and Negotiate the SPA
Close the Transaction
Preparing for Market Marketing Due Diligence Negotiation and Closing
11What is an ESOP?
Flexible Shareholder Liquidity
Key Take-Aways
& Ownership Transition Alternative
Retirement Plan
An ESOP is a qualified “defined
contribution” retirement plan
ESOPs are unique from other
qualified plans in that an ESOP has
the ability to borrow money to
acquire stock
Employee Benefit Plan Tax Advantaged Vehicle ESOPs are designed to be
primarily invested in Company
Long-Term Retirement Benefit Company Tax Benefits stock
Performance-Enhancing Seller Tax Benefits − These combined elements
Incentive create a mechanism for
The Internal Revenue Code transferring ownership to
Reward Employees has been amended several employees
Congress enacted ERISA in times since 1974 targeted to
Other Uses for ESOPs
1974 enabling ESOPs as a way incentivize use of ESOPs
Companies may utilize tax benefits
to make U.S. businesses more brought by the ESOP to accomplish
competitive other strategic initiatives including but
not limited to acquisitions,
spin-offs of subsidiaries, buyout of
The number of S-Corporation ESOPs and the level of active dissident shareholder, and going
participation have MORE THAN DOUBLED since 2002¹ private transactions
1) April 2013 Study by Alex Brill, tax advisor to the Simpson-Bowles deficit reduction commission, “Macroeconomic impact of S ESOPs on the U.S. Economy.”
12Key benefits of selling to an ESOP
Ownership Employee
Liquidity Tax Benefits
Transition Benefits
ESOPs are Flexible: ESOP is friendly buyer Shareholder: Employee participants
Owners who sell to an in an ESOP obtain
Seller can sell up to Selling shareholder is ownership in the
ESOP may defer or
100% of Company able to leave a legacy Company as
eliminate capital gains
by protecting and beneficiaries of the
Seller can receive full tax on the sale of stock
perpetuating ESOP and can accrue
fair market value to an ESOP (IRC
Company’s culture significant retirement
Section 1042)
ESOP transactions can Selling shareholder benefits
create opportunities for may retain operational Company: Key employees may
tax efficient estate and/ or board control of receive separate equity
planning and wealth The full purchase price
Company based incentive
transfer strategies is deductible over time
compensation (e.g.,
Companies that are SARs or Phantom
100% ESOP owned Stock)
may pay no income
taxes Employee ownership
is shown to enhance
The enhanced cash employee engagement
flow from tax savings is and incentivize
used to repay debt and performance,
finance growth productivity and growth
13ESOPs Have a Positive Impact on Companies
Independent studies show companies with Employee ownership are:
More stable, more successful, and better for employees as well as the larger economy
More
S corporation ESOPs outperformed the S&P Total Returns Index in terms of
Competitive total return per participant by 62% from 2002 – 20121
Employee ownership results in higher growth in sales, employment, and sales per employee2
Perform better through difficult business, economic, and industry cycles
More Stable
The default rate on bank loans to ESOP companies during the period 2009–2013 was, on average,
and Resilient an 0.2% percent annually, ten times lower than levels experienced more broadly by mid-sized U.S.
companies (NCEO Study)
Are frequently recognized as great places to work and experience greater employment stability
Great Places
For 2015, 36 of the 71 (51%) U.S. for-profit stock corporations on the annual Fortune 100
to Work Best Companies to Work For feature a type of employee ownership plan3
Strong Companies that are S corporation ESOPs are proven job-creators, even during tough times
Contributors to While overall U.S. private employment in 2008 fell by 2.8%, employment in surveyed
the Economy S corporation ESOP companies rose by 2%4
Note: Sources and additional information available upon request.
1) Ernst and Young's Quantitative Economics and Statistics (QUEST).
2) Douglas Kruse and Joseph Blasi of Rutgers Study.
3) Steven Freeman from the University of Pennsylvania and NCEO.
4) 2010 Georgetown University/McDonough School of Business study.
14ESOPs Have a Positive Impact on Employees
Employees of ESOP owned companies:
Job
Satisfaction & Exhibit higher job satisfaction, organizational commitment, motivation,
Motivation and workplace participation
Job Security Are 4 time less likely to be laid off than employees of companies that
do not have employee ownership¹
Superior Retire with substantially higher retirement assets
Retirement A 2005 NCEO Survey reported that S corporation employee-owners had ESOP
Benefits account balances three to five times higher than the U.S. average for 401(k) plan
participants
For S corporation employee-owners nearing retirement, ESOP account balances were
five to seven times the average. Approximately 80% of companies surveyed by NCEO
offer their employees more than one qualified retirement plan
Note: Sources and additional information available upon request.
1) The General Social Survey.
15Basic Leveraged ESOP Transaction
Minority ESOP, Senior Debt Financing
Company ESOP Trust
Inside Loan
2
Cash (Bank Loan
Proceeds)
Outside Loan
Company
Shares
1 3
Cash
Cash
LENDER
Seller(s)
Leveraged ESOP: Transaction Steps Key Take-Aways
Company borrows cash from Lender on commercial The amount of debt used to facilitate the ESOP purchase
terms (“Outside Loan”) is determined based on incremental debt capacity of the
Company
Company lends the proceeds of the Outside Loan to the
ESOP Trust (“Inside Loan”), taking back a note The ESOP Trust is the shareholder
− The terms of the Outside Loan and the Inside Loan − Employees are not direct shareholders – they are
usually do not match beneficiaries of the trust
The ESOP uses the cash to purchase shares of the Day one, all shares in the ESOP Trust are unallocated
Company from the Seller and will be allocated to participants over time
16Basic Leveraged ESOP Transaction
Debt Repayment & Share Allocation
Company ESOP Trust
Inside Loan Debt Service
1 Shares allocated
Annual based upon payroll
Contribution
Outside Loan
Debt Service
Bank Loan
3 2
ESOP Participants
ESOPs result in broad-based
LENDER employee ownership
Leveraged ESOP: Transaction Steps Key Take-Aways
The Company makes an annual tax deductible contribution to The full transaction value is tax deductible over the term of the
the ESOP which the ESOP uses to make payments on the Inside Loan when contributions are used to repay the Inside
Inside Loan. Loan
As a result of the repayment on the Inside Loan, a portion of Both Contributions and Distributions made to the ESOP are
the shares are allocated to participants’ accounts based on the “non cash” to the extent that they are used to repay the Inside
terms of the Inside Loan (typically on the basis of pro rata Loan. These benefits enhance cash flow and the Company’s
compensation) ability to repay the Outside Loan
The Company uses corporate cash to make payments on the
Outside Loan The repayment of the Inside Loan determines the pace
at which stock is allocated to participants
17Seller Tax Incentive: IRC Section 1042 Rollover
Under certain conditions, Selling Shareholder(s) may defer
(and potentially eliminate) capital gains taxes by electing What qualifies as QRP?
Section 1042 Rollover
Eligible QRP:
Common stock, preferred stock,
Key Criteria for 1042 Election
bonds, and convertible bonds of
Company must be C Corp at transaction date U.S. companies
ESOP must own either (i) 30% of total value of all outstanding shares
Floating Rate Notes (FRNs) are
or (ii) 30% of each class of outstanding shares
long-term, high-quality corporate
Seller must be an individual, a trust, or a partnership, and have held the stock bonds (30–40 years) that pay a
for at least 3 years before sale floating rate tied to LIBOR
Seller must reinvest proceeds in eligible Qualified Replacement Property (QRP) within
12 months Selling Shareholders electing
1042 can typically borrow up to
If Seller elects 1042, Seller and family members will not be permitted 90% of the value (advance rate)
to participate in the ESOP
of FRNs and invest the proceeds
however they wish
For Selling Shareholder(s) For QRP Beneficiaries Ineligible QRP:
U.S. Government Issued or
No Capital Gains Tax is paid so If QRP is held until death of selling
Municipal Bonds
long as QRP is not sold shareholder, the QRP transfers to
heirs and the basis is stepped up Securities issued by non-U.S.
Upon Sale of QRP, capital gains entities
tax is triggered As a result, no Capital Gains tax
Commodities, bank CDs, general
is paid by the beneficiaries of QRP
or LP units, options, mutual
funds, or REITs
Note: PNC does not provide fiduciary services, feasibility studies, valuations, tax advisory, trust or trustee services, or repurchase liability studies. Other criteria and qualifications may apply.
18Strategic Positioning
Business and Personal
Corporate Team Wealth Team
Business vision and strategy Shareholder vision and strategy
− Industry dynamics and plan − Family dynamics and plan
− Competitive positioning − Philosophy and governance
Financial Financial
− Sources and uses − Income, liquidity and risks
− Distribution policy − Estate taxes
Administrative Administrative
− Leadership & demographics − Family leadership & governance
− Initiatives / incentives − Optimal shareholder and asset
Emotional Emotional
− Keep, sell or ESOP − Trust and estate fairness
− Communication strategy − Communication strategy
19Choices: Objective Advice
Internal External
Family Employees IPO Strategic
Private Equity
Investment
Sale Management ESOP
Gift
Buyout
Combination
20Balance Sheet: Before and After
Hypothetical Illustration
Assets Before $ Before % Increases (Decreases) Assets After $ After %
Cash/Money Markets $1,500,000 4% Cash/Money Markets $1,500,000 5%
Marketable Securities $2,500,000 7% $21,000,000 Marketable Securities $23,500,000 73%
Real Estate-Income $2,000,000 6% Real Estate-Income $2,000,000 6%
Real Estate- Primary Residence $2,000,000 6% Real Estate- Primary Residence $2,000,000 6%
Real Estate- Secondary Residence $2,000,000 6% Real Estate- Secondary Residence $2,000,000 6%
Business Interests $25,000,000 69% ($25,000,000) Business Interests $0 0%
Retirement Assets $1,000,000 3% Retirement Assets $1,000,000 3%
Total $36,000,000 100% ($4,000,000) $32,000,000 100%
Before After
Cash/Money Markets Cash/Money Markets
Marketable Securities 6%0%
3%5% Marketable Securities
3%4% 7%
5% 6%
6% Real Estate-Income 6% Real Estate-Income
6%
Real Estate- Primary Real Estate- Primary
69% Residence Residence
74%
Real Estate- Secondary Real Estate- Secondary
Residence Residence
Business Interests Business Interests
*This example is for illustrative purposes only. The results in this example are based on the stated assumptions. Results have inherent limitations because they are not based on actual transactions, and hypothetical results
may under or over compensate for the impact of certain economic and market factors, all of which can adversely affect results. Past performances is no guarantee of future performance.
21Cash Flow: Before and After
Hypothetical Illustration
Sources of Cash flow Before $ After $ After %
Salary $500,000 $0 0%
S Corp Distributions $3,000,000 $0 0%
Investment Portfolio @ 3% $100,000 $730,000 83%
Real Estate Income $150,000 $150,000 17%
Gross Income $3,750,000 $880,000 100%
Taxes (estimated @ 35%) ($1,312,500) ($308,000)
After-tax cash flow $2,437,500 $572,000
After-tax cash flow
$2,500,00 0
$2,000,00 0
$1,500,00 0
$1,000,00 0
$500,000
$0
1 2
*This example is for illustrative purposes only. The results in this example are based on the stated assumptions. Results have inherent limitations because they are not based on actual transactions, and hypothetical results
may under or over compensate for the impact of certain economic and market factors, all of which can adversely affect results. Past performances is no guarantee of future performance.
22Liquidity: Before and After
Hypothetical Illustration
Assets Before $ Before % Increases (Decreases) Assets After $ After %
Liquid $4,000,000 11% $21,000,000 Liquid $25,000,000 78%
Illiquid $32,000,000 89% ($25,000,000) Illiquid $7,000,000 22%
Total $36,000,000 100% ($4,000,000) $32,000,000 100%
Before After
11%
22%
Liquid Liquid
Illiquid 78% Illiquid
89%
*This example is for illustrative purposes only. The results in this example are based on the stated assumptions. Results have inherent limitations because they are not based on actual transactions, and hypothetical results
may under or over compensate for the impact of certain economic and market factors, all of which can adversely affect results. Past performances is no guarantee of future performance.
23Financial Peace of Mind: Cross-Over Point
Hypothetical Illustration
Cross Over Point
2017 2018 2019 2020 2021 2022 2023 2024
Valuation estimate
EBITDA 8.0% $ 3,500,000 $ 3,780,000 $ 4,082,400 $ 4,408,992 $ 4,761,711 $ 5,142,648 $ 5,554,060 $ 5,998,385
Valuation multiple 6 6 6 6 6 6 6 6
Valuation $ 21,000,000 $ 22,680,000 $ 24,494,400 $ 26,453,952 $ 28,570,268 $ 30,855,890 $ 33,324,361 $ 35,990,310
taxes 20% $ (4,200,000) $ (4,536,000) $ (4,898,880) $ (5,290,790) $ (5,714,054) $ (6,171,178) $ (6,664,872) $ (7,198,062)
Net to shareholders $ 16,800,000 $ 18,144,000 $ 19,595,520 $ 21,163,162 $ 22,856,215 $ 24,684,712 $ 26,659,489 $ 28,792,248
Cash Flow
Pre-tax income $ 3,000,000 $ 3,240,000 $ 3,499,200 $ 3,779,136 $ 4,081,467 $ 4,407,984 $ 4,760,623 $ 5,141,473
taxes 40% $ (1,200,000) $ (1,296,000) $ (1,399,680) $ (1,511,654) $ (1,632,587) $ (1,763,194) $ (1,904,249) $ (2,056,589)
net after tax $ 1,800,000 $ 1,944,000 $ 2,099,520 $ 2,267,482 $ 2,448,880 $ 2,644,791 $ 2,856,374 $ 3,084,884
Dividend policy 80% $ (1,440,000) $ (1,555,200) $ (1,679,616) $ (1,813,985) $ (1,959,104) $ (2,115,832) $ (2,285,099) $ (2,467,907)
Net retained $ 360,000 $ 388,800 $ 419,904 $ 453,496 $ 489,776 $ 528,958 $ 571,275 $ 616,977
Distributions, Annual
CEO 60.0% $ 864,000 $ 933,120 $ 1,007,770 $ 1,088,391 $ 1,175,462 $ 1,269,499 $ 1,371,059 $ 1,480,744
CFO 30.0% $ 432,000 $ 466,560 $ 503,885 $ 544,196 $ 587,731 $ 634,750 $ 685,530 $ 740,372
Distributions, Cumulative, growth @ 4.0%
CEO $ 864,000 $ 1,831,680 $ 2,912,717 $ 4,117,617 $ 5,457,784 $ 6,945,595 $ 8,594,478 $ 10,419,001
CFO $ 432,000 $ 915,840 $ 1,456,358 $ 2,058,808 $ 2,728,892 $ 3,472,797 $ 4,297,239 $ 5,209,501
Sale Proceeds
CEO 60.0% $ 10,080,000 $ 10,886,400 $ 11,757,312 $ 12,697,897 $ 13,713,729 $ 14,810,827 $ 15,995,693 $ 17,275,349
CFO 30.0% $ 5,040,000 $ 5,443,200 $ 5,878,656 $ 6,348,948 $ 6,856,864 $ 7,405,414 $ 7,997,847 $ 8,637,674
Total Net Proceeds (Cross Over Point)
CEO 60.0% $ 10,944,000 $ 12,718,080 $ 14,670,029 $ 16,815,514 $ 19,171,512 $ 21,756,422 $ 24,590,171 $ 27,694,350
CFO 30.0% $ 5,472,000 $ 6,359,040 $ 7,335,014 $ 8,407,757 $ 9,585,756 $ 10,878,211 $ 12,295,085 $ 13,847,175
*This example is for illustrative purposes only. The results in this example are based on the stated assumptions. Results have inherent limitations because they are not based on actual transactions, and hypothetical results
may under or over compensate for the impact of certain economic and market factors, all of which can adversely affect results. Past performances is no guarantee of future performance.
24Federal Transfer Taxes
2017 2018 – 2025
Estate Tax Exemption $5,490,000 $11,180,000
Estate Tax Top Rate 40% 40%
Gift Tax Exemption $5,490,000 $11,180,000
Gift Tax Top Rate 40% 40%
Capital Gain Tax At Death? No; Basis “step-up” No; Basis “step-up”
Source: irs.gov
25Cost of Procrastination: Hidden Liability
Hypothetical Illustration
Assumptions:
Estate Value: Current (estimate) $ 50,000,000
Estate Tax Rate (Federal) 40%
Estate Tax Rate (State) 0%
Estimated blended rate (Federal & State) 40%
Growth Rate of estate assets 7.2%
Estate tax rates and exclusions remain unchanged during calculation period
Estate Tax exclusion-individual $ 11,400,000
Estate Tax exclusion-joint $ 22,800,000
Age (beginning) 60
Incremental years 10
Age 60 70 80 90 100
Time Horizon 0 10 20 30 40
Estate Value $ 50,000,000 $ 100,000,000 $ 200,000,000 $ 400,000,000 $ 800,000,000
(Less Exemption) $ (22,800,000) $ (22,800,000) $ (22,800,000) $ (22,800,000) $ (22,800,000)
Balance subject to estate tax $ 27,200,000 $ 77,200,000 $ 177,200,000 $ 377,200,000 $ 777,200,000
Estate tax liability $ 10,880,000 $ 30,880,000 $ 70,880,000 $ 150,880,000 $ 310,880,000
Beneficiary Amount Amount Amount Amount Amount
IRS $ 10,880,000 $ 30,880,000 $ 70,880,000 $ 150,880,000 $ 310,880,000
Family $ 39,120,000 $ 69,120,000 $ 129,120,000 $ 249,120,000 $ 489,120,000
IRS % of total estate 22% 31% 35% 38% 39%
*This example is for illustrative purposes only. The results in this example are based on the stated assumptions. Results have inherent limitations because they are not based on actual transactions, and hypothetical results
may under or over compensate for the impact of certain economic and market factors, all of which can adversely affect results. Past performances is no guarantee of future performance.
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