1 Why your business value mattersKnow your value. Secure your future. Month Day, Year Presenter 1 name Presenter 2 name (or delete) Title(s), designations Title(s), designations Welcome and thanks for attending today’s workshop. Introduce yourself — provide brief intro on background and experience (If applicable) Recognize employer (or other organization) for “sponsoring” this benefit. Optional (time permitting) — Have attendees introduce themselves and say what they would like to get out of the workshop.
2 [Leave on screen long enough for people to read.]Principal National Life Insurance Company and Principal Life Insurance Company, Des Moines, Iowa Insurance issued by Principal National Life Insurance Co. (except in NY) and Principal Life Insurance Co. Securities offered through Principal Securities, Inc., , Member SIPC, and/or independent broker/dealers. Principal National, Principal Life and Principal Securities are members of the Principal Financial Group®, Des Moines, IA No part of this presentation may be reproduced or used in any form or by any means, electronic or mechanical, including photocopying or recording, or by any information storage and retrieval system, without prior written permission from the Principal Financial Group®. Principal, Principal and symbol design and Principal Financial Group are trademarks and service marks of Principal Financial Services, Inc., a member of the Principal Financial Group. ***PRINCIPAL ADVISOR NETWORK VERSION DISCLOSURES – IF USING THIS, DELETE FOLLOWING SLIDE OF BGA DISCLOSURES We are not attorneys nor practicing CPAs, and we encourage you to consult your legal and accounting professionals to determine whether any of the ideas presented here would be suitable for your company. [Leave on screen long enough for people to read.] BB | 05/2017 | t xm | © 2017 Principal Financial Services, Inc.
3 [Leave on screen long enough for people to read.]Principal National Life Insurance Company and Principal Life Insurance Company, Des Moines, Iowa Insurance issued by Principal National Life Insurance Co. (except in NY) and Principal Life Insurance Co. Securities offered through Principal Securities, Inc., , Member SIPC, and/or independent broker/dealers. Principal National, Principal Life and Principal Securities are members of the Principal Financial Group®, Des Moines, IA
4 What can I do to help get full value for my business someday?Protect your value Build a secure retirement Know your value Implement or update a succession plan You've worked hard to build the value of your business. And chances are, you've thought about when you want to sell it, who you want to sell it to and for how much. You might also be depending on your business for retirement income. So you want to make sure you get full value when the time is right. How can you do that? That’s what we’re going to cover today. The four key components are: Knowing the value of your business Having a current succession plan in place Protecting the value of your business from planned or unplanned events Building a secure retirement for you and your key employees
5 Know the value of your businessYou can’t get full value for your business if you don’t know what its value is, right? Let’s talk about how you can go about determining — and enhancing — your business value.
6 Too many owners don’t have an up-to-date business valuationKnow the value of your business Too many owners don’t have an up-to-date business valuation 45% of owners have never had their business valued When have valuations taken place? 51% within the last two years 44% in the last 2-10 years If you aren’t sure what your business value is, don’t feel bad. As you can see, 45% percent of business owners have never had their business valued. And of those that have, only about half have had a valuation done within the last two years. Source: 2017 Principal Financial Group® Business Owner Survey
7 How is a business valued?Know the value of your business How is a business valued? Fair market value: the price agreed upon by a willing buyer and a willing seller. So how exactly is a business valued? There are many different methods, and no one method is always the right one. Ultimately, “fair market value” is the amount agreed upon by a willing buyer and a willing seller. But we realize this definition is vague, so we’ll provide some more details on how business value is determined in the following slides.
8 What influences the value?Know the value of your business What influences the value? Revenue Ruling considerations: Nature and history of business Outlook of economy and specific industry Financial condition of business and its book value Earnings capacity of company Nature and value of any intangible assets of business, such as goodwill Relative size and block of business interest to be valued and any prior sales Market price of actively traded stock of corporations in the same or similar business What factors impact your business value? Here are some key ones: [Read slide]
9 Business valuation methodsKnow the value of your business Business valuation methods Adjusted book value Formulas Capitalization of earnings Multiple of discretionary earnings Excess of earnings Discounted future cash flow Comparables As I noted earlier, there are a number of methods that can be used to determine your business value. These serve only as a guide to owners; no single method will work in every case, and which method is used may ultimately depend on your advisor. These are some established and accepted legal and accounting methods: Adjusted book value: Assets, with adjustments, less liabilities — this generally represents the "liquidation" value. Formulas, which include: Capitalization of earnings: Amount of capital that would have to be invested at a specified rate to yield the current average net annual earnings of the business. Multiple of discretionary earnings: Earnings provided by goodwill, times a multiplier; adjusted book value is added to this number. Excess of earnings method: A combination of the adjusted book value and capitalization of earnings methods. Discounted future cash flow method: Projected future business earnings forecasted, then discounted using an appropriate rate. Comparables: Experts or appraisal firms use data regarding assets of comparable businesses to determine an appropriate value.
10 Where can I get my business valued?Know the value of your business Where can I get my business valued? Business appraisal firms Business brokers or investment bankers CPAs Financial professionals You can get various types of valuations from multiple sources. And those valuations can serve many different purposes. The reason for the valuation determines who might be the best resource to perform it. Business appraisal firm: These appraisals are formal valuations for tax planning purposes, and they can cost $10,000 or more. Investment banker/broker: This is a good option when considering a sale to an outside third party. They can provide not only valuation, but also information on market conditions. This is particularly important in the current economy. CPAs: CPAs may provide valuations as well. They may focus on past performance, which can be a very credible benchmark — particularly in the initial stages of exit planning. Insurance/financial professional: Informal valuations can be provided based on company financials to allow you to obtain a range of potential values in order to initiate necessary business planning.
11 How can I influence my business value?Know the value of your business How can I influence my business value? Focus on increasing cash flow Develop operating systems that improve sustainability of cash flows Document sustainability of earnings Improve facility’s appearance Pay down debt Solidify and diversify customer base Implement a strategy to grow the company Build a solid management team and groom a successor You may be wondering if there are ways to help enhance your business value. Fortunately, there are many. [Read the list] These are things investment bankers and business brokers look for when valuing a business because it’s the same list of attributes that are relevant to investors. Maybe your company is ready to sell tomorrow. But you could likely increase the price by implementing some of these improvements. A lot of these are common sense. Just step back and look at your business from a potential buyer’s perspective. Work with your attorney and CPA to clean up lingering tax, legal or accounting issues. Consider audited financial statements. Review accounting procedures. Review corporate minutes, organizational documents and other legal documents. This may take time but will usually make it easier to sell your business. Consider the last item. Most buyers will want an experienced, capable management team. The value of your business will be lower if you are its only key person. An executive compensation program can attract and retain the right management team and/or groom potential successors. Hiring a business consultant to analyze your business and develop recommendations to increase growth, profitability and marketability may be worthwhile. Most of these things can’t be accomplished overnight. Exit planning is most effective if it’s long term. By keeping these things in mind, you can run your business so that when you do decide you are ready to retire, your business will be ready, too. Earlier, I mentioned that understanding the exit planning process is useful even if your retirement isn’t imminent. By keeping these things in mind, you can run your business so that when you do decide you are ready to retire, your business will be ready, too. These recommendations will help any business. Even if you hope to transfer to a child or key employee, observing these best practices will help increase the chance of a successful transition.
12 Know the value of your businessWe can help Take advantage of our complimentary informal business valuations. Involves five common valuation methods Customized reports are provided Starting point for discussions with advisors Not sure where to turn in order to begin the process of valuing your business? We can help. Principal offers complimentary informal business valuations. We use five common valuation methods as part of this process. We’ll provide you with customized reports based on the documents you give us. These will serve as a starting point for discussions with tax or legal advisors.
13 Am I a candidate for an informal business valuation?Know the value of your business Am I a candidate for an informal business valuation? Good fits include: Manufacturing companies Construction businesses Professional service organizations IT companies Healthcare providers Profitable businesses Some types of business are better fits for our informal business valuation services than others. These include: Manufacturing companies Construction businesses Professional service organizations IT companies Healthcare providers Profitable businesses And these are some of the types of companies that are more challenging: Farms (no goodwill — that is, no established reputation that can be regarded as a quantifiable asset) Real estate (no goodwill) Publicly traded companies (already have a value) Sole props Financial service firms Nonprofit organizations Unprofitable businesses (with negative book value and net losses) New companies (not enough history)
14 5 common valuation methodsKnow the value of your business 5 common valuation methods What does your buy-sell say the value is? Do I have a buyer who will pay this? What does my buy-sell say the value is? Will this hold if a key employee leaves? Will you or your heirs be taxed on this? Or this? Will my heirs be taxed on this? Or this? And before we move on to the next section, I wanted to share an example of what we provide to you when we complete an informal business valuation, as well as some things to take into consideration as you review it. [Talk through the example, noting the five valuation methods and highlight the one we consider the most accurate/appropriate.]
15 Implement or update a succession planOnce your business value is determined, putting a business succession plan and/or buy-sell agreement in place is the logical next step. In the event of a death, disability, loss of a key employee or a future change in management, would your business be as successful as it is today? If the answer is “no,” that’s okay — we can help.
16 Why do I need a business succession plan?Implement or update a succession plan Why do I need a business succession plan? Protection in the event of: A change in relationships An owner’s death or disability Mergers or acquisitions Divorce Bankruptcy Retirement Involuntary termination Well-crafted and funded business succession plans and/or buy-sell agreements offer protection for a variety of events, many of which you might not see coming. These can include: A change in relationships. Like marriages, relationships between owners can fall apart. Why? Some common reasons include: The owners grow apart, developing separate plans, visions, strategies or approaches to doing business. One partner is working harder than the other — or perceives it that way. Embezzlement or other unethical/unlawful activities. An owner dies. In this event, your new partner could be the surviving spouse or other family member. An owner becomes disabled. From a purely business perspective, this may be more difficult than a partner’s death. Additional events that make a succession plan important include mergers or acquisitions, divorce, bankruptcy, retirement and involuntary termination.
17 Common problems with agreements between ownersImplement or update a succession plan Common problems with agreements between owners Not formalized Poorly structured No or partial funding Outdated Here are some common issues with owner agreements: They aren’t formalized. This is the most problematic. Some folks believe a “handshake” agreement should suffice. But trust me, it’s best to solidify an agreement and lock in key variables —such as transition scenarios, valuation methodology and protection mechanisms — at the beginning of the relationship rather than having to negotiate it when emotions are high. And it’s essential to have it all in writing. They’re poorly structured. We’ve seen agreements that provide no transition strategy for an owner unless the other owner dies or does something illegal. That means that for all the other scenarios or events we described before, the partners have no way out without costly litigation. We also see agreements that have no valuation methodology, or use a methodology that wouldn’t pass muster with the IRS. It’s better to develop an agreement with advisors who deal with these types of agreements on a regular basis. There’s no or only partial funding. If an owner dies or becomes disabled, and there’s no funding mechanism that enables the surviving owner(s) to buy out the other, the surviving spouse or family becomes the new partner. The result is that the other owners often find themselves unequal partners with someone who isn’t contributing to the company. One business owner came to me a few months ago because his 72-year-old partner was no longer contributing, but was still drawing 50% of the company’s income. When we took a look at their business agreement, it had a provision for disability income for partners, but the company hadn’t purchased disability income policies on the partners. Just imagine the liability he was facing. It’s better to have the life insurance and/or disability buy-out insurance in place in the beginning to enable the owners to make the break and move forward. They’re outdated. The business succession and/or buy-sell agreements should be living documents — flexible enough to grow as your business grows. Laws can change, and funding mechanisms need to keep pace with your business’s value. It’s best to open these documents up periodically to ensure they’re keeping pace with the owner(s)’ expectations and intentions.
18 How to evaluate an existing agreementImplement or update a succession plan How to evaluate an existing agreement Have all triggering events been addressed? Is the business valuation clear, specific, appropriate and continuous? When is a mandatory buy-out required? Is “disability” defined and consistent? Already have a business succession plan and/or buy-sell agreement in place? It’s important that you evaluate it and ask these questions: Have all the possible common problems been addressed? Does your agreement specify what happens in the event of a relationship between owners going bad, death, disability or any of the other events we talked about earlier? Is the business valuation clear, specific, appropriate and continuous? If you need help with this, we provide complimentary informal business valuation services, so you can understand the value you need to protect. Is a mandatory buy-out required upon death and/or disability? What about retirement? Is “disability” defined and consistent between the agreement and the policies funding the agreement?
19 Benefits of an effective agreementImplement or update a succession plan Benefits of an effective agreement Clarity Financial security Peace of mind Bottom line? A business succession plan and/or buy-sell agreement can help you and your business survive significant events by providing: Clarity — Your agreement will ensure everyone understands the possible outcomes if any of the events we discussed should occur. Financial security — If the unexpected happens, a funded agreement gives you the financial means to solve problems quickly and cost effectively. Peace of mind — It will reduce everyone’s angst to know there’s a plan in place to deal with problematic events. So let’s see how often these events actually occur in the buy-sell agreements we’ve reviewed.
20 Key mandatory triggers to includeImplement or update a succession plan Key mandatory triggers to include An effective buy-sell agreement is at the root of a successful business transition plan. Best practice suggests these agreements should include at least the top three mandatory triggers: death, disability and retirement.
21 Mandatory vs. optional eventsImplement or update a succession plan Mandatory vs. optional events Percentages of business owner agreements that cover the top three transition events and those that include them as mandatory triggers: Now, take a look at the percentage of agreements that actually include these top three transition events as mandatory buy-out events versus optional ones. [Consider handing out the Buy-Sell Review-Retirement Infographic (BB )] As you can see, these triggers are optional buy-out events in a significant number of agreements. That’s a mistake you’ll want to avoid. Summing up — while most buy-sell agreements account for transitioning a business at death, disability and retirement are often overlooked. Planning for these events will help ensure the successful transition of your business during your lifetime. Source: Review of 1,485 buy-sell reviews by Principal Financial Group®, January 1, 2011-January 31, 2017.
22 Protect the value of your businessNext, we’re going to cover business protection. Business protection involves implementing strategies to preserve, protect and promote the value of your business. Why is this important? Business protection helps you: Maintain business operations in the event of the loss of a key employee. Preserve the value of your business until you choose to exit. Better facilitate a transfer to family members, key employees, other owners or third parties when you exit your business.
23 What type of events should I protect against?Protect the value of your business What type of events should I protect against? Planned events: Retirement Termination Unplanned events: Death Disability Divorce Bankruptcy So, we just discussed various triggering events for your buy-sell agreement. There are a variety of events you need to protect against — some planned and some unplanned. [Read slide]
24 Common owner concerns When can I exit my business?Protect the value of your business Common owner concerns When can I exit my business? Will my children be able to, or want to, take over? Will it sell for what it’s worth? How can I avoid huge taxes? Can it survive without me? How can I incent key employees and my management team to stay? Now, let’s discuss some common concerns business owners like you have as you think about your transition out of the business. [Read slide] Some of these questions may apply to you, and others may not. The key is to understand that there’s a process that can help business owners like you answer these questions and more.
25 Succession strategiesProtect the value of your business Succession strategies How do closely held business owners exit their businesses? It’s easy to think you’ll have plenty of time to prepare for a transition in business ownership. But time can go by faster than you think. And there are many events — both planned and unplanned — that could change the business, like retirement, dissolution, death, disability, divorce and termination. You’ve worked hard to build your business. Now take the time to protect its future and those that depend on it. There are many succession strategies to consider, and we can help. Start with a simple question to narrow down your options. [Walk through scenarios in the graphic, and consider handing out the Business Succession Decision Grid (BB )]
26 A written plan reflecting current value is criticalProtect the value of your business A written plan reflecting current value is critical Having a well-documented plan is important, but it’s also crucial to have a current value reflected in that agreement. Only 5% of the buy-sell agreements we review reflect a current fair market value of the business at the time of the review. If there’s uncertainty about the company’s value, this can result in an unintended negative financial impact to the owners. [Consider handing out the Buy-Sell Agreement & Business Valuation Infographic (BB )] The good news? If you put a well-crafted and fully funded written plan in place, reflecting a current fair market value, you’ll have every reason to be confident about your exit strategy. Source: Review of 1,485 buy-sell reviews by Principal Financial Group®, January 1, 2011-January 31, 2017.
27 Build a secure retirement for you and your key employeesYour business will likely play a key role in your retirement which is yet another reason knowing and protecting the value of your business is so important.
28 Business Owner Retirement Analysis — income considerationsBuild a secure retirement for you and your key employees Business Owner Retirement Analysis — income considerations What will it take to retire? Potential retirement income sources: Social Security Qualified plans Nonqualified plans Other savings & investments Sale of your business Depending on the value of your business, the strength of your buy-sell agreement and proper funding, your business can generate income during retirement just like it has during your working years. If you want to gift it to your family and continue working instead of selling your business, that’s also possible. All it takes is some careful planning. [Review slide]
29 Business Owner Retirement Analysis — Achieving your income goalBuild a secure retirement for you and your key employees Business Owner Retirement Analysis — Achieving your income goal What will it take to generate the retirement income you need? Here’s a hypothetical scenario. It makes some assumptions, including: Retirement age: 65 Income to age: 90 Annual retirement income needed: $225,000 Annual Social Security income: $24,000 Business value: $2,500,000 Qualified plans and taxable IRAs: $1,000,000 Investment account balance: $500,000 As you can see from the chart, this would leave you with a retirement gap of $565,958 at age 65. But don’t worry. You can bridge the gap if you start planning now. Here are your primary options. Work longer. I know this isn’t ideal, but it’s worth considering. Save more. Consider implementing a nonqualified supplemental retirement plan that may be a tax-efficient way to create additional annual retirement income. Consider activities that will increase the market value of your business. In this scenario, the estimated retirement gap if you retire at age 65 is $565,958
30 Business Owner Retirement AnalysisBuild a secure retirement for you and your key employees Business Owner Retirement Analysis Free, personalized report Evaluates your current plans and financial position Includes strategies to help you achieve your retirement goals So, how secure will you be during retirement? As we’ve outlined, knowing your business’s value and having a current transition plan are important first steps to figuring out how much you can rely on your business in retirement. You also need to consider how other savings and investments may effectively contribute to your income. We can help! Principal offers a Business Owner Retirement Analysis that can pull all of these factors together to help you evaluate your current plans and financial position. And, if needed, it can direct you to strategies that can help you, as a business owner, achieve retirement readiness. I encourage you to ask your financial advisor for this free, personalized report and take that first step towards the retirement you choose.
31 What makes key employees so important?Build a secure retirement for you and your key employees What makes key employees so important? Losing them would: Impact your operations, customer relations, profitability and potentially your business value Result in significant recovery time for your business Let’s take a second to think about your staff. Perhaps you’re the only person who’s critical to the success of your business. But a lot of us have a key employee or employees we rely on heavily. What makes someone a “key employee?” They’re the ones who, if they were suddenly gone tomorrow, could make a big impact on your: Operations. Perhaps they’re vital to work getting done. Customer relations. Key employees often know everybody, and everybody knows them. And they don’t need a phone to keep track of their contacts. It’s all in their head. Profitability. They have a direct and substantial impact on your bottom line — which, in turn, could impact your business value. Recovery time. If a key employee were to leave, it could take you months or perhaps even a year or two to replace them.
32 Competitive compensation & benefitsBuild a secure retirement for you and your key employees Recruit key employees Competitive compensation & benefits Customized benefits Maybe you don’t have key employees in your organization, but you’d like to. How can you recruit them? The key is to be competitive with what you offer. Too often businesses have preconceived notions about “reasonable” compensation and benefits — which may not match reality. Offer competitive compensation and benefits. You need to compete for good people just as you compete for customers. Someone who’s thinking about working for you will compare your package to what’s available elsewhere. For example, if you’re looking to hire a marketing professional, know that you’re likely competing with other companies who aren’t even in your industry. That doesn’t mean you have to offer the same salary and benefits. But be prepared to offer a competitive package and explain the intangibles that put might elevate you above the competition. Consider offering customized benefits. First, there are the well-known perks that you might be able to offer: company car, flex time, etc. But there are other flexible compensation arrangements that are worth examining as well. We’ll discuss some of those in a minute.
33 Retaining, rewarding and retiring key employeesBuild a secure retirement for you and your key employees Retaining, rewarding and retiring key employees Key employee benefits can help with: To retain top talent and motivate them continue performing at a high level, it’s critical that they: Love what they do and who they’re doing it for. Understand how their performance is linked to their future success. See how their future with the company aligns with their personal goals. How can you encourage all of these things? One-time cash bonuses are nice, sure. But the best incentives are more significant and ongoing. One solution: key employee benefits. Not only are these great ways to incent your key employees — they’re also advantageous to you because they give you a lot of flexibility. There are multiple designs, which means you can choose who you’d like to participate and, how much you want to spend on that benefit. You can design these plans with the objective to: Retain Top Hat or non-Top Hat employees Obtain a current tax deduction for the company or, Obtain a current tax deferral for the key employee [Consider handing out Decision Grids for C Corps (BB11384), S Corps and LLCs (BB11383) and Tax-Exempt Organizations (BB11385)] There are a variety of plan designs and financing options available for these plans. Whatever approach you choose, offering a reward that has significance both today and in the future will go a long way toward keeping your difference makers happy — and keeping them around. * Top Hat employees are defined by the Department of Labor as a select group of management or highly compensated employees making over $120,000/year (2017).
34 Recap: How to get the most value for your business when you leave itKnow the value of your business Implement or update a succession plan Protect the value of your business Build a secure retirement for you and key employees Wrapping up, we know how hard you’ve worked to build your business value. And when the time comes for you to sell your business, we hope these tips will help you get the most value for it. Again, four keys to doing this are: Knowing the value of your business Having a current succession plan in place Protecting the value of your business from planned or unplanned events Building a secure retirement for you and your key employees
35 Questions? [Optional: If time allows, you can offer Q&A at the end of the session. ] Are there any questions I can address for you before we go?
36 Thank you Get in touch with any questions Presenter 1 namePresenter 2 name (or delete) Phone Website Phone Website Thank you again for attending today’s session. Please take a minute to complete the evaluation form (BB11177) to let us know if this information was helpful and if you’re interested in following up. Or please feel free to reach out directly. Here’s how to get in touch. BB | 05/2017 | t xm | © 2017 Principal Financial Services, Inc.