How to be a $ uccessful Construction Financial Manager

1. How to be a $uccessfulConstruction Financial Manager Knowledge. Resource. Opportunity.

2. Shareholder Agreementsa key aspect of ownership sustainability in closely held construction companies

3. Today’s presenter Jon Zeiler, CPA, Partner Crowe Horwath LLP Construction Services Leader Direct: 630.575.4237 jon.zeiler@crowehorwath.com Steve Andrews, CPA, Partner Crowe Horwath LLP Construction Services Leader - Tax Direct: 630.574.1647 steve.andrews@crowehorwath.com

4. Agenda • Overview • Advantages and Risks • Types of Buy-Sell Agreements • Typical Provisions • Valuation, Payment Terms and Other Provisions • Q&A Session

5. Overview – Purpose of Agreement • Set Rules Governing Stock Ownership • Plan for Contingencies – Death and Disability • Plan for Voluntary or Involuntary Withdrawals • Set Economics for Early Withdrawal

6. Basics of Thought process/philosophy • Treat People Fairly • Respect Prior Commitments/Stock Deals • Protect the Company (Golden Goose Theory) • Balance Risk Between Exiting Owner(s) and Remaining Owners

7. Risks with No Buy-Sell Agreement/Advantages of Buy-Sell Agreements • Risks with No Buy-Sell Agreement • Unwelcome business partner • “Cousins in Chaos” • Surviving spouse unwilling or ill-prepared to make decisions • Attorneys are smiling • Undesired economic outcome • Advantages of Buy-Sell Agreements • Guarantees a buyer for an asset which probably would not pay dividends to one’s heirs • Spells out the terms of payment and can usually be fully funded with life and disability insurance, if desired • Provides a smooth transition of complete control and ownership to those who are going to keep the business going • Can establish a value for Federal Estate Tax purposes, which is binding on the IRS

8. Two Types of Buy-Sell Agreements • Entity Plan: The partnership (or corporation) agrees to buy the interest of the deceased /former partner (or shareholder) Partnership or Corporation buy-sell buy-sell buy-sell Partner/ Shareholder #1 Partner/ Shareholder #2 Partner/ Shareholder #3

9. Two Types of Buy-Sell Agreements • Cross Purchase Plan: The partners (or shareholders) agree to buy the interest of the deceased/former partner (or shareholder) Partner/ Shareholder #1 buy-sell Partner/ Shareholder #3

10. Buy-sell agreements • Restrictions on Transfer – General • First option to purchase stock to Company • Section option to purchase stock to shareholders (pro rata) • If one shareholder declines, offer his share to others pro rata • Time periods • Tax implications – cost of basis shares

11. Buy-sell agreements • Specific Situations • Death • Disability • Retirement • Gifting among family – Allowable? Requirements? • Voluntary withdrawal • Involuntary withdrawal

12. Buy-sell agreements • Death • Obligation of estate to sell • Insurance funding must follow obligation – cross purchase vs. Company redemption • Insurance proceeds > Purchase price • Paid upon receipt • Company keeps excess • Insurance proceeds < Purchase price • Promissory Note for balance • Life insurance on owners • Nearly always at full value

13. Buy-sell agreements • Disability • Defining disability – Temporary disability – first 12 months • Evaluation of Permanent Disability • Ability to perform normal job duties • Opinion of physician • If permanently disabled, Company has the option obligation to purchase stock • Full/value purchase price

14. Buy-sell agreements • Retirement • Defining “retirement” • Age plus years of service > 85 • “Put” stock at 55 (Company must buy) • “Call” stock at 60 (Company right to buy) • Generally full value

15. Termination without cause and involuntary transfer • “Cause” defined – ethics, felony, ‘material’ failure to perform duties, comply with Board, personal conduct, injurious to Company • Offer but no obligation to buy • Generally full price • Offering owner may go to third party with any portion not purchased • Company has the right to match third party offer • Payment with Note by Company, all cash if bought by other owner

16. voluntary termination and termination with cause • Leaving owner generally much offer to sell to Company • Generally some reduction in current value • Possible restriction on payment, e.g., note payments delayed until a certain age • Penalty on price is thought to be for doing something within ‘Cause’ definition or leaving the Company early (i.e., before Retirement)

17. Valuation considerations • Net book value (owners’ equity) • Formula based on earning (EBITDA and book value) • Excludes life insurance proceeds • Increase securities or real estate to FMV • Include significant contingencies if >5% of equity • Right of set-off against price for certain adjustments • Certificate of agreed upon value – (with expiration)

18. Buy-sell agreements • Payment Terms • 20% down • Promissory Note for balance • Promissory Note Terms • Payment period – sliding scale based on size of note • Fixed interest rate – Wall Street Journal prime rate • Security for Note – Shares/Dividends paid on shares • Aggregate limitation on payments to exiting owners on notes – e.g., 25% of cash flow • Right of repayment

19. Ancillary Provisions • Non-compete, non-solicitation, confidentiality • Salary continuation • Benefits • Release of guarantees and indemnification

20. Sale of Company • Drag Along and Tag Along Rights • Possible retroactive adjustment of price for owners who exited earlier

21. Questions Jon Zeiler, CPA, Partner Crowe Horwath LLP Construction Services Leader Direct: 630.575.4237 jon.zeiler@crowehorwath.com Steve Andrews, CPA, Partner Crowe Horwath LLP Construction Services Leader - Tax Direct: 630.574.1647 steve.andrews@crowehorwath.com THANK YOU!!!!