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James L. Leet Sacramento Business Owner’s Conference 2013 February 13, 2013

Exit Strategies. James L. Leet Sacramento Business Owner’s Conference 2013 February 13, 2013. QUESTIONS. Do I have a management team that could operate the business? How much  of my involvement is important to the daily operation?

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James L. Leet Sacramento Business Owner’s Conference 2013 February 13, 2013

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  1. Exit Strategies James L. Leet Sacramento Business Owner’s Conference 2013 February 13, 2013

  2. QUESTIONS • Do I have a management team that could operate the business? • How much of my involvement is important to the daily operation? • Is my business tied to my reputation or to that of the organization that I have built? • What do I want to do afterwards? • What is my niche and who needs it? • When was the last time I evaluated the business practices and processes?

  3. SELLING TO A THIRD PARTY • Sell to a family member, long time customer or someone who is a friendly. • Sell to Employees through an ESOP. • Look for a buyer who understands your business and appreciates what you have done in the business. • A competitor is also a possibility if the competitor can see an increase in scope and scale or expansion geographically.

  4. STRATEGIC BUYER v.FINANCE BUYER • The competitor, long time customer and family member may be a strategic buyer. • Strategic buyers have a better understanding of the importance and value of your enterprise. Strategic buyers will pay more for the business than a financial buyer. • Financial buyers are looking at a return on investment. There must be a clear case that the investment will produce an acceptable return.

  5. FINANCIAL BUYERS • Financial buyers will likely assess your business differently and weigh differently the risks. Financial buyers will generally offer lower prices than a strategic buyer. • More conservative and cautious. • Its about maximizing the return on investment with minimizing risks.

  6. WHAT CONSIDERATION FOR EXIT • Stock in Buyer or Buyer’s affiliate • Cash • Notes • Employment Agreement • Covenant not to compete

  7. WHAT FORM • Is this to be an asset sale or stock sale? • If business is a C corporation, a stock sale is preferred to avoid double tax. • If business is an S corporation or partnership or LLC, sale of assets or ownership has one level of tax. • You must be sensitive to the character of the income: 39.5 highest rate for ordinary income. • There are different capital gains rates but all lower.

  8. WANT TO DEFER THETAX ON LIQUIDATION • For corporations (S and C), taxes are deferred in reorganizations. You must take a sufficient amount of stock in the buyer. • For example, a statutory merger taking cash and stock. • Other asset acquisitions taking cash and stock of the buyer or its affiliate. • Transfer stock for stock of the acquirer.

  9. WANT TO DEFER TAXES • For non-corporate enterprises: • No tax deferred reorganizations. • Transfer of assets are treated as the sale of the assets by the owners of the LLC or partnership. • Business combinations by having an acquiror join your business ownership or your entity transferring assets to the acquiror’s entity in exchange for an interest in the acquiror’s entity.

  10. GETTING READY: BUILDING BLOCKS • Build a Management Team.  Start at the top (C Level positions--CFO, CEO, COO) and work down. • Clean up the company's books.  Have an audit performed and follow the auditor's recommendations. • Have your lawyer conduct a legal review of present practices. Accept recommendations. • Review special regulatory practices (such as HIPPA and HR practices, review employment manuals and determine compliance with them). • Consider using an Investment Banker • Speak to your financial planner to prepare for the personal consequences of this event.

  11. CONTINUING PRACTICES • Conduct an inventory of assets. • Have your lawyer and CPA decide what form of transaction makes more sense for you. • Anticipate due diligence by gathering documents now and have your attorney set up a data room to collect contracts and entity documents that will be reviewed in due diligence. • Prepare to spend time away from running the business in order to run the issues in the sales event.

  12. BE PREPARED • Have your goals clear for transitioning. • Select a team in advance to assist and who can work collaboratively to develop a plan. • There will be residual risk. Talk with your lawyer on containing the risk. • Decide how you want to structure the exit for your best advantage. • Implement the plan.

  13. James L. Leet Boutin Jones Inc. 555 Capitol Mall, Suite 1500 Sacramento, CA 95814 jleet@boutinjones.com 916-321-4444, x. 176

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