Business Transfer Contract - PDF

							Ownership Transfer and Business
          Succession


         Presented by
          John Reed
  Ownership Transfer vs. Business Succession
• Ownership transfer can occur with or without a
  change in management through the use of
  voting and nonvoting shares.

• Business succession can be planned with or
  without an immediate ownership transfer

• Business succession begins be assembling a
  management team and spreading the
  concentration of management responsibility
          Why Consider It Now?

•Business valuations historically low

•Interest rates low

•Bonding is more difficult

•Having a succession plan in place is attractive
to sureties

•Owner estate tax planning
General Succession / Transfer Strategies

• Sale to an outside buyer

• Employee Stock Ownership Plans (ESOP)

• Transfer at death or disability through an
insurance contract

• Developing buyer(s) from within / becoming a
Succession Organization. Hardest part usually
is finding and developing the new leader
Outside Sales and ESOPs Harder To Do In Today’s
                    Market
  • Limited market for construction companies
  today.

  • Contractor consolidators out of business

  • Venture capital firms generally not interested
  in contractors.

  • Employee Stock Ownership Plans (ESOPs)
  are less viable today than they once were.
       Ownership Transfer Methods
• Create new company / Wind down old company

• Insurance funded transfer at death or disability

• Bargain sale

• Significant bonuses to buyer used to purchase
seller’s stock

• Phantom stock or nonqualified deferred
compensation

• Gifting using annual and lifetime gift exclusions
     Grantor Retained Annuity Trusts (GRATs)
• An estate planning transfer technique
• Not a new strategy, but one that fits well in today’s
  economy.
• Transfer of shares from one shareholder to other(s)
• Utilizes IRC 7520 rate for month of transaction.
• Death during term results in estate tax inclusion.
• Not a good technique for transfer to grandchildren as
  GST allocated at end.
• Can zero-out, resulting in no gift.
• Authority for GRATs is defined in IRC.
• Valuation self-adjusts.
                 Zero-Out GRAT
• Owner transfers (often nonvoting) stock to
  GRAT

• Owner retains an annuity interest equal to
  assets transferred, resulting in zero gift.

• If assets appreciate more than IRC 7520 rate,
  (2009 rates have ranged from 2.0% to 2.6%,
  currently at 2.4% for May 2009), all additional
  value is transferred to new owner without using
  any unified credit.
        Sample GRAT Calculation
•Fact pattern – S corporation contractor worth
approximately $3,000,000. Net income
$250,000. Tax on S corporation income
handled through owner withholding.

•Contractor wishes to make key employee a
10% to 15% owner.

•Normal shareholder agreements put in place.

•Uses a Zero-Out GRAT as the transfer
vehicle.
            Sample GRAT Results
•Shareholder contributes 35% of company in non-
voting shares to GRAT in February 2009 in exchange
for an annuity of $166,788 per year for 5 years (5 year
annuity payment at 2%).

•New owner’s distributions (35% of $175,000) paid to
old owner as partial funding of annuity. Difference
between annuity value and distributions received paid
in shares of stock (shares returned).

•At end of 5 year period, new owner retains 13%
ownership in company.

•Zero gift, so no gift tax paid or exclusion used
Zero-Out GRAT Calculation
        Zero-Out GRAT “Sweet Spot”

• Low IRC 7520 interest rate

• Income generates cash flow available to distribute
without a net depletion to equity

• No debt service in company

• Equity growth (after distributions) greater than the
IRC 7520 rate

• Ability to justify a larger valuation discount
               LarsonAllen LLP


• Appendix
  – Information about LarsonAllen and
    LarsonAllen’s Construction and Real Estate
    Group
LarsonAllen Construction and Real Estate Group
 Nationally Oriented CPA & Business Consulting Firm
   Established in 1953 by Rholan Larson & John Allen

   History & Focus on Privately-Owned, Owner-
   Operated Businesses

   Primary Advisor Relationship – “Total Client
   Service”

   Managed by the “LEADERS” culture

   Ranked in the top 20 CPA firms in the U.S.;
   approximately 1,400 employees; 27 offices and
   client service centers in 9 states
LarsonAllen Locations
              Upper Midwest
              Minneapolis, St. Cloud, Austin, Alexandria and
              Brainerd, Minnesota
              Eau Claire, Wisconsin
              Midwest
              St. Louis, Missouri
              Dallas, Texas
              East
              Philadelphia, Pennsylvania
              Washington DC
              Boston, Massachusetts
              Southeast
              Charlotte, North Carolina
              Fort Myers, Naples, Orlando and Tampa, Florida
              Southwest
              Phoenix, Arizona
              In addition, there are ten client service centers.
    Construction & Real Estate Group
Construction and Real Estate industry
commitment –
  Focus on industry knowledge and practice development
  Dedicated construction group staff of 100 professionals
  Firm-wide
  Specialized A&A and tax training for all staff and principals
  Construction industry association memberships and active
  involvement

Serving construction and real estate clients
ranging from startups to companies with
revenues greater than $1 billion covering a
wide variety & type of contractors and real
estate entities.
Florida Construction and Real Estate Principals
Naples
Sue Christopher (Lead Florida Principal),
  schristopher@larsonallen.com, 239.280.3562
Stan Schneider, swschneider@larsonallen.com, 239.280.3566
Michael Kosinski, mkosinski@larsonallen.com, 239.280.3517


Orlando
Les Eiserman, leiserman@larsonallen.com, 407.802.1203


Tampa
Jack Rybicki, jrybicki@larsonallen.com, 813.384.2701


Fort Myers
John Reed, jreed@larsonallen.com, 239.226.9903
            Noticeably Different
Construction Operations Consulting
   Information System Selection and Implementation
   Business Planning and Corporate Structure
   Management Training – Project Managers,
   Estimators, etc.
   Reporting Relationships
   Performance Measurement and Assessment
Dispute Resolution Support
   Advisory/Devil’s Advocate Services
   Expert Witness
   Claims Documentation and Assistance
Cost Segregation Services