Your Legacy, Exit Strategy, & Planning Guide by CLB Network

Your Legacy, Exit St rat egy & Planning Guide WHAT YOU NEED TO KNOW TO GET WHAT YOU NEED

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CLB TRUSTED ADVISOR GUIDE CLB measures our partnership success in Revenue, New Projects, Net Profit, and Achieving Your Legacy. We want you to achieve your goal of putting a minimum of $1M in profits in the bank and achieving 10% net profit for the business and building a valued asset that can be transacted. CLB takes a bright and innovative approach to offering easy-to-understand, customizable, and fractional solution options at a significant value compared to hiring employees or firms that do not understand your business, your best-fit clients or the luxury home building and remodeling industry. CLB Network is backed by a team of seasoned professionals who explicitly understand what it takes to be a high performance luxury custom homes and remodeling business and how to deliver a 5-star experience to best-fit strategic partners. prospects, and clients. Our combined experience and solutions allows CLB to offer you and your business genuine peace of mind knowing that we are on your team and will help you achieve your goals years sooner than if you had to do it on your own.

TABLE OF CONTENTS W HY EXIT STRATEGY PLANNING? -

Plan vs. No Plan Elements To A Successful Exit Strategy The Seven Step Process Exit Routes For Business Owners Setting The Stage For Exit Planning - Transfer To Family Member - Transfer To Key Employee (s) - Transfer To Key Employees Via ESOP - Sale To Co-Owners - Sale To A Third Party - IPO - Assume Passive Ownership - Liquidation

DRIVING VALUE TO YOUR BUSINESS -

Management Team Operating Systems Established &Diversified Customer Base Appearance Of Facility Consistent With Asking Price Realistic Growth Strategy Effective Financial Controls Stable & Increasing Cash Flow

CONCLUSION -

Making Sure That Your Business Continues If You Do Not Final Thoughts About CLB Network

W HY EXIT STRATEGY PLANNING? The world of businessownership hasprobably never been more complicated. Competition iseverywhere, consumer loyalty can shift in a heartbeat and the economy and industry marketplace opensup both new opportunitiesand enormouschallenges.

Every year there are new taxes or new ways to avoid them. It should be of no surprise that the planning that goes into exiting a business has also grown in both complexity and importance [if a desired outcome is to be achieved]. With this complexity, Exit Planning has become more crucial than ever. Indeed, we see real value in working with professionals with deep exposure to laws regarding tax, estate, insurance, and valuation. In this short guide, we will not cover all the granular details such as specific tax strategies, though examples may reveal certain opportunities or pitfalls to avoid. Our goal here will be to educate a business owner so that they begin to work with our firm and others to consider the importance of planning, how it can have a

profound effect on their future, and possibly identify areas within their own business that need focus. There were motivating factors pushing us to put this guide together as we continue to witness the effect a lack of planning has on a luxury builder & remodeler?s business and possible transaction. The unfortunate reality is many times, simple changes could have helped avoid major problems. As in Law, ?ignorance is no excuse?. You can?t go back in time. Our hope is this guide puts you on a path of educating yourself as well as forming a strategic mindset of looking at your business from an outsider?s point of view. We hope you appreciate the guide.

Plan vs. No Plan Having a planned exit st rat egy could save you millions Having a planned exit could mean the difference in hundreds of thousands if not millions of dollars to you when you are ready to leave the business. Even those companies that put a well-thought business plan that is executed flawlessly do not often have an exit strategy that answers several questions.

DO YOU HAVE THE ANSW ERS TO THESE QUESTIONS?

Questions that will determine your readiness to exit in a planned fashion or even unplanned due to an unforeseen circumstance such as divorce, sickness, or death.

Do you have t he answers t o t hese quest ions? 1. Do you have retirement goals and what would it take to attain them on an after-tax cash basis? 2. Many of our members at CLB Advisors do not plan to retire but move on to developing another project. Do you know how much after-tax cash basis is needed to sustain your current lifestyle while executing on the business plan for the other project to produce the cash flow necessary?What if business things do not go as planned? 3. If forced to sell today would you be prepared for the due diligence process? 4. Do you know what your BATNA (best alternative to a negotiated agreement) is? 5. Do you know what your business is worth today for an all-cash offering? 6. Do you have relationships in place to help you sell the business (even if years away) to a third party? 7. Do you know how to transfer a business to your employees, family member(s), or co-owner while paying the least in taxes and maximizing your return for your work? 8. Do you have a plan for business continuity in the event something unexpected happens to you? 9. Do you have a plan to preserve wealth and minimize taxes to your estate?

Begin planning t oday We are often asked the question, ?when should I begin the exit planning process??The simplest answer is the day you open your doors for business! Obviously a little dramatic but the point is it's never too early to ask yourself the questions about how and when you want to exit and what your personal and professional goals are so that you can apply this to the ?soup?of variables that make up so many business decisions over the course of one?s business life. Although we wish they were more common, we have had a few members over the past decade have an exit plan in place on the first day of business which included exactly who would acquire their business and when the closing would take place. With this goal in mind, the daily objective remains in clear focus enabling the owner to sell at a premium a business that has practically been built for the buyer. Even if your end game is different it's still a powerful approach.

Compelling reasons t o begin planning t oday When you hear the terms ?legacy?and ?exit planning?you may immediately think about a voluntary sale of your company. The unfortunate reality is some things are often out of our control and you need to take the proper steps to protect your interests and those of your family. We?ve worked with families where disaster struck and the business was not prepared to move forward as it should have been. That has effects on everything from sales, talent retention, taxes, and certainly valuation.

HAVING A PLANNED EXIT STRATEGY COULD SAVE YOU HUNDREDS OF THOUSANDS IF NOT M ILLIONS OF DOLLARS.

Because the above situation was a voluntary agreed upon decision to exit, we were able to discuss and implement a plan before going to market. There was time to both make the necessary internal changes to the corporate structure and external positioning of the business to buyers which enabled both partners to meet their objectives. What if the unexpected happens to you?Is there a plan in place? In the case of the above example, had the owner engaged with the professionals long before his intended voluntary exit, the error in the LLC would have been uncovered and rectified so as to not be treated more like a C-Corp and lastly a business continuity handbook would be readily available to the wife and employees as a guide to keep the business running. Hopefully you can see the advantages of having an exit plan in place. The above situation could have easily been far more valuable to the heirs had the two partners obtained key man insurance with corresponding agreements in the event one should die unexpectedly. The life insurance collected by the surviving partner would then be used to buy from the heirs the other half of the company. Just remember to increase the

payout amounts as the business grows and valuations increase. A few years ago we received a call from a woman inquiring about our services. Her situation was fairly dire. Her husband had died in a car accident three months earlier. He had built from the ground up a successful luxury home building and remodeling company but he was still the ?grease and fuel that made the engine run.?He had two superintendents, one designer, one project manager, one marketing and customer service manager, and a sales rep and a bookkeeper. When he passed, he had no succession plans in place and the business quickly began to deteriorate taking valuation along with it. In addition to not having a succession plan the owner when he first incorporated as an LLC indicated on the forms to treat the LLC as a corporation. As a result the heirs were subject to double taxation on the sale of the business. Needless to say when we helped to sell the business it did not capture the value it otherwise could have. Last year we were called upon by an attorney for the estate of a partner in a lucrative cash flowing luxury builder who had died of a sudden heart attack. The heirs were not involved in the business and wanted to sell their shares in the company. The attorney had called for a valuation opinion and later to engage CLB Advisors in divesting their shares of the company. As it turns out the surviving partner was not in a position to buy out the heirs for the cash value they were seeking. We were engaged to sell their stake in the business. Which went for significantly less because the new buyer would not have controlling interest in the business and would be working with an unfamiliar partner. A past client that engaged our firm was owned by two individuals jointly. They grew the company to an EBIT number of more than $2.5 million dollars with no debt and both partners agreed it was a good time to sell the company. Issues arose when discussing the exit and how the ideal transaction might look. One party was already wealthy from an earlier real estate divestiture and was interested in a tax structure which spread payments out over a longer term increasing the risk, pending future performance of the business. The other owner, having much less financial security outside the asset of this business was far more interested in agreeing to terms that guaranteed him a certain amount of cash upfront even if that meant the total price paid would be lower. Timely conversation with experts can solve many problems and help owners understand the unknowns of what might appear to be far aways, but is actually right around the corner.

Element s To A Successful St rat egy W rit t en plan wit h measurable object ives based on t he owner?s goals. -

A written plan is critical to serve as a manual for the owner, and other advisors during the entire process. It is virtually impossible to start and complete a successful exit from your business without such a plan. Utilize a checklist on the predetermined objectives to measure your progress. The entire internal team and retained external advisors has the ?manual?about the overall process and responsibilities along with the time-line for completion of each task. Experienced Team of Advisors, including an exit planning expert. A team made up of several advisors will be assembled, each with their own area of expertise, as required by your plan. You will also need one advisor who is experienced in the exit planning. PRO TIP: This advisor will provide: HAVING A - Experience in creating exit plans. W RITTEN PLAN - Knowledge of planning strategies used throughout the IS CRUCIAL industry. TO YOUR - Access to professional resources as needed to fill critical roles SUCCESSFUL on the team. EXIT - Expertise in guiding and facilitating the advisor team. - A commitment to keeping the plan on path, on the right path. - Ability to ensure that the plan progresses all the way through the important step of implementation.

St rong, posit ive cash flow? and t he value of your business. -

Cash flow is critical to determine what your business is worth. A commonly used measurement is EBITDA: Earnings before Interest, Taxes, Depreciation and Amortization. A quick look at value of a company is a multiple of EBITDA or a multiple of cash flow. If a business has very little or no EBITDA, or cash flow, there is very little if any value to the business above liquidation. Cash Flow is critical if you are transferring the business to an insider such as a child, co-owner, or perhaps a key employee or management team.- A common denominator between these insiders is that each usually has very little, if any, money with which to buy your business interest.

As such, these insiders must rely on the future cash flow of the business after your exit. This cash flow will provide the bulk of the W HAT YOU funds they need to pay the balance due you. NEED TO KNOW Cash Flow and Value must justify a sale price high enough that the net ABOUT STRONG, profit, after all debts and tax bills have been paid, will enable you to POSITIVE CASH satisfy all your financial objectives when combined with your other FLOW sources of income. Strong, Effective, Motivated, Management Team in Place. It?s very difficult to sell a business to a third party without a management team in place to continue running the business after you have exited. A competent management team is a major plus for any prospective buyer and the lack of such a team can be a deal-breaker. Additionally, such a management team is often the prospective buyer in an insider sale. This management team must be able to manage the day-to-day operations of your business, and must do so profitably. A potential buyer needs to know that the business will continue to operate smoothly and profitably after you are gone.

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The 7 St ep Process St ep 1 ? Owner Object ives Selling your business starts with a definition of what you want and need from the Exit Planning Process, in other words, what a successful exit from the business means to you. Determining what you want is the most important step of the entire process. -

When do I want to sell my business? What is the annual after-tax income I want after I sell my business? To whom do I want to transfer the business?

St ep 2 ? Business and Personal Financial Resources Determining what personal assets owners have, how much the business is worth and how much cash flow the business can generate for Exit Planning is the next step. The current value and projected cash flow, along with other no business assets and income, are used to determine the paths and planning tools available to reach the owner?s objectives.

St ep 3 ? Maximizing and Prot ect ing Business Value The elements that build the value of a business or protect the value the owner has worked so hard to create are called Value Drivers. In Step Three, owners and their advisors identify which Value Drivers are important to meet the owner?s overall exit objectives and devise specific steps to maximize the impact of the Value Drivers.

St ep 4 ? Ownership Transfers t o Third Part ies During Step Four, owners who want to sell their business to a third party will work with their advisors to identify ways to do so in the manner that results in the most beneficial sale price and terms. Not all business owners go through Step Four ? those who don?t either retain their ownership long-term or skip to Step Five.

St ep 5 ? Ownership Transfers t o Insiders Step Five includes a detailed plan to transfer the business to insiders (children, key employees or co-owners). Careful planning in Step Five allows the owner to receive both the desired value from the business while minimizing risk and the resources of the business should the purchaser have little or no personal capital.

St ep 6 ? Business Cont inuit y Step Six prepares the owner for the contingencies that affect the business and its owners. A complete Exit Plan incorporates potential changes, such as death or permanent disability of an owner, so that the owner?s objectives can still be achieved if circumstances change.

St ep 7 ? Personal Wealt h and Est at e Planning The sale of a business generates cash for owners, their families and the IRS. During Step Seven, owners and their advisors create a plan that not only preserves wealth, but minimizes taxes using both lifetime and estate-planning tools.

Exit Rout es For Business Owners W hen business owners st art t o t hink about exit ing t heir companies, t he number of exit rout es available may seem unending. In fact , t here are only eight : 1. 2. 3. 4. 5. 6. 7. 8.

THE 8 EXIT ROUTES YOU NEED TO KNOW ABOUT

Transfer the company to a family member Sell the business to one or more key employees Sell to employees using an Employee Share Ownership Plan (ESOP) Sell to one or more co-owners Sell to an outside third party Engage in an private share offering Retain ownership but become a passive owner; Liquidate

W hich of t hese exit s do owners, in fact , int end t o use? A January 20019, survey by Price Wat erhouse Coopers indicat es t hat : -

About one-half anticipate a third-party sale Nearly one-fifth anticipate a transfer to the next generation Fourteen percent anticipate a management buyout Seven percent expect to sell to an ESOP Ten percent anticipate other options.

This Guide examines the advantages and disadvantages of each before it describes a process that enables owners to choose the best exit path for them.

Let ?s begin wit h a fict ional company case st udy. Luxury Builder and Remodels of Naples was one company with three very different viewpoints on the best way of exiting the business. When the owners decided to meet with their advisors to determine the best exit path for Ben, or perhaps all three of them, the first question was: How do the owners of Luxury Builder and Remodels of Naples agree on an exit strategy? The decision-making steps can be relatively straightforward. First, the ownership needs to find an exit path that best meets the needs of each owner. Second, they need to value the company and determine its marketability. This, by itself, may provide sufficient direction and eliminate some of the potential exit paths. For example, if the value of the company and its marketability are high, then ownership may decide to sell the business to an outside party. Finally, the tax consequences of each exit path need to be evaluated.

Set t ing The St age For Exit Planning While this evaluation takes place, owners need to continue to increase the value of the company and will likely need to revise their existing buy-sell agreement to reflect the true value of the company.

PRO TIP: INCREASE YOUR COM PANY'S VALUE W HILE PLANNING YOUR EXIT

When owners look at each exit path, they can thoroughly evaluate each option, have frank discussions based on realistic possibilities (rather than conjecture or wishful thinking) of what each owner wishes to do and of what the company value can support. In short, owners ultimately decide what path to take and when. Let?s examine each exit path available to business owners.

Transfer t o key employees via ESOP ESOPs are qualified retirement plans, typically profit sharing plans, which must invest primarily in the Share of the sponsoring employer. As mentioned above, the owner considering the transfer to key employees does so because he wants to transfer the company to a known entity and to perpetuate the company?s mission or culture. The owner using an ESOP to affect this transfer usually does not want to remain with the company after closing. And, because his financial security is not at risk as it is in other transfers to key employees, he does not need to remain. So, in addition to the advantages of a standard transfer to key employees, the owner who uses an ESOP to transfer a company to key employees enjoys two additional benefits: -

Beneficial tax treatment. Using an ESOP, an owner can defer or avoid tax on the gain from a sale. Even more importantly, the company can pay for the owner?s Share with pre-tax dollars. Cash. The owner leaves the closing table having converted an illiquid asset into the cash necessary for a financially secure retirement.

Of course, not all aspects of this exit route benefit the owner. -

Owners must consider the cost and complexity of setting up and maintaining an ESOP. While the ESOP is borrowing to pay the owner?s purchase price, the company?s ability to grow and to expand is hampered. At closing, the owner may receive more cash than she would in other key employee transfers but she may be partially paying for her own buyout (because ESOPs typically involve an element of pre-funding by the owner?s business). Similarly, the owner?s assets may be tied to the company as collateral for securing the ESOP loan. Finally, in many cases, key employees may not benefit as significantly as the owner might have preferred nor as much as the employees may require to stay on and run the company after the owner leaves. In summary, the disadvantages are: Cost and complexity of ESOP; Company growth curtailed due to borrowing necessary to purchase owner?s shares; Less than full value received at closing (compared to third party sale); Owner assets (post-sale) used as collateral; and Key employee ownership is limited. But again, these disadvantages may be minimized or eliminated.

Sale t o co-owners Once again, the owner (like Ben) who examines a sale to a co-owner or owners, finds the list of advantages and disadvantages nearly identical to those found on the lists for a transfer to family members or key employees. (For a more detailed discussion of these lists, please refer back to the ?Transfer to Family Members?section.) The advantages to this type of sale are:- Transferring the company to a buyer whose commitment skills and -

knowledge are known quantities; Perpetuating the company?s mission or culture; Allowing the owner to remain involved in the company.

W HICH OF THESE EXIT PLANS W OULD YOU USE?

The disadvantages of the sale to a co- owner are: -

The need to take back an installment note for a substantial part of the purchase price; Increased (and continued) financial risk; Required owner involvement usually continues post-closing; and Less than full fair market value normally received (of little appeal to Ben!).

Sale t o a t hird part y This exit route offers an owner the best chance at receiving the maximum purchase price for his/her company. In addition, the owner who engages in a sale to a third party is best positioned to receive the maximum amount of cash at closing. Owners intending to leave after they sell, choose this exit route. This route also appeals to owners who want to propel the business to the next level - on someone else?s dime. Our list of advantages looks like this: -

Achieve maximum purchase price; Receive substantial cash at closing; Allow owner to control date of departure; and Facilitate company growth without owner investment or risk.

This is undoubtedly an impressive list of attributes. But before you grab the phone to call your favorite investment banker, let?s review the drawbacks of this exit route. The first difficulty would have to be that this exit route does not match the stated intentions of most business owners. If you look back at the survey results quoted at the beginning of this issue, just over half of business owners wish to transfer their companies to an ?insider?(family member, key employee or co-owner). On a personal level, owners who choose this exit route must be prepared to walk away from their companies, but not before being required to work for the ?new boss?for one to three years. All owners who sell to third parties wrestle (with varying degrees of success) with the issue of losing a meaningful part of their lives. Also lost in a sale to a third party is the company?s corporate culture or mission.

As a company merges with a competitor or is assumed into a larger entity, its culture and its role inevitably change. Last on the list of disadvantages is the owner?s perception that a sale to a third party means that employees?jobs are at risk and that their career opportunities are, at best, limited and, at worst, jeopardized. This perception appears on the list of disadvantages because it is so widely held by owners of privately-held companies. Extrapolating from the mergers and acquisitions that they see among publicly-held companies (that in fact, often do lead to massive layoffs) they assume that the effect on their employees of a merger or acquisition of their privately-held companies will be the same. In our experience, however, few employees have lost their jobs. Employees may, and often do, choose to leave a new employer for reasons that have nothing to do with limited or diminished career opportunities. In fact, because privately- held companies are typically acquired by much larger and often publicly-held companies, employee career opportunities are frequently improved. Their compensation and benefit packages are usually enhanced as they become part of a larger organization. Even in those situations in which a company is acquired by a competitor, the workforce of the acquired company is a highly-prized asset. -

Inconsistent with original exit goal of two-thirds of owners who wish to transfer business to another type of successor; Loss of owner identity; Loss of corporate culture and mission; Potentially detrimental to employees; and Receipt of much of the purchase price subject to future performance of the company after it is sold.

SPO The exit route marked ?SPO?or Share Purchase Offering is one that attracts the attention of business owners amenable to a sale to a third party for two reasons. First, the valuation of the ownership interest is usually higher than in any other form of transfer ? including the sale to a third party. Second, an SPO brings with it an infusion of cash (from a pocket not belonging to the owner), which moves the company forward to a new level. These advantages: -

CLB EXPERTS CAN CUSTOM IZE YOUR EXIT PLAN FOR YOU

High valuation; and Cash for the business

are extremely attractive to the owner weighing various exit routes. Unfortunately, the IPO is not without significant disadvantages. The primary one is that despite the high valuation placed on and paid for an owner?s interest, the SPO is not a liquidity event for the owner. An owner?s interest is exchanged, at closing, for interest (shares of stock) in the acquiring entity. The owner is typically prohibited from cashing out these shares until a prescribed amount of time passes. Also prescribed is the rate at which the owner can sell his new shares.

The disadvantages of a sale to a third party last, but certainly not least, when the former owner does sell his shares, the price per share varies (often significantly) from the price at closing. Not only is the closing a non-event from a liquidity standpoint, it is also a non-event from a departure standpoint. In almost all IPOs, the owner is required to stay on with the acquiring company. Staying on is made more difficult by the fact that the former owner is no longer in control.

She may still be the CEO, but she is accountable to shareholders, analysts, the Securities and Exchange Commission and more. Finally, an IPO creates a publicly-held company. As such, it is subject to reporting requirements and must uphold fiduciary responsibilities not necessary in privately-held companies. Many business owners chafe under these additional requirements. To summarize, the disadvantages of an SPO are: -

No liquidity at closing; No exit at closing; Loss of control; and Additional reporting and fiduciary requirements.

Assume passive ownership

SET YOURSELF UP FOR A SUCCESSFUL EXIT W ITH THE RIGHT STRATEGY

Another exit route that an owner can choose is to keep the business while assuming the role of a passive investor. This route attracts owners who wish to: -

Maintain control; Become gradually (or rapidly) less active in the company; Preserve company culture and mission; Manage risk (or is perceived to be low); and. Maintain ongoing cash flow at a higher level.

The first four advantages listed above are the same as those listed in other exit routes. The last, however, deserves comment. In some cases, especially in businesses with a value of less than $5 million, owners feel they are at less risk continuing investment in their businesses than from the sale to an outsider in which the purchase price consists primarily of a promissory note on some type of ?earn-out.? The disadvantages to this exit route are fairly obvious. The owner: -

Never permanently leaves the business; Is not able to establish or fix lifetime business continuity; Receives little or no cash when he leaves active employment; and Continues to experience risk associated with ownership.

Liquidat ion -

There is only one situation in which this exit route is appropriate: the owner wants to (or must? usually for health reasons) leave the company immediately and has no alternative exit strategies in place. Liquidation offers then, the two benefits most important to the owner in that position: Speed and Cash. Not surprisingly, the disadvantages to this exit route are enormous. First, liquidation yields less cash than any other exit route primarily because no money is paid for goodwill. There is none. Second, owners who liquidate pay a higher proportion of their proceeds in taxes than owners in any other type of sale or transfer. Finally, owners considering liquidation must anticipate a devastating affect on employees and, to a lesser extent, on customers. owner you prefer) become standards by which you can evaluate the various exit routes.

Recall Yogi Berra?s warning, ?You?ve got to be very careful if you don?t know where you?re going, because you might not get there.?Establishing your Exit Objectives will tell you where you are headed. The second step in the Exit Planning process is to determine the value of your business. This value tells you, the owner, what you can expect to receive in a third party sale or through an IPO, for example. An accurate valuation will also tell you how much, in a sale to key employees, co-owners or family members, you will leave on the table. For all owners, valuation indicates the distance they must travel before to reach financial security. How they reach this and other Exit Objectives depends on the exit path they choose. In creating the best road map for your exit, carefully compare the benefits and detriments of each path, viewed in light of your specific Exit Objectives as well as the value of your business. Armed with your road map you can take the most appropriate exit path for you, whether it is the autobahn to financial security or a winding and leisurely excursion off the beaten path.

DRIVING VALUE TO YOUR BUSINESS Did you ever wonder why one businesshasbuyerslined up willingto pay top dollar while another sitson the market for months, or even years?What do buyerslook for in a prospective businessacquisition?The characteristics buyersseek must exist before the sale processeven begins. It isyour job as the owner to create value within your businessprior to a sale. The items, common to all industries, which drive up value, are called ?Value Drivers.?They include: -

A stable, motivated management team Operating systems that improve sustainability of cash flows A solid, diversified customer base Facility appearance consistent with asking price A realistic growth strategy Effective financial controls Good and improving cash flow

The reason a buyer is willing to pay a premium price centers on his or her perception of risk and return. If the characteristics that buyers find valuable ? characteristics that both reduce risk and improve return? are present, a buyer will pay top dollar. Buyers will compare both risk and return to alternative investment opportunities. This investment principle applies to large publicly-traded investment opportunities as well as to private companies. Value Drivers are characteristics of a business that either reduce the risk associated with owning the business or enhance the prospect that the business will grow significantly in the future. There are many items that create value including: proprietary technology, market position, brand name, diverse product lines, and patented products. In this article, let?s look only at those key Value Drivers that are common to most businesses, including: management team, business systems, customer base, facilities and equipment, business strategy, and financial controls.

M anagement Team One of t he most import ant Value Drivers in any business is it s management t eam.

PRO TIP: HIRE QUALITY PEOPLE W HOSE SKILLS ARE DIFFERENT THAN YOURS

This team is comprised of those people who are responsible for setting company objectives, monitoring its activities, and motivating the workers. In many small companies this ?team?consists of one person, generally the owner. To build a championship caliber organization, however, the management team should include people with a variety of skills. Surrounding yourself with quality people whose skills are different than yours is a necessary preamble to a successful sale. In addition to talent, you need a management team with staying power. One of the first questions prospective buyers ask is, ?Who runs the company and are they willing to stay??If the answer is, ?The owner is in charge, has not yet identified a successor, and wants to leave soon after closing,?the value of the company plummets and most buyers look elsewhere.

Management teams are so valuable because good teams are hard to assemble, and even harder to keep together. Sophisticated buyers know that if a good management team is in place, prospects are good for continued success. In the investment banking business, the adage is: ?Great management teams are worth their weight in gold, because no matter what happens they find a way to win.?

ONE OF THE M OST IM PORTANT VALUE DRIVERS IN ANY BUSINESS IS ITS M ANAGEM ENT TEAM

In most cases, negotiation over sale price and transaction structure revolves around the buyer?s perception that future cash flows will not match, much less exceed, historical results. When buyers evaluate this risk, they focus on whether or not the existing management team is able, and willing, to grow the business. The stronger the management team, the higher the price. If the buyer perceives your business to be dependent upon your personal relationships and reputation alone and subsequently concludes that, in essence, you are the management, the buyer will not pay a premium price. If a company has a solid management team, a buyer will likely assume that customer relationships can be maintained, and that the company?s reputation will remain intact. Buyers conclude that the company will continue to grow with the existing management and will demonstrate their confidence in future cash flows by paying a higher sale price.

How, t hen, do you keep management in place unt il you sell t he business? If you are planning to sell the business upon finishing this Guide, then any type of long-term, incentive planning is inappropriate. Instead, your best bet is to keep your key management by paying them lots of money in the form of additional salary and performance bonuses. In the short term, it is usually possible to ?buy?key management?s continued presence. If you don?t plan to sell your business for at least a year, then consider an incentive compensation system, cash or share-based, that rewards key employees as the company performs (usually measured by increases in pretax income). Part of incentive compensation should be paid currently and part deferred to be received by key management only if they stay long- term. This deferred compensation is typically subject to vesting. This type of plan is described in greater detail in Chapter Four of John H. Brown?s book, The Completely Revised How To Run Your Business So You Can Leave It In Style. No matter the length of the ?pre-sale?period, it is crucial to keep your key management in place. An example of a cash bonus plan appropriate for the company facing imminent sale is to reward management in the form of cash bonuses based on increased company cash flow. In short, create a ?pot? from which management receives perhaps 10 to 25 percent of the increase in profits over the previous year. If, in this example, cash flow was $1 million in the previous year, award management 10 to 25 percent of the increased cash flow, payable quarterly in the current year. It is important to base the award on increases in cash flow or profitability and to pay the bonus during the current year. To be meaningful, bonuses must be substantial and frequent.

HAVING A SOLID M ANAGEM ENT TEAM APPEALS TO POTENTIAL BUYERS

Providing significant short-term bonuses recognizes that you cannot afford to lose your key employees just as you begin the sale process. Paying them sufficient money means they cannot afford to leave the business

The final motive for maintaining stable management is to demonstrate a healthy corporate culture. High employee turnover will be examined (quite closely) and may negatively affect the value of the company. Again, if your exit strategy is relatively short term, consider implementing programs within the company to improve employee morale thus reducing employee turnover. These programs need not be costly and may include: -

Informal, social get-togethers; Verbal or written appreciation that becomes part of the employee?s work file; Flex time, such as late arrival or departure, or extended four-day work schedules; Time off awarded after completing a job ?above and beyond the call of duty?or awarding over-time compensation; Improved potential for promotion; Pleasant work facilities; Assignment of challenging work; Company-sponsored continuing education; Frequent staff meetings to elicit employees? suggestions and to address concerns; (Be sure comments remain confidential and that, if possible, management works on improvements.) and Periodic attitude surveys to measure job satisfaction and employee concerns.

Business Operat ing Syst ems In addit ion t o building a solid management t eam, owners must also build reliable business operat ing syst ems (BOS) t hat can sust ain t he growt h of t he business.

AS AN OW NER, YOU M UST BUILD BOS THAT CAN SUSTAIN GROW TH

The second Value Driver then is the development and documentation of BOS that generate revenue from an established and growing customer base. If you leave shortly after the sale of your company, what remains?If the answer is capable management and highly efficient BOS, you will be able to leave your business in style. BOS include the computerized and manual procedures used in the business to generate its revenue and control expenses, (i.e. create cash flow), as well as the methods used to track how customers are identified (customer relationship management (CRM) and how products or services are delivered. The establishment and documentation of standard business procedures and systems, like the one from Certified Luxury Builders Network (CLBN) demonstrate to a buyer that the business can be maintained profitably after the sale. Put yourself in the shoes of the would-be buyer for a moment. As a buyer, you want assurance that the business will continue to move forward under new ownership, and that the operations will not break down if (and when) the former owner leaves. This assurance can best be obtained when there are documented systems in place that will enable the buyer to repeat the actions of the former owner to generate income and grow the business. There are several business systems that, once in place, enhance business value whether you plan to sell your business now or decide to keep it. These procedures cover: -

Personnel recruitment, training, and retention; Human resource management (an employee manual); Leadership, management, employee, scorecard; New customer identification, solicitation, and acquisition; Customer relationship management and sales pipeline reporting; Product or service development and improvement; Inventory and fixed asset control; Product or service quality control; Customer, vendor and employee management and communication; Selection and maintenance of vendor relationships; and Business performance reports for management

Obviously, appropriate systems and procedures vary depending on the nature of a business, but, at a minimum, those resources and activities necessary for the effective operation of the business should be documented.

Est ablished & Diversified Cust omer Base Put on t hose buyer?s shoes one more t ime and you?ll find yourself shuffling past companies wit h great management t eams and excellent syst ems but whose cash flow is dependent on one or t wo A DIVERSIFIED cust omers. CUSTOM ER BASE Why spend millions of dollars on a business only to have those customers go INSULATES A elsewhere after you?ve acquired the company? COM PANY FROM THE LOSS OF ANY At the very most, a prudent buyer SINGLE will structure a buyout to protect CUSTOM ER

ANOTHER VALUE DRIVER IS THE DEVELOPM ENT OF A CUSTOM ER BASE IN W HICH NO SINGLE CLIENT ACCOUNTS FOR M ORE THAN 10% OF TOTAL SALES

against the loss of a key customer, probably by making much of the purchase price contingent or requiring the seller to carry a note for the bulk of the purchase price. As a seller, binding your financial security (for several years) to your former company and its customer is the last scenario you?d prefer. Another Value Driver, then, is the development of a customer base in which no single client accounts for more than 10 percent of total sales. A diversified customer base helps to insulate a company from the loss of any single customer. Achieving this objective can be problematic when you are building a business with limited resources and one or two good customers are willing to pay for everything you can deliver. If this is the situation in which you find yourself, it is important to reinvest your profits into additional capacity that will make developing a broader customer base possible.

Appearance Of Facilit y Consist ent W it h Asking Price Alt hough mat ching t he business?s ?face?t o it s asking price is not usually a problem for business owners, some owners can be, shall we say, ?economical?when devot ing financial resources t o t he physical appearance of t heir places of business, or t heir business equipment .

IF THE BUYER IS BEING ASKED TO PAY M ILLIONS, HE W ILL WANT THE BUSINESS TO LOOK LIKE M ILLIONS

This is more often true of businesses whose facilities are not visited by the general public; for example, the offices of a phone-based or off-site sales organization, or a manufacturing or warehouse-based business. However, for the same reason that your retail facility is top notch, your other ?hidden?facilities must also appear first class. Keep in mind, you are about to show those facilities to a new customer? a potential buyer of those facilities.

Admittedly, there is no reason why a new owner of the company would need better appearing facilities than yours because those facilities have gotten you where you are today. But, if the buyer is being asked to pay millions of dollars for your company, he will want the business to ?look like a million dollars.? Besides, a good-looking facility shows buyers that you are proud of your business in every respect and that you have made the necessary investments to keep it going. It also indicates that you have not deferred making necessary capital investments only to create future capital investment requirements for the buyer. Finally, a clean, well-organized office communicates the message that the business is also clean and well-organized. It is amazing how a few thousand dollars of superficial improvements can improve the marketability of your business and increase the interest of potential buyers.

Realist ic Growt h St rat egy Buyers pay premium prices for companies having a realist ic st rat egy for growt h. That strategy must be communicated to a potential buyer in such a way so that a buyer can see specific reasons why cash flow and the business itself will grow after it is acquired. The growth is illustrated in pro forma statements that will be used by buyers and investment bankers when formulating a discounted future cash flow valuation of your company. This valuation typically determines what a buyer will pay for your business. Since future cash flow is based on estimates of future growth, having a realistic growth strategy is vital to reaping top dollar for your business. That growth strategy can be based upon: - Industry dynamics; is the time when you force savvy buyers - Increased demand for the company?s products based upon population growth, etc.; - Unique differentiation, best-fit client, strategic partners, and market specialty; - New products and new service lines; - Market plans; - Growth through acquisition and - Expansion through augmenting territory, product lines, manufacturing capacity, etc.

COM M UNICATE YOUR GROW TH STRATEGY W ITH SPECIFIC REASONS W HY THE BUSINESS AND CASH FLOW W ILL CONTINUE TO GROW

Without a written plan, don?t expect a buyer to appreciate the growth opportunities your company offers. First, a buyer will not understand your business as well as you do, and will not likely see its hidden opportunities. Also, if a buyer does discover an opportunity that he believes you have ignored, he will likely attempt to take advantage of that knowledge during purchase price negotiations. Even if you expect to retire tomorrow, you need to have a written plan describing future growth and how that growth will be achieved based on the areas listed above as well as any other bases for future growth unique to your business. It is that growth plan, properly communicated, that will attract buyers. Building and documenting a positive growth story, however, is only ninety percent of the game. The remaining ten percent is knowing how, when, where and to whom to tell your story. The storytelling takes place during the sale process and is done with the guidance and assistance of an investment banker or other transaction intermediary. That (meaning those with lots of money) to pay for the value you have created in your business.

Effect ive Financial Cont rols Anot her key Value Driver is t he exist ence of reliable financial cont rols t hat are used t o manage t he business.

PRO TIP: DOCUM ENT THE COM PANY'S EFFECTIVE FINANCIAL CONTROLS W ITH A CERTIFIED AUDIT

Financial controls are not only a critical element of business management, but also safeguard a company?s assets. Most importantly, however, effective financial controls support a claim that a company is consistently profitable. In the purchase of a business, the buyer will perform some level of financial due diligence. If the buyer?s auditors are not completely comfortable when reviewing your company?s past financial performance, you have no deal (or at best a reduced value for your company). Once again, put on those buyer?s shoes. You are buying a company that you likely had not heard of three months ago. You face an owner of a business who asserts that the company has been making $1 million per year for the past three years and is projected to make at least that much in the future. Your first thought must be: ?prove it.?If a seller then produces past financial statements that prove incorrect, insupportable, or incomplete, you will be highly skeptical, or, more likely, simply gone. You would never pay millions of dollars without knowing for certain what the company?s cash flow has been. You need to have complete confidence in the past financial activity of that company. The best way to document that the company has effective financial controls and that it?s historical financial statements are correct is through a certified audit or perhaps a verified financial statement by an established CPA firm. In order to even have a third party certify or verify financial statements, it is absolutely necessary that the company has sound financial processes in place, information is well organized and defined, and all key metrics are not only clearly discernible but easily and quickly produced. Unfortunately the lack of detail paid to a company?s financials is often realized at an inopportune time and an inability to produce the required statements along with a lack of financial integrity is one of the most common hurdles encountered during the sale process Business owners universally perceive financial audits to be an unnecessary expense, or, at best, a necessary evil required by their banks. In reality, an audit is an investment in the value and the marketability of your business. The best way to demonstrate the sustainability of earnings is to have your historical financial statements audited and core viewed by an independent, certified public accountant. An audit demonstrates to potential buyers that the historical information can be relied upon when making judgments about purchasing the company based on historical cash flows. Just like any publicly-traded security, buyers of private businesses want to have confidence in the historical financial information. It bears repeating that the best way to instill that confidence is through an independent audit of the company?s books.

When do you need to begin financial audits of your company?There are three traditional levels of ?accountability.?The first is un-audited financial statements that your company?s CPA prepares for you and perhaps for your bank. The CPA firm makes no representations as to the accuracy of those financial statements. It is highly unlikely that any buyer of a mid-market company would give those financial statements any weight whatsoever except as a preliminary idea of what the company says it has done. They may be the basis for discussions but certainly not the basis of a purchase. The next level of accountability is a reviewed statement by your CPA firm. This means that the CPA firm has reviewed the financial information and has determined that it is accurate based upon your representations to the CPA firm. It is not uncommon to see sales of mid-market companies in which the buyer required only reviewed statements. The final level of accountability is verification by a CPA firm that the information contained in the financial statements is accurate based upon its own investigation. Put yourself back in the buyer?s shoes one last time. Which level of assurance is most desirable?Which makes you more willing to pay top dollar for a company?Obviously it is the independently verified financial information and not the unverified representation of a business owner anxious to leave his business. For this reason, it is likely that audited or reviewed financial statements will be necessary. These probably do not need to be prepared until you have begun the sale process. It is very important to engage the services of a recognized, reputable CPA firm to begin a review of your current financial statements and practices. The purpose is to uncover any financial irregularities or inadequacies as soon as possible so that you can correct them immediately.

St able & Increasing Cash Flow Preceding t he sale of t he business, cash flow should be on an upswing. The buyer will also look for earnings of t he company t o cont inue t o increase t hrough t he sale process it self (which can t ake a year or more). Perhaps t he crit ical quest ion is: How do you go about increasing your company?s cash

CASH FLOW W ILL DETERM INE W HAT A BUYER W ILL OFFER TO PAY

Ultimately, all Value Drivers contribute to stable and predictable cash flow. It is the cash flow that determines what a buyer will offer to pay. Buyers buy cash flow? and they pay top dollar for cash flow that they expect to increase after they buy the company. Think like a buyer. -

Reinvigorate yourself. Pay greater attention to increasing cash flow through simply operating the business more efficiently. Sit down for thirty minutes (or longer!) and think about all of the ways your company can improve its cash flow. Concentrate on the methods that you?ve declined to pursue because you and the company are comfortable with the ?way things are.?If you have become a semi-absentee owner, spend more time at the office. You, more than anyone, will discover many ways to increase productivity, decrease costs, and increase cash flow. - Implement specific procedures to increase cash flow. These may include tightening the reins on the purchasing department, or re-evaluating your investment in advertising. Do you have the best possible people in charge of these areas?Have you provided them the economic incentive to maximize cash flow for the business?

Stop using the business as your personal pocketbook (if applicable). Many owners seize the opportunity to use the business to pay for all kinds of hidden perks. These are the types of expenses that are difficult to recast because they are not actual out-of- pocket expenses but are ?soft costs? These activities depress and deplete cash flow and simply cannot be factored back into the sale price via recasting earnings. List the ways you benefit financially from the company. This list will help your advisors ?recast?the cash flow to account for cash flow diverted to you that would be available to a purchaser, thereby increasing the purchase price. Your list should include excessive compensation for yourself, family members, close friends and other relatives. It may also include: cars, vacations, recreational vehicles or excessive rental payments for a building or equipment you rent to the company. Don?t play games with the balance sheet, particularly in inventory and accounts receivable. Carefully scrutinize employee benefits, including discretionary compensation items, such as bonuses and qualified retirement plans. Defer unnecessary capital expenditures. Eliminating or deferring all non-essential equipment purchases can improve the bottom-line, increase cash flow and thus increase the sale price.

CONCLUSION Whether a buyer will pay a premium price for a businessdepends, in large part, upon the effortsof the owner to adopt and implement the Value Driversdescribed in this Paper. These Value Driverswere not dreamed up by a businessschool professor but are what professional, sophisticated buyerstell usthey seek in closely- held businesses. Concentratingon developingand enhancingeach Value Driver will position you to get a premium price for your business. Successful owners are usually optimistic people, somewhat averse to dwelling on the more unpleasant aspects of business. Contemplating one?s demise certainly qualifies as an unpleasant aspect. Consequently, advisors to owners tend to use a lot of buzz words when we talk about business continuity. We ask, ?What happens if the owner ?passes on?or ?leaves the scene???We talk about the consequences of an owner?s death upon the business in theoretical, third party terms: ?Should an owner die ...? Unfortunately, these oblique references gloss over the central fact that you, the owner, must take care of business now in case you (rather than some anonymous third party) die tomorrow. This Guide discusses business continuity planning in a way that you may not expect. Typically, when owners think of business continuity, they do so at the prompting of an insurance or legal advisor who warns that unless owners take prudent measures, they will leave their families unprotected in the event of death of permanent disability. Business continuity, however, is not principally concerned with making sure that an owner?s family is taken care of in the event of the owner?s death or disability. As an owner, you must address those family concerns through proper estate planning. Business continuity is, on the other hand, a means of handling a variety of transfer events and consequences that impact the business and the remaining (or new) owner when the original owner leaves. This Guide discusses the multiple problems ? facing sole owners and owners in multi-owner companies ? that an owner?s death or disability creates for the business, for the other owners (if any), and sometimes, for the family. It also proposes solutions to each of these problems.

M aking Sure That Your Business Cont inues If You Do Not

BUSINESS CONTINUITY IS ABOUT PROTECTING THE BUSINESS IN THE SHORT & LONG TERM

The t hought of what will happen t o our businesses should we die is, at most , fleet ing. In t hat brief moment , we seldom t hink beyond making sure our families are prot ect ed should t he unt hinkable happen t o our co-owner, of course. Yet business continuity, in its most fundamental sense, has nothing to do with protecting an owner?s family. It is about preserving and protecting the business, in the short term and in the long term, should its most important component, its owner, die or otherwise become incapable of continuing in the company. Ownership succession is the most obvious problem facing a company but it is one of four vital issues: the benefit of the business. Without a replacement for that financial strength, the business may well not survive despite a plan in place for its continuity of ownership. More specifically, an owner?s sudden death or incapacity can cause other ?stakeholders?to discontinue their relationships with the business. These situations include: Bank Financing. If you have personally guaranteed the company?s line of credit or permanent financing, your sudden death or departure will make the bank re-examine its lending relationship with your company. Bonding Capability. Construction companies are just one example of firms that need and rely upon bonding capacity to bid and obtain much of their work. Your sudden death will likely cause the bonding companies to refuse to extend bonding unless the financial statements of those left behind are as strong as yours. Inability to secure bonding can mean the end of your company.

OW NERSHIP SUCCESSION IS THE M OST OBVIOUS PROBLEM FACING A COM PANY, BUT IT IS 1 OF 4 VITAL ISSUES.

Obligations under the Lease. If you lease space or equipment, it is likely that you personally guaranteed the lease. While the lessor may be unable to do anything to terminate the lease (provided payments stay current) he is unlikely to renew the lease without the successor owner?s guarantee backed by personal assets. Capitalization Shortfall. Business owners periodically personally capitalize their companies because they keep little money in their companies. There can be sound liability and financial reasons for doing so. Your exit, however, may prevent your company from having the proper working cash flow.

Let?s look at how each problem affects both sole-owner and multi-owner companies.

Problem: CONTINUITY OF BUSINESS OW NERSHIP Sole Owner Company Continuity of business ownership is the critical issue in a solely-owned company. In fact, there is no continuity unless you take steps now to create a future ownership group or owner. Multi-Owner Company Continuity of ownership is not an issue when a funded (with life insurance) buy/sell or business continuity agreement has been implemented. The problem is that most owners (and their advisors) fail to keep their buy/sell agreements up-to-date and, as a result, those agreements often create more problems than they resolve.

Problem: COMPANY?S LOSS OF FINANCIAL RESOURCES Sole Owner Company Sole owners typically give little thought to the loss of financial resources (represented by the owner and his financial statement) used for obtaining ongoing and adequate capitalization from any other source. Your deep pockets go out the door when you do.

Mult i-Owner Company If you, personally, are a principal source for financial funding (bond guarantees, line of credit guarantees, etc.), your death can put enormous pressure on the business to perform or face the risk of third parties refusing to lend or make guarantees on behalf of the company.

Problem: LOSS OF KEY TALENT - YOU Sole Owner Company Your death likely has the same impact upon your business as does the loss of any key person. Your talents, experience, relationships with customers, employees and vendors may be quite difficult to replace, especially in the short term. Without planning, few businesses have the financial resources or successor management to weather this storm.

Mult i-Owner Company Multi-owner companies seemingly avoid many of the problems endemic to single-owner companies. But, as it relates to the loss of key talent, this is only true if surviving owners can readily compensate for your loss. To the company, your death is the same as the loss of the key person. If the remaining owners do not have your experience or particular talents, the business suffers as sorely as if it had been solely-owned. Unless there is a key employee (co-owner or not) to fill the void, the business is wounded--perhaps mortally--upon the death of a co-owner who: -

was the marketing guru on whom the other owners were dependent to provide new members; oversaw the operations of the company; or maintained most of the industry, customer or other key relationships.

Problem: LOSS OF EMPLOYEES AND CUSTOMERS Sole Owner Company A common and natural consequence of an owner?s death is the speedy emigration of employees and customers unless an existing continuation plan is immediately implemented. Without such a plan, the key and non-key employees will wonder where their next paychecks will come from. Typically, they leave for greener and more secure pastures. When the workforce leaves, contracts cannot be completed and are breached, work is unperformed and creditors call in their paper. Of course, the resulting losses often require payment by the owner?s estate as the case study below demonstrates. Case Study Clint was a successful and hard-working owner of two successful businesses. Like most entrepreneurs, he tended to make all the decisions himself. At age 43, he knew he was far too young to be concerned with his death or disability and how that might impact his family or business. And then one day, as he bent over to unbuckle his ski boot, he dropped dead. Tragic as Clint?s death was to his family, his failure to make any plans whatsoever for the businesses was a deathblow to his company. No one knew what Clint?s wishes were with respect to continuing or selling the businesses. No one, (within his family especially) knew the overall business financial condition, administrative status or operational concerns. The key employees knew only one thing for sure: the businesses would not long survive Clint?s death. So, these employees promptly found new employment; thus hastening the inevitable shutdown of Clint?s once-vital businesses.

Mult i-Owner Company Companies with multiple owners must cope with the normal lifetime retirement of their owners. In most cases, retirement imposes a significant cash drain upon a company. In a death scenario, the surviving owners must be capable of keeping both the employees and the customers. Simply having a successor owner is not sufficient. These successors must be able to maintain cash flow as well as the confidence of the business?s employees and customers. Confidence is best gained by having a written, well-capitalized continuity plan.

Solut ion: CONTINUITY OF BUSINESS OW NERSHIP Sole Owner Company How can you prevent the type of disaster that befell Clint?s family?First, create and implement a plan to allow the business to continue after you are gone. Since there is no co-owner, you must provide for the business?s continuity ? even if owned by your estate or a trust for the benefit of your family ? by securing the continued services of your important employees. Do everything you can to prevent your employees from leaving because they are indispensable to the business?s continued existence. Secure their continuation by compensating them at a substantially increased level (usually 50% to 100% more than they ordinarily receive). This is best accomplished through the use of a stay bonus.

A stay bonus is a written, funded plan providing monthly or quarterly bonuses, usually over a twelve to eighteen month time frame, for employees who remain with the company during its transition from your ownership to new ownership. (This applies whether the business is transferred to a third party, to employees or to family members.) The stay bonus provides a cash incentive for your important employees (perhaps 20 to 50 percent of the total workforce) to stay, hence its catchy name. Typically, the stay bonus is funded with life insurance in an amount sufficient to pay the bonuses over the specified time period. The life insurance may be owned by the company or outside the company in an estate tax-sensitive trust. The plan is communicated to the important employees when it is created so that they know a plan exists and, consequently, that thought and planning (and money to pay salaries!) will ensure the continuation of the business. The second linchpin of single-owner continuity planning is to do exactly what Clint didn?t do ? communicate your continuity wishes now. At a minimum, you must communicate, in writing, your wishes as to what should be done with the business upon your death or permanent incapacity: -

Designate key employee(s) or others who can be given the responsibility to continue and to supervise business operations, make financial decisions and oversee internal administration. Name today these individuals on the attached Business Continuity Form. Name advisors and others (such as a friendly competitor) who should be consulted in the ownership transfer process. (Again, put these names on the Form today.) If it is your wish that the business be sold, state that intention and list the names and contacts of businesses who have expressed an interest in acquiring your company or who you think would make an appropriate successor/ owner. Do so on the Form. You may wish to indicate that it is your desire that the business be sold to key employees, continued in the family, or liquidated. The choice is yours, but you must make it while you are alive. Is there a better time than the present to do so? Finally, give the completed Business Continuity Form to your spouse and copies to your advisors. Multi-Owner Company

From a continuity standpoint, the nicest thing about having multiple owners is that the business will continue if one of the owners dies, provided measures are taken (usually in the form of an up-to-date, adequately funded buy/sell agreement) for the remaining owners to acquire the deceased?s interest in the business. Having said this, chances are, your buy/sell agreement has not been recently reviewed, does not reflect current business value and does not completely address the many possible transfer events such as: -

Death, Disability, Transfer to a Third Party, Termination of Employment, Retirement, Involuntary Transfer Due to Bankruptcy or Divorce, and Business Dispute among Owners.

Finally, it is likely that your buy/sell agreement does not fully address each transfer event (e.g, termination of employment of an owner) from the perspective of whether the company has (or the other owners have) an option, or put a mandatory requirement to reacquire the ownership interest.

As may be apparent, the biggest risk to the continuation of businesses that are co-owned is not the death or disability of one of the owners. Rather, it is that the above-listed events are considered once and memorialized in an agreement. All further thought and action on the subject are shelved ? along with the agreement.

Solut ion: COMPANY LOSS OF FINANCIAL RESOURCES Sole Owner and Mult i-Owner Companies The problem of dealing with unexpected losses or unexpected financial complications in the business can best be met in two ways. First, simply use life insurance to fund for the anticipated need. Although life insurance is part of the solution, it is a means to an end; by itself it is simply a source of cash. Realistically, if the business is to succeed long term, after your death, it needs more than life insurance. It will need successor management, motivated by ownership or cash (current and deferred). The only way to make certain the business continues without you is to make certain that the business is more than just you. But any long-term solution, such as having a successor management in place today, cannot succeed without having adequate funds from the outset. And it is precisely this point that owners and their advisors overlook. The loss of an owner usually dries up the company?s financial wellsprings: -

Bank financing, usually guaranteed by you; Equipment and other financing, guaranteed by you; Bonding capability, guaranteed by-- guess who?--and Adequate capitalization, supplied by you.

These resources propel the business through difficult times into a brighter future. It is highly unlikely that successor management or ownership can replace your balance sheet with theirs. A company?s loss of financial resources can be mitigated by placing money, and lots of it, in the company coffers when you depart. A fully- funded (with life insurance) buy/sell agreement (including a current valuation) just buys out the deceased owner?s interest. By itself, it does not place one penny in the company?s bank account. For that reason, few companies have adequate cash to survive an owner?s death. To address the loss of financial resources, a business, for its own current and future needs, requires insurance on your life in an amount sufficient to replace its immediate losses and to provide it with adequate ongoing capitalization. These insurance proceeds will enable the business to grow and prosper without you and your personal balance sheet.

Solut ion: LOSS OF KEY TALENT ? YOU Sole and Mult i-Owner Companies In a solely-owned business, the key employee is almost always the owner. Usually, it is the owner?s entrepreneurial drive, experience and dedication that stimulate a business. Losing its key employee, you, is a blow from which many businesses do not recover. If your business is a mirror image of you, it is unlikely that any amount of key person life insurance or other source of cash will suffice. You must create value (within the company and distinct from you) in the form of successor management capable of filling the void left by your unexpected departure.

In a co-owned business the loss of an owner is not as drastic, provided your co-owner can carry on without you. If your co-owner cannot replace you, train employees to perform the same or parts of the same role as the dearly departed. You must take the same step if you desire to sell the business for top dollar during your lifetime. In either scenario (a lifetime sale or transfer caused by the death or disability of an owner) the underlying need is the same: capable employees must be available to assume the responsibility of running the business. In a lifetime transfer, if the owner is ready to leave the business but the business cannot survive or at least thrive without him, the owner is forced to remain operating the business until successor management is located and trained. When an owner dies, however, the absence of the successor management is more devastating because you are not available and the best hope is to provide the company with adequate cash, in the form of life insurance proceeds, so that the business can survive until replacement management is located and trained. That cash is also used to produce a cash-based incentive plan designed to motivate and retain the new management. In a co-owned business, the loss of an owner can severely strain the business but the remaining owner can, especially with sufficient life insurance proceeds, find and train replacement management as well as provide that replacement management with a significant cash incentive plan. As you well know, finding and training your replacement can take years. Why not prepare your company today for an ownership transition?Remember, at some point you won?t be in your business. We hope your absence will be due to a sale to an outsider or perhaps to the very key employee you have brought into the company. Perhaps, however, it will be due to death or disability. No matter the cause, your business will survive and thrive only if you have found, trained and motivated your replacement before you leave the business. In a real sense the continuity of a business is a transition of ownership from you to equally capable individuals of an operationally and financially sound company. In the situations we have discussed here, (primarily death or disability of an owner) life insurance can instantly provide significant financial strength. But the business also requires talented, motivated key successor management. And for that, there are no quick fixes. The benefit of starting today to find that key successor management is that you will be building value within the company that will be converted to cash when you leave it,we hope, alive and healthy.

Solut ion: LOSS OF TALENT: EMPLOYEES AND CUSTOMERS As Clint?s situation illustrates, the death of an unprepared owner ignited a cascading series of events for the business. Chief among these are the departures of employees and customers. The loss of employees is followed immediately by defaults under contracts. Because of the inability to perform promised work, customers inevitably leave. Why do employees leave?Usually they fear that the business will not survive, thus jeopardizing their salaries and future employment. Additionally, when the owner?s leadership role is hastily transferred to anyone but a recognized successor, employees and customers grow uneasy. With uneasiness comes migration to a new employment and to other vendors.

These financial and personal concerns must be quickly quelled by implementation of a preconceived, funded continuity plan. Employees must know that a plan exists that guarantees their compensation and clearly names your successor. With these assurances, most employees and customers will stay with the company. Sole Owner Company In a solely-owned business, financial and personal concerns about succession are handled through: -

A written (funded by life insurance) Stay Bonus Plan (described above in the Solution to Problem One) communicated to employees when it is prepared; A succession of management plan that you prepare, now, naming the person to be in charge; and A decision made now, by you, regarding the sale, continuation or liquidation of the business in the event of your demise.

Mult i-owner Company -

In a multi-owner company, loss of employees and customers does not usually present a problem because of the presence of other owners.

FINAL THOUGHTS Business continuity issues can be divided into two camps: those that occur while the owner is alive and those that arise upon the owner?s death. In the case of transfers during an owner?s lifetime, you have the luxury of time to find and to train your replacement. Not so in the case of death. In order to survive your demise, your company must have adequate cash (almost always subsidized by insurance on your life) to survive: -

Continuity of Business Ownership Company?s Loss of Financial Resources Loss of Key Talent-You Loss of Employees and Customers.

In the short run, money is required to: -

Effect a buyout; Provide capitalization; Replace your balance sheet with respect to lenders; and Provide cash incentives to entice your employees to stay.

In the long run, a successful business is one you can either sell for top dollar and exit in style, or one that can survive, in style, upon your exit. As you can see Exit planning is not a get it done in one day process. We strongly encourage you to continue to work at developing and implementing a plan. In doing so, in addition to peace of mind, it means higher valuations for your business. Please do not hesitate to contact your CLB Trusted Advisors with any questions you may have.

ABOUT CLB NETW ORK CLB measures our partnership success in Revenue, New Projects, and Net Profit. We want you to achieve your goal of putting a minimum of $1M in profits in the bank and achieving 10% net profit for the business and building a valued asset. CLB takes a bright and innovative approach to offering easy-to-understand, customizable, and fractional solution options at a significant value compared to hiring employees or firms that do not understand your business, your best-fit clients or the luxury home building and remodeling industry. CLB Network is backed by a team of seasoned professionals who explicitly understand what it takes to be a high performance luxury custom homes and remodeling business and how to deliver a 5-star experience to best-fit strategic partners. prospects, and clients. Our combined experience and solutions allows CLB to offer you and your business genuine peace of mind knowing that we are on your team and will help you achieve your goals years sooner than if you had to do it on your own.