Exit Planning Edge

April 2011 20700 Ventura Blvd. #140

Woodland Hills, CA 91364

(818)888-9037

The Exit Planning Edge

Greetings!

Increased gasoline prices in the U.S. stand to offset about 60% of the benefit from the payroll tax cut, says The Wall Street Journal, quoting Barclays Capital. President Obama has said the tax cut would result in an average savings of $1,000 per family this year.

Click hereto view the full article.

Incentive Compensation and Exit Planning

Often the terms "succession planning" and "exit planning" are used interchangeably, but the terms mean different things in different contexts.

In this article we will use exit planning to mean the process employed by the owner of a closely held enterprise preparing to sell his or her company in an M & A (Mergers and Acquisitions) transaction while succession planning will be the process used by a Fortune 500 company to groom internal management to take over for retiring leaders or seek replacement leaders from outside the company.

A March 29, 2011 article by Robin Ferracone, on Forbes.com, entitled Linking Succession Planning to Compensation, discusses issues unique to large company succession planning that can be easily translated to mid-market exit planning.

In the article, the CEO of a large Fortune 500 company announced he would be retiring in 2 to three years. Instead of reporting succession plans with the governance and nominating committee, he was asked to discuss with the COMPENSATION committee the following possibilities:

"(1) linking a portion of the current CEO's annual bonus to his proactive development of the designated internal candidates, (2) rewarding the designated candidates for enhancing their experience in key areas, and (3) providing special retention packages for those senior executives who were not designated as potential CEO successors."

This board clearly saw that linking the exiting CEOs compensation with the company's objective as well retaining key non-CEO candidates was a key strategic initiative.

In a smaller company the same principals are critical. The CEO, often the founder of the company, who plans on selling in a few years will be highly rewarded if he or she can develop the management team by broadening their experience and giving them greater responsibilities, making them more valuable to the new owner. In exit planning, the strength of the management team is a key value driver.

Incentive compensative should be linked to measureable results that move the company forward and enhance the owner's objective of increasing value in the eyes of prospective buyers.

Life Insurance Division

The REBA--a deductible executive comp plan that works for smaller (and S Corporations)

Life Insurance has long been used to informally fund executive comp arrangements such as deferred comp, salary continuation, SERPs and the like. The biggest problem with these plans was that the tax deduction was deferred as well as the tax to the employee. Old executive bonus plans funded with life insurance were deductible, but the employee had full access to the cash values, meaning they were not particularly valuable as a retention tool.

A new generation of plan--The RESTRICTED Executive Bonus Arrangement (REBA) has the benefit of deductibility-but also provides the "golden handcuffs" we look for in a deferred comp type arrangement.

In addition, we use VERY high cash value policies with very low surrender charges that are common only in the large corporate arena so that these plans are attractive to the key executives your client is hoping to reward and retain.

With any questions about REBAs or other incentive compensation issues, please call Steve Craig at (818)888-9037 or email steve@sfpartners.net .

The mission of the SF Partners Life Insurance Division:

SF Partners Life Insurance Division is focused on providing Personalized Solutions for Complex Problems to our clients who we define and the owners of closely held middle market companies and their senior executives. We bring a consultative approach to problem solving, creativity to plan design and clear concise explanation of what is being recommended and why.

Click here for the SF Partners Life Insurance Division's two-page brochure

Issue: 13

In This Issue

Exit Planning brings together uncoordinated planning

Section 79 Plans making a comeback

Quick Links

Life Insurance Brochure

DISCLAIMER: The information in this article is general in nature and is not to be construed as legal or tax advice. For information regarding your specific situation, you should contact an attorney or tax advisor. This newsletter is believed to provide accurate and authoritative information related to the subject matter. Any examples provided are hypothetical.

Susan Laine, MBA and Steven R. Craig, MSFS
Structured Financial Partners