succession planning. john ward wrote in his book keeping the family business family businesses make...
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Succession Planning
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John Ward wrote in his bookKeeping the Family Business
Family businesses make up 90 percent of the 15 million businesses in United States.
They account for 50 percent of all wages paid and 40 percent of the GNP.
One-third of the Fortune 500 are either family owned or family controlled.
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In a survey by Leon Danco recorded
in his book Beyond Survival
When a founder-owner ages or dies, the vision which drove the family business often fades or dies as well.
Almost 70 percent of family businesses do not survive the second generation.
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CONTINGENCY PLANYou can’t always predict the future
A contingency plan covers the unexpected.
A succession plan is an organized plan to transfer the ownership and management.
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CONTINGENCY PLAN
Insurance Buy-Sell agreements
Instructions for the survivors Names and phone numbers What should they do first Who should they consult Your wishes for the future of the
business
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SIGNALS TO BEGIN SUCCESSION
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SYMPTOMS of UNDERLYING ISSUES
Is there Customer dissatisfaction? Is the company losing market share? Is there low employee morale? Is there high employee turnover? Is absenteeism on the rise?
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SYMPTOMS of UNDERLYING ISSUES
Have you noticed any dependency problems?
Do you notice emotional flare-ups? Are there sales increases that do not
translate to profit? Does the owner deny that any
problems exist?
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SYMPTOMS of UNDERLYING ISSUES
Has the business failed to grow beyond its initial product?
Does the owner deny the need for change and innovation?
Does the owner suffer from burnout and is the business becoming tired and aged along with the owner?
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SYMPTOMS of UNDERLYING ISSUES
Do the family needs overwhelm business realities?
Is there poor communication and inability to confront issues?
Does the current owner spend more time outside the business?
Has the business aged along with the owner?
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HOW PREPARED ARE YOU?
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HOW PREPARED ARE YOU? Do you have definite ideas about your
company’s direction for the next five years?
Do you have these ideas documented in the form of a strategic plan?
Is the plan supported by task plans with(achievable) milestone dates?
Are your employees committed to accomplishing this plan?
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HOW PREPARED ARE YOU? Have you defined your personal goals,
including financial, for the next five years?
Do you have these goals documented? Do you have specific and achievable
plans foraccomplishing these goals?
Do these plans include transferring value out of the company?
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HOW PREPARED ARE YOU?
How would you rate your organization’s effectiveness?
What are the prospects for your company prospering over the next five years?
Are these prospects diminished by your absence from the business?
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GET THE TEAM READYFollow the two rules
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RULE #1 WHO IS ON THE TEAM
Owner Successor(s) Stockholders Family members Key company employees Attorney
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RULE #2 THERE SHOULD ONLY BE ONE TEAM
AccountantFinancial PlannerKey SuppliersBankersAdvisors (Peer group)Friends
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GOALS
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WHO SHOULD SET GOALS Owner Company business plan Successor(s) Spouses Children Shareholders Key employees Other family members
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PICKING THE SUCCESSOR
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PICKING THE SUCCESSOR
Henry Ford once said that the question
“Who ought to be the boss?”is like asking
“Who ought to be the tenor in the quartet?”
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PREPARATION OF THE SUCCESSOR
What skills, attributes, or temperament must this individual have?
Has the successor been given behavior assessment?
Should there be experience with another organization?
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PREPARATION OF THE SUCCESSOR
Does the formal education match some of the business needs?
Is the entire team aware who the successor is?
What are the successor’s goals?
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PREPARATION OF THE SUCCESSOR
Is there a plan to attended college or industry courses that will add to the skill level?
Does the successor attend seminars? Does the successor belong to outside
business organizations?
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PREPARATION OF THE SUCCESSOR
Has the successor had the opportunity to work in each aspect of the business?
Has the successor begun the process of attending all key meetings?
Has the successor begun to chair various meetings?
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PREPARATION OF THE SUCCESSOR
Are there any business secrets or information you have not shared with the successor?
Has the successor began to have control of the areas that they have been assigned?
Do not over criticize when mistakes are made.
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PREPARATION OF THE SUCCESSOR
Does the successor share the company vision?
Give them confidence by leaving alone for periods of time.
Let the successor make some changes in the business direction.
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HURDLES TO OVERCOME
Realistic goal setting Solving family conflicts Recognizing stages of life (and
their impact on business decisions)
Commitment How to let go
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HURDLES TO OVERCOME
How much does the owner(s) need to retire?
Everyone's emotions Keeping key employees during
transition Paying estate taxes without forcing
the liquidation or sale of the business
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HURDLES TO OVERCOMEConverting business assets into
retirement income Identifying and preparing
successor(s) Adequately providing for a spouse in
the event of death or sale of the business paying estate taxes without forcing the liquidation or sale of the business
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BUSINESS VALUATIONIncome approach
Capitalized earnings method Discounted future cashflow method Discounted future earnings method
Market approach Sales of similar closely held
companies
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BUSINESS VALUATIONFAIR MARKET VALUE
A price agreed upon between a willing buyer and a willing seller, with neither party being forced into the transaction and both parties having access to all relevant information.
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BUSINESS VALUATION
A price agreed Earnings
Before
Interest
Taxes
Depreciation
Amortization
EBITDA**Operational Cash Flow
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BUSINESS VALUATION
Asset approach Book value Liquidation value
Hybrid approach Excess earnings method Rules of thumb
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OWNERSHIP TRANSFER
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MANAGEMENT TRANSFER ISSUES MUST BE CONSIDERED FIRST
Before a logical method of ownership transfer can be decided
One successor should have absolute control
This will avoid problems and disputes in the future
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Converting business assets into retirement income
Identifying and preparing successor(s) Adequately providing for a spouse in the
event of death Providing for valuable key employees
while leaving the business to a family member
Paying estate taxes without forcing the liquidation or sale of the business
MANAGEMENT TRANSFER ISSUES MUST BE CONSIDERED FIRST
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The appropriate form of corporate ownership to limit potential liabilities (tax and otherwise)
Tax issues associated with potential successionand/or sales strategies
Transition strategies as they relate to owner’sobjectives for income, control or liquidity
Coordinating succession plans with an owner’spersonal financial planning objectives in the areasof retirement planning, liquidity and taxes
MANAGEMENT TRANSFER ISSUES MUST BE CONSIDERED FIRST
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OWNERSHIP TRANSFER METHODS
Management Buy Out MBO Leveraged Managed Buy Out
LMBO Leveraged Buy Out LBO Gifting Selling directly to outsiders
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OWNERSHIP TRANSFER METHODS
Family Limited Partnership (FLP) A limited partnership among
members of a family
General partners & Limited partners Benefits Reduced asset values
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OWNERSHIP TRANSFER METHODS
Family Limited Partnership (FLP) You can control the disbursement of
income The Partnership Agreement governs
how income will be divided
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OWNERSHIP TRANSFER METHODS
Family Limited Partnership (FLP) The principle value of the FLP is
reducing a transferor's gift and estate tax
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OWNERSHIP TRANSFER METHODS
Grantor Retained Annuity Trust (GRAT)
Is a trust used to reduce gift taxes.
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OWNERSHIP TRANSFER METHODS
Employee Stock Ownership Plan – ESOP
Can be used to buy the shares of an owner in a closely held company
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OWNERSHIP TRANSFER METHODS
Employee Stock Ownership Plan – ESOP
Can be used to borrow money Can be used to create an employee
benefit plan
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OWNERSHIP TRANSFER METHODS
Buy-Sell AgreementsSets forth the conditions under
which a shareholder will sell, and another shareholder(s) will buy, interests in the business
Also establishes the value (or method of valuation) of the company’s stock for estate tax purposes
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OWNERSHIP TRANSFER METHODS
Buy-Sell Agreements
Cross-purchase agreements are between shareholders
Stock redemption agreements are between the company and a shareholder
Insurance is the most common form of funding
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PHANTOM STOCK OWNERSHIP PLAN
What are the Objectives of a PSOP?
Managers that will act like owners
Managers that are loyal
Head start on an MBO?
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PHANTOM STOCK OWNERSHIP PLAN
PSOPs are not “Qualified Plans” In setting up a PSOP you execute a
formal and binding agreement with employees.
PSOPs provide legal rights: Equity Appreciation in equity [stock
appreciation rights] Income
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Small number of key executives and managers.
Valuation depends on various circumstances!
Pay-out - Payments generally made over several years.
PSOPs are subject to the desiresof the Board of Directors:
Modification Termination New plans
PHANTOM STOCK OWNERSHIP PLAN
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TECHNIQUES
Considerations:
Shared risks Contingent Agreements Variable Sales Price Goodwill v. Operating Expense LT Gain v. Ordinary Income Non-Compete Agreements
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GOOD LUCKBe prepared for a: