1. Succession Planning

2. John Ward wrote in his book Keeping 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.

3. 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.

4. CONTINGENCY PLAN You 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.

5. 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

6. SIGNALS TO BEGIN SUCCESSION

7. 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?

8. 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?

9. 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?

10. 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?

11. HOW PREPARED ARE YOU?

12.  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?

13. 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 for accomplishing these goals?  Do these plans include transferring value out of the company?

14. 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?

15. GET THE TEAM READY Follow the two rules

16. RULE #1 WHO IS ON THE TEAM  Owner  Successor(s)  Stockholders  Family members  Key company employees  Attorney

17. RULE #2 THERE SHOULD ONLY BE ONE TEAM  Accountant  Financial Planner  Key Suppliers  Bankers  Advisors (Peer group)  Friends

18. GOALS

19. WHO SHOULD SET GOALS  Owner  Company business plan  Successor(s)  Spouses  Children  Shareholders  Key employees  Other family members

20. PICKING THE SUCCESSOR

21. 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?”

22. 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?

23. 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?

24. 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?

25. 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?

26. 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.

27. 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.

28. HURDLES TO OVERCOME  Realistic goal setting  Solving family conflicts  Recognizing stages of life (and their impact on business decisions)  Commitment  How to let go

29. 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

30. HURDLES TO OVERCOME  Converting 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

31. BUSINESS VALUATION  Income approach  Capitalized earnings method  Discounted future cashflow method  Discounted future earnings method  Market approach  Sales of similar closely held companies

32. BUSINESS VALUATION FAIR 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.

33. BUSINESS VALUATION A price agreed Earnings Before Interest Taxes Depreciation Amortization EBITDA* *Operational Cash Flow

34. BUSINESS VALUATION  Asset approach  Book value  Liquidation value  Hybrid approach  Excess earnings method  Rules of thumb

35. OWNERSHIP TRANSFER

36. 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

37.  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

38.  The appropriate form of corporate ownership to limit potential liabilities (tax and otherwise)  Tax issues associated with potential succession and/or sales strategies  Transition strategies as they relate to owner’s objectives for income, control or liquidity  Coordinating succession plans with an owner’s personal financial planning objectives in the areas of retirement planning, liquidity and taxes MANAGEMENT TRANSFER ISSUES MUST BE CONSIDERED FIRST

39. OWNERSHIP TRANSFER METHODS  Management Buy Out MBO  Leveraged Managed Buy Out LMBO  Leveraged Buy Out LBO  Gifting  Selling directly to outsiders

40. OWNERSHIP TRANSFER METHODS Family Limited Partnership (FLP)  A limited partnership among members of a family  General partners & Limited partners Benefits Reduced asset values

41. OWNERSHIP TRANSFER METHODS Family Limited Partnership (FLP)  You can control the disbursement of income  The Partnership Agreement governs how income will be divided

42. OWNERSHIP TRANSFER METHODS Family Limited Partnership (FLP)  The principle value of the FLP is reducing a transferor's gift and estate tax

43. OWNERSHIP TRANSFER METHODS Grantor Retained Annuity Trust (GRAT) Is a trust used to reduce gift taxes.

44. OWNERSHIP TRANSFER METHODS Employee Stock Ownership Plan – ESOP  Can be used to buy the shares of an owner in a closely held company

45. OWNERSHIP TRANSFER METHODS Employee Stock Ownership Plan – ESOP  Can be used to borrow money  Can be used to create an employee benefit plan

46. OWNERSHIP TRANSFER METHODS Buy-Sell Agreements  Sets 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

47. 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

48. 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?

49. 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

50.  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 desires of the Board of Directors:  Modification  Termination  New plans PHANTOM STOCK OWNERSHIP PLAN

51. TECHNIQUES Considerations:  Shared risks  Contingent Agreements  Variable Sales Price  Goodwill v. Operating Expense  LT Gain v. Ordinary Income  Non-Compete Agreements

52. GOOD LUCK Be prepared for a: