SUCCESSION PLANNING. May 15, 2015

Transcription

1 SUCCESSION PLANNING May 15, 2015

2 Our Panel Peter Franz (Event Moderator), Co-Chief Investment Officer and Advisor with Beacon Financial Partners is responsible for researching and developing the investment platform for the firm and facilitating the relationships with the numerous asset managers that partner with Beacon. He serves as a consultant to the firm s other advisors, working together with them on various aspects of portfolio management including plan design, portfolio analysis and market strategy.

3 Our Panel David Kraninger, Managing Partner of Kraninger & Associates and Geauga Growth Partnership Business Consultant, who provides consulting services to GGP members as needed. Consulting assignments include Organizational Development, Cost Structure and Analysis, Sales and Marketing, which include evaluating core competencies, improving product margins, and reorganizing businesses to reduce queue time and improve through put.

4 Our Panel Neil R. Waxman, Managing Director, CERTIFIED FINANCIAL PLANNER, Accredited Estate Planner with Capital Advisors, Ltd., has over 30 years of experience advising high net worth family business owners. His practice focuses on, but is not limited to, the integration of wealth management with the various tools and techniques of business succession and corporate transaction strategies.

5 Our Panel Carl J. Grassi, Firm President of McDonald Hopkins, LLC serves as corporate counsel and business advisor to a number of middle market and growth companies. He has extensive experience assisting clients in areas of complex mergers and acquisitions, choice of entity planning, business succession planning, financing and structuring ESOPs, executive compensation and tax planning, creation of family limited partnerships, formation and use of limited liability companies, and IRS controversies.

6 SUCCESSION PLANNING Geauga Growth Partnership Dave Kraninger

7 OUTLINE What is succession planning Where are you Statistics Beginning the discussion Drivers Continuous process Considerations Summary

8 WHAT IS SUCCESSION PLANNING? Smaller/private businesses Ongoing process Involving ownership, board, and/or current top management Identifying skills required, organization structure, and people to be promoted Becoming aware of tax implications Funding, financial sourcing for transfer Preparation for next top leadership (ownership) Timeline defined

9 WHERE ARE YOU? If you have started, good for you. If you haven t, no time like the present. If you have plan, maybe we can offer suggestions or additions. If you don t know what to do, ask for help!

10 STATISTICS 53% of small/medium sized family companies plan to keep in the family after current executive no longer running. 30% are successfully passed. Source: National Small Business United 3000 family owned businesses in U.S., in business average 50 years & average sales $19 million. 25% of CEO s plan to retire within 5 years. 50% or more plan to retire within 10 years. 32% of CEO s retiring in next 5 years have not selected a successor. 21% have not completed an estate plan beyond a simple will 66% do not have a written strategic plan to guide the company through transition Source: Mass Mutual 37% of inheritors of privately held businesses reported they had to shrink or restructure their enterprises to meet estate tax obligations. 33% of all owners expect that some or all of the business will have to be sold to satisfy estate tax liabilities. Study of 749 family businesses which failed within 4 years of transfer to second generation 97% of the heirs blamed lack of succession/transition strategy and estate taxes. Source: Gallup Source: Prince and Associates

11 BEGINNING THE DISCUSSION Most private/small business owners want to keep business going. Most hope within the family. Is there a plan; usually not a succession plan. Where is business in business life cycle? Is there energy, enthusiasm, & vision? What are the key leadership needs? Ownership structure & financial health?

12 DRIVERS TO THE PROCESS Required future planning Age & retirement Ownership transfer ideas (ESOP) Divorce, health, other critical issues (death) Retirement funding Shifting leadership skills required Difference of opinion by multiple owners Retool organization, new direction Available family candidates Lack of family candidates Business sustainability Financial planning including tax consequences Different desired use of assets

13 CONTINUOUS PROCESS LEADERSHIP COMMITMENT VISION & GOALS MONITOR & EVALUATE ANALYZE GAPS/NEEDS DEVELOP/IMPLEMENT STRATEGY SEEK KEY INFORMATION EVALUATE TALENT

14 PRACTICAL CONSIDERATIONS Current business plan & strategy Ownership structure (simple, complex) Legal entity (current & future) Updated value; valuation process Transfer funding source Buyout; sale to third party Tax implications Qualifications/characteristics of future leadership Availability of future leadership Liquidity Ongoing & future operational issues Timing & end game

15 SUMMARY Important process to start sooner rather than later. Leadership vision and action mandatory. Gather information, analyze needs, involve key advisors, & objectively assess the future. First plan does not have to be final plan. Seek advice on legal, valuation, tax, and funding issues, but do not abdicate your role. Contact GGP to start your planning or answer questions relative to your planning.

16 The Six Ingredients of Succession Planning Neil R. Waxman

17 The Six Ingredients of Succession Planning 2 Parts Psychology 2 Parts Social Work 1 Part Finance 1 Part Tax Note: Failure to combine in the proper order could result in explosion. Please See Important Disclosures on Final Slide

18 Components of Succession Planning Philosophy Mechanics Economics The refinement of objectives must take place first. Mechanics and Economics often take place simultaneously through a process of financial modeling to determine the best results. The parameters should always be driven by the objectives, but may require revision if the solution is worse than the problem. Please See Important Disclosures on Final Slide

19 Components of Succession Planning Philosophy Feelings, Convictions, and Fundamental Benefits Strategic Plan for Business Family Mission Statement/Ownership and Operational Mission Statement Application of Mission Statement/Define Objectives Who What When How Roles Please See Important Disclosures on Final Slide

20 Components of Succession Planning - Philosophy Strategic Plan for Business Define Direction of the Company Define the Complexion of the Assets Determine if they are Divisible Please See Important Disclosures on Final Slide

21 Components of Succession Planning - Philosophy Family Mission Statement/Ownership and Operational Mission Statement A family mission statement articulates the family s commitment and the reasons behind it. It also describes other aspects of the family s vision for the business and the family s role in it. Some family mission statements are brief, contained in a few succinct sentences or paragraphs. Others may continue for several pages, including, among other things: A statement of family values as they relate to the business Policies on family participation in the business Principles guiding family-member advancement in the business A family code of conduct as it relates to the business Policies on sharing financial information Guidelines for forming a family organization Source: Craig E. Aronoff, Ph.D. and John L. Ward, Ph.D., Family Business Succession: The Final Test of Greatness Please See Important Disclosures on Final Slide

22 Components of Succession Planning - Philosophy One Family s Goals for Estate/Succession Planning In Order of Importance: 1. Financial Security of Parents 2. Financial Integrity of Company 3. Balanced Ownership Among All Family Members 4. Employees Must be Stakeholders 5. Financial Security Outside of the Business 6. Minimization of Taxes Please See Important Disclosures on Final Slide

23 Components of Succession Planning - Philosophy Application of Mission Statement/Definition of Objectives Who Family Members (outright or in trust) Other Shareholders Executives All Employees Charitable Entity Outsiders Initial Public Offering Please See Important Disclosures on Final Slide

24 Components of Succession Planning - Philosophy Family Members Co-Leadership Co-Leadership succession should not be undertaken without a formal outside board and shared leadership should only be considered when there is no logical successor and the right circumstances exist. It is rarely more than a onegeneration solution. Source: Benjamin Benson, co-author of Your Family Business: A Success Guide for Growth and Survival. Please See Important Disclosures on Final Slide

25 Components of Succession Planning - Philosophy Family Members Co-Leadership When and Why it Works Equal ability (can be different kinds), motivation, and commitment Division of day to day job responsibilities according to individual talents (e.g. production and sales) Common philosophy concerning such things as risks and rate of growth History of resolving conflict constructively Fundamental mutual respect Please See Important Disclosures on Final Slide

26 Components of Succession Planning - Philosophy Family Members Co-Leadership When and Why it Doesn t Work One person is more forceful than the other, which can result in stronger person making all decisions leading to resentment by others Referee no longer available (delegation of duties prior to disengagement by referee can circumvent problems) Co-leaders don t respond the same to changes in business circumstances (e.g. rapid growth, new competition, economic downturn, miscellaneous financial difficulties). Management by committee in times of stress can cause finger pointing and hinder company s operation Please See Important Disclosures on Final Slide

27 Components of Succession Planning Mechanics Tools and Techniques of Succession, Financial, and Estate Planning Financial Planning for Current Owner Financial Security Analysis Retirement Planning Estate Planning Wills Trusts Financial Planning for Successors Please See Important Disclosures on Final Slide

28 Components of Succession Planning Cause and Effect - Capital and Liquidity Needs Compensation of Retired Owners Redemptions Growth/Acquisition s Dividends Estate Gift Taxes Compensation Growth Causes of Transactions and Capital Needs Death Disability Retirement Termination (voluntary or involuntary) Shareholder financial needs Shareholder bankruptcy Divorce Differences in opinion/management style, etc. Dividends disappointing Shareholder wants to diversify assets Competition with the company Offer to purchase shares by third party Business Ventures Ownership Transition can equal liquidity crisis Create patient capital to alleviate crisis 1 st Generation Founder 2 nd Generation Sibling/ Multishareholder or Possibly Inactive Shareholders Please See Important Disclosures on Final Slide 3 rd Generation Cousin/Multishareholders Inactive Shareholders

29 Financing and Funding Succession Plans Economics - Financing the Plan Valuation of Assets Transaction Analysis Based Upon Techniques Cash Flow and Tax Effects - Individuals and Entities Implement Most Effective Strategy and Create Resources for the Funds Please See Important Disclosures on Final Slide

30 Important Disclosures Neil R. Waxman, Capital Advisors, Ltd. Peter R. Franz, Beacon Financial Partners Capital Advisors, Ltd Advisory services offered through Capital Advisors, Ltd., LLC, Capital Analysts, Inc., or Lincoln Investment Planning, Inc., Registered Investment Advisors. Securities offered through Lincoln Investment Planning, Inc., Broker Dealer, Member FINRA/SIPC Capital Advisors, Ltd., LLC and the above named firms are independent, non-affiliated entities. A copy of our current written disclosure statement discussing our advisory services and fees continues to remain available for your review upon request. Beacon Financial Partners Advisory Services offered through Capital Analysts, Inc., Registered Investment Advisors. Securities offered through Lincoln Investment Planning Inc., Broker/Dealer, Member FINRA/ SIPC. Beacon Financial Partners and the above named firms are independent, non-affiliated entities. None of the information in this document should be considered as tax advice. You should consult your tax advisor for information concerning your individual situation. Date of First Use: May 15, 2015

31 ESSENTIAL LEGAL DOCUMENTS IN SUCCESSION PLANNING See Handout Carl J. Grassi

32 Corporate Governance Issues A. Corporate Law Provisions Consider whether anti-dilution (pre-emptive) rights should be added. Consider whether the required shareholder approval percentage for certain extraordinary actions (e.g., sale of the business, merger or dissolution) should be reduced from two-thirds to simple majority.

33 Corporate Governance Issues B. Board of Directors Consider whether there should be agreement as to the composition of the Board of Directors (i.e., whether certain shareholders or classes of shareholders should have the right to name directors).

34 Corporate Governance Issues C. Super-Majority Voting or Consent Rights Consider whether certain actions should require super-majority or unanimous voting by the shareholders and/or the directors of the Corporation or whether such actions will require the consent of certain shareholders and/or directors. These voting provisions could address extraordinary actions (e.g., sale of the business, merger or dissolution) or more common actions (e.g., incurring debt over a specified dollar threshold; making any capital expenditure in excess of a specified dollar threshold; acquisition of additional businesses; purchasing, leasing or selling any real property; purchasing, leasing or selling any material assets outside of the ordinary course of business; issuing securities of the Corporation; modifying employment arrangements with the principals; or transacting business with the principals or related parties).

35 Buy-Sell Provisions A. S Corporation Restrictions If the Corporation is an S corporation, include an absolute prohibition against transferring shares to any person if such transfer would cause a termination of the Corporation s S corporation status.

36 Buy-Sell Provisions B. Restrictions on Transfer during Lifetime of Shareholder Consider requiring a shareholder who wishes to sell his shares to offer the shares to the remaining shareholders and/or the Corporation. Consider whether purchase price and payment terms should be the purchase price and payment terms in the bona fide third party offer, or whether the purchase price and payment terms should be the more favorable (as determined by the offeree shareholders and/or the Corporation) of the purchase price and payment terms contained in the third party offer or the purchase price and payment terms contained in the Shareholder Agreement applicable to purchases upon trigger events.

37 Buy-Sell Provisions B. Restrictions on Transfer during Lifetime of Shareholder (continued) Consider whether the offeree shareholders and/or the Corporation must purchase all the offered shares or whether the offeree shareholders and/or the Corporation may purchase less than all of the offered shares. Consider an exception for gifts or transfers to or for the benefit of family members or affiliated entities.

38 Buy-Sell Provisions B. Restrictions on Transfer during Lifetime of Shareholder (continued) Consider drag-along rights and/or tag-along rights with respect to the remaining shareholders. A drag-along right provides shareholders selling a certain percentage of the shares to compel the remaining shareholders to sell at the same price and terms (facilitating sales where the buyer wants to purchase all of the outstanding shares). A tag-along right provides shareholders the right to participate in a sale of shares at the same price and terms as shareholders selling a certain percentage of the shares.

39 Purchase Events upon Certain Trigger Events Consider whether certain events which occur will trigger a purchase option or requirement of a shareholder s shares by the remaining shareholders and/or the Corporation. Events which may trigger purchase right or requirement death, disability, termination of employment or bankruptcy of a shareholder.

40 Purchase Events upon Certain Trigger Events Upon the occurrence of a trigger event, consider whether the remaining shareholders and/or the Corporation will have the option to purchase all or less than all of the shareholder s shares or whether the remaining shareholders and/or the Corporation will be required to purchase all the shareholder s shares. Note: There can be different requirements relating to different trigger events (e.g., the remaining shareholders and/or the Corporation could have the obligation to purchase shares in the event of death, but the option to purchase shares in the event of termination of employment).

41 Purchase Events upon Certain Trigger Events Consider how the purchase price for the shares will be determined and whether there will be any adjustments based upon the trigger event (e.g., reduced purchase price for a termination of employment for good cause ). Agreed upon value value per share determined on an on-going basis by either the shareholders or directors. Consider a contingency method (e.g., an appraisal mechanism) if the parties neglect to revalue the shares after a period of time.

42 Purchase Events upon Certain Trigger Events Appraised value value per share determined by appraisal made within a certain period of time after the trigger event. Consider how appraiser(s) will be selected if the parties are unable to agree upon one appraiser. Formula value value per share based upon a pre-determined formula (e.g., capitalization of earnings). Book value value per share based upon book value.

43 Purchase Events upon Certain Trigger Events Consider the payment terms for purchase price. Consider structuring as a down payment with the balance paid over a number of years. If life insurance is used to fund part or all of the purchase, consider structuring such that down payment is at least equal to the amount of insurance proceeds received.

44 Purchase Events upon Certain Trigger Events Consider how any purchases will be funded. Life insurance can be used to fund part or all of the purchase. Note: If insurance is to be used to fund purchase and the Corporation is a C corporation, consider structuring as a cross-purchase arrangement among shareholders since there may be alternative minimum tax concerns if the Corporation owns the insurance and receives the proceeds. Installment payments (i.e., seller-financed).

45 Q & A Peter Franz, Moderator

46 Thank You for Attending! Please consider these upcoming business programs: June 24 Geauga Growth Partnership Annual Meeting July 24 Social Media Issues for Business & BYOD (Devices in the Workplace) Aug 12 University Hospital CEO Thomas Zenty Updates the Business Community Sep - Oct Emerging Leaders Program a 6 part program led by SCORE* * Fees apply contact info@geaugagrowth.com for information Geauga Growth Partnership, Inc. is a business-led non-profit organization dedicated to the retention, growth and attraction of jobs, investment and economic growth in Geauga County. We lead business growth in Geauga County through education, collaboration and advocacy. Contact info@geaugagrowth.com