transition planning for your business - taa online training › ... › transitionplanning.pdf ·...

Transition Planning forYour Business

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Trade Adjustment Assistance Intensive Training

BUSINESS CONTINUATION

Transitioning to the Next Generation

TAA for Farmers and Fisherman

• Welcome to Business Continuation Transitioning to the Next Generation

• Business Succession Planning for Farmers and Fishermen

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Business Life-Cycle

Introduction Growth Maturity Decline

Penetrate & Grow

Protect & Defend

New Opportunities

Divest

Time

Source: Wadsworth

KEY QUESTION

Do you want your business to continue to exist beyond your life and be operated by future generations?

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Business Life-Cycle

Maturity

Time

Source: Wadsworth

Maturity

Time

1st Generation 2nd Generation

Business Life-Cycle

Maturity

Time

Source: Wadsworth

Introduction

Maturity

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KEY QUESTIONS• Do you only want the ownership of

your business asset to continue?

OR

• Do you want a viable ongoing business to continue?

OWNER GENERATION’S ASSETS

Moneywage,profit share

Managementresponsibilityaccountability

SUCCESSIONPLAN

BUSINESSSUCCESSOR

HEIRS

Owner’s priorityContinuation of family ownership assets

Owner’s priorityContinuation of family business

Assetsgift, sale,inheritance

ESTATEPLAN

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YES, I WANT MY BUSINESS TO CONTINUE BEYOND MY LIFETIME

–Planning does not create certainty.

–Much of the future is beyond your control.

–Making a PLAN will improve your chances for a success transition.

A Critical Difference

How we define “family”, the priorities, the expectations, the relationships, and the measures of success in a family are, and should, be different than how we define the priorities, the expectations, the relationships and the measures of success in a business.

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Business Succession Planning

Here

What is here?Why is it here?Who is here?Why are they here?What are they doing?Why are they doing it?How is it being done?How well is it being done?Profitable?Increasing wealth?

Here and Now There and ThenWhen is “then”?Where is “there”?

There

What is there?Why is it there?Who is there?Why are they there?What are they doing?Why are they doing it?How is it being done?How well is it being done?Profitable?Increasing wealth?

Business Succession Planning

Here and Now There and ThenWhen is “then”?Where is “there”?

NowWhat is happening:

In our industry?In our business?In our lives?

ThenWhat is happening:

In our industry?In our business? In our lives?

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Why don’t we Plan?

• Too Complicated

• Don’t like to Plan

• Facing our own Mortality

The Need for Planning

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Time Management Matrix

I. Activities

Crisis Management

Deadline Projects

II. Activities

Planning

Relationship Building

III. Activities

Some Phone Calls & Mail,

Popular Activities

IV. Activities

Time Wasters

Busy Work

Urgent Not Urgent

No

t Im

po

rtan

tIm

po

rtan

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Why We Need To Plan

− Increasing volatility in the economy

− Increasing volatility in costs

− Increasing volatility in markets

− Increasing volatility in income

− Increasing longevity

− Increasing lifestyle expectations

− Increasing business expectations

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Necessary Skills For Your Business Success/Succession• Communication skills

• Decision making skills

• Personnel management skills

• Production skills

• Financial management skills

• Marketing skills

Skills Are Developed From -

A-K-A-R– APTITUDE

– KNOWLEDGE

– ATTITUDE

– REPETITION

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Skills, Abilities And Competencies

– A skill is a developed ability. You are born with abilities and you learn skills.

– A skill is learning how to do something competently.

– Developing competency takes skill, ability, knowledge, education, experience, practice and repetition.

How are Skills Developed?

• APTITUDE..natural ability/talent

–What you were born with

–Not a predictor of final skill level

–Minimum level of ability required

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How are Skills Developed?• KNOWLEDGE IS..

• The application of information acquired through education and experience


• ATTITUDE..

• The mental outlook that may be either positive or negative.

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• REPETITION..

• The consistent and correct practice of the desired skill with result in improved performance.

Essential Skills for Business Success

Skill needed by Firm Owner ‘s Skills ( + - 0 )

Successor’s Skills ( + - 0 )

Management

Financial Management

Production

Strategic Planning

Communication

Decision Making

Conflict Resolution

Marketing

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???????

????????

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Business Components• All businesses have five components

– MANAGEMENT..long and short term decisions

– ASSETS..what you own, rent or control

– INTANGIBLES..employees, business contacts, customer loyalty, community loyalty

– LABOR..the physical work involved

– PROFIT..Income minus expenses equals profit.

Business succession planning

– Business succession is the planned and systematic transfer of management, assets, intangibles, labor, and profit from the today’s owner to the successor during a defined period of time.

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Key Business Components• The three most important components in a

successful business are:

– MANAGEMENT

–MANAGEMENT

–MANAGEMENT

Key Business Components

• MANAGEMENT

–Managing Money

–Managing Time

–Managing Decisions

–Managing People

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Key Business Components• ASSETS

–Short term

–Intermediate term

–Long term

–Real property

–Personal property


• INTANGIBLES

–Farms

–Fishing

–Small business

–Large business

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• LABOR

–Owner or family provided labor

–Hired labor

–Farms

–Fishing


• PROFIT

–INCOME IS NOT PROFIT!!!!

–PROFIT PAYS FOR ... Growth..Dividends..

–INCOME PAYS FOR ... Family living..Debt Service..Taxes..

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COMPONENT Testing Owner and Successor’s Expectations

Commitment Owner and Successor’s Expectations

EstablishedOwner and Successor’s Expectations

WithdrawalOwner and Successor’s Expectations

Timeline How long and when

How long and when

How long and when

How long and when

Assets Who owns or controls and how are assets owned

Who owns or controls and how are assets owned



Intangibles EmployeesContactsCustomers Community

Employees,ContactsCustomers Community

EmployeesContactsCustomers Community


Labor DutiesResponsibility

DutiesResponsibility



Management AuthorityResponsibilityAccountability

AuthorityResponsibilityAccountability



Income/profit AmountSourceMethod

AmountSourceMethod

AmountSourceMethod

AmountSourceMethod

Estate Planning For Succession

– Your estate plan will determine what happens to your property after your death. It may involve the use of wills, trusts, gifts and how you own your property. Your estate plan determines who will inherit your property, when they will inherit your property and the value of that property.

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–Estate planning is not business succession planning.

–Estate planning needs to be compatible with business succession planning.

Retirement Planning For Succession

– Your retirement plan will determine when you will no longer provide any labor or any management to the business. You may choose to fully retire or semi-retire and you may want to gradually retire. To have a successor you must choose to retire.

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MAKING THE BEST DECISIONS

What criteria will be used;financial, values, production, time, family, etc.

Who will make the decision;Owner/Parents, children, employees, advisors.

How will decisions be made;Autocratic, democratic, consensus, collaboration.

How will conflicts be resolved.

Identify What, Who and How

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The “SOCS” of Decision Making

–Define the Situation

–Explore the Options

–List Consequences for options

–Select the Solution

A financial perspective?A social perspective?A legal perspective?An emotional perspective?A personal perspective?A family perspective?A community perspective? Affect on your personal goals?A moral perspective?

Define a SITUATION from as many perspectives as you can imagine. Does it have:

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Options

It is always necessary to explore at least two

options to make any decision.

Be careful not to create an option that becomes the immediate solution or other options will not be explored.

Do not reject any option.

Be non-judgmental.

ConsequencesFor each option list the positive and negative

consequences. Consider quality and quantity.

Pros Cons

+

+

+

+

--

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Pros Cons

+

+

+

+

--

SolutionSelect the option that has the most positive and least negative consequences in terms of quality and quality.

Important Considerations

TIMING- Choose the right time for making the decision.

INFORMATION- There is never the right amount of information. EMOTIONS AND EXPERIENCE- Listen to your “gut instincts”. DEADLINE- Set a date certain for making decisions

ACT- Once the decision has been made act forcefully and promptly

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HAVE A PLAN-Develop a plan for implementing the decision.TAKE NOTHING FOR GRANTED-Follow up and make sure that everyone is carrying out their responsibilities.HAVE ALTERNATIVES-If a problem arises in implementing a decision have alternative ways of implementing the decision.DO NOT GIVE UP-Implementing a decision is often difficult. Be persistent.

REMEMBER TO SAY

THANK YOU

Job Description• Write a job description and

include:

• The owner should write a job description that reflect his/her expectation of what the successor will do.

• The successor should write a job description the reflect his/her expectations of what the job requires.

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WHAT IS IMPORTANT ?

What Is IMPORTANT?

We value the things that are important to us.

We want to do that which is important to us.

We make decisions based upon our values.

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VALUES

What is important to me? What do I hold dear?

VISION

What does the future look like?

MISSION

Why are we here? What do we believe in?

GOALS

What do we want to do? What do we want to be?

OBJECTIVES

How will we measure our progress? How will we know when we have arrived?

STRATEGIES

What do we need to do? What are we required to do?

TACTICS

What is needed to carry out our strategies?

VALUES QUESTIONSWhat do you like or dislike in other people?

Who are your heroes?

What do you consider your successes?

What do you consider your failures?

What are your fears?

What is important in your business?

What factors do you consider when making decisions?

What do you buy?

Where do you buy what you buy?

?????????????

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Write a list of word that describe what you value and put a plus sign (+) after the values that are most important to you.

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COMMUNICATION

CommunicationsCommunication is the skill that is the -Key to effective managementKey to developing a succession planKey to maintaining family harmonyKey to developing relationships Key to maintaining relationships

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Dominance

Preference

Interests

Competencies

The way we work

The Science of Communications

Circle the 8 descriptors that represent work activities that most “turn you on.”Underline 2-4 descriptors that most “turn you off.”

Counseling People Analyzing DataHaving Variety Paperwork TasksBeing ChallengedWorking With NumbersDesigningExcitementCommunity AspectsTeaching & TrainingAn Ordered EnvironmentAttending To DetailExpressing IdeasCoachingSelling IdeasMaking Things WorkSeeing An End From A BeginningBuilding Things

Building RelationshipsBringing About ChangeSolving Tough ProblemsWorking With PeopleListening & TalkingPreserving Status QuoDeveloping New ThingsExplaining ThingsWorking SoloGetting Groups to Work Well TogetherStabilizingOpportunity To ExperimentAccomplishingBeing Part Of A Team Planning Things OutHaving A Lot of Space

Analyzing & DiagnosingGetting Things Done on TimeLogical ProcessingPlaying AroundPersuading PeopleBeing In ControlTaking RisksProviding VisionStructured TasksHelping PeopleExpressive WritingInventing SolutionsApplying FormulasEstablishing OrderPutting Things TogetherClarifying IssuesProviding SupportAdministrating

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Circle the 8 descriptors that represent work activities that most “turn you on” Underline those that most “turn you off”.

© 1997 Ned Herrmann Group

Differences in Processing Modes

A “Blue” B “Green” C ‘”Red” D “Yellow”

Descriptors

Logical, Factual Rational, Critical

AnalyticalQuantitativeAuthoritarian Mathematical

Technical readerData collector

Conservative, Controlled Sequential, ArticulateDominant, Detailed

Musical , SpiritualSymbolic, Talkative

Emotional Intuitive (regarding

people) reader (personal)

Intuitive (regarding solutions)

SimultaneousImaginative

Synthesizer, HolisticArtistic, Spatial

Skills

Problem SolvingAnalytical, StatisticalTechnical, Scientific

Financial

Planning, RegulatorySupervisory

AdministrativeOrganization

Implementation

Expressing ideasInterpersonal

Writing (correspondence)Teaching , Training

Integrative, Visualizing

Causing ChangeConceptualizing

Generating IdeasTrusting Intuition

Typical Phrases Used

“Tools”, “Hardware”“Key Point”

“Knowing the bottom line”“Take it Apart” “Break it Down” “Critical Analysis”

“Establishing Habits”Always done it this way”

“Law and Order”“Self Discipline” “By the Book” , “Play it Safe”“Sequence”

“Team Work”“The Family”“Interactive”

“Participatory”“Human Values”

“Personal Growth”“Human Resources”“Team Development”

“Play with an idea”“The Big Picture”“Broad-Based”“Synergistic”

“Cutting Edge”“Conceptual

Blockbusting” “Innovative”

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HOW THE BRAIN COMMUNICATES

A “BLUE”-Uses facts to illustrate points-Very matter of fact-Expresses emotions abstractly-Appears to display little or no emotion regardless of the situation

D “YELLOW”-Ask questions that lead to other questions

-Speaks in phrases-Stops in mid sentence thinking others obviously know

-Very abstract in speaking – uses metaphors and musical words

-Asks questions that have answers-Speaks in sentences & paragraphs-Completes sentences & paragraphs-Very concrete in speaking

B “GREEN”

-Face is animated- eyes flash, etc.-Uses expansive non-verbal gestures-Uses stories to illustrate points-Talks out loud or to self to learn

C “RED”© 1997 Ned Herrmann Group

Communication DifferencesMale and Female

1. Problem Solving

2. Information

3. Conversation

4. Directions

5. Support

5

LISTENING FOR

FACTS

FEELINGS

PERCEPTIONS

Communication BlockersDirecting/Ordering“Stop complaining…”

“Try harder…”Threatening/Warning“You had better…”“If you don’t……”

Moralizing/Preaching “You ought to…” “Good people don’t…”

Lecturing/Arguing “The fact is…” “Yes, but this is the way…”Advice Giving “Why don’t you …”“If you would do this…”

Criticizing/Blaming“You’re not thinking straight..”“You’re acting like an idiot…”“You should have…”Diagnosing/Counseling“You don’t really mean that…”“What you need is….”Cross-examining, Prying“When are you going to …..?”“Why did you do that?”Denying/Reassuring/Withdrawing“Don’t worry about it…”“It’s not that big of a deal…”“Lets not talk about it now…”“I know how you feel…”

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Communication Openers

1. Be attentive. Look, Listen, Track.

2. Invite responses.

3. Summarize.

4. Ask.

5. Clarify.

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Planning for Retirement

Retirement Planning

None at All 35%

Moderate 29%

A Little 18%

A Lot 18%

2

Will you:

–Never retire

–Semi-retire

–Fully retire

Will You. . . Maintain a role in the business?

Transfer it to a successor?

Sell it or lease it?

Gift it?

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Benefits of Retirement Planning

Planning can help you . . .

• Base your savings on realistic information• Find out if retirement plans are realistic • Adjust your plans if necessary• Increase investments to reach your goals• Reduce your worries

How do I envision retirement?

How much income will I need?

Where will I live?

Will I be able to maintain my health?

How will I balance work and leisure time?

How can I strengthen my relationships?

Six Important Questions

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What Are Your Spouse’s Goals?

Will you retire at the same time?

Will you stay in your home?

Will you be able to travel if one spouse is working?

Will an early retirement reduce your benefits?

Retirement Income

How much retirement income will you need?

What is the source of your retirement income?

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Retirement Cost of Living

How will your expenses change in retirement?

Are there family living expenses that are currently being paid by the business?

Will they continue to be paid?

Expenses likely to increase

Health Insurance

Health Care

Entertainment and Recreation

Travel

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Expenses likely to remain constant

Food

Utilities

Auto and Home Insurance

Gifts and Contributions

Personal Care

Considerations

Adjusting expenses and income for inflation

Saving for retirement income

Growth of current investments

Additional investments needed

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Investing for Retirement

Have you made retirement investments that are not in your business?

Are your investments diversified?

Is investing in your business the same as investing for retirement?

Physical safety of your home

Security for health care

Financial security

Companionship

Desire for independence

Housing Retirement Concerns

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Maintaining Health? Have you had prior health concerns?

Do you have current health concerns?

Are there adequate community health care resources & facilities?

Will more money be needed for care?

Will you be able to maintain your independence?

Balancing Work & Leisure

Do you have hobbies?

Will you have a new career?

Will you travel?

Will you go back to school.

Will you attend adult ed. classes?

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Strengthening Relationships

Will you spend more time with your spouse and with your family?

Will you spend less time with your business associates and friends?

Will you spend more time with new friends in new locations?

Common Mistakes Failure to participate in retirement

savings plans.

Failure to estimate retirement income and retirement expenses during your working years.

Believing that Social Security will provide adequate retirement income.

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Estate Planning For Succession

Who Should Be Included

Key Areas of Concern

2

Estate Planning Questions

• What?

• Who?

• When?

• How?

KEY CONCEPTS

• Concepts

–Fair vs Equal

–Compensation = Contribution

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EQUAL DISTRIBUTION OF ASSETS

•Heirs receive equal shares•Simplest Way•Issues

Contribution = Compensation• 1990 Net worth = $300,000/3 children = $100,000

• 2010 Net worth= $3,300,000/3 children=$1,100,000

• Contribution = Compensation Calculation

• 50%-50% Successor and Owner

• $3,000,000 Successor & Owner $1,500,000 each

• $2,100,000 Successor’s share – $100,000 from 1990

– $1,500,000 from the Successor’s growth and appreciation

– $500,000 from Owner’s growth and appreciation

– $2,100,000 total for Successor

• $600,000 Successor’s Siblings’ Share

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ESTATE PLANNING TOOLSWILLS

TRUSTSGIFTS

OWNERSHIP OF PROPERTYLIFE INSURANCE

FIRST OPTION TO BUYBUY-SELL AGREEMENTS

Example Estate PlanOption A

–Estate Plan grants the Successor ownership and, therefore, control of major business assets and provides. . .

• If the successor sells major business assets before x number of years then the proceeds will be shared with all the heirs.

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Example Estate PlanOption B

– Estate Plan divides ownership of major business assets equally among heirs but control to successor and provides. . .

• Non-business heirs cannot sell their interest in the business before x number of years and if sold must offer the first right of refusal to the successor.

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Business Succession PlanThe Transfer Process

MANAGEMENT

ASSETS

INTANGIBLES

LABOR

INCOME

Transfer Period

ownersuccessor

time

Short Transfer Period

Long Transfer Periodowner

successor

time

2


MANAGEMENT

The factors in a successful business:

–Management

–Management

–Management

Key Business Components• ASSETS

• Order of Asset TransferShort term (Operating Inventory & leases) 1

Intermediate term (Breeding Livestock) 2

Intermediate term (Machinery) 3

Intermediate term (Buildings & Facilities) 4

Long term (Land) 5

3


• INTANGIBLES

– Relationships

– Business contacts

– Customer lists

– Blue sky

– Good will

– Employees


• LABOR

– What is needed

– Does the successor fill the need

– Expectations

– Job description

4

Key Business Components• INCOME

– INCOME IS NOT PROFIT!!!!

– PROFIT PAYS FOR ... Growth..Dividends..

– INCOME PAYS FOR ... Family living..Debt Service..Taxes..

Timeline

–How long in each Stage?

• Testing?

• Commitment?

• Established?

• Withdrawal?

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Business Succession Plan The Transfer Stages

Testing

Commitment

Established

Withdrawal

COMPONENT Testing Owner and Successor’s Expectations

Commitment Owner and Successor’s Expectations

EstablishedOwner and Successor’s Expectations

WithdrawalOwner and Successor’s Expectations

Timeline How long and when

How long and when

How long and when

How long and when

Assets Who owns or controls and how are assets owned




Intangibles EmployeesContactsCustomers Community


EmployeesContactsCustomers Community


Labor DutiesResponsibility




Management AuthorityResponsibilityAccountability




Income/profit AmountSourceMethod

AmountSourceMethod

AmountSourceMethod

AmountSourceMethod

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Transfer Models

• Spin-Off Arrangement

• Multi-Person Arrangement

SPIN-OFF APPROACH

Business Business S

S

S

O

O

Business

O Business

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MULTI-PERSON APPROACH

O S

Business O & S

Business

O Business S

Resources• John Baker, Attorney at Law

– Iowa State University

– Administrator of the Iowa Beginning Farmer Center

– 800 447 1985

• Roger A. McEowen, Attorney at Law

– Iowa State University

– Associate Professor of Agricultural Law

– Phone: 515 294 4076

• Dave Goeller

– University of Nebraska

– Deputy Director NCRMEC

– 402 472 0661

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