The Basics of Business Succession Planning

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A Succession Plan is CriticalYou will Exit your business. Who will be in control?

March 17, 2011

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A Succession Plan is CriticalYou will Exit your business. Who will be in control?

Speaker: Roy Messing, MBA, CEPA Program Coordinator

1010BOSS Presentation Beacon HillColumbus , OH March 17, 2011Roy MessingProgram CoordinatorOhio Employee Ownership Center Kent State University

Program OverviewBrief Overview of Succession Planning

Background

Implications of not planning

Succession Planning Basics

Helpful Tools

Resources

4.6 millionfamily-owned/closely-held businessesSome Statistics...4.6 million closely-held or family-owned businesses employ 76% of workforceEmploy76%of U.S. workforceSome Statistics...4.6 million closely-held or family-owned businesses employ 76% of workforceSome Statistics...Small and medium-sized businesses create65%of net jobs in U.S.Small and medium sized businesses create 65% of net jobs in countrySome Statistics - (the wave)During the next 20 years close to 80 million baby boomers will be retiring.

More than 70 percent of privately owned businesses will be changing hands within the next two decades.

Some Statistics (the wave)The largest intergenerational transfer of wealth in history a staggering $10 trillion A "business transfer tsunami

Some Statistics...20 years ago30%of small businesses made it to 2nd generation &15% made it to the 3rd generation

20 years ago, 30% of small businesses made it to the 2nd generation, 15% made it to the 3rdNow15%of small businesses make it to 2nd generation & 5%Make it to the 3rd generationSome Statistics...Now, 15% make it to the 2nd, and 5% make it to the 3rdSome Statistics...COSE study found that about80%Do NOT have a succession plan

COSE = Council for Smaller Enterprises in Cleveland, OhioRecipe for Disaster.Fewer companies transitioning to next generation

Aging Ownership Population

Few Owners have plans in place

What can go wrong.Worst CaseFamily loses business investmentBusiness Ceases OperationsEmployees Lose JobsCommunities Lose Tax BaseQuality of Life and Services SufferDomino EffectWhat Happens When a Company Doesnt Plan for Succession?Elements of a Succession PlanTransactionalEconomicPersonal/EmotionalTom23Sale or Transfer to InsidersSale or Transfer to Outsiders

Or do nothingOptionsChris24Potential Inside BuyersFamily Members

Partners

Management

Employees

Combination of the AbovePotential Outside BuyersStrategic Buyer Within Industry

Strategic Buyer in Aligned Industry

Financial BuyerDo Nothing TransferOnly two things are certain in life

Death & TaxesIf the Owner does nothing The Courts decide,

Uncle Sam gets his share, and

All others left to pick up the piecesGiven all that can go wrong and the impact of that inaction..

Why dont owners start a succession plan?DifficultiesDeathTaxesRiskControlLife ChangesRelationshipsOptionsValueSuccession Planning StepsStartIdentify Owners Needs and GoalsResearch/Identify ProfessionalsDraft/Communicate PlanRevisit & Adjust PlanThe Key is starting.Identify Owners Needs and Goals by asking some basic questions (next slide)The Best Time to Start a PlanNow!!!Key Questionsfor the Business OwnerDo I need the sale and/or transfer proceeds to finance my retirement? Can the business support that?Key Questions for the Business OwnerDo I have family members in the business? Do they rely on the business for their income?Key Questions for the Business OwnerWould I like to see the business continue as a viable entity after I leave?Key Questions for the Business OwnerCan I let go of the business?Why Dont They Do It? What will motivate a typical small business owner to begin and actually execute a succession plan? Family IssuesOwner(s)Spouse(s) (or spice)Parents/siblings/in-lawsChildren & GrandchildrenLimit to soft Issues - Technical stuff comes laterFamily IssuesCommunicationCompetencyFairness or EqualityAre entrepeneurs good communicators?Is competence necessary for employment if youre family?Which is a best practice, fairness or equality?Management SuccessionOften OverlookedExtremely ImportantCreates and Maintains ValueWhos Taking Over Sellers Duties?Selecting AdvisorsFind experienced professionals

Interview several before selection

Get and check references

Have a Team of trusted advisors

Define roles amongst teamTeam of AdvisorsEstate and Trust Professionals

Financial Planner/Insurance Agent

Business Attorney

Business Valuation Expert/Accountant

Exit Planning AdvisorDrafting the PlanFocuses on the goals and needs of the owner

Includes input from advisors, owner and other appropriate parties

Outlines the projected outcome and the path to reach that outcome

Specifics better than generalities Time Frame3 Months -20 Years1-2 Years OK5 + Years IdealImplement, Track and Adjust the PlanPlans that collect dust are worthless

Routinely monitor implemented plan

Note uncontrollable changes that impact plan (good or bad)

Adjust plan to fit new realitySPP ToolsBuy/Sell Agreements

Life Insurance

Trusts

Gifting of SharesValuationValuationEvery ownership transaction should include a valuationIndependent, third-partyThink of it as an insurance policy against future litigationChrisBusiness Owners tend to overvalue businessBusiness is their babyInitial cost is sometimes an impediment - $5000-$20,000Litigation issues48Valuation MethodsAsset Approach

Market Approach

Income ApproachDifferent Levels of ValueStrategic outside buyerFinancial outside buyerFair market value ESOPSmall group internal buyer (maybe)Family internal buyerBusiness ValuationChris50Project Exit OutcomeFinancial outcome of exit per goals

Anticipated outcome per evaluation

Calculate the Exit Gap

Closing the Gap?Adjust exit time horizon

Develop plan to increase value

Adjust exit expectationsOur ResourcesSeminarsConferencesWebinarsWeb SiteExit Planning PublicationsTechnical assistanceReferrals for Service ProvidersWebsite & Contact Information www.oeockent.org

Roy Messing330.672.0333rmessin2@kent.eduQ & AMarch 17, 2011

www.BOSSworkshops.comB.O.S.S. Workshops(Business Owner Strategy Sessions)

A Succession Plan is Critical

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