Succession Planning Family Business Leadership for the Next Generation Gary Elekes – EPC Inc. [email protected] 615-579-7995

Succession Planning

Family Business Leadership for the Next Generation

Gary Elekes – EPC Inc.

[email protected]

615-579-7995

www.eplresidential.comCopyright of EPL Residential Inc

Succession PlanningAgenda

1. Ownership Objectives

2. Family Preparations

3. Preparing Your Business

4. Developing Successors

5. Whom to Choose?

6. Transferring Control of the Business

7. Taking Charge

8. Letting GO

9. Estate Planning, TaxesCopyright of EPL Residential Inc

A. Clarify your objectives before you beginB. Choosing the right ownership structureC. Promotion stewardshipD. Twelve steps in planning successionE. Getting help from the board of directorsF. Are you ready to transfer control?

Succession Planning Objectives

Copyright of EPL Residential Inc

A. Clarify your objectives before you begin

Efficiently & Fairly Distribute Assets to Younger Generations Pass Control of the Business Maintain & Promote Family Harmony



Strategic Points – Major Mistakes MadeKeep it SIMPLEPlan when you are COMMITTED!Be sure to INVOLVE the successors in the planningKeep planning group small – 4-6 peopleCEO or Main Leader MAY NOT run the sessions – HUGE ERRORDo not worry about perfection – write a good planConsider breaking sessions over monthsSet-up a plan

Set up follow-up 1 year outSet-up procedures to monitorAction plans for progress


23% of owners have NO Plan on a successor

25% have poor understanding about Estate Taxes

69% of family businesses lack a plan in writingCopyright of EPL Residential Inc

B. Choosing the right ownership structure

1. Controlling Owners (proprietor/stockholders)2. Sibling partnerships3. Cousin consortium



C. Promotion stewardshipView yourself as a steward not a proprietorshipSafeguard the TrustDevelop a family participation planSuccessor Development PlanShareholders AgreementBusiness Continuity Plan



D. Twelve steps in planning succession

1. Decide if the family will continue ownership2. Assess whether a family can actually hold-up under the process of continuity planning3. The owner must actively commit to getting the next generation involved in

continuity planning4. Consult and actively engage other stakeholders in plan

(Stockholders/family/managers)5. Create a consensus forum (Family council/Board/Task force on Succession)6. Develop a business vision – and clearly define the roles of family in writing7. Choose a successor and define a training plan for them8. Help the successor build authority in the family (power vs. authority)9. Design an estate plan with family & attorneys – not just attorneys10. Be sure the family understands their roles in the succession11. Inform key suppliers and vendors about succession plan12. Have a crisis plan – just in case of the unthinkable untimley happens



E. Getting help from the board of directors

The board as insurance policyBoard can aid in raising timely succession planningBoard can help examine optionsPerspectives on SuccessionSetting up SuccessionPreparing & Assisting a Successor



F. Are You Ready to Transfer Control?

Do you have a valuation method?Do you have formal criteria for employing family members?Is there a training program for preparing new family members?Is there a mentoring program for any successor(s)Do employee family members receive professional performance reviews?Have you identified next generation leaders?Have the next generation family members articulated their vision/values statement?Have existing shareholders determined/articulated their expectations for ROI and business performance objectives? Have any key managers or non-family execs been given incentives for developing family members?Is there a dispute resolution plan to help any family members work out their Potential disagreements about management issues?



A. Exposing the emotional issuesB. Family councils: the key to communicationC. How to handle the relativesD. Split the business to unify the family

Preparing the Family


A. Exposing the emotional issues (Psychology) Discuss the stages of life Hidden feelings among family members – process? Masked expectations of successors Unresolved differences among family-siblings



B. Family councils: the key to communicationEstablish a forumNot a democracy – family vs. dad – VETO PowerWho are the members?Retreats – business developmentProfessionals as mediatorsPossible family creed – in writing – to facilitate planningAs new family may come into the company – amend the creedInvite independent skills – board/accountants/to speak



C. How to handle the relativesExit/Voice/Loyalty – Alfred HirschmanAspirations of family – kidsShareholder liquidity to allow exitsThose in Power must empowered others – controlConsensus in family on goals – growth, profits, visionDefine the appropriate levels of participation for familyCreate a forum of participation - family council?



D. Split the business to unify the familyOccasionally siblings or successors cannot work togetherSplit into divisions for each successor – corporate split off (tax free)



A. Preserving company valuesB. Support for senior managersC. How to avoid losing executivesD. Help for employees, supplies, customersE. From second to third generation

Preparing the Business


A. Preserving company values Family vision/mission/purpose Family Planning Forums Bring in youth/successors/allow a voice



B. Support for senior managersKey Managers may have long ties with owner – valueInvolve any key managers in succession discussionsThe operating plan of a company involves the key managersFinancial incentives/or other for developing talent



C. How to avoid losing executivesThe “Squeeze” – a new family employee is in – someone is outYoung Turks battling the old guardDevelop an orderly succession of power – defined



D. Help from employees, suppliers, customersManaging a successful departureA company policy statement for guidance and control

Vision/ValuesOpportunityPerformance & RewardsTeamwork How supervision should performGrowthCompany Planning Process – objectivesProductsQuality and reliabilityAccounting PracticesContributionsDividends and Valuation Policy



E. From second to third generationHistory sows the seeds of success or failure2nd Gen family starts well – suffers late

Immediate family is focused and provides lower cost efforts for promise Spouses eventually become involvedConflicts may ariseGreed/agendas/differing interests arise

3rd Gen - More members may like to work?Promoting and hiring people on meritDevelop a business first culture – ownership is separated from management



A. Sparking interest in younger childrenB. Raising a daughter as the next CEOC. Mentoring the next generationD. Parenting versus mentoringE. The non-family mentor’s guideF. Infusing successors with core valuesG. Meeting customers and suppliers

Developing Successors


A. Sparking interest in younger children Expose them to rewards and satisfaction early Over worked and stressed parents make bad models for kids Expose your children to real work with real standards Set tough rules and high standards but not unfair Pay them market wage – not high or low Start early not late – most are notoriously late There is no entitlement to ownership



B. Raising a daughter as the next CEOEducation, mentorsLoved, message of accomplishment, risks, creative aggression, dreamWomen may make decisions based on impact to others first, then themselves Males based on goals and preferences Support her talentsReinforce real accomplishmentsAllow her to take risks based on her skillsDefine goals with her – make them hersCreate equal time for the daughter at dinnerMake sure she dreamsHer empathy and style of management are valued



C. Mentoring the next generationEstablish the values for the sibling and mentorExpose them to more than one mentorFacilitate the mentor process – endorse it



D. Parenting versus mentoringYoung people needs parentsYoung leaders need mentorsEffective succession requires finding transition



E. The non-family mentor’s guideYou need a plan to create a mentor – mentors

Career strategy advisorIndividual counselorSponsor or mediatorMonitorRole ModelOrganizational analystLiason



F. Infusing successors with core valuesEstablish themDiscuss themDebrief with them about value challenges when appropriate



G. Meeting customers and suppliersStage the preparation of suppliers, customers, lendersGood rule of thumb with vendors and lenders is 25-30Assign direct contact with customers, vendors, lenders at 30



A. Why smart people make dumb choicesB. You make the final decisionC. Choosing the best among siblingsD. Co-leadership: when can it work?E. Getting partners to agree on a successorF. Preparing for emergencies

Whom to Choose


A. Why smart people make dumb choicesOrganizational challengesThink multiple candidatesTrack performanceConsider outside talentChecks and balances

Whom to Choose


B. You make the final decisionCreate experience as a testing groundFind an outside viewpointCreate a process with the consultant – to be objective

Whom to Choose


C. Choosing the best among siblingsParents do have favoritesPersonality variations do have impactPersonality traits outweigh gender differentiationForget entitlement

Whom to Choose


D. Co-leadership: when can it work?Equal ability and drive, motivationsDivision of responsibilitiesAgreement and mutual respect for divisionsCommon philosophiesAbility to resolve conflicts in their historyDo NOT need parent referee

Whom to Choose


E. Getting partners to agree on a successorReal board meetingsSeeds of core valuesDefine the successor role early on and agree on parametersFamily participation plan and advisory board

Outside helpFormal valuationOwner issues all resolvedSecurity for partners family members – employment agreementsSelect leader

Whom to Choose


F. Preparing for emergencies – Unspoken!Short term crisis plan

Key insurance policiesPossibilities of TrustsSpouses/kids into key meetingsMentors assigned nowDiscuss possibility before handLetter of instruction

List of key outsiders in relation to companyOutside board of advisors

Long term transition plan

Whom to Choose


A. Match ownership to controlB. How to avoid multiple shareholder madnessC. Tools for transferring ownershipD. Protecting your retirement incomeE. Breaking deadlocks over valuationF. Trusting the firm to trusteesG. Incentive for non-family caretakersH. Attracting a non-family CEO

Transferring Control and Ownership


A. Match ownership to control Ownership and voting rights should match Non-voting shares can be to other family members Real estate to other family members



B. How to avoid multiple shareholder madnessFairness has nothing to do with assigning controlAssign shares and control to members operating the company



C. Tools for transferring ownershipGiftsGrantor Retained Annuity Trusts (stock to trust)Installment buyoutsCovenant of non-compete – ownerDeferred compensation plans (retirement benefits)



D. Protecting your retirement incomePersonal guarantees from buyersCompensation and bonus capsRestrictions on dividends or K1 distributionsRestrictions on new debt to the buyerEstablish cash flow requirements to cover deferred payoutsRight to review the company financials – if noteStock in escrow until payout is completeNon – complete for new ownersLife and disability insurance as requirementNo sale of assets or acquisitions without approvals



E. Breaking deadlocks over valuationMethod establishedYearly reviewsSystem of arbitration established



F. Trusting the firm to trusteesTrust creates smooth transition of ownership assetsTrustee control distributions – predeterminedTrusts are usually tied to a will of the ownerOwnership and control are separated in this mannerCarefully choose this personPreserving wealth for family vs. board – accepting risk



G. Incentive for non-family caretakersCreate incentives or development of up and coming familyEstablish guidelines for the successor to take control



H. Attracting a non-family CEOCompensation packageTermination agreementsSERPSPre-tax wealth plansPrivate pension plansSensitive to family’s needsExperience



A. How successors establish authorityB. Making sibling teams work

Taking Charge


A. How successors establish authority Need to be liked vs. power and control Leadership decisions affecting others Choosing team around successor

Taking Charge


B. Making sibling teams workAllocate tasksWrite out the skills of eachUnderstand the rivalry – don’t sweep it under the rugHave a system of conflict resolutionOutside board of advisors

Taking Charge


A. The Top 10 excuses for not letting goB. The deep reasons for founders’ resistanceC. Letting go with grace and styleD. Make a career of retirement

Letting Go


A. The Top 10 excuses for not letting go Death immediate to retirement I am the business – without me it’s nothing I am nothing without it No interests outside Someplace to hang your hat Kids will screw it up Choice of siblings Income source I am the master What if I am not the master – someone is better?

Letting Go


B. The deep reasons for founders’ resistance-DARK SIDEProprietors

Identity in companyConductors

Control through harmonyTechnicians

Special non-transferable skills

Letting Go


C. Letting go with grace and styleRetirement job description

What successor wants and needsCustomers wantsCo-workers wantsRetirees contribution points

Letting Go


D. Make a career of retirementStart a foundationBecome a mentorSupport a business as an advisorTeachDevelop interests while you are planning succession/plan it

Letting Go


A. The 10 deadly sins in estate planningB. Protection against liabilitiesC. Equality is often unfairD. The primary transfer toolsE. A second opinion on great tax escapesF. Better to buy out than to receiveG. Sound real estate planningH. Prisoners of protective trustsI. Keeping the peace with stock liquidityJ. The rights of minority stockholdersK. The new exemption rules of 1997

Estate Planning and Taxes


A. The 10 deadly sins in estate planning Procrastination Wishful thinking Saving pennies on advice Trying to skin “UNCLE” Confusing equality in kids with fairness Going for consensus management Failure to plan and share your philosophies Failure to teach – and test validly Not keeping plan up to date No outside review processes



B. Protection against liabilitiesFailure to operate as a legal corporationBusiness assets owned outside of corporation (real estate – separate protections)Personal guarantees by CorporationExcessive Corporate distributionsPersonal fault or negligence/TortPiercing the veil of corporationPayment of wages – state laws apply herePension and profit sharing plans – ERISATrusteeships for non-qualified compensation arrangementsTrust taxes that may applyShareholder liability for taxesEnvironemntal laws



C. Equality is often unfairFair for division of wealth is not fair for business controlIf the business asset is the estate – think about challengesRough justice



D. The primary transfer toolsValue the businessWealth vs. liquidityEstate and gift taxes - mechanisms

Living trust 43%, Life Insurance Trust 39%, Skipping Trust 22%, Partnership family 16%Stock sale 15%, Non voting stock 9%, Charitable remainder trust 9%Personal residence trust 5%, Grantor trust 4%, Private annuity 4%

Gifts & Trusts – get accountant attorneys professional adviceRevocable living, Irrevocable trust, Crummey trust, Grantor trustEtc….

Buy-Sell AgreementStock redemption agreementNon-business assets buildup and transferSplit Dollar Insurance – business gets premium back



E. A second opinion on great tax escapesMyth – Revocable trust saves taxesMyth – control goes with 50% of corporation (voting vs. non voting)Myth – Advantage to joint assets holdingMyth – leave to your spouse avoids taxes (she needs a plan too)Myth - Life insurance will transfer wealth to your heirs free of estate taxMisconception - Gift tax and estate tax rates are the same?Mistake – not understanding your estates valueMistake – not considering generation skipping taxMistake – for the wealthy to leave large sums in qualified pension or IRA Mistake-myth-misconception - Estate laws rarely change



F. Better to buy out than to receiveBuying is better than giftings



G. Sound real estate planningRental income and written guaranteesTransfer real estate at lower tax ratesResolve real estate ownership questions now



H. Prisoners of protective trusts Avoid taxes Protect children till they are mature Prevent costly mistakes Guarding inheritors from the world of danger Maintain control over kids lives Establishing a dynasty



I. Keeping the peace with stock liquidity Use of redemption funds



J. The rights of minority stockholdersCourts are supporting these more



K. The new exemption rules – LEGAL/ACCOUNTING



Documents

Succession Planning Family Business Leadership for the Next Generation Gary Elekes – EPC Inc. [email protected] 615-579-7995