Exiting Right
A Roadmap to Successful Business Succession

By Bill Williams

If you were unable to run your company, would your family members, co-owners, managers or employees know what to do, and would they have the guidelines and tools needed to help the business survive and thrive?

One of the most critical issues for the life of a business is the planning of who will take over when the owner is gone.

By planning for a transfer of your business and your wealth, you can ease many burdens and uncertainties, including ownership and leadership issues.

But your company’s next generation of leaders has to be prepared for the responsibilities of ownership, too. The wrong transition can put the business at risk.

Paul and Maxine Rodriguez have owned Rodriguez Mechanical Contractors, Kansas City, Kan., for 27 years. Two of their four children are working in the business, and the Rodriquez’s felt it was important to put things in place for succession and estate planning.

“We don’t want to work forever,” said Maxine. “Two of our sons have taken a lot of interest in the business and so we believe there is a need to pass it on down.”

The two Rodriguez sons will run the company when Maxine and Paul back out of the business.

For Jerry Meinert, owner of Midwestern Builders, the planning process was more difficult.

“I had been working for my dad’s business for several years, went to work for corporate America for some time, and when I returned to our business, we started discussing succession issues,” said Meinert.

But Meinert’s father died unexpectedly and without a succession plan, and there was no buy/sell agreement in place. Meinert was given 1 percent of the company in the will, and with his two siblings, that gave him 34 percent controlling interest of the business. He bought the company from the estate, but only after a thorough appraisal of what the business was worth, then and in the future. The company has been very successful, and Meinert’s vision for the future is to sell the company to his 10 employees, because his young daughters may not be interested in running it.

But the story doesn’t end there.

Meinert’s wife is currently in succession discussions with her aging parents. Her father has owned a profitable gas mart construction and supply company for 35 years. Her 80-year-old father has no succession plan, and her mother — an invalid — is the executor. She is physically unable to sign documents. Only time will tell how they solve those problems, but in the meantime, Meinert has advice for small business owners like him and his wife: Seek various experts and start planning early.

Techniques For Passing It On
One of the big benefits of pre-death estate planning is the ability to name your heirs, specify the share of your estate they will receive and dictate the manner and timing at which the heirs get their share. There are a variety of estate plans, trusts and even gifting, which can help transfer your business interest to family members. Other popular plans, each with a specific tax advantage, include family limited partnerships, irrevocable life insurance trusts and buy/sell agreements. Some are even protected during a divorce.

Regardless of the technique, financial planners recommend that business owners and their financial advisers monitor the chosen plan on a regular basis.

Succession Planning
Succession planning, simply stated, is providing adequate funding when ownership of a business is transferred, so that it is accomplished with minimal difficulty.

But according to surveys conducted among businesses, only half had a strategic business plan, and of that group, only 12 percent had written succession plans. The majority of the planning was in the owner’s head.

“Long term planning is not something that entrepreneurs inherently do,” said Bill Chapman, a family business consultant at Legasus Group in Overland Park. “Whether you’re thinking about your business in general, your own personal financial plans or a succession plan, all business owners should ask ‘what is my exit strategy or my exit plan?’”

For many owners that’s a very difficult thing to do, because they are either very closely associated with the business and don’t want to relinquish control, or are challenged in their skill sets with respect to developing leadership capabilities in others who might succeed them.

Ron Ward, his two brothers and his son own and manage Western Forms. Ron’s father started the 50-year-old Kansas City business and built it into America’s leader in aluminum forms for basements and foundations.

The Wards have experienced ownership succession issues from Ward’s father to him, and from him to the next generation. Three children have worked in the business, but only one son plans to stay on indefinitely. It has been 20 years since they began seeking help, support and guidance from outside the family.

“My dad had the wisdom back then to recognize that we needed the help of an outside board of directors,” said Ward. “They helped guide the business to new growth and also helped the family focus on the right issues.”

The Wards hired a financial planner to enhance the communications in family meetings. Ward said he wished they had gotten started in the communications process earlier.

“The main issues that a business owner will confront when he realizes he needs a succession plan are selling the business to an outside person, selling it to an inside person, transitioning it to family, or some combination of those three,” said Matt Wagner a certified financial planner and president of the Trust Advisory Group within Enterprise Bank and Trust in Kansas City.

Whichever of those choices an owner makes, he should write it down, have a clear strategy and review it often.

Leadership and Management

Leadership is an important part of succession, whether you are passing the business on or selling it. If you perpetuate family ownership, you have to determine who will be the next leader of the company. When you position your company for sale, prospective buyers look at the strength of the management team.

“We encourage the creation and development of a strategic blueprint for the organization, and sharing that with the employees so that everyone in the organization—owners, management and employees—are in alignment with where the company is going,” said Chapman.

With a plan, you can make important management and leadership decisions, including the acquisition of management skills through training or hiring.

The Golden Years
Understandably, business owners focus time and energy on the demands of running and growing their businesses. But, they rarely put a lot of time or thought into how to position the business so it provides them financial security when it is time for them to go.

For most owners, the value of the business represents 70 to 80 percent of their net worth. The owner may have a home and some investments, too, but often profits are reinvested in the business rather than placing them into a retirement plan.

Privately held businesses aren’t liquid assets like mutual funds or investment accounts, and that presents a challenge to owners. Some business owners will gift assets to the next generation, and the new tax laws have improved that process by allowing larger gifts and lower tax rates. But for others, placing profits in a more liquid form is important so that at retirement the owner is not dependent on business income.

All In the Family
Mom or Dad may have ideas on where they’re headed, but may not have articulated those with their children and other managers in the company.
“You have to have good communications with the person who will be leaving the business, and then talk to the family members who want to take over the business, and those who do not,” said Rodriguez. She said that can help avoid conflict.

The challenge for most offspring is taking on management roles and their ability to work effectively as owners. Depending on how the parent transitions ownership, there may be several family members who will have to develop mechanisms and processes for how they’re going to work together and share power and responsibility.

Bo Steed, who started Kansas City-based Steed Remodeling 28 years ago, has nine children. His plan is for one son to buy him out. The other offspring did not want to run the upscale home remodeling business, but 32-year-old Mike worked in the business and became very adept at it, so a five-year purchase plan has begun. The other siblings will get an equitable portion when  Steed’s on-going estate planning and gifting is completed.
“I will stay on as a salesman, an employee rather than an owner, and will retain 20 percent ownership, banking toward retirement,” said the senior Steed.

It is important for owners to understand that the business will have to grow if it is going to support all the family members. So there needs to be a strategic plan for growth.

“We recommend an owners council where they come together periodically in a non-business setting to review and discuss family and ownership issues,” said Chapman.

Most financial advisers recommend some sort of advisory board as an effective sounding board for family-owned businesses. The board can provide business savvy and objectivity to the family setting.

Estate Planning With Your Uncle Sam
Any financial planning for the business will have a direct affect on your estate, and keeping things equitable is often a primary concern.
“We want to have a hand-off that makes it fair even to the children who are not in the business, so estate planning is very important,” said Maxine Rodriguez. “The business needs to be protected and the children need to get what they all deserve.”

Your assets take a lifetime of working, saving and thinking to accumulate. But many people risk losing all that through poor planning.
“Most business owners know they need to do this stuff, but they just don’t do it,” said Wagner. “Part of it is procrastination, but the other factor is that estate planning is dealing with mortality. No one likes to face their own mortality.”

Pat Moore wanted to provide for his children’s future, and to him “future” meant when he turns 80 years old, or when he gets hit by a bus. As the owner of Firstat Nursing Services, which provides private duty and temporary nurses, he was concerned about his profitable business, his two kids in college and the fact that he was in his 50s.

“It’s not my business to know about estate planning,” said Moore. “I knew that I needed professional advice, so I built a financial plan so my children and I would have security.”

Moore’s advice to local business owners who don’t have a plan is this: “Get some valuation of your company, and then get professional advice on how to protect it, because you never know what will happen.”

If you’re a business owner and you die without having created instructions for passing your estate on to your heirs, inheritance laws may determine how your property will pass and to whom. And the government’s plan for moving your assets may not be what you would have chosen.

“Most people keep the business or the assets in their name and end up with a tax problem,” said Chapman. “They may have created $10 million in value, but their heirs could pay five million in taxes.”

From the most mundane to the most complex issues and plans, you can get great advice on succession and estate planning from attorneys, bankers, life underwriters, accountants and financial planners.

Most of those professionals agree that keeping everyone communicating will avoid tactical errors, and that meeting many times the first year and at least twice a year after that keeps people thinking of everything for a successful transition.

Ward said he has seen an evolution in financial planners who help families transition businesses, and it is very important for family-owned businesses to know that help is available.

Ward’s advice for family owned businesses is to start the succession planning and transition planning earlier rather than later, get the family and non-family team engaged in the process to better communications, and get some outside professionals to help with planning and communications.

Bill Williams is the managing editor of Kansas City Small Business Monthly.