Securing the Life and Legacy of Your Family Business

Failure to develop an adequate plan for the disposition of a business interest at the death or disability of its owner could kill your business legacy.  It may result in a forced sale of the interest whether it is a proprietorship, partnership, or a substantial stock ownership in a closely held corporation. A buy-sell agreement is often the only way to arrange for the disposition of the owner’s interest in a fair and equitable manner.

Buy-sell agreements are directed toward the continuance of the business interest after the death of one or more of the owners. The existence of a buy-sell arrangement is designed to eliminate the problems that may arise if the surviving owners are forced to become business associates of the decedent’s family. Not only may there be goal and personality conflicts, but inexperience and differing financial needs are potential business killers which could ultimately result in the financial death of a once-profitable enterprise.

A business without a buy-sell agreement is comparable to a person without a will. In each case, important decisions will need to be made. Allowing the property to pass according to a plan specified in the state law of intestacy, rather than according to the wishes of the decedent, might result in outcomes that are unintended by the individual and/or business owner. They might not be appropriate and, in the case of the business, could result in its sale to non-family members leaving remaining family and/or partners without income and often in debt.

Estate liquidity will be a paramount concern for survivors. Every business owner will want to assure the family of a fair and reasonable price for the business—not a liquidation price that may result from a forced sale. Finally, few people want their family’s future totally dependent upon the fortunes of a business venture which they no longer manage. A properly drafted business buy-sell agreement should accomplish the following:

• Pre-determine the business’s value for federal estate tax purposes
• Assure that any future growth in value accrues to benefit those responsible for the gain
• Provide sufficient cash to surviving business associates with which to purchase the decedent’s interest
• Assure a fair and adequate sales price
• Separate the family’s financial position from that of the business
• Transform illiquid assets into a liquid income-producing fund

Keeping your business alive while you’re running it is hard work.  Keeping it alive after you pass it on is even harder work.  A buy-sell agreement is a powerful tool to consider as you plan for the ongoing life of your business.

[Note: This article is not to be used as tax or legal advice. Always consult with local counsel or a tax specialist on all specific tax and legal matters.]

When it comes to ensuring that your business succeeds now and through the next generation the old adage, ‘when you fail to plan, you plan to fail’, comes to mind.  Taking the time to pick the right grape vines, choose the right soil, cultivate it correctly, care for and support the initial stages of growth and then prune appropriately leads to successful harvest and wine in the future.  If planned and implemented well, the vintage can get better and better.  Taking the time to plan for the success and succession of your business is critical to giving your business an increased opportunity to thrive into and through the next generation.

Recently, in speaking with a father, who founded a very successful business, he mentioned that his planning was all done.  When I asked him what he meant, he indicated that his wills and trusts were in good order and he was now relying on the kids to take over the business and run it the way that he had done so successfully for the past thirty years.  I was impressed and went on to ask how the plan to make sure that the kids and the key employees were ready to run the business was laid out?  He hesitated a bit and told me about the recent awards his business had won and how successful he has been and that he expected his kids to do the same.

We had gotten together because he wanted to make sure that he was done with his planning.  I learned that he had the transition transactions in place – wills, trusts, etc. – and I discovered that he had been very successful.  Yet, I was asking about two things in addition to that:  first, what were the plans to make sure the people, to whom he was passing on leadership of the business were ready; and, secondly, what were the plans to make sure the business would make it through the generation to which he was passing on the business and make it successfully to the next generation of leaders?

Succession planning includes celebrating success and getting documents in order to guide the transition process at your death.  However, it also includes the planning, people and provision for continued success and longevity.

The planning includes strategically thinking about how best to grow and position the business for ongoing success.  Take the time to assess where you are — the good, bad and ugly –, determine where you want to go and then create the goals and action steps to get there.  This does not have to be a long drawn out process.  It does need to be clear and relevant.  This planning is increasingly important as a business is preparing to change leadership.  How clearly laid out is your planning process and ongoing plan?

The people taking on leadership need a path forward and the knowledge, skills and abilities to successfully take the baton from the outgoing leadership.  Taking the time to assess the strengths and weaknesses of potential new leaders and then creating a successor development plan for them, is powerful.  Businesses that put the effort into developing people experience a process of continued growth as they grow new leaders prior to the time when they take on the full mantle of responsibility.  Succession planning is about the people most of all.  Estate planning documents are necessary, yet the ‘will’ that is more important is at the heart of those taking on leadership.  Are they ready, able and willing to do what it takes to keep the business on track?

The provision of exit strategies, business structures and funding that effectively prepare the business to move successfully through the next generation can make or break the legacy.  Over time businesses typically grow in size and value.  This growth presents challenges and opportunities.  Take the time to carefully plan for what that growth will look like so that the next generation can exit the business to make room for successors.  This means making sure the exit strategies do not drain the business or leave it weakened in some way.  Paying attention to business structures to minimize transition difficulties and tax liabilities can make or break a business.  Desire to pass a business on to the next generation is one thing, providing the funding and economic viability is another.  How will the successor generations be able to take on the business without compromising the lifestyle of the outgoing business leaders?

Failing to plan is the forerunner of planning to fail.  As you consider the success and succession of your business, take the time to fill the holes in your plan.  The planning, people, and provision for success are critical elements in every succession plan.  Taking the time to cultivate success will go a long way to grow your business now and through the next generation.

by Eugene J. Wallace
“Let me get this straight, Pat,” Jerry asked with a degree of shock and awe, but without rancor, “you are asking for hundreds, no thousands of dollars for executive leadership development, when we have a company-mandated cost-savings directive?” Pat, looking down for a moment, touched the report, which had been worked and re-worked, as if to draw some reassurance from it. With a self-questioning, slight turn of the head and then an involuntary nod, as if the report itself encouraged Pat to respond, “Well, yes actually. When we were asked to cut costs, a question popped into my mind, and I could not shake it.” Jerry was curious about how a question, the answer to which would cost money, might resolve the short-term and long-term financial stability of the company.

“I’ve never been good at Jeopardy, but I would like to know the answer, er, I mean the question.” “Okay, here it is,” Pat began, as Jerry leaned forward to listen, “I started to wonder what would happen if, instead of only looking at how to cut expenses, we started to consider how we can avoid spending money?” A slight furrow formed on Jerry’s forehead as he worked to catch the distinction between the cost-savings mandate and the question Pat laid out.

Pat continued on, “Of course we have fixed expenses, and we can work to minimize those to some degree. We can look at other costs connected to operations, procurement, marketing, sales, etc. We need to continue to improve across all areas, but we can only tighten our belt so far. When I began looking at variable spending and started to dig into the costs connected to recruiting, hiring, training and retaining employees I was amazed.” Pat slid the report across the desk to Jerry. “Take a look at these facts and figures.”

Turnover Considerations

• 2006 average voluntary turnover rate for all industries was 23.4% [US Dept. of Labor]
• The industries with the highest turnover were: Service (food, accommodation, entertainment, 45.7%), Retail (34.7%), Construction (28.7%), Professional Services (27.8%) and Trade, Transportation and Utilities (27.4%) [US Dept. of Labor]
• Estimated costs to replace supervisory, technical and management personnel run from 50% to several hundred percent of their salaries. [Galbreath, 2000]
• Almost one-third of all employees expect to leave for another job within one year.*
• Turnover costs the average organization more than 27 million dollars per year.*
• Almost half of these organizations have no plan to address this concern. *
  *[Bernthal, Wellins, 2004]

Cost Categories of Turnover

• Processing turnover employees as they leave
• Recruiting efforts to identify viable candidates
• Selection process to replace
• Training systems to prepare
• Retaining high quality employee efforts
• Lost business and opportunity costs

Reasons People Stay or Leave
The top five factors affecting an employee’s decision to stay or leave* are:

1. Quality of relationship with supervisor or manager.
2. Ability to balance work and home life.
3. Amount of meaningful work – the feeling of making a difference.
4. Level of cooperation with coworkers.
5. Level of trust in the workplace.
   *[Bernthal, Wellins 2004]

“Okay, help me put this together Pat. What is your thinking here? If we find more of the right people and keep them here, we somehow cut costs?” “Close,” Pat’s eyes lit up as Jerry started rubbing his chin, “we find the right people and we work hard to make this a great place to work. The key to this is intentionally developing our leaders, starting at the top, with you, so that we can create and sustain a culture in which people want to stay and where they can thrive. The quality of relationship with supervisor or manager is the number one factor employee’s consider when deciding to stay or leave.

“Jerry, we had five people leave this year. The average salary was fifty-five thousand dollars: one of those was one hundred and twenty thousand dollars and a key player. It took five months to replace her. If we conservatively use a figure of 50%, for replacement and training costs, we are looking at over 137 thousand dollars. When we interview these folks as they were leaving, they confirmed that they were dissatisfied with the quality of leadership as one of the major reasons for going. The lost business and opportunity costs are tough to measure, but you can bet we felt the loss of each of these employees in the revenue column as well.”

Leaning forward and tapping the report, Jerry made a clicking noise with his mouth and then laid his understanding, of what Pat had been suggesting, out on the table. “So, conservatively, we are looking at what, a quarter of a million dollars lost, as a hidden cost, because of turnover?” “This year alone,” added Pat, indicating as well, “we could have used that money for a lot of other things.”

“Pat, you are asking that we spend more money on executive leadership development when we are trying to cut costs. By spending this money you believe that we will decrease our variable spending connected to turnover?” “That’s right, the question turns on the comparison between the cost of executive development versus the cost of not spending money on executive development.”

“Pat, you think this should start at the top with me, huh?” asked Jerry. Tapping the report, and after a quick clearing of the throat, Pat looked at Jerry and responded, “I don’t think that we can afford not to.”

“This is good work, very good work. Let’s get on this immediately,” concluded Jerry, and as Pat rose and began to leave, Jerry added a final comment, “and, I want to thank you very much for being honest and for a job well done Patricia.”