Roadmaps for Multi-Generational Success

Welcome to the World of Family Business

Succession Planning

Welcome

• Please introduce yourselves,

• Your business,

• Your location,

• Your generation,

• Your expectations.

Any questions before we start?

Welcome to the World of Family Business

Succession Planning

Bill Wade’s Experience: – Started in family business

– Moved to 100 year old family business

– Worked with a 3 Jewish-family business

– Acquired 5 family suppliers

– Acquired 14 family distributors to start FleetPride

Still work with distributor and supplier families !

Roadmaps for Multi-Generational

SuccessHistory is not on your side:• While 88% of current family business owners

think the family will control their business in 5 years:

– 30% of family businesses survive into the 2nd generation; – 12% are still viable into the third generation; – 3% operate into the fourth generation or beyond.

… Then there are the Grotes, Betts’ and Palmers!

A Multi Headed Dragon

• Business Assessments

• Succession Planning

• Conflict Resolution

• Recession Planning

• Strategic Planning

• Expense Reduction

• Leadership Development

• Estate Planning

• Human Resource

• Business Valuations

• Family Meetings, Retreats

• Family Governance

Family-first Business or Business-first Family?

• To be determined prior to beginning the family succession plan.

• The answer will significantly impact the succession planning process.

• Major Tip: Solutions to problems are rarely pure business or pure family in nature… so attempts at complete separation are counterproductive

• The Sunday dinner test…

Family-first Business or Business-first Family?

• Family businesses mix business and family. … social occasions can involve more business talk than family talk.

• Tranquility in a family that is in business together requires acceptance of the double lives everybody is living.

Three Trials at Once

Management Succession Planning – Administration and finance

– Operations and customer fulfillment

– Sales and marketing

Not who will own shares… who's going to do the thankless and countless tasks which make the family business an asset worth preserving in the first place.

Three Trials at Once

Ownership Succession Planning

• 60% of family business owners report a good understanding of the estate taxes due upon their deaths…but 20% have no estate planning at all!

• 30% of junior family business members have no knowledge of their senior generation's transfer plans.

Three Trials at Once

Ownership Succession Planning

Most common areas of contention:

• Technical mistakes

• Planning in a vacuum

• Leaving business to the surviving spouse

• The challenge of treating children equitably

Three Trials at Once

Leadership Succession Planning

• Leadership is often a murky and nebulous concept, but it is important…

• How many times have you seen a new leader come in… and with the same cast of characters produces results?

"He can take his'n' and beat you'rn', and he can take you'rn' and beat his'n'."

Old vs. New ExpectationsNew: Families may decide, for good and justifiable reasons, to

liquidate their successful businesses rather than pass them to the next generation.

Old: Managers of successful family businesses oppose liquidation in their life times and believe they owe the next generation the opportunity to continue.

New: In management succession, family and business concerns are overlapping and inseparable.

Old: In management succession, the business concerns dominate and family matters are secondary and separate.

Old vs. New ExpectationsNew: Successful management succession does not guarantee the long-run viability of a founder's thriving family business.

Old: A family business thriving in this generation depends primarily on management succession to be successful in the next generation.

New: Employment outside the family business may provide essential perspective and experience necessary for success in the family business.

Old: Haste in joining the family business is essential because the opportunity may be lost.

Old vs. New ExpectationsNew: Mission and goals for the family business continuously

address management succession.

Old: Management succession, retirement planning and estate planning are relevant issues only at the end of the founder's career.

New: Planning of management succession encompasses the extended family.

Old: Planning of management succession concerns only the people directly involved in ownership and operation of the business.

New: Joining the family business as an employee in a non-management capacity with a formal job description and regular performance evaluations provides a beneficial testing period both for the family and the family member.

Old: Family members come into the business as managers and co-owners so that they have an immediate sense of responsibility, importance and commitment

Old vs. New Expectations

Send me in coach…

It's not the will to win… but the will to prepare to win… that makes the difference.

STEP 1: Discover Expectations

• Find out if any children are interested.

• Decide whether the family wants to operate together and when the parents no longer wish to run the place.

• Calculate whether the shop is financially capable of supporting multiple families.

STEP 1: Discover Expectations

• Find out what non-operating children expect from the business.

• Assess the management ability and level of training successor(s) require to manage the shop in the future.

• Decide what is fair to successors and non-operating children.

STEP 2: Explore the Options• Research the options available for the following:

– ownership/control of land and buildings– ownership of machinery and equipment– ownership of inventory

• Match business arrangements to your family business:– sole proprietorship– joint venture– partnership– corporation

• Examine management roles for all individuals.

• Discuss labor allocation and skill development.

• Research the option for financing the transfer of assets.

STEP 3: Build a Succession Plan

• Do you have a business plan?

• Prepare a management plan:– management skills– management functions– management roles

• Develop a transfer of labor plan.

• Design an asset transfer plan:– ownership of land and buildings– ownership of machinery and equipment– ownership of inventory

STEP 4: Check With the Experts

Contact your professionals to get their advice– Get a legal opinion on the plan.– Discover the tax implications from your accountant.

Seek financial advice … you only get 1 shot!

– Check with insurance specialists – Check with your trusted suppliers for their advice.– Lenders need to be involved (security is being transferred)

STEP 5: Review / Finalize the Plan

• Bring all of the family members back together for a final look at the plan.

• Review and discuss the opinions and feedback from all of the specialists.

• Make any necessary modifications to your plan.

• Have everyone review your revised plan.

The Pritzker Debacle

• Pritzker patriarch, Jay Pritzker, and the resulting dispute among family members, triggered a fire sale that has gutted the family's business holdings.

• The disintegration of the family's business conglomerate, worth billions of dollars, occurred despite the patriarch's clear intention that the structure remain intact after his death.

•What went wrong?

Did the Pritzkers hate paying taxes more than they seem to despise one another?

Can they bust up the family fortune without the IRS breaking down their doors?

Hyatt: What went wrong?

• Failure to build consensus among the interested parties as to the final result

• Reactive planning in the face of an impending health crisis (or any financial, age, or market-related trigger)

• Trusts, while excellent tools for transfer tax planning and liability protection, are not necessarily the best mechanisms to manage family businesses in the long term.

• The fiduciaries, as the controlling executives of the family business, awarded themselves excessive compensation

Avoid the Hyatt Syndrome

• Traditional estate and corporate plans with autocratic and restrictive management structures are no longer sufficient to address the needs of business owners in the current environment.

• Any business succession plan must retain the flexibility to be updated frequently to address changing circumstances and family dynamics.

• An ongoing review of the plan, once implemented, is an absolute necessity

Other Upsets…

• Failure of ‘the board’ to align on strategy

• Before deciding on a future leader, board members need to agree on strategic direction.

– One director may favor emphasizing the high-volume part of the business that earns the lowest multiple, while another sees more potential in focusing on the riskiest part of the business that earns the highest multiple but could sink the ship.

• Wise families reach universal agreement on these strategic issues up front.

• Avoid choosing an executive who mimics the incumbent’s strengths, instead of selecting the candidate with the qualifications best suited to the company’s strategy.

Other Upsets…

• Trying to plan succession with the entire ‘board’

• Succession planning is arguably one of the more interesting responsibilities of the board — and a task that many board members are eager to be a part of.

• While the entire family should be involved at critical touch points, a smaller planning committee — that includes only directors who are qualified and who have the necessary time — can steer the process and handle the granular work associated with assessment and benchmarking.

Other Upsets…• Conducting internal successor assessments too

late

• Once the list of key qualifications are agreed upon, it is generally best if the assessment of internal candidates takes place as quickly as possible.

• The more time internal candidates have to focus on their developmental areas, the better the chance that one or two of them can become a serious candidate.

• If an executive is told three months before the transition that he or she really needs an international assignment to get ready for the role, obtaining that experience is not a realistic option.

Other Upsets…

• Creating a “horse race” too early• Avoid organizing a process that fosters excessive

early competition between candidates or that intimates in any way that the process is an interview.

• Clearly communicate that the company has decided to make a significant investment in candidates’ career by putting them through a rigorous process and giving them feedback.

Other Upsets…• Neglecting external benchmarking• The benchmarking of internal candidates (especially family

members) versus external ones is sensitive.

• Just as companies benchmark their shop operations and repair processes against the best in class, they can also benefit from seeing executive leadership stack up against other companies in their industry.

• Ideally, benchmarking should happen in tandem with internal assessment. It is generally best to be transparent with internal candidates about the purpose of and approach to the benchmarking.

How to “Let Go" Effectively

• Will you be financially secure after retirement?

Is there a strategic plan for the business?

Have you chosen a successor? (Told anyone?)

• Have you set a firm date to retire?

How to “Let Go" Effectively• Have you completed your estate planning?

• Do you believe there is life after retirement?

• Are you willing to let others take risks?

Are you comfortable with the successor’s style of leadership and the fact they may be introducing new systems into the business?

A Set of Succession Goals

• Check your goals (personal and business) to be sure they reflect the values and attitudes of all family members.

– Goals should reflect the needs of both the retiring and younger generations, whether or not they are participating.

• Check each goal to make sure it is well written… CLEAR!

– A clear goal will pass the SMAC test: specific, measurable, achievable and consistent with your values.

Fair and Equal are not the Same

• Many families find that the issue of fairness to all children is the most difficult part of succession planning.

– You may find that a consultant is helpful during this task if family members have trouble discussing fairness issues.

Fair and Equal are not the Same

• Family businesses may not provide opportunities that fit all family members' strengths. The current generation (or the next generation) may have strengths not applicable to the business.

• Family businesses typically provide limited career growth opportunities for family members and employees given the small number of top managers and only one to three levels of management.

Fair and Equal are not the Same

• Business continuity requires generation to generation transition. Timeliness in the transition is essential.

• Parents may be unwilling to give up control and authority at the time the next generation wants it or should have it.

• The next generation may not be ready for their responsibilities when they have to assume them.

• Continuous change complicates the external environments… technology, public policies and regulations.

The Checklist

1) Start business succession planning early.

Five years in advance is good.. build an exit strategy right into their business plan… the longer you spend on succession planning, the smoother the transition process

2) Involve your family in business succession planning discussions.

Making your own succession plan and then announcing it is the surest way to sow family discord.

The Checklist3) Look at your family realistically and plan accordingly.

Examine the strengths of all possible successors as objectively as possible and think about what's best for the business.

4) Get over the idea that everyone has to have an equal share.

Management and ownership are separate business succession planning issues. It may be fairer for the successor(s) who run the business to have a larger share of ownership.

The Checklist

5) Train your successor(s) and work with them.This is not Kudzu! Your family business succession plan will have a much better chance of success if you work with your successor(s) for a year or two before you hand over the reins..

6) Get outside help with your business succession planning.

There are companies that specialize in family business succession planning to facilitate the process.

Some Structures that Can Promote Success

• Family Council - regular meeting for family members to learn about the business, make plans, develop leadership in the next generation, share understandings and define the limits of family involvement in the business

• Family Charter - written document that spells out the goals, purpose, values of the family and that establishes policies about the family assets.

• Family Retreats - meetings of the whole family that combines both business and pleasure, usually over a 2-3 day period of time and often employing the services of a facilitator and/ expert in the field to organize.

• Ownership Forum - is often created by an older and more complex family business. This group can act as a resource to the board and represents the owners' values.

Roadmaps for Multi-Generational Success

Bill Wadebwade@wade-partners.com 630-768-1227

A NEW DIRECTION FOR INDEPENDENT DISTRIBUTORS OF

AGRICULTURAL PARTS AND EQUIPMENT Designed for Continued Growth, Higher Profitability and a Stronger & More Secure Business

CSA FINAL THOUGHTSTHREAT OR OPPORTUNITY ?

Working With CSA; Threat ?

• Be Prepared !

• This information is public. Anyone with a computer has access. Plaintiff attorney’s, potential customers, the general public, etc. will all be able to see the results of your maintenance program.

• Media has already began to exploit CSA Scores after large truck crashes.

• Expect attorneys to dig deep when possible.

• Documentation is critical. If it’s not documented, it doesn’t exist.

• Training is critical. Look to HDA, ASE and ACOFAS for training sessions.

THREAT OR OPPORTUNITY ?

Working With CSA; Opportunity ?

• There are approx 800,000 Motor Carriers registered in the United States. 97% have fewer than 20 power units.

• Motor Carriers must ensure that their maintenance program is complete.

• Motor Carriers cannot risk operating units if repairs are not done.

• Motor Carriers will find Maintenance Partners that understand the new regulations and have systems and processes in place to ensure their vehicles do not operate with Vehicle Maintenance violations and are maintained in the absolute best shape possible.

• Most Motor Carriers will not be able to do this on their own. Today’s equipment is too complex and requires frequent training and updates to stay current.

THREAT OR OPPORTUNITY ?

Working With CSA; Opportunity ?

• Drivers will have their own individual scores. Owner/Operators will absolutely have to have a Maintenance Partner that they can depend on and that can shore up their operation.

• Know, understand and stay current with all the Vehicle Maintenance BASIC regulations. Motor Carriers and O/Os will need a partner that completely understands the rules.

• Offer Driver training.

• Complete the Annual Federal Inspection every time you touch the vehicle.

• Cargo Securement leading violations for all “open trailer” operations (Flatbed, Auto Transport).

• Opportunity to inspect, repair or replace tiedowns, ratchets, etc.

THREAT OR OPPORTUNITY ?

• Most speeding violations carry a weighted severity between a “1” and “4”.

• Lamp and light violations carry a weighted severity score of “6”.

• Tire related violations carry a weighted severity score of “8”.

• Most “cargo securement” violations carry a weighted severity score of “10”.

THREAT OR OPPORTUNITY ?

Road-side Inspections• All of the data that will generate action by the FMCSA comes from on-road

safety performance. (Crashes or Road-Side Inspections)

• 70%-80% of all points accrued in CSA are tied to non out-of-service violations, which were never included in SafeStat.

• 66% of all road-side inspections arise from an observed behavior or defect. MUST keep trucks clean with all lights, conspicuity taping and tires working and securement systems in good order.

• The four most common items cited for Vehicle Maintenance violations are; 1. Brakes Out of Adjustment, 2. Other Brake Issues, 3. Lights & Conspicuity Taping and 4. Tires & Wheels. These violations make up about 75% of all Vehicle Maintenance violations

• Zero defect road-side inspections will be crucial in the CSA program.