Dennis Blender, Ph.D. Strategies and Techniques in Succession Planning

“Succession planning is a lifelong process encompassing everything aimed at ensuring the continuity of the business through the next generations”. Succession Planning

Family businesses permeate our economy –90% of the 15 million businesses in U.S. –33% of Fortune 500 are family-owned or controlled –40% of GNP is generated from family business activity –78% of all new jobs By 2005, virtually all closely-held businesses will lose their primary owner to death or retirement Key Facts

70% of family businesses do not survive to the 2 nd generation. Only 12% survive to the 3 rd generation. 81% of family owned businesses want the business to stay in the family. 70% of family business owners cite life insurance as their top source of funds to pay for death taxes. Key Facts

3 primary causes of failure of family- owned businesses: –Inadequate estate planning –Failure to prepare and provide for transition to the next generation –Lack of funds to pay estate taxes –Lack of clear goals and objectives –Conflict between family business system –Financial dependence on the business –Overlooking the impact of key (non-family) employees Key Facts

2 parts courage 2 parts psychology 1 part finance 1 part tax (Note: failure to combine in the proper order could result in explosion) The 6 Ingredients of Succession Planning

1.Philosophy 2.Mechanics 3.Economics 4.Luck Component Parts of Succession Planning

Business Family Ownership Family Business Model

Continuity of business Continuity of family Achieve founder’s dream Life cycle of a business Retain key executives Tax implications Retirement: getting the value out of the business Planning for capital and liquidity needs Rationale: Why do it?

Overwhelmed Uncertainty Denial Avoidance Lack of control Conflict adverse No perfect answer Fee adverse Lack of understanding financial resources Obstacles: What prevents clients from doing it?

Understand client’s objectives Understand key players –Family –Non-family Understand the facts –Legal, financial tax –Personal and business –Identify potential conflicts Planning Process

Attempt to resolve conflict(s) Strategic/business planning –Identify options –Set timetable –Establish strategies for”what if” –Proper documentation Buy-sell agreement –Types –Funding Formulate and Execute a Plan (Blueprint)

“Key executive” retention plan –Address “non-family” member concerns –Stock vs. Non-qualified plans  Problems  Advantages –Types/Non-qualified plans  SERP  DBO  Phantom stock  Stock options Formulate and Execute a Plan (Blueprint)

Blueprint (continued) Succession selection process –Family –Non-Family –No successor exists  Sell company  Voting Trust (No Sell-Buy Sell)  Completion Clauses Blueprint

Coordination with personal estate planning –Income for surviving spouse  Assets outside the business  Insurance  Securing business assets –Leaving everything “equally” or “equability” Blueprint

Variety of issues Complexity of issues Best interest of the client Multidisciplinary Approach