PASSING THE BATON BUSINESS TRANSITION PLANNING Jonathan R

PASSING THE BATON: BUSINESS TRANSITION PLANNING Jonathan R. Bauer 208. 388. 4885 jbauer@hawleytroxell. com

HAWLEY TROXELL INDUSTRIES SERVED / PRACTICE AREAS • Full Service Business Law Firm • Complex Commercial Litigation • General Business/Corporate Advisors • M&A • Estate Planning / Business Transition Planning • Real Estate • Employment Issues • Intellectual Property

BACKGROUND Jonathan R. Bauer – Business Law – Estate Planning/Probate – Business Transition – Real Estate Law

PRESENTATION OVERVIEW • Some Facts • A Few Brief Case Studies • Tough Questions and Answers

A FEW FACTS Jonathan R. Bauer

A FEW FACTS • What is business transition or business succession planning?

FEW FACTS • What is involved – Estate Planning – Business – Management – Financial Planning for owners – Tax issues – Life Insurance

FEW FACTS • Team Effort – Business Owners/Families – Employees or other successors – Attorney – Financial Advisor – Accountant • Sounds Expensive! – “I know a guy…. ”

FEW FACTS • Closely- held businesses permeate our economy – – 90% of the 15 million businesses in US 33% of Fortune 500 are family owned or controlled 40% of GNP is generated 78% of all new jobs • Virtually ALL lose primary owner to death or retirement

FEW FACTS • 81% of family owned businesses want/believe or plan for the business to stay in the family • 70% don’t survive first transition and almost 90% don’t make it to the 3 rd generation • Why? ‘Cause its like fishing…

FEW FACTS (I MUST TALK FISHING) • Spin Rod/Entry Level Position • You cast and they reel/Early Successes • Read the water/Start educating them on the business • Let them cast and reel/Mistakes and problem solving

FEW FACTS (I MUST TALK FISHING) • Make them buy some of the first FF; Equipment/Skin in the game • They fish alone but with support/Board of Directors and President • Give them the keys to the boat and they will be landing the 180 lb tarpon you never could catch – they are taking you fishing now

FEW FACTS • Specifically, why do it? – Business Continuity/Founder’s Dream – Family Continuity – Retain Key Employees – Tax implications – Retirement/Maximize business value – Capital and liquidity needs

FEW FACTS • Why Don’t They Just Do It? – Overwhelmed/Too Busy – Uncertainty – Denial – Lack of Control

FEW FACTS • Why Don’t They Just Do It? – Conflict Averse – No Perfect Answer – Fee Averse – Lack of Understanding Financial Resources

FEW FACTS • How do you get them to do something? – Education – Trust – Team Effort – Scare the heck out of them

FEW FACTS • Without a plan or process most business owners and management teams hope that succession will turn out ok.

FEW FACTS HOPE IS NOT A STRATEGY!

CASE STUDIES Jonathan R. Bauer

CASE STUDIES • Before • After (bad) • After (good)

CASE STUDIES (BEFORE) • Husband Wife owned • “Small/Mid-Sized” (about $2. 5 mm value) 30 year old business • Live nicely/modestly and work hard • Son in the business; really good at running the projects and crews • H&W run back office; bidding; bonding; business formalities; employment issues • Questions: when; how much; how pay; who’s in charge; who runs projects; relationships; value (tax reporting v. “real”)

CASE STUDIES (AFTER- BAD) • Husband; Wife uninvolved • “Midsize” (about $4 mm value) business • Started it from the ground up, very successful • Sold their share to key employee/part owner two years earlier • Payments slowed after a year, then stopped • Question (from them this time): What can we do? • Answer: Not much

CASE STUDIES (AFTER- GOOD) • 2 Owners – One “project guy”; one “back office guy” • “Midsize-Large” (about $10 mm value) business • 5 second generation buy in, came with cash • All new owners on board/now they have regular board meetings • Original owners still majority shareholders • Business growing (even a bit through the recession) • One fell out and was required to sell back shares • Remaining about to buy out original owners after 6 transition years

TOUGH QUESTIONS Jonathan R. Bauer

QUESTIONS • If you die or become disabled unexpectedly, can your family or partners continue to run the business without you?

QUESTIONS • If you die unexpectedly, and have partners, are you sure they will pay your family a fair price for your interest?

QUESTIONS • How do you protect your family in the event of your early death?

QUESTIONS • Will you have enough income when you retire?

QUESTIONS • Do you have a management succession plan in place?

QUESTIONS • Does your succession plan accommodate siblings with different skills or different interests in the business?

QUESTIONS • Are you willing to pay the costs of planning to protect your business and your family?

QUESTIONS (CONTINUED) • Are you willing to give up some control over the business and decision making?

QUESTIONS (CONTINUED) • Are you and your spouse in agreement on the ultimate disposition of the family business?

QUESTIONS (CONTINUED) • Are you willing to face the fact that at some point you will retire or die?

QUESTIONS (CONTINUED) • Are you willing to deal with a certain amount of complexity in your business succession plan?

QUESTIONS (CONTINUED) • Are you concerned enough to take action? • …you should be.

THE MOMENT OF TRUTH • “…The final test of greatness in a [business owner] is how well he chooses a successor and whether he can step aside and let his successor run the business. ” – Peter Drucker

TEN STEPS • • • Face reality of constant change Develop non-business interests Establish outside resources Prepare the business for transfer Identify your ideal replacement(s) or concede there are none

TEN STEPS • • • Review your financial statements Put aside your ego Determine your businesses value Seek and use advisors Start sooner not later

REMINDER!! HOPE IS NOT A STRATEGY!

BUSINESS SUCCESSION PLANNING Questions?

ESTATE PLANNING & BUSINESS TRANSITION PRACTICE GROUP Thank you! Jonathan R. Bauer jbauer@hawleytroxell. com