Business Succession Report

Don’t Miss a “Do-Over” Opportunity

2007-02-14T13:58:00.000-08:00

As parents, ranking family members or managers, we are mentors to those under our direct authority, whether we like it or not. As direct mentors, we are the source of accountability to our children, siblings or subordinates with the opportunity to acknowledge their shortcoming as critics and/or guide them as coaches to enhanced performances. Furthermore, as managers who are commissioned to execute the business affairs of the business, we are indirect mentors to all employees who covet the position, who we have worked so hard to achieve. Under the hypersensitive eye of those who envy our positions of power, prestige and high compensation, every move we make is subject to exhaustive unrelenting critique. As indirect mentors, we have role models that establish the low water mark of acceptable professionalism, commitment and behavior.
Unfortunately, none of us are perfect. Since the serpent made his pitch about the apple, we have predictably made mistakes and experienced varying degrees of regret and embarrassment. It is just part of life and certainly part of business. As fate would have it, in the contemporary business environment, one of the defining characteristics of a successful manager is his or her willingness to work outside the box, be vulnerable, take chances and make mistakes. And in contradiction to the opinions of our mothers, we are known to occasionally make the wrong decision regarding an employee, say the wrong thing to a family member or just step on ourselves regarding teamwork. For those fortunate among us, we usually know when this management “do-over” opportunity occurs. We feel it in our souls, “that was the wrong thing to say…or do.”
As you embark on developing family members and managers to support your succession goal, you can teach no greater lesson than “good, managers make mistakes and still continue on the pathway to survival and long-term success.” In the wake of your indiscretion, insensitivity or blunder with your son, daughter or subordinate, you have a unique opportunity to illustrate two indispensable characteristics of a good manager: humanity and humility. Managers are human and all humans make mistakes. Humble humans don’t let their pride block the best opportunity they will have to illustrate how family members or managers should not communicate or interact. Taking advantage of “do-over” opportunities not only illustrates how much you know, but most importantly it illustrates how much you care, not only about the individual you are mentoring, but also the business. And no doubt, the most dependable management axiom is “caring and communicating are inseparable partners.” Don’t miss a “do-over” opportunity. Humility is a small price to pay for an extraordinary opportunity to make a lasting impression on the future leaders of your dealership.

"Don’t Miss a Do-Over Opportunity" ©, Loyd H. Rawls.

He's My Brother and He's Heavy

2007-01-16T09:09:00.000-08:00

By Jeff Faulkner, M.S.

“Steve, explain to me your top reason for hiring me,” I asked. Steve kicked back in his oversized black leather chair, raised his cigar to his mouth, puffed slowly, and exhaled for what seemed like a full minute. As the smoke began to clear he responded, “I want you to help me find a way to buy my brother out.” I asked, “Does he want to sell?” “That’s beside the point,” Steve responded. “The employees don’t like him. He’s disruptive to teamwork, he doesn’t contribute anything around here and I can’t count on him. I’m tired of carrying his dead weight and I want him out!”

The song “He Ain’t Heavy, He’s My Brother” popularized by the Hollies in 1970 is packed full with positive images of a man who believes in his brother and that “his welfare is of my concern.” While this sentiment is nice, it can be idealistic. The reality is that in many family business environments, nothing could be further from the truth. My colleagues and I often seem to be permanently ensconced in the middle of some intense sibling rivalry, where the sentiment is more like “he’s my brother, he’s heavy, and I’m not about to carry him another inch.”

What we have discovered in most cases is that the “carrying” is a perception that is often based in past family dysfunction and relational bitterness that the family has never worked through. In more cases than not, the reality is that each sibling is carrying his own weight. However, the business relationship between them was established on some poorly understood principles and dynamics of sibling partnerships. The misperceptions, misunderstandings, and the consequences of such have taken root and taken a toll.

If you are a part of a sibling partnership in business, please understand that your relationship, just like any other relationship, will require a significant amount of effort to make it an effective one. Effective sibling partnerships will not happen by default. It takes an intentional effort and there are many factors that lead to its effectiveness. Here are a few of the primary factors that if addressed, will help you establish an effective working relationship with a sibling:

Rise above Sibling Rivalry by recognizing that you are no longer fighting each other for your parent’s approval. You are now in business together fighting for the success of your business. You should now be more interested in earning your sibling’s approval. If the dysfunction runs deep, admit it, and seek professional help together.

Engage in Family Strategic Planning to determine a “shared vision” of your future together. If there is a shared vision or dream that you are both pursuing, it will serve to assist you through some difficult times.

Agree upon a Leadership Model. It doesn’t matter whether you take the more traditional route of one sibling being the leader, or the more contemporary co-CEO approach, as long as you have agreed upon the basic model and how it will work.

Create a set of Covenant Agreements that will dictate how you will make decisions together, how you will communicate, how you will resolve conflict, how you will hold each other accountable, how you will represent one another to the senior managers and employees, etc. Then, stick to the agreements.

Establish a Supporting Outside Board. If necessary, agree to have outside independent advisors to facilitate debate and discussion.

Develop a comprehensive Family Business Employment Policy. This policy will cover everything from the criteria by which members of the next generation become eligible for employment in the family business, to compensation, bonus, and perk structures, to behaviors and attitudes expected on the job. Agreeing upon these sensitive issues ahead of time will serve to minimize a lot of disagreement in the future.

Provide assurance that your Estate Plans are in order. We have seen on many occasions the tragedy of an untimely death without appropriate estate planning and the subsequent challenges it can create in family business circles. Having your estate plans in order will provide peace of mind regarding your sibling’s affairs and the impact it could have on the business.

Agree upon an Exit Strategy. It is inevitable that eventually one or more siblings will want to exit the business. Knowing that you have an agreed upon strategy for handling this difficult discussion and transition will alleviate concern.

If you are in the beginning stages of a sibling partnership, putting these Best Practices in motion will serve to provide you with a firm foundation for future growth of the partnership and the business. If you have been in a sibling partnership for some time that has gone awry for lack of implementation of the above principles, realize that it’s never too late to pull it together…if you want to. It will require hard work, but with resolve and determination you can forge an effective sibling partnership. Recognize that you may need the services of an outside facilitator to help you work through the issues. Otherwise, you may not have the resolve to continue working at it. And understand that it’s okay to need help. In the end, remember that the family business is all about family and sometimes we need to bear up under the load and carry each other through. For “the load doesn’t weigh me down at all…he ain’t heavy, he’s my brother.”

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So You Think You Have It All Done?

2006-12-13T06:09:00.000-08:00

By David J. Ciambella and Loyd H. Rawls

Over the years we have encountered hundreds of successful business owners who have made the statement “I have it all done,” as they describe how well they have planned and documented their business succession plan. Unfortunately, in most cases these business owners were referring to the work they have done to implement their wills, trusts, buy/sell agreements and life insurance, which we would constitute as business continuity planning. You may be asking yourself, what is the difference?

Business continuity planning addresses transferring a business TO the next generation, whereas business succession planning addresses transferring a business THROUGH the next generation. Frankly, achieving business continuity is a relatively simple transactional project addressed within your will, trust and/or buy-sell agreement to transfer your business to your children or partners.  On the other hand, business succession planning is a more ambitious process that addresses both transactional and operational issues. A predicate to succession is operational success. Therefore, business succession planning addresses several interdependent operational issues over and above typical estate planning transactions.

Achieving Succession Successsm requires the willingness and dedication to stay involved in a process that addresses issues such as exit strategy, family communication, key manager retention and strategic planning. The fact is, the majority of family business owners indeed “have it all done” only within their limited scope of understanding. According to industry experts, approximately 33% of family businesses succeed from first to second generation and approximately 10% succeed from second to third generation. Unfortunately a large portion of business succession failures are due to the misunderstanding that the succession of a business legacy can effectively be addressed completely through wills, trusts and life insurance.

Frequently, the business is the greatest source of an owner’s self esteem. Therefore, reluctance to pursue genuine succession planning and activate an exit strategy is understandably difficult as it can be associated with a loss of self esteem or even severing a relationship with the business owner’s “first born,” (the business).  For the balance of this article, we will focus on this challenging aspect of succession planning, because unless you want to be carried out the door with your boots on, an exit strategy is essential.

Some business owners simply cannot step back and give their successors an opportunity to validate their ability. Having “no clue” is a cute reaction at a surprise birthday party but a pathetic approach to an issue that is critical to the succession of a business. Unfortunately, at 65 or even older, many self-made business owners have concluded that they are just hitting their prime. After many years of sacrificing to build their architectural, engineering or construction company, they have finally achieved the personal satisfaction of business success and want to enjoy the fruits of their labor. As a result, they feel they have time to address those matters; “while failing to recognize their duty to allow the next generation to assume responsibility and be held accountable for their actions.

Unfortunately, we have no silver bullet that can relieve this behavior. Our best advice is to persistently remind the senior generation of their stewardship responsibility to reinforce the importance of developing successors who are capable of managing the business. It is also worthwhile to mention that in the absence of verifying that successors are capable, the financial security of family employees are at risk.

”Those with nothing better to do” have characteristically been so absorbed by the business that they have failed to develop hobbies and friends. Relationships with employees, key managers, vendors and business colleagues represent their world. Their families usually lack intimacy and these “work-a-holics” consequently abhor the possibility that the only things to look forward to are household chores and an escape to the golf course. With this business centric mantra, the concept of stepping aside is tantamount to the end of a life’s mission.

For these business owners the solution should not be “find a hobby.” It is not difficult to convince an owner “with nothing better to do” of the virtues of developing an exit strategy; it will just be a battle to pull it off. The message should be that an exit strategy is a transition not a transaction. Identifying and obtaining agreement to a transition time line is the best approach.  Seek conservative time lines, give parents/owners the opportunity for emotional preparation, then patiently and persistently hold them accountable to follow the agreed upon course of action.

Concern about the competency of the next generation can also be a major impediment to an exit strategy. This can be a complex issue because unfortunately some business owners, will attempt justify staying in charge by pointing out the imperfections and mistakes of prospective successors. On the other hand, there are circumstances where successor managers are sending perplexing messages that they are not ready for prime time.

Addressing a business owner’s successor competency concerns involves forcing questions regarding the successor’s management abilities. Assuming successors have the experience and the training to assume responsibility, wise counsel will urge the owner to confirm those assumptions.  The sooner “Mom/Dad” makes this conclusion, the sooner anxiety will recede about the transition of management responsibility. From a negative perspective, keep in mind that there is no such thing as a perfect successor. If the fundamental competencies have not been confirmed, strategies are available to lock in key managers to supplement short suits of family successors, as described in the book The Succession Bridge..

The last category and the most common reason for a business owner’s death grip is “personal financial concerns.” This insecurity is justified because business profitability is often reinvested to grow the business. Other aspects of financial insecurity are based upon subjective considerations of how much is enough to be secure. Regardless of the derivation, as a business owner approaches 60, the amount and source of income needed to support a retirement lifestyle becomes a hot issue. An entrepreneur’s worst nightmare is to fall on hard times and become financially dependent upon their children. The ability to address financial security concerns is dependent upon building wealth outside of the business, which can be developed through implementing a wealth accumulation program.

Hopefully we have provided insight into the importance in developing an exit strategy. No doubt an exit strategy dilemma can be perplexing. However, like all succession issues this one can be mastered. You simply must maintain a “we will get it done” attitude and continue to engage the subject. You may find that before too long, you just may “have it all done.”

For further information on this subject email Loyd Rawls at askloyd@rawlsgroup.com or David Ciambella at djciambella@rawlsgroup.com

“I Love My Kids Equally But They Don't Produce Equally!

2006-11-02T12:50:00.000-08:00

By Hugh B. Roberts

“How do I resolve this issue?  If I don’t address this, there will be a mess after I’m gone, but if I open up this can of worms, my life may be hell and my family will be in a uproar.”  I asked this frustrated dealer if he was paying his sons the same amount and not surprisingly he said, “yes”.  “Do they own equal amounts of stock?” Again, the answer was “yes”.  Clearly he had identified the problem but did not know how to resolve it.  In almost 25 years of working with car dealers, I have heard this story retold many times.  Why?  What is the impact upon Succession Planning?

When dealing with family members, dealers often disregard sound business practice and make decisions from the heart, instead of what is best for the business.  Ironically, this usually backfires, creating family problems on top of business problems.  Equal pay plans, regardless of responsibility or productivity, promoting children before they are ready or qualified, allowing children to operate in a free-lance style, coming and going as they please, are the behaviors my partners and I see all the time in dealerships.

When your child begins working in your business, are you/were you willing to apply the same ground rules that you would if he/she were not related?  For instance, did your son/daughter have to qualify for a job in your business on the same basis that a non-relative applies?  Would his/her resume qualify your son/daughter to be given their initial job? Future jobs?

It is amazingly common for children to be paid the same, regardless of their position within the dealership.  You certainly would not do this with employees who are not related to you.  Undoubtedly this happens because Dad is unwilling to make business decisions that appear he is playing favorites. He may also feel pressure to help his children equally so that they can take care of their own families and have similar lifestyles.

This is a problem that must be addressed NOW if you plan to have your legacy continued via your children.  Sooner or later the more productive child is not going to put up with equal pay and equal stock ownership when he/she is carrying the major load.  In most cases, the turmoil is brewing below the surface, but it will definitely boil over when Dad is gone, if not before.  In order for the dealership Succession Plan to be successful, this issue needs to be resolved NOW while Dad is around to help reach a solution.  But, many dealers are reluctant to get into this discussion because they are fearful of not being able to find a solution without tearing apart the family.  Unfortunately, unless Dad addresses the problem, his family and often the dealership will be torn apart after he is gone.  Therefore, a third party advisor is usually necessary to open up these potentially volatile issues and achieve amicable solutions.

Key to getting this problem resolved is to engage all the players in discussion regarding their expectations.  What do you expect from your sibling?  What should your sibling be able to expect from you?  What should Dad be able to expect from each of his children who are working in the dealership?  What should they be able to expect from him?  Values, job descriptions, roles and responsibilities, decision-making, communication, hours, authority, vacations, pay plans, stock ownership, bonuses, etc. etc. – all of this needs to be discussed.  The more detail the better and they need to be written down.

Often one or more parties perceive things entirely differently and this will present problems.  As a result, each of the parties is likely to have unreasonable expectations.  This is where a third party intermediary is critical, helping each of the siblings and the dealer to work through their differences.  If done properly this process will take several meetings, culminating in all parties signing what has been agreed upon.  There is no short cut, if you want to find solutions that will work for everyone.

The stakes are very high – the future of your business and the ability of your family to enjoy harmonious relationships.  Find someone soon who can help you tackle and resolve this crucial issue or risk having to sell your dealership in the future.  What could possibly be more important?

Hugh Roberts, CFP, Partner of The Rawls Group: hbroberts@rawlsgroup.com

Don't Miss a Do-Over Opportunity

2006-10-04T11:17:00.000-07:00

By Loyd H. Rawls

As parents, ranking family members or managers, we are mentors to those under our direct authority, whether we like it or not. As direct mentors, we are the source of accountability to our children, siblings or subordinates with the opportunity to acknowledge their shortcoming as critics and/or guide them as coaches to enhanced performances. Furthermore, as managers who are commissioned to execute the business affairs of the business, we are indirect mentors to all employees who covet the position, who we have worked so hard to achieve. Under the hypersensitive eye of those who envy our positions of power, prestige and high compensation, every move we make is subject to exhaustive unrelenting critique. As indirect mentors, we have role models that establish the low water mark of acceptable professionalism, commitment and behavior.

Unfortunately, none of us are perfect. Since the serpent made his pitch about the apple, we have predictably made mistakes and experienced varying degrees of regret and embarrassment. It is just part of life and certainly part of business. As fate would have it, in the contemporary business environment, one of the defining characteristics of a successful manager is his or her willingness to work outside the box, be vulnerable, take chances and make mistakes. And in contradiction to the opinions of our mothers, we are known to occasionally make the wrong decision regarding an employee, say the wrong thing to a family member or just step on ourselves regarding teamwork. For those fortunate among us, we usually know when this management “do-over” opportunity occurs. We feel it in our souls, “that was the wrong thing to say…or do.”

As you embark on developing family members and managers to support your succession goal, you can teach no greater lesson than “good, managers make mistakes and still continue on the pathway to survival and long-term success.” In the wake of your indiscretion, insensitivity or blunder with your son, daughter or subordinate, you have a unique opportunity to illustrate two indispensable characteristics of a good manager: humanity and humility. Managers are human and all humans make mistakes. Humble humans don’t let their pride block the best opportunity they will have to illustrate how family members or managers should not communicate or interact. Taking advantage of “do-over” opportunities not only illustrates how much you know, but most importantly it illustrates how much you care, not only about the individual you are mentoring, but also the business. And no doubt, the most dependable management axiom is “caring and communicating are inseparable partners.” Don’t miss a “do-over” opportunity. Humility is a small price to pay for an extraordinary opportunity to make a lasting impression on the future leaders of your business.

Succession Planning Builds Value

2006-09-22T10:09:00.000-07:00

By Loyd Rawls
The valuation of a business is an assumption of future productivity based upon the perception that the multiple value drivers at play within a business will continue. An appraisal (of value) is simply an analytical assumption of the future productivity of current value drivers supported by historical performance combined with assumptions as to how those value drivers can be or will be impacted by future circumstances. Businesses have both social value and economic value. For the purpose of explaining how succession planning impacts value we will dwell upon classic economics. The current economic value of a business lies in the demand for products or services provided, the assembly and distribution cost of those services relative to sales price, the adequacy of financial resources to support product development, assembly and distribution and the managers and leaders who are responsible for overseeing the business. These are components of current economic value because the marketplace fully understands that all of these value components are depreciating. Products and/or services will become obsolete. Assembly and distribution of products will become inefficient and/or ineffective. Facility and technology demands will consume cash resources. And most important, as has been an unfortunately predictable cycle, leaders and managers who have astutely integrated the development of products, sale of products, management of cash resources and the infusion of winning attitudes will move on, retire, become distracted or lose their edge. Consequently any presumption of financial value is temporary and conditional. At some point these value drivers will expire unless they are being assessed, refined and as necessary, regenerated.The process of succession planning addresses all issues impacting the continuation of a business through the next generation. Of course, “all issues” includes value drivers which are part of the fundamental components of The Succession Matrix. With resolute understanding that the predicate to succession is continuing success, succession planning assesses the value drivers that will be support the commitment of the next generation to continue the success required to perpetuate the business. This assessment predictably demands refinement to products and processes and a commitment to providing the financial resources needed to support those products and processes. Furthermore, succession planning demands a challenge to the assumed progression of leadership and management because the foundation of Succession Successsm is confidence that the next generation leaders will have the competency, capacity and commitment to not only maintain the current business value but also reach full value potential. In summary, Succession Planning builds value because the succession planning process focuses on achieving Succession Successsm. The process for achieving Succession Successsm, by its very nature confirms, refines and where necessary regenerates the drivers that constitute business value.

Answers to Commonly Asked Questions: Part 4

2006-09-06T13:52:00.000-07:00

Q: Why do I need written Stockholder Agreements when I am passing my business to my children?

Stockholder Agreements are needed in a family business to deal with two main issues:

Stockholder Security: Unexpected stockholder contingencies such as death, disability, bankruptcy or divorce can create uncertainty about personal security, estate liquidity, business control and stock disposition.

Precluding Disagreements: Harmony is a vital element for a successful family business. Stockholder Agreements defining the procedures for buying and selling stock should preclude negotiations. Documenting and communicating stock disposition agreements in advance significantly reduces the likelihood of disagreements between family members. A well defined stockholder=s agreement will protect the family from negotiations during emotional circumstances and therein protect the harmony of the family.

Q: One of my children works in the business and the others are employed elsewhere. How can I pass the business on to my active child and still be fair to the rest of my children?

The classic Aequal asset distribution@ approach to estate planning can be complicated by ownership of a capital intensive business. Inactive children are classically better served by owning more liquid and/or less management intensive assets. The family business complicates the question of asset distribution due to the subjective nature of business valuation and the impact employed children have on value. Experience has shown that acceptable solutions can be achieved by developing a reasonable method of business valuation and pursuing an equitable (not necessarily equal) asset distribution that addresses the circumstances, talents and needs of each child. Family business Stock Transfer agreements are vital to success. The Rawls Company has experience in valuation methodology that takes into account the contributions of actively employed children to business valuation. We also have extensive experience in intra-family communication that is necessary for agreement regarding asset distribution, business control, etc.

Answers to Commonly Asked Questions Part III

2006-09-01T06:14:00.000-07:00

Answers to Commonly Asked Questions III:

Q: One of my children works in the business and the others are employed elsewhere.  How can I pass the business on to my active child and still be fair to the rest of my children?

The classic Aequal asset distribution@ approach to estate planning can be complicated by ownership of a capital intensive business.  Inactive children are classically better served by owning more liquid and/or less management intensive assets.  The family business complicates the question of asset distribution due to the subjective nature of business valuation and the impact employed children have on value. Experience has shown that acceptable solutions can be achieved by developing a reasonable method of business valuation and pursuing an equitable (not necessarily equal) asset distribution that addresses the circumstances, talents and needs of each child.  Family business Stock Transfer agreements are vital to success. The Rawls Company has experience in valuation methodology that takes into account the contributions of actively employed children to business valuation.  We also have extensive experience in intra-family communication that is necessary for agreement regarding asset distribution, business control, etc.

Q:  Is probate really something to be concerned about?
Probate can be a very significant aspect of estate administration.  Depending upon your state of residence, the nature of your estate assets and the harmony of your family, probate can:

Increase administration costs.

Expose private family affairs to public scrutiny.

Increase administrative entanglements that complicate the management of assets, especially an operating business.

Q: Why do I need written Stockholder Agreements when I am passing my business to my children?

Stockholder Agreements are needed in a family business to deal with two main issues:

Stockholder Security: Unexpected stockholder contingencies such as death, disability, bankruptcy or divorce can create uncertainty about personal security, estate liquidity, business control and stock disposition.

Precluding Disagreements: Harmony is a vital element for a successful family business. Stockholder Agreements defining the procedures for buying and selling stock should preclude negotiations. Documenting and communicating stock disposition agreements in advance significantly reduces the likelihood of disagreements between family members. A well defined stockholder=s agreement will protect the family from negotiations during emotional circumstances and therein protect the harmony of the family.

Answers to Commonly Asked Questions: Part II

2006-08-17T10:30:00.000-07:00

Answers to Commonly Asked Questions: Part II

Q: My daughter is graduating from college and expects to take a position in our company.  How do I include her without upsetting my current management team, which includes my son?

Family members who seek a career in the family business and contribute to its success merit recognition and respect.  A family business should have a Family Member Employment Policy that is utilized to define the guidelines and requirements for a family member to be employed in the family business.  This written policy defining the terms and conditions for employment will greatly reduce emotional stress that can develop with the expanded employment of competitive family members.

Secondly, a Successor Manager Development Curriculum should be utilized to confirm the training and accountability program required for family members to become fully integrated into the business.  These programs help aspiring family members and junior executives to understand the performance standards and demands of the business as well as acquire the skills and experience required to be successful members of the family business management team.

Q:  What is the best way to deal with estate taxes?
Dealing with estate taxes is a four step process:

Recognize the reality that taxes will be assessed the fair market value of your assets being transferred to anyone other than your spouse.

Utilize all compatible avenues to discount the estate tax appraisal of your assets.

Utilize opportunities to defer estate taxes by passing your assets to a spouse. Tax deferral provides continued benefits of cash to heirs. Tax deferral also allows continued action for tax avoidance, such as gifting.

Develop the most effective and compatible way of paying the net estate tax due. The three acknowledged sources for payment of estate tax are liquidated capital, debt, and leverage reserve - life insurance.

Answers to Commonly Asked Questions

2006-08-11T09:46:00.000-07:00

Answers to Commonly Asked Questions

Q: My children are bickering and quarreling.  This frustrating behavior weakens my confidence that they can work together.  How should I deal with family dissention or acrimony?

Your first stewardship responsibility is to provide for the appropriate disposition of your business based upon your circumstances.  Your subsequent calling is to provide for the succession of your business within your family.  Teamwork can be taught, but you cannot force unity.  Furthermore, you can not justify transferring your business to children who lack unity of purpose and goals.  Consequently, pursue one of two courses of action.  Advise the quarreling children that succession cannot be achieved with disunity.  If they do not reconcile their differences, you will select the child (children) that must leave the business in the interest of unity.  Or, advise your children that your responsibility is first to family harmony and security.  Therefore if they do not achieve unity of purpose and goals, you will sell the business.

Structured communication between siblings may be needed to enhance empathy and understanding. Patience will be needed because relationship problems are rarely resolved overnight.

Q:  What does personal financial planning have to do with business succession planning?
Aggressive estate and business succession planning should address the lifetime transfer of assets to minimize estate taxation.  The transfer of management control and ultimately the ownership of assets can affect financial security.  In most cases, the family business is an important security asset to the current ownership generation (parents). Parents are typically reluctant to transfer control or ownership of their business to their children or partners until they have no reservations about their personal financial security.  Personal financial planning provides the current owners peace of mind that they can actively participate in the estate continuity and succession planning process without undermining their own security.

To vs. Through

2006-08-03T15:03:00.000-07:00

By: Loyd H. Rawls
lhrawls@rawlsgroup.com

“I am pleased to meet you, Mr. Rawls.  Thank you for taking time to visit.  Won’t you have a seat hear across from my desk?  Before we get started Mr. Rawls, I want to tell you the same thing I told my friend, ‘I have taken care of my succession planning’.”
     “Oh,” I responded, as though it was the first time I had heard this story.  “Well I am impressed that the planning side of your business is just as impressive as the facilities.  If you don’t mind, tell me a little bit about your planning, so I can brag on you as I attempt to motivate some of your less conscientious colleagues.”
     “Well, I have always been a believer in planning,” he responded.  “Just six months ago I sat down with my attorney and insurance representative and we reviewed my estate planning and made some minor refinements.  I also have a buy-sell agreement with my son and daughter, who are 36 and 33, and they own an insurance policy to buy the stock from my estate.  Also, my son is on the successor addendum, and he has been approved as the successor nominee.”
     “That certainly is impressive,” I responded.   “How old are you?  Do you and the missus have plans to step out of here and travel the world?  It sounds to me like that may be the next step?”
“I am sixty-three,” he quickly reflected.  “But, unfortunately I do not have any immediate plans to back away from here.  If I am fortunate enough to get a few issues addressed in the next three to four years, I might be able to begin playing some more golf.  However, up until then, it looks like I will be here making sure that this Taj Mahal gets paid for.”
“Oh, really,” I inquired, anticipating that their may be some cracks in the foundation.
The business owner, who has previously been quite nervous, leaned back in his chair, seemingly relieved to be able to air his burden.  “Well this beautiful facility, which you so graciously acknowledged, didn’t come cheap.  In fact, the bank owns substantially more of this sucker than I do.  I ask myself everyday why I let my kids talk me into this?  Six months after we moved in my son’s wife filed for divorce.  That was a year and a half ago, followed by a nasty fight over child custody and a property settlement.  I don’t think he has worked three full days, in any week, since the battle began.  About that same time, my daughter got pregnant, and her husband lost his job.  She quit working here, to be a stay-at-home mom, and her husband replaced her.  Another way of putting it is, she got the mine and I got the shaft. Her husband is about as much of a car man as I am a nuclear physicist.  Thank God I have a couple, three, very good key managers.  You can bet your sweet ass that as long as I am guarantying the note on this real estate, I am not going anywhere.”
I just sat there a few moments without saying anything, acknowledging his predicament.  I then responded with my common fishing line, that frequently brings up ugly critters.  “I appreciate the frustration of your circumstances, and I have the impression that there are even other issues regarding your children beyond what you are mentioning.”
“Oh, Mr. Rawls,” he responded with dejection.  “You wouldn’t believe what I am catching from my wife over this and my oldest son who has been suffering from drug addiction for the last fifteen years. He is divorced and his oldest daughter is living with us because she can’t get along with her mother.  I sometimes think this office is Grand Central Station for problems.  Everyone just screams through here and throws their baggage in my lap.”
“Above all, sir, let me assure you of several important points.  I understand and appreciate the challenging circumstances you are experiencing at a time of your life when you would like to be out from under the pressure.  Second, and equally unfortunate, you are not the only one in this predicament.  Third, there is hope.  You can effectively deal with these circumstances.  However, the most important point that you need to understand is the difference between “To” and “Through.”  When we initially met, you contended that you had completed your business succession planning, when in fact, all you have addressed is the continuity of your business to the next generation.  As you have just described, you have many unaddressed issues, any one of which could impair, or even devastate the ongoing success of your business legacy, through the next generation.  Although you may have addressed the transfer of this business to the next generation, you can only achieve piece of mind by undertaking succession planning, which will address all issues impacting the successful operation of your business through the next generation.”
The gentleman pondered what I had said to him for a few moments, as he worked at straitening a paperclip.  Subsequently, rolling the straight wire between his thumb and forefinger, he looked up at me and responded, “Yes, I just have been hoping these family and management issues were going to solve themselves before I fall over dead from frustration.  The fact is I have not addressed how this business can make it through the next generation.  Thanks for the wake up call.”

"To versus Through" © Loyd H. Rawls

The Cornerstones of Succession: Part II

2006-07-26T13:30:00.000-07:00

In last week’s issue, I introduced the four cornerstones of succession for assuring the continuity of your dealership into the next generation. We discussed that an exceptional family owned business which maintains profitability and momentum through the transfer from generation to generation was indeed likened to Aesop’s fable “The Golden Goose”, which we all remember was deemed valuable for its ability to lay golden eggs. Today, the term “golden goose” has become the common metaphor used to describe a very valuable, long-term asset, capable of generating a continuous flow of abundance. Previously I described the first two cornerstones of succession, Business Success and Personal Financial Planning. We will now reflect upon the third and fourth cornerstones: Successor Management Development and Inter-Family Communication.

Succession Cornerstone #3: Successor Management Development
It would not make any sense to hand over a business to someone who did not respect its value. With respect to business succession, the continuity of proven successful management philosophy and systems are vital to maintaining the value of a business. The obvious fact is that establishing a successful management culture with highly competent successor managers is critical to future business operations and the creation of a golden goose. Profitable first generation family businesses are reasonably common. Profitable second generation family businesses are significantly less common due to the difficulty of establishing a successful management culture and preparing capable successor managers. Highly profitable second and third generation family businesses are rare for the same reason. If your children are not good managers and if they are unable to develop and maintain a competent management support team, succession will be a struggle and creation of a golden goose will only be a dream. Unprepared family successors will become “succession casualties” as the complexities and demands of contemporary business runs over them. Your challenge first is to determine if your successors are capable of managing your business. Then, assuming they have the moxy and drive, your challenge is to adequately prepare them to manage the business profitably and properly. Otherwise you might as well grab the ax, because in your absence, your goose will suffer and probably become a victim of neglect.

Successor manager development also always involves establishing adequate support managers. Only the merciless rocky road of starting a business from scratch develops the complete manager. Even then, entrepreneurs commonly build businesses that outgrow their management capability. Your successors will need help managing the business. You should take an active role in identifying and training the support managers who will augment your children to create a complete management team. The livelihood of your business and opportunity to create a golden goose will be at risk.

Succession Cornerstone #4 : Inter-family Communications
An ordinary business takes a major step towards becoming a golden goose when inter-family relationships build a caring environment that achieves hyper-productivity through teamwork. Communication is the medium for conducting relationships. Relationships are the bonds that hold a family together and give it strength, resilience, power and energy. Inter-family communication is also the medium for teaching heirs and successors how to be good business managers. The better the communication between parents and children, the more prepared children will be to operate the business. Unique team relationships modeled by family members, partners and key managers are what make a family business special. The feelings generated by family unity in the process of business succession can be very gratifying to family members, partners and all concerned. However, there is a price to be paid to achieve these relationships. Inter-family relationships are like most dynamic situations: you get out of them what you put into them. The foundation to a good relationship is communication. Capitalizing on these assets to build synergy and tenacious teamwork are fundamental steps to creating a golden goose.

Depending upon experiences, attitude and practices, enhancing communication can be a complex endeavor. This must also be a group undertaking. Regardless of how bad you want to communicate, the parties to a relationship must want to communicate and be willing to subordinate their personal agendas in order to build quality relationships. Talking is relatively easy. The toughest part in communication is listening and understanding through the confusion of our own existing mind set. Communication is facilitated by forming a Family Business Council and making a group commitment of time and effort to exchange feelings and discuss the impact of those feelings on the succession challenge at hand. Fortunately this is not one of those “either you have got it or you don’t” issues. Where there is motivation and a willingness to listen, communication can be achieved. Motivation and willingness can improve with time. It is amazing how a team attitude can be created and even grow during the succession process when family members and managers can effectively share opinions and collaborate on management issues.

For more information on this subject email info@rawlsgroup.com

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Successor Development, Inter-family communications
, Business Succession Planning

The Cornerstones of Succession: Part I

2006-07-12T06:01:00.000-07:00

By Loyd H. Rawls

With the phenomenal growth of the American economy, we commonly hear reference to the term “golden goose”. This term has become a symbol of prosperity and security. Most of us have used this term to refer to something that we perceive to be of great value. The term is commonly utilized to describe the object of our dreams, that which is perceived to be out of our reach. For the unique purpose of promoting family business succession, we define a golden goose as the exceptional family owned business that maintains profitability and momentum through the transfer from generation to generation. Outstanding family owned businesses are relatively common. However, the family business that becomes a golden goose by preparing effectively for succession is rare because special effort is required to prepare the business for succession. In order for you to convert your successful business into a golden goose, you must address four critical issues I call the Succession Cornerstones: Success, Personal Financial Planning, Successor Manager Development and Inter-Family Communication. This article is the first in a two-part series, wherein we will discuss two of the critical factors: Success and Personal Financial Planning.

Succession Cornerstone #1: Success

The first critical succession cornerstone is success. Succession planning is an intellectual exercise in futility if there is no confidence that the business can lay golden eggs for your successors. The defining aspect of a golden goose is that it will continue to be a success for the next generation. Your succession plan should aggressively address questions relating to successful business operation, such as:

Why have we been successful?

Can my successor continue what we have been doing?

Can our business compete in the future changing market place?

How can we do better?

Do we have the needed support management talent?

Do we have the needed technology?

Is our management style compatible with the changing market?

Strategic self evaluation by addressing questions such as these will identify the obvious questions and answers regarding the future success of your business. The subsequent conclusions may generate optimism or doubt regarding your ability to establish a golden goose. The critical issue regarding gained knowledge is the follow-up response. Gained knowledge may create stewardship responsibility to affirm and reinforce management and structural assets to assure success and achieve the coveted status of golden goose. On the other hand, gained knowledge may create the responsibility that your business could possibly be continued by your children, but it will fall short of being a golden goose. An even harsher conclusion may be that the business should be sold.

Succession Cornerstone #2: Personal Financial Planning

Effectively passing your business to your children requires consideration of the financial implications of transferring both ownership and management responsibility. Ideally, as you approach retirement, you should begin transferring equity and allow your children to assume management responsibility. You can then provide advice and counsel during an extended transition period. Although transferring business equity and operational control may appear simple, there are notably personal financial planning challenges. In order for you to step aside and allow your children the opportunity to learn the business with any peace of mind, you must first establish personal financial security.

This typically involves a long term capital accumulation plan that will generate sufficient assets to relieve your dependence upon the business profitability. Financially independent parents are assets to a succession plan because they are able to transfer business equity during their lifetimes without the fear that they are giving away their financial security. Being financially independent also allows parents the luxury of preparing the best managers who have learned through the school of hard knocks. Conversely, parents who are financially dependent upon the business are likely to be liabilities to the succession process as they inhibit learning by creating an environment of restrictive conservatism in a natural reflex action intended to protect their security nest egg. There are risks involved in allowing children to assume management control. However, with those risks comes the reward of confidence that your successor can indeed appropriately attend to the needs of the golden goose.

For more information on this subject email Loyd Rawls: lhrawls@rawlsgroup.com

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Business, Succession Planning,

12 Easy Steps to Succession

2006-06-29T11:41:00.001-07:00

The two most important steps in the succession planning process are initiation and completion. However, before you undertake a significant challenge of any nature, it is wise to have a plan. Otherwise, it is very easy to become distracted, discouraged and fall short of your initial goal. Therefore we strongly suggest you consider these time-proven steps for your succession planning process.

Make a commitment to get started and communicate this commitment to someone who will hold you accountable.

Select qualified advisors to facilitate your succession planning efforts.

Establish a time target for the initial implementation of your plans.

Close each meeting with a scheduled commitment for the next meeting and a reservation time for the following meeting.

Develop and understand a schematic diagram of your succession plan before drafting any documents.

Prior to drafting documents, develop and refine simple document summaries that stipulate pertinent document provisions.

Discuss succession planning intentions with those who will be impacted by your plans, such as spouse, children, key managers, vendors, and lenders.

Refine plans and document summaries as dictated by discussions with those who are impacted by the plans.

Draft, affirm and execute the documents.

Conform property and plans with documents.

Make final review of documents and conform property.

Make a commitment to periodic review.

For additional resources visit www.seekingsuccession.com or www.rawlsgroup.com,
email info@rawlsgroup.com, or call 1.800.77.RAWLS

(c) Loyd H. Rawls, Publication, reproduction or use of this article other than that of this publication is strictly prohibited without the express permission of the author..

Why is Succession planning important to family and privatley owned businesses?

2006-06-29T11:41:00.000-07:00

Definition of a family owned business

“Two or more people in business together for reasons other than money”

If you are in business with a partner, you have a family of at least three: you, your partner, and your business. Add to the family your employees, strategic partners, bankers, other vendors, customers, and your immediate and future family who depend on the success of your business. After realizing the success of what may have begun as a hobby, you may realize that your friends and family have now become dependent on the success of your business.

Unfortunately based on research, a failure to plan for the succession of your business is a plan to fail:

2nd generation: 1 in 4
3rd generation: 1 in 16
4rth generation: 1 in 100
5th generation: 1 in 1000

Therefore it is critical for business owners of “family” owned businesses to develop an understanding of the business they have built, their stewardship responsibility to their family and what it will take to pass it to the next generation.

Many business owners feel that “they have their planning all done” through the development of wills, trusts, and the purchasing of life insurance plans. However, what is believed to be succession planning is actually continuity planning, and many businesses are missing the mark on business practices vital to the Succession Successsmof a business such as:

Key manager identification, retention, and motivation
Intra-family communications
Strategic Planning
Proper business structuring
Successor manager training and curriculums
Strategic planning
Personal financial security outside of the business
Development of “Exit and Entrance” strategies

Continuity Planning focuses on the transfer of a business to the next generation while Succession planning is the perpetuation of a business through the next generation. Succession planning is easily postponed because it demands patience and forces families and partners to discuss difficult issues that are imperative to Succession Success, but is necessary as family and privately owned businesses are a vital part of our culture.

Succession Success builds value, and gives all of those who are associated with the business, the peace of mind that it will continue to be a viable business for many future generations.

Family business owner's misconceptions may impact the world wide economy

2006-06-26T16:55:00.000-07:00

Eighty percent of the worlds businesses are family owned and approximately half of our nations Gross Domestic Product is provided by family owned enterprises, according to the Cox Family Enterprise Center, which is a unit of the Coles College of Business. As a result of this overwhelming statistic, proper family and privately owned business succession planning is imperative to the ongoing growth and success of the nation wide economy. The majority of businesses believe that “they have their planning all done” through the development of wills, trusts, and the purchasing of life insurance plans. Unfortunately, what is believed to be succession planning is actually continuity planning, and they are missing the mark on imperative business practices such as strategic planning, identifying and developing successors, and the development of exit and entrance strategies.

According to J.H. Astrachan and M.C. Shanker’s, “Family Businesses’ Contribution to the U.S. Economy: A Closer Look,” published in the Family Business Review in September 2003, the greatest part of America’s wealth lies with family-owned businesses and family firms comprising 80% to 90% of all business enterprises in North America. A little more than 30% of all family-owned businesses survive into the second generation, and twelve percent will still be viable into the third generation, with only 3% of all family businesses operating at the fourth-generation level and beyond. Because succession planning forces business owners and family members to face difficult issues, succession planning demands patience and is easily postponed; however, because of the staggering statistics above, business owners must look beyond continuity planning to ensure the viability of their business legacy for the benefit of their families, employees, vendors, and all those who depend on the success of the business.

“Succession is a challenging endeavor even in the best scenarios.” says Ricci Victorio, Vice President of The Rawls Group (TRG) and their sister division, the Family Business Resource Center (FBRC). “In my experience, I have not come across any yet who have a broad vision of where there company will be next week, much less after they’re gone. Fewer still have a well documented and communicated plan which addresses issues such as identifying and developing successors, key manager retention, strategic planning, family conflict and leadership development. Succession planning involves more than creating a financial plan and then putting it on the shelf; business and family dynamics will inherently change, therefore goals and planning should be re-visited on an ongoing basis in order to achieve Succession Successsm.”
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Choosing a Positive Relationship Can Impact Succession Plans

2006-06-23T16:25:00.000-07:00

The importance of choice to inter-family relationships is based upon the theory that, as individuals, we are for the most part responsible for our feelings and attitudes. Our attitudes are not the total result of circumstances or how others make us feel. Our attitudes are the result of how we choose to react to circumstances or the input of others. Theoretically, in every interpersonal relationship, we are the captains of our own ship; and after our initial instinctive reactions have cleared, we choose our emotional position relative to the person and circumstances at hand. I use the term theoretically because, as emotional humans, we have only a limited ability to deal objectively with our own feelings; however, this limited ability to choose our reaction has a major impact upon the quality of a relationship.....(Complete article)

Article Author: Loyd H. Rawls- askloyd@rawlsgroup.com