Succession Planning


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Succession Planning

  1. 1. FPO Solutions Creating a Succession Plan
  2. 2. Who is FPO Solutions? <ul><li>The professionals behind NAPA stores on the move. </li></ul><ul><li>Partner with over 1400 NAPA Auto Parts Stores </li></ul><ul><li>Started NAPA accounting in 1997. </li></ul><ul><li>Our office & staff are dedicated solely to your business. </li></ul><ul><li>We work with Genuine Parts Company. We work for the NAPA Store Owner. </li></ul><ul><li>Our mission: Helping you manage your “401k”. </li></ul>
  3. 3. <ul><li>NAPA Specific Consulting Services </li></ul><ul><li>Financial Performance </li></ul><ul><li>Store Operations </li></ul><ul><li>Risk Management </li></ul><ul><li>Sales & Business Planning </li></ul><ul><li>Executive Coaching </li></ul>Who is FPO Solutions? The professionals behind NAPA stores on the move.
  4. 4. Communication? <ul><li>Does it ever seem like you and your accountant really </li></ul><ul><li>don’t speak the same language? </li></ul>
  5. 6. Succession Planning Overview <ul><li>This session is an broad overview on how to get </li></ul><ul><li>started, what to think about and some idea’s on where </li></ul><ul><li>to go. </li></ul><ul><li>If you get nothing else out of the next hour, get this; </li></ul><ul><li>Start Early! </li></ul>
  6. 7. Succession Planning Overview <ul><li>Developing Your Strategy. </li></ul><ul><li>Preparing Your Business For Transition </li></ul><ul><li>Succession Options Other NAPA Owners Are Using </li></ul><ul><li>Key Employee </li></ul><ul><li>Outside Buyer </li></ul><ul><li>Family Member </li></ul>
  7. 8. Preparing for Transition <ul><li>Stop procrastinating and start planning. </li></ul>
  8. 9. Preparing for Transition <ul><li>Here’s a scary thought… </li></ul><ul><li>What would happen to your business if you suddenly </li></ul><ul><li>couldn’t function? </li></ul>
  9. 11. Preparing for Transition <ul><li>Succession Planning is about taking control of </li></ul><ul><li>the inevitable </li></ul><ul><li>If no planning is done, lawyers and the government will control the process </li></ul><ul><li>But if you plan it; </li></ul><ul><li>– You can reduce the taxes paid </li></ul><ul><li>– Get the maximum value out of the business </li></ul><ul><li>– Leave it in the hands of your chosen successors </li></ul><ul><li>– And avoid business crisis! </li></ul>
  10. 12. Preparing for Transition <ul><li>Become as profitable as possible </li></ul><ul><li>Profitable NAPA Stores are always in demand </li></ul><ul><li>Profitable NAPA Stores are easier to finance through banks and SBA </li></ul><ul><li>Start family member in a growing, profitable business </li></ul><ul><li>Build additional wealth for yourself </li></ul>
  11. 13. Nothing Fails Like Success Natural Law
  12. 14. The Greatest Enemies of Mature Business <ul><li>Size (Both physical & market share) </li></ul><ul><li>Age </li></ul><ul><li>Past Success </li></ul>
  13. 15. The Challenge of Success Sigmond Curve – Life Cycle of a Business Time Success Success X Time = Increased Odds of Stagnation, Complacency and Failure
  14. 16. With Success, Size and Age comes… <ul><li>Rigid Thinking… tendency to think that they are already doing the right things. The more successful they’ve been, the less they are open to new ideas. </li></ul><ul><li>Bureaucracy …large or small, time tends to build a lot of “layers” or traditions into a business that creates inflexibility. </li></ul><ul><li>Limited Perspective… great at improving the way they do things, but poor at questioning if they’re doing the right things. </li></ul>
  15. 17. You cannot stay on top forever. First, it was my dream to become number one, and now that I am on the top, staying there would be far more difficult and challenging than to get to the top slot. Vijay Singh Natural Law
  16. 18. The Second Cycle
  17. 19. Preparing for Transition <ul><li>Implement a strong sales and gross profit plan </li></ul><ul><li>A track record of year over year sales growth is golden when selling a business </li></ul><ul><li>Start family member in a growing, profitable business </li></ul><ul><li>Build additional wealth for yourself </li></ul>
  18. 20. Preparing for Transition <ul><li>Implement a strong sales and gross profit plan </li></ul><ul><li>NAPA Dealer & Retail Programs </li></ul><ul><li>Employee Incentives </li></ul><ul><li>Reputation Categories, Category Management and Focus Lines </li></ul>
  19. 21. Preparing for Transition <ul><li>What is a Reputation Category? </li></ul>
  20. 22. <ul><li>Pads </li></ul><ul><li>Shoes </li></ul><ul><li>Wheel Bearings </li></ul><ul><li>Calipers/Caliper Pins/Caliper Bolts </li></ul><ul><li>Oil Seals (Spline, Hub, Wheel) </li></ul><ul><li>Combination Kits </li></ul><ul><li>Drum/Rotor </li></ul><ul><li>Wheel Cylinder </li></ul><ul><li>Hydraulic Hoses </li></ul>Brake Category Example
  21. 23. Where Do Reputation Categories Begin?
  22. 24. Where Do Reputation Categories Begin?
  23. 25. <ul><li>Determine your stores top product lines using sales by manufacture report (RPT023). </li></ul><ul><li>Focus on 1-3 specific lines or categories that drive the majority of sales in your store. </li></ul><ul><li>Determine your sales and pricing strategy. (Example: Rotor pricing drives brake sales). </li></ul><ul><li>Determine your stocking strategy. (Example: if inventory is class driven stock up to WW items. If MIC, use a stock 1 for every 3 or 4 vehicles in market). </li></ul>How to develop your Reputation Categories
  24. 26. <ul><li>Find subcategories that matter. A reputation in gaskets doesn't live or die with head gaskets. It does however live or die with valve cover gaskets. </li></ul><ul><li>Set a fail safe. Auto order the part on nightly stock order if you run out. </li></ul><ul><li>Determine factory ordering strategy based on days of supply. </li></ul><ul><li>   </li></ul>How to develop your Reputation Categories
  25. 27. <ul><li>Identify current customers who are not currently buying this line or category. Use RPT013 (Sales by Customer) or RPT057 (Sales by Product by Customer). No current customer should NOT be buying this line from you. </li></ul><ul><li>Keep accurate shelf counts. Inventory on a regular basis. (Use data review to run sales more than X report). </li></ul><ul><li>Sales. Focus on these lines in store meetings and in sales calls to your customers. Train employees to ask for the complete sale.    </li></ul>How to develop your Reputation Categories
  26. 28. <ul><li>Turn on Sales Tracking by Customer in TAMS of your top customers. This is in AR2. D – Detailed Sales. (RPT127). </li></ul><ul><li>Use RPT056 (Sales by Customer by Part Number) & RPT057 (Sales by Product by Customer). </li></ul><ul><li>Measure Customer Catagories using RPT055. </li></ul><ul><li>Measure same customer overall sales growth. (+5%) </li></ul><ul><li>Measure same customer sales growth in reputation catagory. </li></ul><ul><li>GMROI by product line. </li></ul><ul><li>   </li></ul>How to Measure Reputation Categories Results
  27. 29. Asset Management - KPI 1.5 1.3 1.2 Trend Gross Margin Return on Inventory Investment How to measure: Gross profit dollars divided by Inventory line value dollars.
  28. 30. Asset Management - KPI <ul><li>Gross Profit Return on Investment </li></ul><ul><li>What does it indicate? </li></ul><ul><li>Rate of return on inventory investment. </li></ul><ul><li>High profit, high velocity part numbers & product lines. </li></ul><ul><li>Marketing effort and sales strategy. </li></ul><ul><li>What has been Advanced Auto Parts highest GMROI SKU? </li></ul>
  29. 32. Preparing for Transition <ul><li>Keep operating costs and business performance </li></ul><ul><li>(KPI’s) within the “normal range” </li></ul><ul><li>Potential buyers and lenders want to see healthy business performance </li></ul><ul><li>Use the NAPA Consolidated Operating Statement & FPO Solutions KPI’s to measure your store’s performance </li></ul>
  30. 33. Preparing for Transition Time for a Check-Up? Four Critical Areas to Measure the Financial Health of Your NAPA Auto Parts Store Cash Management Inventory Store Operations Building Wealth Comparison to NCOS FREE from FPO Solutions
  31. 34. Preparing for Transition <ul><li>Have clear accurate financial statements that </li></ul><ul><li>document business growth and earnings </li></ul><ul><li>Explaining the Past will Sell the Future </li></ul>
  32. 35. Preparing for Transition <ul><li>Clean up Balance Sheet </li></ul><ul><li>Accounts Receivables (Past Due, Battery DEBI’s, A/R Aging correctly) </li></ul><ul><li>Asset Listing Complete and Current </li></ul><ul><li>Non-Existent Investments, Loans, Etc. </li></ul>
  33. 36. If Your Dream is This….
  34. 37. Make Sure You Don’t End Up With This!
  35. 38. Preparing for Transition <ul><li>Align Book Inventory and TAMS Inventory </li></ul>
  36. 39. Inventory is the bulk of your retirement fund <ul><li>Variance between your “book inventory” and TAMS inventory = not knowing where you are at. </li></ul><ul><li>Book higher than TAMS = Loss (less money to retire with) </li></ul><ul><li>Book lower than TAMS = gain (Higher capital gains when you sell your store) </li></ul>TAMS Book Actual
  37. 40. Start Working 0n Inventory Now
  38. 41. Don’t let understated income and inventory value ruin your day <ul><li>IRS Form 1335 – Amnesty </li></ul><ul><li>Change in accounting depreciation methodology </li></ul><ul><li>4 year “grace period” </li></ul><ul><li>Look for bad debt and other operating costs to offset as part of your exit strategy </li></ul>
  39. 42. <ul><li>What if I have an employee or several employees I </li></ul><ul><li>would like to sell my business to, but they don’t </li></ul><ul><li>have enough money? </li></ul><ul><li>Or </li></ul><ul><li>How can I make a key employee or employees </li></ul><ul><li>“ stakeholders” in my business with a profit sharing </li></ul><ul><li>program? </li></ul>Succession Planning – Key Employee
  40. 43. <ul><li>Three Approaches for developing Key Employee “Equity” </li></ul><ul><li>Plans (KEEP’s) to purchase your business or as a Equity </li></ul><ul><li>Incentive Bonus Plan </li></ul><ul><ul><li>Real Equity </li></ul></ul><ul><ul><li>Phantom Equity </li></ul></ul><ul><ul><li>Deferred Income </li></ul></ul>Succession Planning – Key Employee
  41. 44. <ul><li>Key Employee Equity Plan Basics </li></ul><ul><li>Today’s plans we are discussing are “non-qualified” </li></ul><ul><li>Qualified plans (ESOP,401k SEP IRA, Simple IRA, etc.) must be offered to all employees (can’t discriminate) </li></ul>Succession Planning – Key Employee
  42. 45. <ul><li>Effects of Key Employee Equity Plans </li></ul><ul><ul><li>Greater productivity </li></ul></ul><ul><ul><li>Better alignment between Key Employee & Owner </li></ul></ul><ul><ul><li>Gets everyone focused on sales, marketing, customer service, expenses, and asset management </li></ul></ul><ul><ul><li>Increased earnings for you </li></ul></ul><ul><ul><li>Chance to build equity for everyone </li></ul></ul><ul><ul><li>Attract/Retain the best people </li></ul></ul>Succession Planning – Key Employee
  43. 46. <ul><li>Key Employee Equity Plan Basics </li></ul><ul><ul><li>Plans needs to fit your strategy and time table </li></ul></ul><ul><ul><li>Plans need to be put together by a professional </li></ul></ul><ul><ul><li>Key Employee(s) need to know what they’re getting </li></ul></ul><ul><ul><li>Key Employee(s) need to be kept in the “loop” </li></ul></ul>Succession Planning – Key Employee
  44. 47. <ul><li>Plans Can Take on Various Forms </li></ul><ul><ul><li>Restricted Stock </li></ul></ul><ul><ul><li>Stock Appreciation Rights (SAR’s) </li></ul></ul><ul><ul><li>Phantom Equity Agreements </li></ul></ul><ul><ul><li>Deferred Income </li></ul></ul>Succession Planning – Key Employee
  45. 48. <ul><li>Real Equity- Restricted Stock </li></ul><ul><li>Restricted stock is actual stock ownership in your corporation. By giving restricted stock to an employee, your making him/her a business partner. </li></ul>Succession Planning – Key Employee
  46. 49. <ul><li>Real Equity- Restricted Stock </li></ul><ul><li>What are the restrictions? </li></ul><ul><ul><ul><li>Non-Voting </li></ul></ul></ul><ul><ul><ul><li>No “say” in whether company is sold </li></ul></ul></ul><ul><ul><ul><li>No “say” in valuation of business </li></ul></ul></ul><ul><ul><ul><li>No “say” in asset acquisitions or taking on debt </li></ul></ul></ul><ul><ul><ul><li>Forfeiture if the employee terminates before the stock has vested </li></ul></ul></ul>Succession Planning – Key Employee
  47. 50. <ul><li>Real Equity-Restricted Stock Example </li></ul><ul><li>I’m a key employee in your store who wants to buy the </li></ul><ul><li>business, but no equity. </li></ul><ul><li>We set up an agreement providing me with 5% ownership of the company through restricted stock. </li></ul><ul><li>I don’t own 5% of the company overnight. My equity vests over a time period set up in our agreement. </li></ul><ul><li>As the business grows, my stake in the business grows with yours. </li></ul>Succession Planning – Key Employee
  48. 51. Succession Planning – Key Employee
  49. 52. <ul><li>Restricted Stock Benefits/Downside </li></ul><ul><li>Real equity for the employee </li></ul><ul><li>Shares vest over time </li></ul><ul><li>No immediate cash deployment </li></ul><ul><li>Remember, it does dilutes future earnings for you </li></ul><ul><li>Tax issues for employee as vesting takes place (Section 83) </li></ul>Succession Planning – Key Employee
  50. 53. <ul><li>Stock Appreciation Rights (SARs) </li></ul><ul><li>SAR’s are the right to the monetary equivalent of the increase in value of a specific number of shares in a company over a specific period of time. </li></ul><ul><li>Similar to a stock option, SAR’s are valued based on today’s equity and set up to become vested in the future. </li></ul>Succession Planning – Key Employee
  51. 54. <ul><li>Stock Appreciation Rights (SARs) </li></ul><ul><li>No legal ownership </li></ul><ul><li>No voting or shareholder rights </li></ul><ul><li>Gives employee right to the appreciation in the value of stock </li></ul><ul><li>Generally designed to be paid out in shares in the company </li></ul>Succession Planning – Key Employee
  52. 55. <ul><li>Stock Appreciation Rights Example </li></ul><ul><li>I’m a key employee in your store who you want to keep or want to buy your business, but I have no equity. </li></ul><ul><li>We set up an agreement providing me with X number of SAR’s that will fully vest at some point in the future. </li></ul><ul><li>I don’t own any part of the company. Our agreement is that in the future, I’ll be paid the difference between today’s value of those shares and the actual value in restricted stock. </li></ul><ul><li>As the business grows, my stake in the business grows as well. </li></ul>Succession Planning – Key Employee
  53. 56. <ul><li>Stock Appreciation Rights Benefits/Downside </li></ul><ul><li>Not ownership of the business by the employee </li></ul><ul><li>SAR’s can vest over time similarly to restricted stock </li></ul><ul><li>Like restricted stock, no immediate cash deployment by you </li></ul><ul><li>Tax considerations for the employee when exercised </li></ul>Succession Planning – Key Employee
  54. 57. <ul><li>Phantom Equity Agreement </li></ul><ul><li>No legal ownership </li></ul><ul><li>No voting or shareholder rights </li></ul><ul><li>Gives employee some form of payout at designated time </li></ul><ul><li>Generally designed as deferred income to be paid as cash rather than converted into stock </li></ul><ul><li>Can be set up where money goes into a mutual fund or other investment </li></ul>Succession Planning – Key Employee
  55. 58. <ul><li>Phantom Equity Example </li></ul><ul><li>I’m a key employee in your store who you want to keep or want to buy your business, but I have no equity. </li></ul><ul><li>We set up an agreement stating that based on the increased equity/earnings/profits you will pay me a annual deferred bonus. </li></ul><ul><li>I don’t own any part of the company. That bonus goes into a mutual fund or other outside investment. </li></ul><ul><li>As the business grows, my stake in the business grows as well. </li></ul>Succession Planning – Key Employee
  56. 59. <ul><li>Keep in mind with this plan… </li></ul><ul><li>Company records an expense, sets up a </li></ul><ul><li>liability, and sets up an asset </li></ul><ul><li>Actual cash outlay to mutual fund </li></ul>Succession Planning – Key Employee
  57. 60. <ul><li>What happens if </li></ul><ul><ul><li>Key employee changes his mind? </li></ul></ul><ul><ul><li>Employee steals from you? </li></ul></ul><ul><ul><li>Goes to work for a competitor? </li></ul></ul><ul><ul><li>You have a son/daughter wants to come into the business? </li></ul></ul><ul><ul><li>There’s a personality difference? </li></ul></ul>Succession Planning – Key Employee
  58. 61. <ul><li>Buy/Sell Agreement – document that determines the </li></ul><ul><li>rules of ownership. </li></ul><ul><ul><li>Vesting </li></ul></ul><ul><ul><li>Buy/sell provisions </li></ul></ul><ul><ul><li>Financing </li></ul></ul><ul><ul><li>Valuation </li></ul></ul><ul><ul><li>Termination </li></ul></ul><ul><ul><li>Change of heart/change in control </li></ul></ul><ul><ul><li>Transferability - Death/disability/divorce </li></ul></ul><ul><ul><li>Non-Solicitation </li></ul></ul>Succession Planning – Key Employee
  59. 62. <ul><li>Start business succession planning early and involve </li></ul><ul><li>your entire family in business succession planning </li></ul><ul><li>discussions </li></ul><ul><li>Currently estate and gift tax are on a course to non-existence 2010. </li></ul><ul><li>Many financial planners recommend starting this process ASAP because of uncertainty in 2011. </li></ul>Succession Planning – Family Member
  60. 63. <ul><li>Look at your family realistically and plan accordingly </li></ul><ul><li>Bring in outside professionals. The price you pay for good advice is minimal. </li></ul>Succession Planning – Family Member
  61. 64. <ul><li>Get over the idea that everyone has to have an equal </li></ul><ul><li>share. </li></ul><ul><li>Equitable Treatment Techniques </li></ul><ul><li> Life Insurance Proceeds </li></ul><ul><li> Real Estate </li></ul><ul><li>Not Working in the Business </li></ul><ul><li> Non-Voting Stock </li></ul><ul><li>Buy-Back Agreement w/Installments </li></ul>Succession Planning – Family Member
  62. 65. <ul><li>Train your successor(s) and work with them. </li></ul><ul><li>30% of second generation family businesses survive. </li></ul><ul><li>15% of third generation family businesses survive. </li></ul>Succession Planning – Family Member
  63. 66. Succession Planning – It Takes Everyone
  64. 67. Thanks for your time! Greg Foss Senior Consultant FPO Solutions 1-866-622-7011 Ext. 2908 1-254-732-5970