This document discusses succession planning and governance for family businesses. It addresses the risks family businesses face, such as inadequate management or lack of a succession plan. Key issues include balancing family and business interests and resolving disputes. The document provides steps to take such as establishing a board of directors and governance policies to define roles, compensation, and conflict resolution. It also recommends developing a formal succession plan to select competent future leaders whether family or non-family. Overall, the document aims to help family businesses plan for generational transitions and long-term success.

1. FAMILY &
BUSINESS
SUCCESSION
PLANNING
IS YOUR COMPANY EXIT
READY?

2. 2
I. Succession Planning Overview
II. Key Issues
III. Governance
IV. Senior Management: Key Steps
V. Board of Directors: Key Steps
VI. Funding Your Exit
VII. Legal Agreements and Documentation
VIII. Conclusions and Questions
AGENDAAGENDA

3. 3
RISKS OF FAMILY BUSINESSESRISKS OF FAMILY BUSINESSES
Family businesses have an
opportunity to sustain a legacy and
get the benefits of customer and
community goodwill. But:
•2/3 to 3/4 collapse or are
sold by the founders
•95% do not survive third
generation ownership
•Simple planning and action can
double the chances for success

4. 4
RISKS OF FAMILY BUSINESSESRISKS OF FAMILY BUSINESSES
Reasons:
• Inadequate management
• Insufficient cash to fund growth
• Non-alignment of incentives
among family members
• Lack of clearly defined practices
and procedures
• Taxes
• Lack of a succession or exit plan

5. 5
CHALLENGES & OPPORTUNITIESCHALLENGES & OPPORTUNITIES
What Makes Family
Companies Different?
Families Are
Changing
• Changes from the traditional family (e.g.
divorce/remarriage; unmarried partners) may
complicate issue of who should participate in
the business and how they should benefit
(salary, capital appreciation, retirement
income etc.).
• Need well thought out Board governance and
management processes that are fair and
consistent for all family (and non-family)
stakeholders.
• Well run family business can earn tremendous
market advantages in goodwill with customers
and communities, employee loyalty.
• Family companies have significant presence in
segments and niches in industries across the
economy
• Family companies include first generation
companies hoping to transition the company
to younger generation.
• Family businesses have issues and transitions,
which may require consideration of family
values alongside strictly “bottom line”
thinking.

6. STAGES OF COMMON ISSUESSTAGES OF COMMON ISSUES
STAGE 1
The Founder(s)
STAGE 2
The Sibling
Partnership
STAGE 3
The Cousin
Confederation
Leadership transition
-Aspiration to transmit the business
-Succession
-Estate planning
- Maintaining teamwork and harmony
- Sustaining family ownership
- Succession
- Allocation of corporate capital: dividends, debt, and profit
- Shareholder liquidity
- Family conflict resolution, participation, and role
- Family vision, mission and linkage with the business

7. 7
KEY ISSUE: BALANCE FAMILY & BUSINESS VALUESKEY ISSUE: BALANCE FAMILY & BUSINESS VALUES
OVERLAPPINGOVERLAPPING
ROLES ANDROLES AND
RESPONSIBILITIESRESPONSIBILITIES
OF FAMILYOF FAMILY
MEMBERSMEMBERS
Family
Member
Director
Manager
Owner

8. 8
Generational transition. Only a third of all family
businesses make the transition to the second
generation successfully.
Alignment of family interests. Alignment of interests
between current owners and others becomes more
pronounced as members retire and turn over the reins
to the new generation.
Balancing of financial returns. Creating buyout
agreements is challenging. When the retiring
generation looks to the value of their interest, they
often look to a static balance sheet number.
II. KEY ISSUESII. KEY ISSUES
1
2
3

9. 9
Interfamily disputes. The interests of family
members may not be aligned. For example, a death
or divorce may leave a surviving spouse who is not
involved in the business holding stock (including
voting rights).
Estate and inheritance issues. These include taxes
and probate delays upon the death of a family
owner.
II. KEY ISSUESII. KEY ISSUES
4
5

10. 10
III. GOVERNANCEIII. GOVERNANCE
• Get consensus on and communicate the
values, mission, and long-term vision for
the family business--to family and non-
family stakeholders.
• Keep family members (especially non-
executives) informed about major
business accomplishments, challenges,
and options.
• Communicate the rules and decisions that
affect family members’ employment,
dividends, and other benefits they get
from the business.
WELL-FUNCTIONING GOVERNANCEWELL-FUNCTIONING GOVERNANCE
STRUCTURES AIM TO:STRUCTURES AIM TO:

11. 11
III. GOVERNANCEIII. GOVERNANCE
• Establish formal communication
mechanisms that allow family members to
share their aspirations, ideas and issues.
• Facilitate building of consensus around key
decisions.
• Avoid or minimize family disputes as to
value, succession and fairness. They will
happen!
WELL-FUNCTIONING GOVERNANCEWELL-FUNCTIONING GOVERNANCE
STRUCTURES AIM TO:STRUCTURES AIM TO:

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KEY GOVERNANCE POLICIESKEY GOVERNANCE POLICIES
Employment: Stipulates fairness and
optimizes motivation for all employees,
family and non-family.
Shareholding: Establishes rules for
share ownership and transfer to ensure
shares are kept in the family when
desired (e.g., Share Redemption Fund,
Single Manager LLC, Common/Preferred
stock).
Dividends: Establishes principles to
help resolve differing family cash
demands.

13. 13
KEY GOVERNANCE POLICIESKEY GOVERNANCE POLICIES
DIRECTORS and Officers:
Guidelines for electing family members to
the company Board of Directors and to fill
executive positions.
FAMILY EDUCATION POLICY:
Guidelines for helping family members
gain educational and professional training
(may include Education fund).
CONFLICT RESOLUTION POLICY
(AND COMMITTEE): Measures to
help resolve conflicts between family
members within a defined scope.

14. 11
Analyze talentAnalyze talent
implication of theimplication of the
business strategybusiness strategy
• Where are we
taking the
business?
• What type of leaders
do we need?
22DefineDefine
talenttalent
standardsstandards
• What does “best-in-industry”
talent look like?
• What are the critical
experiences, skill set and
behaviors required for
leadership roles?
33
Analyze individual &Analyze individual &
pool strengths &pool strengths &
weaknessesweaknesses
• Who are our stars? Blockers?
• Where do we have issues in
our overall leadership talent
portfolio?
44ConductConduct
regular talentregular talent
reviewsreviews
• What actions are
necessary to
address talent gaps?
• Who “owns” what
actions?
55
Execute talentExecute talent
plans &plans &
measuremeasure
impactimpact
• What actions are
necessary to
implement plan?
• Are we getting the
results wanted? If
not, why?
5 STEP
EVALUATION
PROCESS

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FAMILY FIRST VS BUSINESS FIRSTFAMILY FIRST VS BUSINESS FIRST
KEY ISSUE FAMILY FIRST BUSINESS FIRST
FAMILY
EMPLOYMENT
Open-Door Policy for all family
members; qualifications less stringent
for family members
Qualification-Based Employment, as for any
other new hire
COMPENSATION Equal pay for all, regardless of their
experience or performance
Merit-Based pay, based on experience,
performance
LEADERSHIP Leadership based on Seniority in
Family—assuming basic qualifications
are met
Leadership granted to the right person
(family or non-family), based on merit and
qualifications
RESOURCE
ALLOCATION
Business Resources used for personal
needs (e.g., loans, grants)
Business resources only used for business
purposes – separate family reserve fund
utilized for family needs
DECISION-
MAKING
Unilateral & Concentrated with Senior
Family Member (e.g., Chairman/CEO)
Multi-lateral, based on Defined Governance
Structure (e.g., Executive Committee)

16. 16
BUILD CONSENSUS ON FOUNDATIONAL ISSUESBUILD CONSENSUS ON FOUNDATIONAL ISSUES
• Principles for best short- and long-term
outcome for the business, the family and
other stakeholders.
• Prospects for the business, its viability in the
market; its capital needs.
• The role of the family in company ownership
and management, including personal and
business goals of the next generation.
• Whether to bring in non-family professional
management.
• How to grow the company while serving
family interests

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STEPS TO FORMAL SUCCESSION PLANSTEPS TO FORMAL SUCCESSION PLAN
1. Start Early
• To ensure continuity of business, plan to identify next CEO should begin as soon as
CEO is appointed.
2. Career Development Processes
• Consider strategic direction of company and what executive skills will be needed
• Create development systems to help family and non-family executives fill skills gaps.
3. Seek Advice
• Get objective advice from independent directors or non-family executives.

18. 18
STEPS TO FORMAL SUCCESSION PLANSTEPS TO FORMAL SUCCESSION PLAN
4. Build Consensus
• Involve key stakeholders in the selection process.
5. Clarify the transition process
• Develop a transition plan between the current CEO and the successor, including level
of involvement of current CEO after retirement.

19. 19
BENEFIT FROM OBJECTIVE ADVICEBENEFIT FROM OBJECTIVE ADVICE
• Identify and address tensions between
family-based values and the
performance culture that a business
needs to survive in today’s competitive
environment.
• Balance long-term and short-term
financial and family interests.
Issues on which family businesses often seek advice from outside experts:
• Get beyond the personalities and
family dynamics that can impede
successful decision-making.
• Ensure that shareholder agreements,
by-laws and other structures do not
prevent the company from raising
money, selling shares and otherwise
conducting itself in the market as a
non-family company would.
• Get expert tax, legal and estate
planning advice.

20. 20
IV. SENIOR MANAGEMENT – KEY STEPSIV. SENIOR MANAGEMENT – KEY STEPS
• Formalize a strong senior management
team, composed of family and non-
family members.
• To manage day-to-day operations of
the business and the direction that is
set out by the board of directors.
• Consider establishing Executive
Committee.
• Remuneration based on performance
(subject to “family” versus “business”
values).
• Performance evaluations conducted
fairly and objectively.

21. 21
SENIOR MANAGEMENT SUCCESSION PLAN
• This is most important issue for family-
owned business.
• Succession problems are the main reason
family businesses fail to reach the third
generation.
• Formal succession plan should allow
selection of clearly competent person
(whether it is a family member or not).
• Family members, the board, key senior
managers, and other stakeholders must be
involved.

22. 22
IDENTIFY AND PREPARE SUCCESSORSIDENTIFY AND PREPARE SUCCESSORS
• Determine policy regarding
whether successor will be
from family.
• Evaluate readiness and capabilities
of candidates among family, non-
family (depending on policy)
owners and managers of the
company.
• Define ongoing role in the
business of the retiring owner,
if any.
• Identify active and non-active roles
of family members going forward.
• Identify support for the successor
that is expected from family
members.
• Help prepare the next generation
for leadership roles.
• Provide counsel and support to
successors.

23. 23
• The Board of Directors is central to governance of
family-owned business.
• Initial role: comply with legal requirements and
agreements.
• Role becomes more complex as the business grows.
(As interim step, many family companies add an
Advisory Board to complement skills of current
directors). Ultimately, the Board must mature to be a
platform for long-term sustainability. For example:
 Include outside, independent members.
 Delineate roles of the Board and role/responsibilities
of family and senior management.
 Ensure Board has ultimate authority to direct and
control the organization, separate from family
influence.
V. BOARD OF DIRECTORS – KEY STEPSV. BOARD OF DIRECTORS – KEY STEPS

24. 24
INDEPENDENT DIRECTORSINDEPENDENT DIRECTORS
• Normally, a board consists initially of family
members and a few trusted non-family
members.
• Independent directors:
 Bring outside perspective on strategy and
control.
 Add new skills and market knowledge to the
firm.
 Help to approve important hires.
 Bring objectivity to resolving disagreements
in the among family-member managers.
 Can use their connections to the advantage of
the business.

25. 25
VI. FUNDING YOUR EXIT – EXTERNAL SALEVI. FUNDING YOUR EXIT – EXTERNAL SALE
• Senior Debt – generally term debt with
a low rate of interest available from
banks and often secured by company
assets or company cash flow. (5-10%)
• Mezzanine – available as subordinated
debt (behind in priority to senior debt
but above equity) from lenders or PE
firms, often with a warrant or other
equity kicker. ( 10-16%)
Today, companies have a range of different types of
capital available to create liquidity to buy out retiring
owners:
• Equity – Often issued in the form of
stock together with options. If new
investor is PE firm or strategic buyer,
will usually want control of the
company.
• Subordinated Debt Restructurings –
gaining importance as way to get
capital and maintain control of the
company as long as cash flow covers
interest and any payment of principal.

26. 26
TRANSFER OBJECTIVES
Objective 1 business
owner’s objective to retain
control of the business for some
period of time – just in case!
Objective 2 lower the
gift/estate tax value due to
valuation discounts for lack of
control and marketability.
Objective 3 assure a
smooth transition of the business
and consider non-participating
family members.
Objective 4 avoid and
shift as much tax as possible.
Objective 5 create
retirement income.

27. 27
FORM OF SALE – FAMILY MEMBERS
Installment Sales - An installment sale is an excellent way to provide a
steady stream of cash flow (and retirement income) to the business owner
while transitioning ownership of the business to the active children.
The installment sale must bear interest at not less than the applicable
federal rate published monthly by the IRS. (Caution - bargain sale rules).
Private Annuities - With a private annuity, the business owner
(the annuitant) sells the business interest to the active children
(the purchasers) for an unsecured promise to make periodic payments to
the annuitant for the remainder of the annuitant’s life.
Family ESOP – essentially an installment sale but to a family Employee
Stock Ownership Plan.

28. 28
VII. LEGAL AGREEMENTS & DOCUMENTATIONVII. LEGAL AGREEMENTS & DOCUMENTATION
• Review current buy sell agreement
as to whether it achieves the goals
of all owners and future
management.
• Assess full range of potential
transaction options such as sale to
a third party, debt-financed sale to
next generation owner, capital
structure alternatives such as
preferred/common stock
restructuring.
• Identify a team of professional
advisors (attorney, CPA, bankers,
financial advisors).
• Document the succession plan
(including emergency plans) in
writing.
• Communicate the succession plan to
family and stakeholders.
• Establish a timeline for
implementation of the succession
plan.
• Always consider tax implications –
Estate, Gift and Income and liquidity
needs to pay taxes.

29. 29
INCOME TAX CONSIDERATIONSINCOME TAX CONSIDERATIONS
• Transfer of business interests between family
members –(IRC 2701-2704). Business interests
transferred between family members must be FMV
and conditions should be arm’s length.
• Corporation redeems its stock and the withdrawing
shareholder remains with the corporation as a
director, officer or employee, the purchase price is
treated as a dividend rather than a capital gain.
(302,303 and 318).
• This means the entire purchase price will be subject
to tax, rather than the amount in excess of basis.

30. 30
TRANSFER TAX CONSIDERATIONS
Annual Exclusion Gifts - Gifts of business interests up to $14,000 ($28,000 for
married couples) in 2015 can be made annually to as many donees as the
business owner desires.
Gift Tax Exemption - $14,000 gift tax annual exclusion ($28,000 for a married
couple), indexed for inflation, the business owner can gift $5.43 million unified
credit (dollar for dollar) the estate tax exemption at death - such gifts remove the
income and future appreciation on the gifted property from the business owner’s
estate.
Family limited liability company (FLLC) - LLC that only includes family members.
It can be a valuable tool to transfer a business or business real estate to children
at a discount from the value of the underlying assets owned by the FLLC – Single
member manager or collective management?

31. 31
BUY/SELL AGREEMENTS – YOU NEED ONE NOW!BUY/SELL AGREEMENTS – YOU NEED ONE NOW!
A Buy-Sell Agreement is an agreement
among business owners to:
• Provide a mechanism to limit who can become a new
co-owner.
• Define approach to creating a market for the sale or
transfer of ownership interests.
• Specify the mechanism for determining a purchase
price and how purchase price will be paid. (Warning:
beware of book value-based formulas.)
• Provides funding for purchase of a deceased owner’s
interest.
 Owners typically required to purchase life
insurance on each other.
 In some situations, remaining owners may pay
over a period of time on an installment basis.

32. 32
SHAREHOLDER WILLS AND TRUSTS – CRITICAL!SHAREHOLDER WILLS AND TRUSTS – CRITICAL!
• Create Revocable Trust to hold stock –
avoids delays on ownership transfers
and reduces costs.
• Consider gifting of stock to transfer
ownership under the Uniform Gift and
Estate exemption.
• Have clear provisions as to whom the
stock will pass to upon death – family
management versus heirs.
• Consider the spousal effect of the
ownership passing to offspring in
case of death, divorce.
• Establish equalization provisions to
reflect rising stock values passing
to selected beneficiaries.
• Avoids probate and time delays
upon death, both first and second.
• You will have done your family a
great disservice without making
your clear intentions known – and
why.

33. 33
VIII. CONCLUSIONS & FURTHER DISCUSSIONVIII. CONCLUSIONS & FURTHER DISCUSSION
• A sound governance structure—
between Board, owners and senior
management--can mitigate many
challenges of family businesses
and provide the right foundation
for succession planning.
• Governance structure must clearly
define the roles, responsibilities,
rights and interaction between the
company’s main governing bodies.
• A clear governance structure will
make it easier to maintain family
cohesion and attract capable
non-family employees, to help
provide long-term sustainability.
• A fair buy/sell arrangement and
well designed wills and trusts for
owners will avoid disputes on
death and retirement.

34. 34
SUMMARY TAKEAWAYSSUMMARY TAKEAWAYS
• Every business has succession issues
– create a succession plan now.
• Establish buy/sell agreements that
reflect the true value of the business.
• Consider multiple classes of
ownership of your business
(common/preferred).
• Draft wills and revocable trusts.
• Begin gifting program to utilize tax
credits.
• Review company structure to make
sure to avoid double layers of tax.

35. 35
QUESTIONSQUESTIONS
Michael Evans
(415) 990-1844
michael.evans@newportboardgroup.com
Caleb White
(860) 805-0046
caleb.white@newportboardgroup.com
Contact Information:

36. 36
ABOUT NEWPORT BOARD GROUPABOUT NEWPORT BOARD GROUP
Newport Board Group is a national professional
services firm of partners who are highly
experienced CEOs and operating leaders. They
are experts in helping middle market companies
navigate the challenges of No Man's Land. They
have led businesses, driven major initiatives,
worn many operating hats and experienced
many significant M&A and capital transactions.
All have deep experience building growth
companies and helping them through
transitions. NewportBoardGroup.com