More Related Content
What's hot
What's hot (20)
Viewers also liked
Viewers also liked (9)
Similar to Five_Reasons_Family_Business_Successions_Fail_051216_final
Similar to Five_Reasons_Family_Business_Successions_Fail_051216_final (20)
Five_Reasons_Family_Business_Successions_Fail_051216_final
- 1. Five Reasons Family Business Succession Plans Fail
- 2. 2 A Few Facts • It is estimated that… –8 to 10 trillion dollars are going to pass from one generation of ownership to another over the next 14 years. –99% of businesses are small and privately held with less than 500 employees. –95% of businesses have 20 or less employees
- 3. 3 A Few Facts • It is estimated that… –Family Firm Institute and statistics 88% of Family Business owners’ belief… new generation of owners Actual statistics of survival rates…
- 5. 5 Why Businesses Fail… – 32.1% Poor management of financial activities – 14.6% Lack of management competence or experience – 12.4% Inflation and economic conditions – 12.3% Poor books and records – 10.7% Sales and Marketing problems – 6.2% Union problems – 9.0% Staffing problems – 2.7% Failure to use external advice • Many times the above reasons are caused by the successor owners not understanding how to run the business • Notice, only 18.6% of failures are outside of the owner’s control!
- 6. 6 Understand Value How a seller sees the value How a buyer sees the value
- 7. 7 Today’s presentation topics Waiting too long to planWaiting too long to plan Not dealing with family issuesNot dealing with family issues Skills Evaluation and Choice for SuccessorSkills Evaluation and Choice for Successor Financial TrapsFinancial Traps
- 8. 8 Financial Traps What are common Traps? 1) Inadequate price and terms for founder to sell the company and transition into retirement 2) Wherewithal to pay of successor(s) 3) Satisfying Lender requirements in the succession How to resolve these issues?
- 9. 9 Financial Traps 1) Inadequate price and terms for founder to sell the company and transition into retirement One critical step to determine the founder’s post-retirement needs: Prepare Financial Analysis of founder’s post-retirement financial plan… – and a “Buckets” analysis
- 10. 10 ___% ___% ___% Objective: •Safety net-guaranteed income for life •Flexibility to increase income stream •Maintain capital for future charitable giving Return Objective: Balanced Risk Objective: Average Objective: •Investment funds: • “Mad money” for investments Return Objective: High Risk Objective: High Objective: •Keep portion of legacy holding Return Objective: High Risk Objective: Very High Financial Traps- Post-Retirement Buckets
- 11. 11 Financial Traps 2) Wherewithal to pay - successor(s) a) Small Business Administration (SBA) loan funding b) Alternative plans- negotiated annuity to seller with buy-sell agreement ** disability or death of seller 1) Insurability of seller 2) Note payable to seller or seller’s estate 3) Satisfying Lender’s requirements in the succession a) Collateral on lending relationships, how to transfer? b) Personal Guarantees on company loans and transition time c) Provide Lender confidence in new management, ownership
- 12. 12 Waiting too long to plan Issues - Liquidity needs of family upon founder’s death, estate taxes Wealth loss upon disability or death of founder Leadership crisis due to health problems Examples- 1) Printing company founder was not able to agree with successors on price and terms of sale / succession. 2)Professional accounting office founder - no succession plan. 3)Manufacturer / distributor founder with chronic illness - business closed
- 13. 13 Prepare for Transition What does the owner want to achieve from their succession and exit? What is the personal situation and what are the necessary planning initiatives? What is the current business situation and how does it reach its potential? What is the best method to transition the business and meet the owner objectives? Transitional Objectives 1 Personal Initiatives Personal Review 2 Business Review Business Strategy 3 Consider Best Way to Exit 4 Plan solution - The Transition Planning Process What needs to happen to optimize business value for the owner? Strategy for Transition 5
- 14. 14 Not dealing with family issues As with many family situations: – Siblings have strengths and weaknesses as well as a history of healthy collaborative relationships and –There are relationships that are strained or have rivalries. How does the founder, the family, and successors manage and resolve issues in relation to the succession of the business? Succession planning is a delicate process. In reality, family, business and ownership are equally important. Some owners consider using the “do-it-yourself” approach, and find trouble.
- 15. 15 Integrating the needs of the business, its owner and the family… • The succession plan integrates the needs of these often conflicting groups Family Business Exiting Owner Health, prosperity, wealth management, participation, community involvement, communication, education, family values, legacy, philanthropy, etc. Daily operations, finance, reporting, strategic planning, employee relations, customer and supplier relations, cash flow, competition, etc. Leadership, shareholder value, liquidity, succession, profitability, etc.
- 16. 16 Skills evaluation & choice of Successor(s)- four phase approach… Phase Three: Develop a Professional Development Plan, job description, scorecard and compensation program Phase Two: Assess the candidates for succession and identify the successor Phase One: Assess the existing environment and team Phase Four: Implement the Professional Development Plan, develop the team, measure and adjust as necessary Phase One Phase Two Phase Four Phase Three
- 17. 17 Skills evaluation & choice for Successor(s) • Identify Successor(s) –Family Member(s) – predetermined? –Employee(s) – predetermined? –Other • Understand Successor(s) –Interview Process – Understand how successors are wired –Current Role(s) –Current Knowledge and Skills
- 18. 18 Typical evaluation criteria… • Experience • Skills • Leadership Ability • Team Integration • Fit with Owner Objectives • Timeframe for Succession • Financial Ability for Ownership
- 19. 19 Evaluation Criteria - Samples • Timeframe for Succession – Using Stoplight Chart –High: succession in under 2 years –Medium: succession in 2 to 3 years –Low: succession in over 3 years
- 20. 20 Evaluation – using a stoplight chart… Score for each Candidate Criteria 1 2 3 4 5 Experience Skill Level Leadership Abilities Team Integration Fit with Owner Objectives Financial Ability for Ownership Timeframe for Succession
- 21. 21 An optimal outcome is the preferred successor… • The chart helps to identify the successor and/or the potential areas of challenge for the predetermined successor • The next step is to document the new way forward in terms of development and training that is required to prepare the successor for the role of owner • This is what we define as the Professional Development Plan
- 22. 22 Why you need to do this… • To enhance business success • To guide the succession transition • To bring the team together • To allow consistent decision making • To create shareholder value • To secure retirement plan
- 23. 23 Summary of today’s topics Waiting too long to planWaiting too long to plan Not dealing with family issuesNot dealing with family issues Skills Evaluation and Choice for SuccessorSkills Evaluation and Choice for Successor Financial TrapsFinancial Traps
- 24. 24 Helpful Resources • Finishing Big… Bo Burlingham, author of Small Giants • Family Firm Institute website http://www.ffi.org • Small Business Administration website http://www.sba.gov
- 25. 25 Questions and Answers Additional Questions? Scott Wait, CPA, AEP Richard E. Wait, CPA, CVA, AEP RS Wait, Chtd. RS Wait, Chtd. 775-825-7337 775-825-7337 scott@rswait.com rich@rswait.com
Editor's Notes
- Transactions that are published in the news, in industry publications are often the larger companies. We know from the previous slide that these companies command higher multiples than the smaller companies. This often leads to a disconnect in value perception between the buyer and the seller. With this in mind, I’d like to talk a little bit more about the importance of valuation in the transition process.
- Brief intro to process – These are the necessary steps to a successful transition
- Succession planning is a delicate process that must balance sometimes very disparate needs. Some business owners put the family system ahead of the business. Some put the business ahead of all else. In reality, family, business and ownership systems are equally important to the long-term success of the family business. None should be neglected. All should be granted equal respect and consideration. Often, owners consider using the “do-it-yourself” approach, and quickly find that coordinating all of the needs, advisors and information is much too complicated without expert assistance. Because the emotional component can take a toll on the relationships of the stakeholders, our role is to be a professional facilitator to help gather candid information, build a shared understanding of the differing viewpoints, and arrive at equitable compromises. It is very difficult for someone “inside” the business to accomplish these tasks effectively.
- Explain the phases.
- The following are typical criteria that businesses use in assessing their strategic options. You must decide what is important to you in making a decision on where your business is going. This list is something to select from. It is not mandatory and it can be edited or added to meet your specific needs.
- Once we have established this criteria, we can then use the following stoplight chart to rate each strategic option against the criteria. The stoplight chart allows you to compare options visually and objectively with a group of key decision makers.
- The outcome of this exercise is the preferred option. Once this option has been identified, we can now start on fleshing it out into a business model. Make sure client understand what a business model is. It is the heart of strategy.
- Pathfinding is critical to every business. It will give your business direction. It will bring your team together. It will help guide management decisions. It will allow consistent decision making. It will create shareholder value.
- GREAT SOURCES OF INFORMATION
- But first . . . we’ve covered a lot here today and I’m sure you have questions…we’d like to open it up now to spend some talking discussing any specific items on your mind…