Succession Planning: 6 Key Questions You Must Answer!

THANKS TO CZEPIAGA DALY POPE & PERRI, LLC, author of this article. (written, March 22, 2019) 

*I came across this article last year and I thought I would pass it forward.  I thought it was written very well and had a great message to it.  Should you have any questions, give me a call.  Thank you Czepiga, Daly, Pope and Perri.  

Building and growing an independent family business is an accomplishment to be proud of. It takes an enormous amount of passion, ingenuity, and downright grit. Preserving and protecting your business also requires some effort, but it’s a task many business owners overlook or put off. 

Business succession planning, like any kind of estate planning, is something that should be addressed with the help of a professional well in advance of the actual event. Unfortunately, the majority of family business owners are missing that window of opportunity. According to a 2016 survey from Price Waterhouse Coopers, while 69% of family businesses surveyed expected the next generation to take over the business, only 23% had invested in creating a robust and well-documented business succession plan. 

It’s not difficult to understand how business owners find themselves without a succession plan. It’s a complex and time-consuming process that involves addressing hard realities and tough questions. But, it’s also a task that’s well worth the investment of time and money in the long run. 

If you own a family business and have not yet developed a thorough business succession plan, you may want to consider the following list of questions. These cover just some of the issues a good plan would address. It’s really never too early to start thinking about what’s next for your business, and these questions will put you on the right path. 

Who will take over when you’re gone? 

  • Whether you’re taking the precaution of planning in case of unexpected tragedy or simply doing due diligence in advance of a planned retirement, one of the biggest questions you need to answer is who will take the reins when you’re no longer in charge. 
  • If you were to become incapacitated or die unexpectedly, is there someone ready to step in to run the business? 
  • In such a situation, would your family or other business stakeholders have fast access to funds that would allow them to hire any necessary resources to keep the business going? 
  • Is your family protected against financial risk if you should pass unexpectedly? 
  • Do you have a detailed management succession plan that clearly defines who will take over which roles? 
  • If you face a temporary disability, do you have a business Power of Attorney in place to manage financial affairs related to the business? 

How much control would you like to retain?  Continue reading “Succession Planning: 6 Key Questions You Must Answer!”

A Great Benefit Every Business Owner Should Be Aware Of! 

Over the years in the small business arena, when retirement is mentioned, the discussion usually focuses on programs like 401k, Profit sharing, SEP’S, and Simple Plans.   

 They are all very good plans and every business should offer one of them to their employees for the purpose of having a benefit plan where employees can save for their retirements.   

 However, not every employer wants to take on the burden of funding retirement for their employees for many reasons.  The reasons range from a lack of cash flow, employee groups who would rather take the money home.   

 In situations where the employer feels they would like to use their company to create a benefit for themselves, and not the employees, they should look into an executive compensation plan called the CEEP (Corporate Executive Equity Plan).  The CEEP is a hybrid of a few types of benefit plans used for the higher paid group in companies and for the owners.   

 The term “non-qualified “, refers to a plan that normally is not used for the masses, but used for a selected group of people.  As an example:  Employer A can decide that they want to put a plan in for employee B, C but not employees D-Z.  In most cases the plan itself would not be tax-deductible as a “plan”, however, it can be tax deductible under certain conditions. 

How the CEEP works!  

Mr. Jones owner of the Big Dip Donut shop decides that he wants to allocate $25,000 a year into a retirement plan for himself and no other employees of the company.  For the most part, he can’t have a qualified retirement plan without offering it to the employees.  Even a “Simple Plan”, which is the easiest to implement would have drawbacks.    Continue reading “A Great Benefit Every Business Owner Should Be Aware Of! “

Case Study#5 Using Corporate Dollars To Keep Wealth Out Of The Business But In Your Pocket

This is the case of Joey Bag of Donuts and his pursuit of keeping wealth outside of his business.  You see, over the years working with Joey Bag of Donuts we told him that leaving too much of his wealth in the business can be problematic, especially when the time came when he needed to exit his business.  He heard me tell him many times, that someday he will leave his business by either a death, disability, or retirement, and taking the wealth with you when you need it the most, can be a problem, if you don’t have the right exit strategy.

There are many reasons wealth gets lost in a business when it is sold.  It can range from bad planning to bad luck, but Joey Bag of Donuts always remembered to keep as much of his personal wealth outside of the business as possible.  By the way this is why he purchased his company building and put it in a separate LLC.  Joey Bag of Donuts also believes in putting as much of his income to the company pension plan, again, outside of the business.

We also taught him to have his company support whatever it can legally towards his personal lifestyle.  For example, his cars, gas, some entertainment, health insurance, retirement, and other things are paid for through company.

Joey Bag of Donuts wanted to put more money away for himself and his family’s future, but didn’t want to use his own funds, so why not have the company support more retirement contributions?

We already had a profit-sharing plan, and he was sharing company contributions with his employees.

We decided that a non-regulated plan was the best way to go, so we developed a plan for only him.  The plan is a combination of two concepts.  We call this the CEEP PLAN (CORPORATE EXECUTIVE EQUITY PLAN).

The plan is a discriminatory plan, so Joey Bag of Donuts can pick himself or anyone else he wants, unlike a profit sharing or 401k plan, which is a regulated plan.

THE PLAN:  As you can see, the company made all the contributions, and took the deductions for them.  Joey Bag of Donuts was the sole participant of the plan. His cost was “0” out of pocket and he ends up with almost $800,000 of cash at retirement.  He also could turn the cash into a tax-free income stream.  In this case it was $67,500 tax-free income. The stream of income is worth more than $1,215,000.  Along with that he has a death benefit of $2,300,000 payable to his family tax-free.

THE BOTTOM LINE:  Joey Bag of Donuts gets retirement income using corporate funds.  All the contributions can be applied to just his account.  He also has the use of the account before retirement, like a  “family bank”, along with the ability to withdraw funds tax-free.[1]  There would be no 10% penalty if withdrawn before 59 ½.  Continue reading “Case Study#5 Using Corporate Dollars To Keep Wealth Out Of The Business But In Your Pocket”

THE SECRETS OF BUILDING A GREAT ORGANIZATION

I recently read a book called,” The Secrets Of Building A Great Organization”, by Bruce Clinton owner of BusinessWise, L.L.C., a business consulting and coaching firm based in Connecticut.

I found the book to be very interesting because, not only does it provide a road map of management for newer managers, but it re-educates older experienced managers in the most up to date strategies.

Bruce is the first person to mention that there are no magic formulas in being a good manager, however, with the basic strategies that he covers, a good manager, through their own talents, can become a great manager using the strategies Bruce discusses.

Many of the strategies are ones that Bruce uses in his practice as a business coach, and strategies developed while he ran different businesses.

For anyone who is a business owner or running a business, I would suggest this read.  In the book it is mentioned that most business owners don’t consider themselves good managers or they feel they don’t know enough about managing.

Any business owner who does $1-$150 million in annual sales, has 8-200 employees, is family owned and may be facing growth or succession issues, should read this book.

What I really enjoyed about the book is the small details that Bruce covers which are needed to build a successful business.  These are details which are not normally discussed in detail.  The book covers the importance of them.  These are the small details that make all the difference in the world of a business’ success, and Bruce covers them extremely well.  For example:

  • Overcoming communication breakdowns
  • Dealing with levels of incompetence
  • Fitting family members into the business
  • Retaining good employees
  • Building a workable succession plan

Continue reading “THE SECRETS OF BUILDING A GREAT ORGANIZATION”

Why Use Non-Compete Agreements!

Non-compete agreements (NCA) represent a separate agreement. They could be in an employment contract, or as a separate article in a buy and sell agreement. Sometimes they are referred to as Covenants not to complete. “

This is based on the possibility that an employee can do harm to a company upon termination.  They could know sensitive information about the company’s operation, owners and employee’s personal information, special operations, and proprietary information to a competing advantage, along with so much more.

Picture a very long-term employee working side by side with the owners, for many years, and then leaving to work for the owner’s competitor.  Certainly, there can be issues.

No compete agreements (NCA), can be used to retain employees also.   It would be very difficult to change jobs within an industry or profession when the leaving employee is limited to compete in a geographic and specific industry for a period of time.  However, non-compete agreements are hard to enforce, because in many instances the agreement has overreached and is very broad in the definition of industry and geographic coverage.

Continue reading “Why Use Non-Compete Agreements!”

What Status Is The Stock After A Triggering Event?

Chris Mercer author of “Buy-Sell Agreements for Baby Boomers Business Owners” addresses a very good question.  Who owns the stock after the trigger event?  After a trigger event, does the affected shareholders retain the rights, risks and privileges of the ownership, things like, voting, distribution, access to financial information, etc., or are their shares converted to another status, such as (example), the “pending sales of stock” status?

If the shares are converted into the new class or status, do they have the right to receive dividends, or interest while in that pending status, if so, who should be receiving it?

The agreement can also have a clause where the stock that is waiting to be purchased would convert to a “non-voting “status prior to being purchased.

There are many times a stockholder has signed personally for a corporate debt.  The stockholder may desire to have the remaining stockholders make an effort to get the departing stockholder off the note, as they have ceased to be a stockholder.

The questions that Chris puts forth are legitimate issues and should be dealt with when business owners and their council set out to design a buy and sell agreement for the company.

Thank you, Chris Mercer, for bringing these topics to the forefront.

Over the years, many of the buy and sell agreements which I have reviewed over the years, do not address or mention these particular situations, and could create a void should the situation arise.

Check Chris Mercers publications.  He puts out very good information that is useful to practitioners.

Alternatives To Buy And Sell Agreements – Different Documents To Put Buy Sell Agreement Language In!

  1. Governance documents– Articles of incorporation, partnership, organization, bylaws or operating agreements frequently have Buy And Sell Provisions (BSP). Is critical that you change your agreement within these documents should you update to a formal BSA, so the language is consistent.
  2. Compensation based plans: Such as consulting agreements and salary continuation plans.
  3. Entity recapitalization: It is possible to recapitalize the ownership interests of the entity which could create differences and ownership interests.
  4. Gifts of ownership interest: this could change the ownership and voting rights.
  5. Charitable gift of ownership interest. Same as #5.
  6. Private annuities: You could transfer ownership of your interest to someone else in exchange for a promise to make payments for you for the rest of your life
  7. ESOP’s: EMPLOYER STOCK OPTION PLANS.
  8. Non-qualified deferred compensation plans.
  9. Qualifying for section 6166 deferral.
  10. Division of an entity.
  11. Confidentiality and non-competition agreements; In conjunction with a buy and sell buyout , the former owner could be paid to not compete with the entity and to keep secret all confidential trade secrets, customer lists, and other private proprietary information of the entity.
  12. Installment sales: The owner simply wishes to retire and sells the stock in exchange for promissory note that is payable overtime.
  13. Sale to outsiders.
  14. Public offering.
  15. New generation opening a similar type of business: This is where senior generation winds down and a new generation may open a similar business preferable to allow younger generations to open a new look but similar to the identical business of the old. The dying on the vine concept.

*A good read would be “Buy and Sell Agreements (US Legal Series); Paul L. Hood Jr.  Also, I have included a link to article from Ed Partesi, ASA,CM&AA of UHY Advisors “Covering the bases:  “The Need for Effective Buy -Sell Agreements”. Effective Buy and Sell Agreement!

Lastly,  a very good book to read about the future of the selling your business,  “Your Exit Map”   by  John Dini;  This gives you a great insight as to the next generation of buyers and the market place for selling your business.