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					Succession Planning
Family Business Leadership for the Next Generation




                                                  Gary Elekes – EPC Inc.
                                                  Gary@buckeyeheat.com
                                                  615-579-7995
                                                  www.eplresidential.com
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Succession Planning
Agenda
1.   Ownership Objectives
2.   Family Preparations
3.   Preparing Your Business
4.   Developing Successors
5.   Whom to Choose?
6.   Transferring Control of the Business
7.   Taking Charge
8.   Letting GO
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9.   Estate Planning, Taxes
 Succession Planning Objectives


A. Clarify your objectives before you begin
B. Choosing the right ownership structure
C. Promotion stewardship
D. Twelve steps in planning succession
E. Getting help from the board of directors
F. Are you ready to transfer control?




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 Succession Planning Objectives

A. Clarify your objectives before you begin
      Efficiently & Fairly Distribute Assets to Younger Generations
      Pass Control of the Business
      Maintain & Promote Family Harmony




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 Succession Planning Objectives
Strategic Points – Major Mistakes Made
   Keep it SIMPLE
   Plan when you are COMMITTED!
   Be sure to INVOLVE the successors in the planning
   Keep planning group small – 4-6 people
   CEO or Main Leader MAY NOT run the sessions – HUGE ERROR
   Do not worry about perfection – write a good plan
   Consider breaking sessions over months
   Set-up a plan
      Set up follow-up 1 year out
      Set-up procedures to monitor
      Action plans for progress

     23% of owners have NO Plan on a successor
     25% have poor understanding about Estate Taxes
     69% of family businesses lack a plan in writing
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 Succession Planning Objectives

B. Choosing the right ownership structure

1. Controlling Owners (proprietor/stockholders)
2. Sibling partnerships
3. Cousin consortium




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 Succession Planning Objectives

C. Promotion stewardship
   View yourself as a steward not a proprietorship
   Safeguard the Trust
   Develop a family participation plan
   Successor Development Plan
   Shareholders Agreement
   Business Continuity Plan




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 Succession Planning Objectives

D. Twelve steps in planning succession

1.  Decide if the family will continue ownership
2.  Assess whether a family can actually hold-up under the process of continuity planning
3.  The owner must actively commit to getting the next generation involved in
    continuity planning
4. Consult and actively engage other stakeholders in plan
    (Stockholders/family/managers)
5. Create a consensus forum (Family council/Board/Task force on Succession)
6. Develop a business vision – and clearly define the roles of family in writing
7. Choose a successor and define a training plan for them
8. Help the successor build authority in the family (power vs. authority)
9. Design an estate plan with family & attorneys – not just attorneys
10. Be sure the family understands their roles in the succession
11. Inform key suppliers and vendors about succession plan
12. Have a crisis plan – just in case of the unthinkable untimley happens


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 Succession Planning Objectives


E. Getting help from the board of directors
   The board as insurance policy
   Board can aid in raising timely succession planning
   Board can help examine options
   Perspectives on Succession
   Setting up Succession
   Preparing & Assisting a Successor




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 Succession Planning Objectives

F. Are You Ready to Transfer Control?
   Do you have a valuation method?
   Do you have formal criteria for employing family members?
   Is there a training program for preparing new family members?
   Is there a mentoring program for any successor(s)
   Do employee family members receive professional performance reviews?
   Have you identified next generation leaders?
   Have the next generation family members articulated their vision/values statement?
   Have existing shareholders determined/articulated their expectations for ROI
    and business performance objectives?
   Have any key managers or non-family execs been
     given incentives for developing family members?
   Is there a dispute resolution plan to help any family members work out their
    Potential disagreements about management issues?



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 Preparing the Family



A. Exposing the emotional issues
B. Family councils: the key to communication
C. How to handle the relatives
D. Split the business to unify the family




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 Preparing the Family



A. Exposing the emotional issues (Psychology)
   Discuss the stages of life
   Hidden feelings among family members – process?
   Masked expectations of successors
   Unresolved differences among family-siblings




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 Preparing the Family


B. Family councils: the key to communication
   Establish a forum
   Not a democracy – family vs. dad – VETO Power
   Who are the members?
   Retreats – business development
   Professionals as mediators
   Possible family creed – in writing – to facilitate planning
   As new family may come into the company – amend the creed
   Invite independent skills – board/accountants/to speak




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 Preparing the Family


C. How to handle the relatives
   Exit/Voice/Loyalty – Alfred Hirschman
   Aspirations of family – kids
   Shareholder liquidity to allow exits
   Those in Power must empowered others – control
   Consensus in family on goals – growth, profits, vision
   Define the appropriate levels of participation for family
   Create a forum of participation - family council?




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 Preparing the Family




D. Split the business to unify the family
   Occasionally siblings or successors cannot work together
   Split into divisions for each successor – corporate split off (tax free)




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 Preparing the Business



A. Preserving company values
B. Support for senior managers
C. How to avoid losing executives
D. Help for employees, supplies, customers
E. From second to third generation




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 Preparing the Business




A. Preserving company values
      Family vision/mission/purpose
      Family Planning Forums
      Bring in youth/successors/allow a voice




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 Preparing the Business



B. Support for senior managers
   Key Managers may have long ties with owner – value
   Involve any key managers in succession discussions
   The operating plan of a company involves the key managers
   Financial incentives/or other for developing talent




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 Preparing the Business



C. How to avoid losing executives
   The “Squeeze” – a new family employee is in – someone is out
   Young Turks battling the old guard
   Develop an orderly succession of power – defined




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 Preparing the Business

D. Help from employees, suppliers, customers
   Managing a successful departure
   A company policy statement for guidance and control
       Vision/Values
       Opportunity
       Performance & Rewards
       Teamwork
       How supervision should perform
       Growth
       Company Planning Process – objectives
       Products
       Quality and reliability
       Accounting Practices
       Contributions
       Dividends and Valuation Policy




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 Preparing the Business

E. From second to third generation
   History sows the seeds of success or failure
   2nd Gen family starts well – suffers late
        Immediate family is focused and provides lower cost efforts for promise
        Spouses eventually become involved
        Conflicts may arise
        Greed/agendas/differing interests arise
   3rd Gen - More members may like to work?
   Promoting and hiring people on merit
   Develop a business first culture – ownership is separated from management




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 Developing Successors


A. Sparking interest in younger children
B. Raising a daughter as the next CEO
C. Mentoring the next generation
D. Parenting versus mentoring
E. The non-family mentor’s guide
F. Infusing successors with core values
G. Meeting customers and suppliers




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 Developing Successors

A. Sparking interest in younger children
      Expose them to rewards and satisfaction early
      Over worked and stressed parents make bad models for kids
      Expose your children to real work with real standards
      Set tough rules and high standards but not unfair
      Pay them market wage – not high or low
      Start early not late – most are notoriously late
      There is no entitlement to ownership




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 Developing Successors

B. Raising a daughter as the next CEO
   Education, mentors
   Loved, message of accomplishment, risks, creative aggression, dream
   Women may make decisions based on impact to others first, then themselves
    Males based on goals and preferences
   Support her talents
   Reinforce real accomplishments
   Allow her to take risks based on her skills
   Define goals with her – make them hers
   Create equal time for the daughter at dinner
   Make sure she dreams
   Her empathy and style of management are valued




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 Developing Successors



C. Mentoring the next generation
   Establish the values for the sibling and mentor
   Expose them to more than one mentor
   Facilitate the mentor process – endorse it




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 Developing Successors


D. Parenting versus mentoring
   Young people needs parents
   Young leaders need mentors
   Effective succession requires finding transition




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 Developing Successors

E. The non-family mentor’s guide
   You need a plan to create a mentor – mentors
      Career strategy advisor
      Individual counselor
      Sponsor or mediator
      Monitor
      Role Model
      Organizational analyst
      Liason




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 Developing Successors



F. Infusing successors with core values
   Establish them
   Discuss them
   Debrief with them about value challenges when appropriate




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 Developing Successors



G. Meeting customers and suppliers
   Stage the preparation of suppliers, customers, lenders
   Good rule of thumb with vendors and lenders is 25-30
   Assign direct contact with customers, vendors, lenders at 30




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 Whom to Choose


A. Why smart people make dumb choices
B. You make the final decision
C. Choosing the best among siblings
D. Co-leadership: when can it work?
E. Getting partners to agree on a successor
F. Preparing for emergencies




                Copyright of EPL Residential Inc
 Whom to Choose


A. Why smart people make dumb choices
   Organizational challenges
   Think multiple candidates
   Track performance
   Consider outside talent
   Checks and balances




                     Copyright of EPL Residential Inc
Whom to Choose



B. You make the final decision
   Create experience as a testing ground
   Find an outside viewpoint
   Create a process with the consultant – to be objective




                    Copyright of EPL Residential Inc
 Whom to Choose

C. Choosing the best among siblings
   Parents do have favorites
   Personality variations do have impact
   Personality traits outweigh gender differentiation
   Forget entitlement




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 Whom to Choose

D. Co-leadership: when can it work?
   Equal ability and drive, motivations
   Division of responsibilities
   Agreement and mutual respect for divisions
   Common philosophies
   Ability to resolve conflicts in their history
   Do NOT need parent referee




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 Whom to Choose

E. Getting partners to agree on a successor
   Real board meetings
   Seeds of core values
   Define the successor role early on and agree on parameters
   Family participation plan and advisory board
      Outside help
      Formal valuation
      Owner issues all resolved
      Security for partners family members – employment agreements
      Select leader




                    Copyright of EPL Residential Inc
 Whom to Choose

F. Preparing for emergencies – Unspoken!
   Short term crisis plan
      Key insurance policies
      Possibilities of Trusts
      Spouses/kids into key meetings
      Mentors assigned now
      Discuss possibility before hand
      Letter of instruction
            List of key outsiders in relation to company
      Outside board of advisors
   Long term transition plan




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 Transferring Control and Ownership


A. Match ownership to control
B. How to avoid multiple shareholder madness
C. Tools for transferring ownership
D. Protecting your retirement income
E. Breaking deadlocks over valuation
F. Trusting the firm to trustees
G. Incentive for non-family caretakers
H. Attracting a non-family CEO




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 Transferring Control and Ownership



A. Match ownership to control
      Ownership and voting rights should match
      Non-voting shares can be to other family members
      Real estate to other family members




                    Copyright of EPL Residential Inc
 Transferring Control and Ownership



B. How to avoid multiple shareholder madness
   Fairness has nothing to do with assigning control
   Assign shares and control to members operating the company




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 Transferring Control and Ownership



C. Tools for transferring ownership
   Gifts
   Grantor Retained Annuity Trusts (stock to trust)
   Installment buyouts
   Covenant of non-compete – owner
   Deferred compensation plans (retirement benefits)




                     Copyright of EPL Residential Inc
 Transferring Control and Ownership

D. Protecting your retirement income
   Personal guarantees from buyers
   Compensation and bonus caps
   Restrictions on dividends or K1 distributions
   Restrictions on new debt to the buyer
   Establish cash flow requirements to cover deferred payouts
   Right to review the company financials – if note
   Stock in escrow until payout is complete
   Non – complete for new owners
   Life and disability insurance as requirement
   No sale of assets or acquisitions without approvals




                     Copyright of EPL Residential Inc
 Transferring Control and Ownership



E. Breaking deadlocks over valuation
   Method established
   Yearly reviews
   System of arbitration established




                      Copyright of EPL Residential Inc
 Transferring Control and Ownership



F. Trusting the firm to trustees
   Trust creates smooth transition of ownership assets
   Trustee control distributions – predetermined
   Trusts are usually tied to a will of the owner
   Ownership and control are separated in this manner
   Carefully choose this person
   Preserving wealth for family vs. board – accepting risk




                      Copyright of EPL Residential Inc
 Transferring Control and Ownership



G. Incentive for non-family caretakers
   Create incentives or development of up and coming family
   Establish guidelines for the successor to take control




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 Transferring Control and Ownership


H. Attracting a non-family CEO
   Compensation package
   Termination agreements
   SERPS
   Pre-tax wealth plans
   Private pension plans
   Sensitive to family’s needs
   Experience




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 Taking Charge




A. How successors establish authority
B. Making sibling teams work




               Copyright of EPL Residential Inc
 Taking Charge


A. How successors establish authority
      Need to be liked vs. power and control
      Leadership decisions affecting others
      Choosing team around successor




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 Taking Charge


B. Making sibling teams work
   Allocate tasks
   Write out the skills of each
   Understand the rivalry – don’t sweep it under the rug
   Have a system of conflict resolution
   Outside board of advisors




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 Letting Go



A. The Top 10 excuses for not letting go
B. The deep reasons for founders’ resistance
C. Letting go with grace and style
D. Make a career of retirement




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 Letting Go

A. The Top 10 excuses for not letting go
      Death immediate to retirement
      I am the business – without me it’s nothing
      I am nothing without it
      No interests outside
      Someplace to hang your hat
      Kids will screw it up
      Choice of siblings
      Income source
      I am the master
      What if I am not the master – someone is better?




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 Letting Go


B. The deep reasons for founders’ resistance-DARK SIDE
   Proprietors
       Identity in company
   Conductors
       Control through harmony
   Technicians
       Special non-transferable skills




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 Letting Go



C. Letting go with grace and style
   Retirement job description
      What successor wants and needs
      Customers wants
      Co-workers wants
      Retirees contribution points




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 Letting Go



D. Make a career of retirement
   Start a foundation
   Become a mentor
   Support a business as an advisor
   Teach
   Develop interests while you are planning succession/plan it




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 Estate Planning and Taxes

A. The 10 deadly sins in estate planning
B. Protection against liabilities
C. Equality is often unfair
D. The primary transfer tools
E. A second opinion on great tax escapes
F. Better to buy out than to receive
G. Sound real estate planning
H. Prisoners of protective trusts
I. Keeping the peace with stock liquidity
J. The rights of minority stockholders
K. The new exemption rules of 1997

                Copyright of EPL Residential Inc
 Estate Planning and Taxes


A. The 10 deadly sins in estate planning
      Procrastination
      Wishful thinking
      Saving pennies on advice
      Trying to skin “UNCLE”
      Confusing equality in kids with fairness
      Going for consensus management
      Failure to plan and share your philosophies
      Failure to teach – and test validly
      Not keeping plan up to date
      No outside review processes




                     Copyright of EPL Residential Inc
 Estate Planning and Taxes

B. Protection against liabilities
   Failure to operate as a legal corporation
   Business assets owned outside of corporation (real estate – separate protections)
   Personal guarantees by Corporation
   Excessive Corporate distributions
   Personal fault or negligence/Tort
   Piercing the veil of corporation
   Payment of wages – state laws apply here
   Pension and profit sharing plans – ERISA
   Trusteeships for non-qualified compensation arrangements
   Trust taxes that may apply
   Shareholder liability for taxes
   Environemntal laws




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 Estate Planning and Taxes




C. Equality is often unfair
   Fair for division of wealth is not fair for business control
   If the business asset is the estate – think about challenges
   Rough justice




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 Estate Planning and Taxes


D. The primary transfer tools
   Value the business
   Wealth vs. liquidity
   Estate and gift taxes - mechanisms
        Living trust 43%, Life Insurance Trust 39%, Skipping Trust 22%, Partnership family 16%
        Stock sale 15%, Non voting stock 9%, Charitable remainder trust 9%
        Personal residence trust 5%, Grantor trust 4%, Private annuity 4%
   Gifts & Trusts – get accountant attorneys professional advice
        Revocable living, Irrevocable trust, Crummey trust, Grantor trust
        Etc….
   Buy-Sell Agreement
   Stock redemption agreement
   Non-business assets buildup and transfer
   Split Dollar Insurance – business gets premium back



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 Estate Planning and Taxes


E. A second opinion on great tax escapes
   Myth – Revocable trust saves taxes
   Myth – control goes with 50% of corporation (voting vs. non voting)
   Myth – Advantage to joint assets holding
   Myth – leave to your spouse avoids taxes (she needs a plan too)
   Myth - Life insurance will transfer wealth to your heirs free of estate tax
   Misconception - Gift tax and estate tax rates are the same?
   Mistake – not understanding your estates value
   Mistake – not considering generation skipping tax
   Mistake – for the wealthy to leave large sums in qualified pension or IRA
   Mistake-myth-misconception - Estate laws rarely change




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 Estate Planning and Taxes




F. Better to buy out than to receive
   Buying is better than giftings




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 Estate Planning and Taxes




G. Sound real estate planning
   Rental income and written guarantees
   Transfer real estate at lower tax rates
   Resolve real estate ownership questions now




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 Estate Planning and Taxes



H. Prisoners of protective trusts
      Avoid taxes
      Protect children till they are mature
      Prevent costly mistakes
      Guarding inheritors from the world of danger
      Maintain control over kids lives
      Establishing a dynasty




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 Estate Planning and Taxes




I.   Keeping the peace with stock liquidity
        Use of redemption funds




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 Estate Planning and Taxes




J. The rights of minority stockholders
   Courts are supporting these more




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Estate Planning and Taxes




K. The new exemption rules – LEGAL/ACCOUNTING




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