Raise your hand if you have a firm succession plan in place for your company. What does that plan entail? Does it prepare for any unforeseeable events, or is it tailored solely for when you decide to step down? How confident are you that, when the time comes, this plan will work flawlessly?
If you didn't raise your hand or didn't have answers to all the questions, you have work to do. You're not going to live forever and you're definitely not going to run your company forever. In today's business environment, if you are a multi-generational business intent on keeping things within the family, experts agree you need a succession plan. If not, the odds of keeping the company intact get increasingly slim.
According to the Family Business Institute, which specializes in business consulting to family-run firms, only 30% of family businesses survive into the second generation, just 12% make it to the third generation, and a tiny 3% operate into the fourth generation and beyond. "Research indicates that family business failures can essentially be traced to one factor: an unfortunate lack of family business succession planning," says the institute.
Richmond, Va.'s Siewers Lumber is part of that 3%. Now in its fourth generation of Siewers family ownership, the company has put together a succession plan designed to bring in fresh ideas and make sure future owners are fully committed.
"The keys to our success have been that all the owners work fulltime in the business with no outside ownership, in addition to a culture of values that has been developed and passed on through the generations," says Richie Siewers, executive vice president.
Richie currently owns the company along with his older brother Freddy III, who is president; younger brother Michael, a vice president; and cousin John III, also a vice president. They took over about 10 years ago when Richie's father, Freddie, and uncle, John II, decided to retire–although both still come to work regularly. Richie says Freddie and John II have backed off their hours and let the younger Siewers run the show, offering advice at the monthly business meetings and whenever asked.
Avoid Solo Flights
There is no single way to go about transferring ownership, but you'd be well advised to take several of the following steps offered by Paul Bumblauskas, a consultant and ProSales contributor experienced in transition planning.
According to Bumblauskas, the best thing a company can do is plan in advance using an independent outsider to set up the plan, organize family holdings into entities, and monitor the plan as it is executed. A consultant isn't absolutely necessary to plan the actual succession but provides a valuable resource when plans are discussed, he says. He says it usually takes an event, such as an impending illness or equity growth, for a company to realize it needs a succession plan.
Jon Stier, owner of Irmo, S.C.-based Stier Supply Co., knows all too well how an unexpected event–in his case his father's death–can change a business.
"I wasn't old enough or experienced enough to know how to run a business," says Stier, who was only 20 when his father died in 1967. His grandfather, who retired as controller and held some of the company's shares, died a short time later. After his father's death, Stier's shares in the company, and those of his siblings, were placed into a trust. The remaining shares were divided between Jon's mother and grandmother.
Bumblauskas encourages companies to plan ahead by getting a good valuation of their business. It's something that should be done at least once a year. Bumblauskas says the number doesn't have to be exact, but it should be reliable.
He also encourages owners to be consistent in their valuations, regardless of who their successor is.
"If you want to transfer your business generationally, that's no reason to undervalue your business," he says. Another reason to know your company's value is to ensure you are selling at your peak and getting as much as possible for it.
An easy way to figure out the value of your company and its parts is to break it down into pieces, or entities. Examples of entities include real estate, operations, any divisions (installed sales would be an example), and other assets.
According to Bumblauskas, establishing entities addresses risks and opportunities for the business by keeping things separate, making decisions easier. He says entities also help firms prepare for unexpected scenarios, such as if a family member has enough money to purchase the operations but not the real estate. With separate entities, that family member can purchase one part and then have the other transferred to him or her through various means, such as a stock transfer.
Dividing up the business prevents conflict by giving pieces to those who want to take over the company. It also weeds out the contenders from the pretenders.
During the ownership transfer at Stier Supply, the contenders were determined in a sawdust setting. Jon says every sibling worked at the store throughout high school. Those who later wanted to get further involved were able to do so. Those who didn't sold their shares back to the company, which were placed in Stier Supply's treasury stock. Jon and his two younger brothers decided to stay with the business, with Jon serving as the majority shareholder and president.
Pretenders sometimes can emerge when a business becomes too successful. When profits are easy, Bumblauskas says, owners can become complacent. This lack of challenge in maintaining a successful business can lead families to sell it at its peak and put the money elsewhere.
The Taxman Cometh
Beyond entities and valuation, taxes also play a prominent role in the transfer of ownership and stock. For Stier, estate taxes were the tricky part. When his father died, his mother had a lawyer draw up papers for her estate while an accountant kept an eye on the numbers. Stiers' mother kept her tax liability low by giving away shares and assets later in life in such a way that she would stay below certain tax thresholds.
Richard Heath, a certified public accountant based out of Surfside, S.C., says owners need to procure the proper resources to help them with taxes. For instance, he says, suppose the owners of a company decide to transfer ownership to their children by giving them stock but remain active in the company. As a result, the children in effect are getting a dividend on their stock–the extra shares–that no other shareholders received. This makes those gifted shares "preferred stock" in the eyes of the Internal Revenue Service, which then can tax the whole transaction.
Heath says tax laws also vary based on how a business is incorporated and set up. For example, a company can be an "S" corporation and not pay taxes at the entity level, or it can be a partnership where the owners pay the taxes, not the business.
Lately, Heath has been studying the health care reform act that President Obama helped to put into law. Heath says dealers need to address how the law impacts the income of the retiree. The law contains a 3.8% tax on "unearned income," which includes capital gains, for high-income taxpayers. Married couples who earn at least $250,000 are slated to get hit with the tax, as will single people who earn at least $200,000 per year. Since it's so new, there is much to be learned as to how it will affect retirees, says Heath.
Keeping the finances in order and making sure everyone understands what is going on and who is getting what are key parts of transition planning. Often overlooked in these transfers, however, is the emotional element of the deal.
It's something unique to multi-generational ownership transfers.
"It is different most of the time because of the emotional involvement of the current owner getting ready to sell to the next generation," says James R. Vann, a lawyer with the North Carolina-based firm of Vann & Sheridan who often handles ownership transfers at lumberyards. Vann says former owners sometimes have a tough time overcoming the fact that they are no longer in charge.
"[New generations] are going to do things differently, and you need to be ready for that," Vann says. "You still give them advice and counsel, but you have to temper that with some patience and what you are going to say."
At Siewers Lumber, the family took advantage of a local family business forum in Richmond prior to taking over. It also hired a family business consultant to help them oversee the process, which took years of planning and work.
"It was gradual; it wasn't something that came up all of the sudden," Richie says. "With the gradual process, the roles kind of worked themselves out. We all get along with each other and we all have the same goals as far as what we want to achieve."
The challenge lies in knowing how to separate family from business. Richie says it can be difficult to sit down at a meeting and not ask about the kids or talk about things at home.
With its founder's death, Stier Supply faced more than just a decision to transfer ownership. Jon Stier was young and far from ready to take over, so the ownership transfer process was much longer. Jon didn't become part owner until 1974, when he bought out the company's treasury stock, including shares from his grandparents' estate. In 1977 and 1978, Jon's four sisters sold their stock back to the company. In 1982, 15 years after the death of his father, Jon finally became president of Stier Supply. The transition was complete.