1. 1. Keep it in the Family Planning for Succession Presented by: Jon Lefebvre and Yasmine Shaalan BMG320
2. 2. Agenda Rationale for research Key points on succession planning Succession matrix Succession planning overview Succession planning model Components of succession planning Three levels of succession planning Managment Ownership Transfer taxes Pros & Cons to family succession Recommendations
3. 3. Rationale for research It is estimated that approximately 70% of family businesses do NOT survive the transition of ownership Baby boomers retirement void Family owned businesses are the backbone of the American economy o Account for 63% of U.S. Gross Domestic Product o Generates 60% of the countrys employment o Account for 78% of all new job creations Family firms comprise 80-90% of all businesses in North America
4. 4. Key Points Three main focuses: Management, Ownership, Transfer taxes o Difference between management and ownership o Lawyer and/or accountant should be consulted with respect to transfer taxes Lead-time is crucial to a successful transition Important to have a key employee or employees in the top management team (TMT) to assume more responsibility during the transition Succession has many parallels to employee retention
5. 5. Three Levels of Succession Planning Taking away from and simplifying the succession matrix we can break succession planning down to three main points: 1) Management 2) Ownership 3) Transfer taxes If executed properly, these three factors will lead to a smooth transition between both management and ownership as well as minimizing the cost of transition.
6. 6. Management Management is NOT the same as ownership Top management team members who are leaving should begin allocating certain tasks of their own to possible successors o either key employees or their own blood Focus on employee retention; want most suitable candidate o Retention tactics include: Employee agreements, nonqualified deferred- compensation plan, stock option plans, change-of-control agreements, and/or advisory board
7. 7. Transfer of Ownership It is important for the current owner of the business to considers the best option(s) for transferring ownership Owners often face certain dilemmas such as: o How do I treat multiple children equally? What if none of my children are interested in my business? When is the best time for me to pass the torch? Common techniques used to address these issues: o Sell to active children, use voting and nonvoting shares, leave non-business assets to inactive children, reward active children for their hard work equally, establish conditions and assurance for active children, provide retirement income for business owner, buy-sell agreements
8. 8. Succession Matrix
9. 9. Transfer Taxes Transfer taxes can claim over 50% of the value of a business o this can lead to the business having to take out debt or liquidate in order to keep the company alive There are a number of strategies that can be used to minimize transfer taxes which will ultimately lead to a more profitable business o Techniques and strategies used by owners to minimize taxes at the time of the transition include: Gifting techniques, sales strategy, freezing techniques, statutory relief, and/or life insurance applications
10. 10. Owner-Managers and Succession Planning Im not going to retire, I cant figure out the financial payout, Im too busy with clients, Im not going to die anytime soon Owner-managers usually have a personal vision to retire and pass down the family business someday, but he or she may not have adequately considered what it will take to make that vision a reality.
11. 11. Components of an Integrated Succession Plan: Family Goal Articulation Family information and communication Business Business Strategy Assessment Management Talent Assessment Corporate Structuring Current Business Valuation Retirement Planning
12. 12. Five Principal Stages of a Succession Planning Model Ongoing Enabler: A well-defined strategic planning process Identification of target roles and positions Determination of core competencies and skills Identification/ assessment of successor candidates Stage 1 Stage 2 Stage 3 Stage 4 Stage 5 Desired Outcome Business case for proactive succession planning Leadership developmental programs Organizational and continuity leadership capability Ongoing Enabler: Leadership Support
13. 13. Stage 1: The Business Case The Mission Statement Considering the longer-term impact of: o Industry sector, market share, competition, and barriers to growth o Long term business strategy for growth o Independent business valuation and the potential to increase brand equity over time o Timeframe for implementing a succession plan o Commitment, ability and leadership potential of family members
14. 14. Stage 2: Identification of Target Roles Not just slotting family members into roles An assessment of the key positions needed to achieve business goals. o Serves to set priorities among the key positions that will support or drive growth.
15. 15. Stage 3: Determination of Core Competencies and Skills In order for family members to be considered for key positions or as successor candidates, there must be a commitment to developing the necessary skills to meet future business needs. Family members must be fully involved and have access to opportunities to develop an effective succession strategy. The Case of Samsung
16. 16. The case of Samsung Samsungs chair Lee Kun-hees health has been deteriorating Lee Jae-yong, his son, joined Samsung in 2001. o 10 years later he had the title of vice-chairman o Employees think he is unproven as a manager Yet he is qualified
17. 17. Stage 4: Identifying Successor Candidates No free passes! Determining whether family members have what it takes o A family member may be identified as a potential successor candidate but not want the responsibility. o Another may want to be the leader but not want to invest the time to develop the skills needed.
18. 18. Stage 5: Leadership Development Review of current and required training and development practices Accepting positions outside of the family firm o Practical, first hand experience outside of the comfort zone of the family firm is a huge benefit!
19. 19. Skills Missing From Boards HR-Talent Management o 58% in Family Owned Business boards Succession Planning o 26% in Family Owned Business boards Strategy o 23% in Family Owned Business boards
20. 20. Pros and Cons of Passing the Business to a Family Successor Advantages: o Reduces third-party involvement o Gives the predecessor the option to maintain involvement and influence within the business Disadvantages: o It can be difficult to identify and train the right successor o Potential for conflicts at work and/or in the family
21. 21. Recommendations Evaluate company's worth Find and develop top talent o Most in line with company values and their predecessor Successful knowledge transfer Recycle the Boomers o Part time or project basis Set in place a succession plan between five and ten years before you expect the transition to take place Have regular meetings Keep it professional Get outside help
22. 22. Food for thought Minority owned businesses that will no longer be minority owned o Creates competitive disadvantage Do gifting techniques not give enough incentive to the successor? Should the successor work up slowly or jump right up? When should someone draw the line or pull the plug on an unsuccessful successor? Who should do it?
23. 23. Questions? Rationale for research Key points on succession planning Succession matrix Succession planning overview Succession planning model Components of succession planning Three levels of succession planning Managment Ownership Transfer taxes Exit strategy Recommendations