Transition Planning for Your Business

Transcription

1 Transition Planning for Your Business

2 Trade Adjustment Assistance Intensive Training BUSINESS CONTINUATION Transitioning to the Next Generation TAA for Farmers and Fisherman Welcome to Business Continuation Transitioning to the Next Generation Business Succession Planning for Farmers and Fishermen 1

3 Business Life-Cycle Introduction Growth Maturity Decline Penetrate & Grow Protect & Defend New Opportunities Divest Time Source: Wadsworth KEY QUESTION Do you want your business to continue to exist beyond your life and be operated by future generations? 2

4 Business Life-Cycle 1st Generation 2nd Generation Maturity Maturity Time Time Source: Wadsworth Business Life-Cycle Maturity Maturity Introduction Source: Wadsworth Time 3

5 KEY QUESTIONS Do you only want the ownership of your business asset to continue? OR Do you want a viable ongoing business to continue? OWNER GENERATION S ASSETS Owner s priority Continuation of family business Owner s priority Continuation of family ownership assets SUCCESSION PLAN ESTATE PLAN Assets gift, sale, inheritance Money Management wage, responsibility profit share accountability BUSINESS SUCCESSOR HEIRS 4

6 YES, I WANT MY BUSINESS TO CONTINUE BEYOND MY LIFETIME Planning does not create certainty. Much of the future is beyond your control. Making a PLAN will improve your chances for a success transition. A Critical Difference How we define family, the priorities, the expectations, the relationships, and the measures of success in a family are, and should, be different than how we define the priorities, the expectations, the relationships and the measures of success in a business. 5

7 Business Succession Planning Here and Now Here What is here? Why is it here? Who is here? Why are they here? What are they doing? Why are they doing it? How is it being done? How well is it being done? Profitable? Increasing wealth? When is then? Where is there? There and Then There What is there? Why is it there? Who is there? Why are they there? What are they doing? Why are they doing it? How is it being done? How well is it being done? Profitable? Increasing wealth? Business Succession Planning Here and Now Now What is happening: In our industry? In our business? In our lives? When is then? Where is there? There and Then Then What is happening: In our industry? In our business? In our lives? 6

8 Why don t we Plan? Too Complicated Don t like to Plan Facing our own Mortality The Need for Planning 7

9 Time Management Matrix Important Not Important Urgent I. Activities Crisis Management Deadline Projects III. Activities Some Phone Calls & Mail, Popular Activities Not Urgent II. Activities Planning Relationship Building IV. Activities Time Wasters Busy Work Why We Need To Plan Increasing volatility in the economy Increasing volatility in costs Increasing volatility in markets Increasing volatility in income Increasing longevity Increasing lifestyle expectations Increasing business expectations 8

10 Necessary Skills For Your Business Success/Succession Communication skills Decision making skills Personnel management skills Production skills Financial management skills Marketing skills Skills Are Developed From - A-K-A-R APTITUDE KNOWLEDGE ATTITUDE REPETITION 9

11 Skills, Abilities And Competencies A skill is a developed ability. You are born with abilities and you learn skills. A skill is learning how to do something competently. Developing competency takes skill, ability, knowledge, education, experience, practice and repetition. How are Skills Developed? APTITUDE..natural ability/talent What you were born with Not a predictor of final skill level Minimum level of ability required 10

12 How are Skills Developed? KNOWLEDGE IS.. The application of information acquired through education and experience How are Skills Developed? ATTITUDE.. The mental outlook that may be either positive or negative. 11

13 How are Skills Developed? REPETITION.. The consistent and correct practice of the desired skill with result in improved performance. Essential Skills for Business Success Skill needed by Firm Management Financial Management Production Strategic Planning Communication Decision Making Conflict Resolution Marketing????????????????????? Owner s Skills ( ) Successor s Skills ( ) 12

14 Business Components All businesses have five components MANAGEMENT..long and short term decisions ASSETS..what you own, rent or control INTANGIBLES..employees, business contacts, customer loyalty, community loyalty LABOR..the physical work involved PROFIT..Income minus expenses equals profit. Business succession planning Business succession is the planned and systematic transfer of management, assets, intangibles, labor, and profit from the today s owner to the successor during a defined period of time. 13

15 Key Business Components The three most important components in a successful business are: MANAGEMENT MANAGEMENT MANAGEMENT Key Business Components MANAGEMENT Managing Money Managing Time Managing Decisions Managing People 14

16 Key Business Components ASSETS Short term Intermediate term Long term Real property Personal property Key Business Components INTANGIBLES Farms Fishing Small business Large business 15

17 Key Business Components LABOR Owner or family provided labor Hired labor Farms Fishing Key Business Components PROFIT INCOME IS NOT PROFIT!!!! PROFIT PAYS FOR... Growth..Dividends.. INCOME PAYS FOR... Family living..debt Service..Taxes.. 16

18 COMPONENT Testing Owner and Successor s Expectations Commitment Owner and Successor s Expectations Established Owner and Successor s Expectations Withdrawal Owner and Successor s Expectations Timeline How long and when How long and when How long and when How long and when Assets Who owns or controls and how are assets owned Who owns or controls and how are assets owned Who owns or controls and how are assets owned Who owns or controls and how are assets owned Intangibles Employees Contacts Customers Community Employees, Contacts Customers Community Employees Contacts Customers Community Employees, Contacts Customers Community Labor Duties Responsibility Duties Responsibility Duties Responsibility Duties Responsibility Management Authority Responsibility Accountability Authority Responsibility Accountability Authority Responsibility Accountability Authority Responsibility Accountability Income/profit Amount Source Method Amount Source Method Amount Source Method Amount Source Method Estate Planning For Succession Your estate plan will determine what happens to your property after your death. It may involve the use of wills, trusts, gifts and how you own your property. Your estate plan determines who will inherit your property, when they will inherit your property and the value of that property. 17

19 Key Business Components Estate planning is not business succession planning. Estate planning needs to be compatible with business succession planning. Retirement Planning For Succession Your retirement plan will determine when you will no longer provide any labor or any management to the business. You may choose to fully retire or semiretire and you may want to gradually retire. To have a successor you must choose to retire. 18

20 MAKING THE BEST DECISIONS Identify What, Who and How What criteria will be used; financial, values, production, time, family, etc. Who will make the decision; Owner/Parents, children, employees, advisors. How will decisions be made; Autocratic, democratic, consensus, collaboration. How will conflicts be resolved. 19

21 The SOCS of Decision Making Define the Situation Explore the Options List Consequences for options Select the Solution Define a SITUATION from as many perspectives as you can imagine. Does it have: A financial perspective? A social perspective? A legal perspective? An emotional perspective? A personal perspective? A family perspective? A community perspective? Affect on your personal goals? A moral perspective? 20

22 Options It is always necessary to explore at least two options to make any decision. Be careful not to create an option that becomes the immediate solution or other options will not be explored. Do not reject any option. Be non-judgmental. Consequences For each option list the positive and negative consequences. Consider quality and quantity. Pros Cons

23 Solution Select the option that has the most positive and least negative consequences in terms of quality and quality. Pros Cons - - Important Considerations TIMING - Choose the right time for making the decision. INFORMATION - There is never the right amount of information. EMOTIONS AND EXPERIENCE - Listen to your gut instincts. DEADLINE - Set a date certain for making decisions ACT - Once the decision has been made act forcefully and promptly 22

24 HAVE A PLAN -Develop a plan for implementing the decision. TAKE NOTHING FOR GRANTED -Follow up and make sure that everyone is carrying out their responsibilities. HAVE ALTERNATIVES -If a problem arises in implementing a decision have alternative ways of implementing the decision. DO NOT GIVE UP -Implementing a decision is often difficult. Be persistent. REMEMBER TO SAY THANK YOU Job Description Write a job description and include: The owner should write a job description that reflect his/her expectation of what the successor will do. The successor should write a job description the reflect his/her expectations of what the job requires. 23

25 WHAT IS IMPORTANT? What Is IMPORTANT? We value the things that are important to us. We want to do that which is important to us. We make decisions based upon our values. 1

26 VALUES What is important to me? What do I hold dear? VISION What does the future look like? MISSION Why are we here? What do we believe in? GOALS What do we want to do? What do we want to be? OBJECTIVES How will we measure our progress? How will we know when we have arrived? STRATEGIES What do we need to do? What are we required to do? TACTICS What is needed to carry out our strategies? VALUES QUESTIONS What do you like or dislike in other people? Who are your heroes? What do you consider your successes? What do you consider your failures? What are your fears? What is important in your business? What factors do you consider when making decisions? What do you buy? Where do you buy what you buy?????????????? 2

27 Write a list of word that describe what you value and put a plus sign (+) after the values that are most important to you. 3

28 COMMUNICATION Communications Communication is the skill that is the - Key to effective management Key to developing a succession plan Key to maintaining family harmony Key to developing relationships Key to maintaining relationships 1

29 The Science of Communications Dominance Preference Interests Competencies The way we work Circle the 8 descriptors that represent work activities that most turn you on. Underline 2-4 descriptors that most turn you off. Counseling People Analyzing Data Having Variety Paperwork Tasks Being Challenged Working With Numbers Designing Excitement Community Aspects Teaching & Training An Ordered Environment Attending To Detail Expressing Ideas Coaching Selling Ideas Making Things Work Seeing An End From A Beginning Building Things Building Relationships Bringing About Change Solving Tough Problems Working With People Listening & Talking Preserving Status Quo Developing New Things Explaining Things Working Solo Getting Groups to Work Well Together Stabilizing Opportunity To Experiment Accomplishing Being Part Of A Team Planning Things Out Having A Lot of Space Analyzing & Diagnosing Getting Things Done on Time Logical Processing Playing Around Persuading People Being In Control Taking Risks Providing Vision Structured Tasks Helping People Expressive Writing Inventing Solutions Applying Formulas Establishing Order Putting Things Together Clarifying Issues Providing Support Administrating 2

30 Circle the 8 descriptors that represent work activities that most turn you on Underline those that most turn you off Ned Herrmann Group Differences in Processing Modes A Blue B Green C Red D Yellow Descriptors Logical, Factual Rational, Critical Analytical Quantitative Authoritarian Mathematical Technical reader Data collector Conservative, Controlled Sequential, Articulate Dominant, Detailed Musical, Spiritual Symbolic, Talkative Emotional Intuitive (regarding people) reader (personal) Intuitive (regarding solutions) Simultaneous Imaginative Synthesizer, Holistic Artistic, Spatial Skills Problem Solving Analytical, Statistical Technical, Scientific Financial Planning, Regulatory Supervisory Administrative Organization Implementation Expressing ideas Interpersonal Writing (correspondence) Teaching, Training Integrative, Visualizing Causing Change Conceptualizing Generating Ideas Trusting Intuition Typical Phrases Used Tools, Hardware Key Point Knowing the bottom line Take it Apart Break it Down Critical Analysis Establishing Habits Always done it this way Law and Order Self Discipline By the Book, Play it Safe Sequence Team Work The Family Interactive Participatory Human Values Personal Growth Human Resources Team Development Play with an idea The Big Picture Broad-Based Synergistic Cutting Edge Conceptual Blockbusting Innovative 3

31 HOW THE BRAIN COMMUNICATES A BLUE -Uses facts to illustrate points -Very matter of fact -Expresses emotions abstractly -Appears to display little or no emotion regardless of the situation -Asks questions that have answers -Speaks in sentences & paragraphs -Completes sentences & paragraphs -Very concrete in speaking B GREEN 1997 Ned Herrmann Group D YELLOW -Ask questions that lead to other questions -Speaks in phrases -Stops in mid sentence thinking others obviously know -Very abstract in speaking uses metaphors and musical words -Face is animated- eyes flash, etc. -Uses expansive non-verbal gestures -Uses stories to illustrate points -Talks out loud or to self to learn C RED Communication Differences Male and Female 1. Problem Solving 2. Information 3. Conversation 4. Directions 5. Support 4

32 LISTENING FOR FACTS FEELINGS PERCEPTIONS Communication Blockers Directing/Ordering Stop complaining Try harder Threatening/Warning You had better If you don t Moralizing/Preaching You ought to Good people don t Lecturing/Arguing The fact is Yes, but this is the way Advice Giving Why don t you If you would do this Criticizing/Blaming You re not thinking straight.. You re acting like an idiot You should have Diagnosing/Counseling You don t really mean that What you need is. Cross-examining, Prying When are you going to..? Why did you do that? Denying/Reassuring/Withdrawing Don t worry about it It s not that big of a deal Lets not talk about it now I know how you feel 5

33 Communication Openers 1. Be attentive. Look, Listen, Track. 2. Invite responses. 3. Summarize. 4. Ask. 5. Clarify. 6

34 Planning for Retirement Retirement Planning A Lot 18% A Little 18% None at All 35% Moderate 29% 1

35 Will you: Never retire Semi-retire Fully retire Will You... Maintain a role in the business? Transfer it to a successor? Sell it or lease it? Gift it? 2

36 Benefits of Retirement Planning Planning can help you... Base your savings on realistic information Find out if retirement plans are realistic Adjust your plans if necessary Increase investments to reach your goals Reduce your worries Six Important Questions How do I envision retirement? How much income will I need? Where will I live? Will I be able to maintain my health? How will I balance work and leisure time? How can I strengthen my relationships? 3

37 What Are Your Spouse s Goals? Will you retire at the same time? Will you stay in your home? Will you be able to travel if one spouse is working? Will an early retirement reduce your benefits? Retirement Income How much retirement income will you need? What is the source of your retirement income? 4

38 Retirement Cost of Living How will your expenses change in retirement? Are there family living expenses that are currently being paid by the business? Will they continue to be paid? Expenses likely to increase Health Insurance Health Care Entertainment and Recreation Travel 5

39 Expenses likely to remain constant Food Utilities Auto and Home Insurance Gifts and Contributions Personal Care Considerations Adjusting expenses and income for inflation Saving for retirement income Growth of current investments Additional investments needed 6

40 Investing for Retirement Have you made retirement investments that are not in your business? Are your investments diversified? Is investing in your business the same as investing for retirement? Housing Retirement Concerns Physical safety of your home Security for health care Financial security Companionship Desire for independence 7

41 Maintaining Health? Have you had prior health concerns? Do you have current health concerns? Are there adequate community health care resources & facilities? Will more money be needed for care? Will you be able to maintain your independence? Balancing Work & Leisure Do you have hobbies? Will you have a new career? Will you travel? Will you go back to school. Will you attend adult ed. classes? 8

42 Strengthening Relationships Will you spend more time with your spouse and with your family? Will you spend less time with your business associates and friends? Will you spend more time with new friends in new locations? Common Mistakes Failure to participate in retirement savings plans. Failure to estimate retirement income and retirement expenses during your working years. Believing that Social Security will provide adequate retirement income. 9

43 Estate Planning For Succession Who Should Be Included Key Areas of Concern 1

44 Estate Planning Questions What? Who? When? How? KEY CONCEPTS Concepts Fair vs Equal Compensation = Contribution 2

45 EQUAL DISTRIBUTION OF ASSETS Heirs receive equal shares Simplest Way Issues Contribution = Compensation 1990 Net worth = $300,000/3 children = $100, Net worth= $3,300,000/3 children=$1,100,000 Contribution = Compensation Calculation 50%-50% Successor and Owner $3,000,000 Successor & Owner $1,500,000 each $2,100,000 Successor s share $100,000 from 1990 $1,500,000 from the Successor s growth and appreciation $500,000 from Owner s growth and appreciation $2,100,000 total for Successor $600,000 Successor s Siblings Share 3

46 ESTATE PLANNING TOOLS WILLS TRUSTS GIFTS OWNERSHIP OF PROPERTY LIFE INSURANCE FIRST OPTION TO BUY BUY-SELL AGREEMENTS Example Estate Plan Option A Estate Plan grants the Successor ownership and, therefore, control of major business assets and provides... If the successor sells major business assets before x number of years then the proceeds will be shared with all the heirs. 4

47 Example Estate Plan Option B Estate Plan divides ownership of major business assets equally among heirs but control to successor and provides... Non-business heirs cannot sell their interest in the business before x number of years and if sold must offer the first right of refusal to the successor. 5

48 Business Succession Plan The Transfer Process MANAGEMENT ASSETS INTANGIBLES LABOR INCOME Transfer Period Short Transfer Period owner time Long Transfer Period owner successor time successor 1

49 Key Business Components MANAGEMENT The factors in a successful business: Management Management Management Key Business Components ASSETS Order of Asset Transfer Short term (Operating Inventory & leases) 1 Intermediate term (Breeding Livestock) 2 Intermediate term (Machinery) 3 Intermediate term (Buildings & Facilities) 4 Long term (Land) 5 2

50 Key Business Components INTANGIBLES Relationships Business contacts Customer lists Blue sky Good will Employees Key Business Components LABOR What is needed Does the successor fill the need Expectations Job description 3

51 Key Business Components INCOME INCOME IS NOT PROFIT!!!! PROFIT PAYS FOR... Growth..Dividends.. INCOME PAYS FOR... Family living..debt Service..Taxes.. Timeline How long in each Stage? Testing? Commitment? Established? Withdrawal? 4

52 Business Succession Plan The Transfer Stages Testing Commitment Established Withdrawal COMPONENT Testing Owner and Successor s Expectations Commitment Owner and Successor s Expectations Established Owner and Successor s Expectations Withdrawal Owner and Successor s Expectations Timeline How long and when How long and when How long and when How long and when Assets Who owns or controls and how are assets owned Who owns or controls and how are assets owned Who owns or controls and how are assets owned Who owns or controls and how are assets owned Intangibles Employees Contacts Customers Community Employees, Contacts Customers Community Employees Contacts Customers Community Employees, Contacts Customers Community Labor Duties Responsibility Duties Responsibility Duties Responsibility Duties Responsibility Management Authority Responsibility Accountability Authority Responsibility Accountability Authority Responsibility Accountability Authority Responsibility Accountability Income/profit Amount Source Method Amount Source Method Amount Source Method Amount Source Method 5

53 Transfer Models Spin-Off Arrangement Multi-Person Arrangement SPIN-OFF APPROACH O Business S O Business Business S O Business S 6

54 MULTI-PERSON APPROACH O Business S Business O & S O Business S Resources John Baker, Attorney at Law Iowa State University Administrator of the Iowa Beginning Farmer Center Roger A. McEowen, Attorney at Law Iowa State University Associate Professor of Agricultural Law Phone: Dave Goeller University of Nebraska Deputy Director NCRMEC