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Monthly Archives: January 2016

Planning to succeed with succession planning for a small family-owned business

The first paragraph of the September 2015 article on succession planning for family-owned businesses in Entrepreneur Magazine sounded the warning: “More than 50 percent of all small-business owners are 50 or older, according to the U.S. Small Business Administration. That means many of America’s 28 million small business owners are coming to that point in their lives when they need to think about a transition for businesses.”

As AEDC staff has visited companies throughout Allentown’s Enterprise Zone, we continually hear about companies that are in various stages of transition between generations of leadership. With this in mind we decided to profile two Allentown companies, as case studies, that have been working through the process of succession planning. Both companies were in agreement on two key points: start planning early, and get professional guidance from experts with experience in this area.

In regards to professional guidance, we are also fortunate to have three guest columnists who cover legal, financial, and business consulting advice on succession planning. Our guest authors are:

Here are the stories of Protective Coatings, Inc. and King Coatings LLC and their journey of planning the succession of their businesses:

 

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Protective Coating Co.

When second-generation owner Steve Long decided it was time to start planning his retirement in 2012, he already knew the family-owned business would be passed to his son Scott Long, now CEO, and daughter Cyndi Roberts, CFO. He’d been gradually gifting both of them shares of the company over the past few years. But he knew that wouldn’t be enough legally to make the company truly theirs upon his retirement.

Protective Coating Co. was started by Steve’s father in 1954 to make a two-part epoxy paste that binds surfaces together without dripping. “We always knew we wanted it to remain a family business and that my brother and I as the third generation would take over,” said Cyndi Roberts.

Steve actually started the succession planning process in 2010 by hiring a business consultant to help get him thinking about how it would happen. Next they brought their lawyer and accountant into the mix for their professional advice on legal, financial, and tax issues.

“It’s important to start the process early so you have plenty of time to get all the pieces in place without being rushed,” said Roberts. “You can’t push it off or table it because it won’t go away. And expect it to be an ongoing process; you can’t really just stop planning once you start.”

Her advice to other family-owned businesses getting ready to start the succession planning process: “Get professional advice. You need outside help beyond your own family and staff. And meet with those professionals yearly to review how things are going. Also, look into all of your options regarding taxes, company structure, and life insurance before making a decision.”

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King Coatings LLC

When Jaryd Karpyn selected Bloomsburg University a few years ago for his undergraduate college education, he already knew what his course of study would be – a major in business economics with a minor in accounting. Why did he know this? Because even at age 18 he knew he wanted to work for the company his father had started, King Coatings, and some day take it over when his dad retired.

“I knew I’d have to learn about business and finances in college in order to apply it to our family business one day,” said Karpyn.

Kings Coatings produces a powder coating product used on metal surfaces such as a cars, fencing, gates, and patio furniture. It also does specialty metal fabrication and machining.

The family started by consulting with a business lawyer who gave them advice on their options which resulted in Jaryd being added to the business as a co-owner. They next worked with an accountant to determine if they needed to restructure the business for tax purposes. They ultimately decided to leave the existing limited liability company (LLC) structure in place.

“The entire process took about four years, but the majority of the work was done in about six months once all of the groundwork had been completed,” Karpyn explained.

And while Jaryd’s father is not yet ready to retire, everything is now in place with the business for him to do so when he’s ready.

As for what advice he’d offer another small business going through the succession process: “Have the discussions with your family members early. Be clear, open and proactive. Once you put the wheels in motion, be sure to stay on top of it. Expect the process to take a while; you can’t rush it so just be patient. And consider hiring a business appraiser to help you understand the full scope of your company’s value.”

 

Guest Column – Business Succession Planning Advice by Buddy Lesavoy

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Buddy Lesavoy, MBA, JD

Lesavoy Butz & Seitz, LLC

Business Succession planning is always an exciting process, but it is usually more complicated with family businesses. Every transition can be time consuming and distracting. It is extremely important that the business owners and executives keep their eye on the ball – i.e. growing the business. Therefore additional time and effort needs to be devoted to the process above the normal day-to-day demands of running the business itself.

Successors must be ready and capable of taking over the business to ensure they have the necessary knowledge, expertise, experience and resources (technical, professional, and financial).

Having grown up in and being part of multiple, multi-generation family businesses, I have seen first-hand many successes, failures, and challenges in transitioning businesses to successive generations. One of the most critical challenges is timing. It is easy to transition a business too soon or likewise, too late, both of which can be disastrous. As a result, timing is critical.

Succession planning is best handled early and often. The most successful succession plans are the ones that evolve over a long period of time. Invariably, they are a work in process and living plans that get refined over time. They are developed most efficiently and cost-effectively well in advance of implementation.

The worst possible scenario is failing to have such plans if and when a disaster strikes (death, disability, or otherwise). Proper planning ensures the smoothest transition and minimizes the potential for disruption, or worse, disgruntled, surprised or angry surviving family members and employees.

While proper planning admittedly takes time, money and proper documentation (wills, trusts, buy-sells, shareholder agreements, etc.) the process is far more affordable when it is carefully planned out over time than when it is done reactively after the fact, and compounded by the stress, strains, and emotions surrounding a traumatic event.

Begin planning now. Make it a long-term life-long process. Require the next generation of family members to get outside experience before coming into the family business. Require family members to start at the bottom to learn and work their way up, earning the respect that they will need once they get to the top.

 

 

Guest Column – Four Key Elements of a Successful Succession Plan by Stephanie Olexa

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We asked Consultant and Executive Coach Stephanie Olexa, Ph.D., MBA, with Lead to the Future for advice on how to begin planning the process of transitioning ownership of a business from one family member to another. Here is her professional advice:

The four key elements of a successful succession plan:

  1. A sustainable business – Picture a relay race on a hot day in July with the first runner carrying a snowball in both hands. He is a great runner and had a record time in the first section of the race. The second runner has been training for awhile and is set to pick up the snowball and have a record time in his lap.

As the first runner gets close, he hands off the snowball and water is dripping through his hands and a lot of the snow sticks to his hands as he hands it off. By the time the second runner gets to the end of his lap the snowball is very fragile and there is almost nothing left to hand off to the third runner.

Now picture that same race with a stainless steel ball, a sustainable ball. The key is that regardless of how good the hand-off leader and the receiving leader are, they need to have a sustainable business to pass on.

A sustainable business is one that will thrive through times of change and is not reliant upon one key individual. The key elements are: a strong business model; a defensible market position; a stable financial position; and strong leadership and governance.

  1. A capable new leader to take over – In family businesses the age gap between the senior generation and the succeeding generation is growing. In years past, that age gap was about 22 to 24 years. Now, with people having children later in life, the gap has increased to 30 to 32 years. Development of functional skills and leadership skills in the succeeding generation must be on a faster pace in order to have the succeeding generation capable to take over a complex business in a growingly complex world.
  1. An exit plan for the current leader – In a phenomenon known as “the sticky baton” the exiting senior leaders sometimes have difficulty letting go and allowing the succeeding generation to put their own signature on the business. The exiting generation must replace the position, power, money, and mission that they had as the business leader, and now find a new meaning in their lives.
  1. Governance through an engaged board of directors – Many privately held companies have boards of advisors. As a business transitions, having a fiduciary board of directors enables the business to sustain its culture, best practices, discipline and strategic focus.

 

Lessons learned – Here are five things not to do when it comes to succession planning:

  1. Don’t wait too long to start the succession planning process. Companies should start three to five years before they intend to have the hand off completed.
  2. Don’t let leaders hang on too long can allow the business to suffer.
  3. Don’t select leaders from a limited group of candidates. Families should consider family and non-family leaders.
  4. Don’t blur the lines between family, shareholder and business roles.
  5. Don’t think you can do it alone without help from professionals like consultant, lawyers and accountants.

 

Parting thoughts:

If you want to keep the business, sell it, or pass it on through your family, focus on making the business sustainable and it will create value now and for the future. Then you will be in a great position to choose the next path rather than being forced into a decision that you many not want.

There are many exit strategies that are not all or nothing, such as mini-IPO, ESOP, or bringing in non-family investors. Get advice on all of your options before deciding which way to go. In summary:

  • Start planning now.
  • Consider many options.
  • Understand your roles in family, business and shareholders and keep them distinct.
  • Work with a team of advisors.

Guest column – Succession Planning Accounting Advice by William C. Fritz

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Knowing how important professional financial and tax advice is for family-owned businesses that are planning a succession, we asked William C. Fritz, Jr., CPA, CGMA, of DGK Group, P.C., Certified Public Accountants and Business Consultants, for his advice. Here is what we learned:

Even with proper planning, the transition of your business in an orderly fashion to the next generation will be one of the toughest management challenges a business owner will face. Not only is the selection of a successor difficult but the owner must also thoroughly prepare this person in taking on this new role while structuring the transfer to minimize the tax impact on the business and the owner’s family.

Top accounting issues to address when transitioning a business:

  • Determine reasonable and amenable terms to ensure greater probability for a successful transition.
  • Review pros and cons of both asset and stock sale deals in transitioning a business.

Common pitfalls to avoid that can cause major issues for company owners:

  • Business owners who do not consult with professionals and/or peer advisors
  • Business owners who promise future leaders too much

In the event of a catastrophic event, what are some of the issues that arise for the company’s new leadership when dealing with potential heirs

  • Lack of cash flow to buy out the estate or heirs
  • Lack of planning for such event
  • Potential heirs may have different plans or goals for the business going forward.

Expenses to plan for:

  • Certified Public Accountant
  • Attorney
  • Business valuation
  • Business coach or advisor
  • Management’s time

Bill could not overemphasize the importance of having protection measures in place including insurance coverage, shareholder agreements, etc. Equally important is for companies to get professional advice and planning guidance.

 

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