Whether yoiu plan for the eventual transition of your business or are thrust, kicking and screaming from your office into some form of retirement, the fact remains: At some point, you’re going to have to hand over the business you spent the better part of your life building to someone else. We know it’s difficult; we realize it’s your livelihood. But at some point, you’re going to have to leave.

However, that doesn’t mean you can’t maintain some semblance of control. When it comes to business transition, there are seven phases: financial planning, estate planning, ownership transition planning, leadership and management training, strategic planning, family dynamics, and personal growth and fulfillment. It’s not particularly easy to transfer the business ownership to your family or key employees, and there’s a significant amount of risk — both to you and to the business itself. This article will focus on how to structure the plan so you lessen the risk while transferring the day-to-day activities to the next generation. Talk about the best of both worlds.

Valuation
To begin, the value of the company must be determined. What’s the business really worth? Values can be wide ranging depending upon the capacity of the business to generate cash over and above fixed costs. For tax purposes, as well as family negotiations and to help manage the emotions inherent in the transition process, we recommend that owners consult with an independent third party to determine the value of the business.

Forecasting
Once the value of the business has been determined, it’s important to develop realistic models to determine if the business has the cash flow for the next generation to pay for it. Since the ultimate goal is the health of the business, we often allow 15-year notes even though the intent is to pay the debt much more quickly (typically over 5 years). The forecasting stage also allows incumbents to determine how much of the business they want to sell to the next generation over a fixed period of time. To assure that the next generation has the time to become acclimated to business ownership, we recommend that this process occur gradually.

Balancing Taxes Against Good Business Judgment
This stage determines the best income, gift, and estate tax opportunities for both parties balanced against the need for the incumbent to get the money necessary to live after retirement. Within family businesses, the tendency is to want to gift the business to the next generation, but this often isn’t wise. In fact, more often than not, gifting a business creates problems — particularly in terms of family dynamics. The son or daughter who is simply given a business will be perceived as fortunate, not capable; privileged, not accomplished. Further success will be diminished — particularly in the eyes of jealous family members who have no stake in the business.

Structure
More often than not, we recommend that the company be restructured with voting and non-voting shares, allowing the incumbent generation to maintain control of the more difficult issues (bonuses, dividends, titles and roles, compensation, strategic planning, etc.). We’ve found that this creates a two-generation team that allows the transfer process to occur gradually over time. It affords the incumbent generation the security knowing they’ll be paid; it also affords next generation the luxury of time to learn how to run the business effectively before being charged with making top decisions. As the saying goes, it can be lonely at the top.

Creating a Market for the Stock Among the Next Generation
If a business is transferred to more than one person within the next generation, a buy/sell agreement must be established. The agreement must take into account not only the cash already committed to the first generation but also a price that fairly represents value for the person exiting the business. Our experience has found that this is not a boilerplate agreement; rather, it must be negotiated through significant discussion among the next generation of owners.

Education
It’s important that the new owners are educated regarding their roles as such. Most incumbent owners have traditionally held three roles within their company: owner, director, and manager. However, when it comes to the next generation, some owners may not be managers, some owners may not be directors, and some managers may not be directors. There must be significant discussion regarding what’s involved in these various roles — particularly if some family members will own shares but decline to participate in the active management of the business. This is a good time to begin to formalize the board of directors. Appointing outside directors is optional, but it’s a good idea to have structured board meetings where family members can participate and grow together as a team.

Plan Ahead
The most common reason for the premature demise of a family business is failure to plan for the transfer of ownership. Given time, a well-managed company and well-thought-out plan will increase the odds of a successful transfer. It’s always the right time to ensure the survival and prosperity of your business — whether you exit gracefully or not.

For Your Consideration
Ownership transition planning is just one of seven steps within the business transition process. Other steps include:

• Financial planning
• Estate planning
• Leadership and management training
• Strategic planning
• Family dynamics
• Personal growth and fulfillment

The process isn’t linear but extremely fluid. Some areas are more important than others depending upon the age at which you begin the transition. However, before the transition is complete, you will likely have touched on all of them.

How We Helped
Established in 1964, Fernco Inc. specializes in manufacturing products for the plumbing industry. Family-owned since 1979, Chairman Darrell Cooper has been undergoing the business transition process for nearly 10 years. Plante & Moran’s Mindy Kroll recently interviewed him to get his thoughts on the business transition process.

How long have you been working on your ownership transition plan?
About 10 years. I’ve approached ownership transition planning like estate planning… a work in progress.

What was the biggest challenge?
Deciding exactly what to give up, to whom, and when.

How about the benefits?
My children are all wealthy and comfortable with their jobs and relationship with the company. I feel the biggest benefit has been transitioning the company while I was still active in the company and could advise rather than after my death.

Are you comfortable now that the kids own 95 percent of the company?
Yes. I have no regrets. I no longer need majority ownership to provide power, money, or prestige. However, I am still involved as much as I want to be in the business.

You have the voting shares of your business; when do you think you might give them up?
Mentally and financially I’m prepared to do that now. However, because of certain family and business dynamics, I want to stay involved. The final transition of voting control will probably continue in stages, i.e., equal voting rights to mine, then equal voting rights for each shareholder, then equal voting rights among children, and finally no voting rights or stock held by me.

How has P&M been instrumental in guiding you through the process?
Paul Bernhard has been most helpful in the planning and implementation of our ownership transition plan, particularly the deciding of what, whom, and when. I’ll never forget an early meeting with Paul when he asked me what my bulletproof wealth number was. I’d never thought about that. It had always been more — more — more. After considering the question, I decided that I’d already achieved my personal wealth goals and, therefore, I was bulletproof. Paul replied that if that were true, then the ownership transition mechanics would be easy, and we could focus on training and planning to make the “What, Whom, When” happen. And it’s been happening ever since, thanks to Paul and Plante & Moran.