When an event occurs that is contemplated by a buy-sell agreement to cause a purchase or sale of a business interest, that event is called a trigger. Common triggers include death, disability, retirement, withdrawal from employment, competition with the corporation, certain contemplated sales or transfers, pledges and transfers pursuant to foreclosure, tag-along provisions, and deadlock.
For each trigger, a buy-sell agreement should set forth the procedure for the transfer contemplated including the payment terms. Chapter 12 of Business Succession Planning reviews and discusses triggers and related transfer procedures.
Tuesday, March 31, 2009
Monday, March 30, 2009
S Corporations
The shareholders of a corporation must file an election with the IRS to be treated as a small business corporation under a discrete set of taxation rules in Subchapter S – Tax Treatment of S Corporations and Their Shareholders, Subtitle A – Income Taxes, Chapter 1 – Normal Taxes and Surtaxes, Title 26 – Internal Revenue Code, United States Code. Subchapter C of Subtitle A governs Corporate Distributions and Adjustments for corporations not electing S corporation tax treatment. Hence, the nomenclature C corporations and S corporations has been established.
An S corporation must maintain its status as a “small business corporation” under § 1361 of the Code at all times. Generally this requires that the S corporation, having properly elected S corporation status, not have more than 100 shareholders, not have a shareholder who is not a person (with certain statutory exceptions), not have a nonresident alien as a shareholder, and not have more than one class of stock.
The buy-sell agreement must provide a procedure that prevents the S corporation from “ceasing to be a small business corporation” and thereby terminating the S election “on and after the date of cessation” pursuant to § 1362(d) of the Code.
Generally the two problem requirements have to do with a shareholder being an individual (especially in the case of the shareholder’s death) and there only being one class of stock. Chapter 11 of Business Succession Planning reviews these requirements and describes the various methods of dealing with the issues of S corporations.
An S corporation must maintain its status as a “small business corporation” under § 1361 of the Code at all times. Generally this requires that the S corporation, having properly elected S corporation status, not have more than 100 shareholders, not have a shareholder who is not a person (with certain statutory exceptions), not have a nonresident alien as a shareholder, and not have more than one class of stock.
The buy-sell agreement must provide a procedure that prevents the S corporation from “ceasing to be a small business corporation” and thereby terminating the S election “on and after the date of cessation” pursuant to § 1362(d) of the Code.
Generally the two problem requirements have to do with a shareholder being an individual (especially in the case of the shareholder’s death) and there only being one class of stock. Chapter 11 of Business Succession Planning reviews these requirements and describes the various methods of dealing with the issues of S corporations.
Sunday, March 29, 2009
Structure of the Buy-Sell Agreement
The three basic structures of the buy-sell agreement may be analyzed from the aspect of the source of funding of the purchase, from the perspective of the shareholders purchasing shares, from the perspective of the shareholders selling shares, and from the perspective of the corporation.
Chapter 10 of Business Succession Planning reviews the structure of the buy-sell agreement from these perspectives. It is important an advisor take into consideration the tax and other legal aspects of these structures. Adding to the complications brought by these factors is the frequent use of the hybrid structure whether the aspects of the structures are combined in one structure.
Creating the structure of the buy-sell agreement requires the business succession team to communicate and act together to document a solid and understood structure for the buy-sell agreement.
Chapter 10 of Business Succession Planning reviews the structure of the buy-sell agreement from these perspectives. It is important an advisor take into consideration the tax and other legal aspects of these structures. Adding to the complications brought by these factors is the frequent use of the hybrid structure whether the aspects of the structures are combined in one structure.
Creating the structure of the buy-sell agreement requires the business succession team to communicate and act together to document a solid and understood structure for the buy-sell agreement.
Friday, March 27, 2009
Buy-Sell Agreement
Once a succession plan is created in written form, the plan should be made enforceable. The document that makes the succession plan enforceable is the buy-sell agreement. In the corporate context the buy-sell agreement might be called a shareholder agreement. In the LLC or partnership context buy-sell provisions should be in the operating or partnership agreement.
The buy-sell agreement has a number of more specific functions or purposes and these are detailed in Chapter 9 of Business Succession Planning. Of course a primary purpose of the agreement is to deal with value. The purposes are accomplished through one of the three basic structures of the buy-sell agreement: cross purchase, redemption, and hybrid.
The buy-sell agreement has a number of more specific functions or purposes and these are detailed in Chapter 9 of Business Succession Planning. Of course a primary purpose of the agreement is to deal with value. The purposes are accomplished through one of the three basic structures of the buy-sell agreement: cross purchase, redemption, and hybrid.
Thursday, March 26, 2009
Creating the Succession Plan
Business owners of owner-managed businesses frequently do not prioritize and schedule planning time. In addition, the owners have difficulty planning as a group and in having critical conversations. If there is a group and a scheduled planning meeting, the meeting is often not conducted appropriately.
Chapter 8 of Business Succession Planning deals with the process that can create the succession plan. It deals with the two basic tactics to get the group discussing the planning issues, the questions technique and the fire drill technique. The chapter goes on to discuss the topics that must be reviewed and decided upon before a written plan can be produced. The production of such a written plan is a difficult but valuable basis for successful business experience.
Chapter 8 of Business Succession Planning deals with the process that can create the succession plan. It deals with the two basic tactics to get the group discussing the planning issues, the questions technique and the fire drill technique. The chapter goes on to discuss the topics that must be reviewed and decided upon before a written plan can be produced. The production of such a written plan is a difficult but valuable basis for successful business experience.
Wednesday, March 25, 2009
External Systems
Internal ownership systems are usually accounted for and understood. Ownership interests are purchased and held as capital accounts. External ownership systems involving those who have a critical interest of the business but are not owners are less well defined. The easiest example is the husband, who is an owner of the business, and his wife, who is a stakeholder of the business, one who has a critical but not direct ownership interest in the business.
In Chapter 7 of Business Succession Planning entitled External Systems the observation is made that if the stakeholder is ignored, frequently the plan will have to be revised to recognize the interest of the stakeholder. At the same time there need to be boundaries between the governance of the external system and the governance of the internal system.
For example, the well advised family-owned business has two areas of governance, one for the business and one for the family. For example, the family might have a family council and the business might have a holding company. The boundaries for these areas of governance need to be established and respected. If this is not the case, then the establishment of these governance structures and boundaries is the first step. The governance of the business must involve appropriate selection of personnel based on merit (not relationship to the family) and the culture of the company. The strategic and operating plans for the business must deal with the culture of the business and the process of authority and delegation. As appropriately selected managers come into the business, the planning cycle (analysis, written plan including actions, implementation, and analysis) should continue and involve these new managers. Frequently the issues of control, delegation, and trust are at the forefront.
The creation of a written plan containing wise decisions evolved from polling a group of diversely informed individuals (including those new managers) is the best way to deal with these issues.
In Chapter 7 of Business Succession Planning entitled External Systems the observation is made that if the stakeholder is ignored, frequently the plan will have to be revised to recognize the interest of the stakeholder. At the same time there need to be boundaries between the governance of the external system and the governance of the internal system.
For example, the well advised family-owned business has two areas of governance, one for the business and one for the family. For example, the family might have a family council and the business might have a holding company. The boundaries for these areas of governance need to be established and respected. If this is not the case, then the establishment of these governance structures and boundaries is the first step. The governance of the business must involve appropriate selection of personnel based on merit (not relationship to the family) and the culture of the company. The strategic and operating plans for the business must deal with the culture of the business and the process of authority and delegation. As appropriately selected managers come into the business, the planning cycle (analysis, written plan including actions, implementation, and analysis) should continue and involve these new managers. Frequently the issues of control, delegation, and trust are at the forefront.
The creation of a written plan containing wise decisions evolved from polling a group of diversely informed individuals (including those new managers) is the best way to deal with these issues.
Tuesday, March 24, 2009
Control, Power, and Prestige
For the dominant owner, the succession plan will be acceptable depending on the factors relating to control, power, and prestige. These factors will determine whether the dominant owner is comfortable with the plan. That comfort level will usually have something to do with the ability of the dominant owner to stop the succession process until some significant point is reached in the planning process.
As an example, a dominant owner of a corporation may agree to a sale of shares up to the point that the dominant owner is no longer owner of a majority of shares in the corporation. At that point the dominant owner may not feel comfortable owning less than a majority of the shares unless other things (such as the receipt of an appropriate amount of money) have occurred.
Chapter 6 of Business Succession Planning is titled Control, Power, and Prestige and deals with the importance of these factors in compiling an effective succession plan.
As an example, a dominant owner of a corporation may agree to a sale of shares up to the point that the dominant owner is no longer owner of a majority of shares in the corporation. At that point the dominant owner may not feel comfortable owning less than a majority of the shares unless other things (such as the receipt of an appropriate amount of money) have occurred.
Chapter 6 of Business Succession Planning is titled Control, Power, and Prestige and deals with the importance of these factors in compiling an effective succession plan.
Sunday, March 22, 2009
Meetings and Decisions
Many businesses hold meetings ostensibly “to make decisions.” In Chapter 5 of Business Succession Planning, the argument is made that meetings are not where decisions should be made.
Wise decisions are made when a manageable group of diversely informed individuals aggregate their judgments. The process of aggregation, polling, is done by the decision-maker, the one who has authority to make the decision.
While a meeting may be a place where information is efficiently disseminated, it is not a good place for decision-making. Polling is better done outside the meeting and is most accurate when done in writing. A meeting may, however, be an excellent place to announce a decision.
Creating a succession plan is done by documenting a series of decisions. It is essential for the quality of the planning that meetings be used appropriately.
Wise decisions are made when a manageable group of diversely informed individuals aggregate their judgments. The process of aggregation, polling, is done by the decision-maker, the one who has authority to make the decision.
While a meeting may be a place where information is efficiently disseminated, it is not a good place for decision-making. Polling is better done outside the meeting and is most accurate when done in writing. A meeting may, however, be an excellent place to announce a decision.
Creating a succession plan is done by documenting a series of decisions. It is essential for the quality of the planning that meetings be used appropriately.
Thursday, March 19, 2009
Values
Years ago I gained an insight from a fine book, Estate Planning for the Healthy Wealthy Family, Baris, Garrity & Neeleman (Allworth Press). For the authors this insight was “axiomatic” - that if you exercise personal choice in the development, management, consumption, and disposition of personal and community resources in harmony with your core values, you will likely experience a sense of self-fulfillment and personal well-being.
While I was doing succession planning work with business owners, I had not been asking about the owner’s core values. I now ask the owners to be able to articulate their values as is appropriate in the planning process. I find this leads to some definitional work and then hard work. What we discover is that this is work of a lifetime, not just for a planning project, and that it is valuable and rewarding work that should be diligently continued.
A value is a guiding principle that informs and controls thoughts, desires, feelings, choices, and behavior. A value is not a preference, but an enduring and essential attribute of character. Most owners are only vaguely aware of the principles that comprise their personal value systems. Most unthinkingly embrace an array of concerns and standards to which they assume most caring and intelligent people adhere. Few have consciously attempted to resolve the tension that inevitably arises when those concerns and standards conflict. If an owner’s value system is to serve effectively as the framework for the formulation of a plan, the owner must first clarify and prioritize its components. To bring clarity and order to the owner’s personal value system, the owner should reflect on the circumstances and experiences that have informed and shaped the owner’s hopes, fears, and perspectives. The product of this reflection should be memorialized in writing. The writing should be reviewed and altered from time to time to reflect changing circumstances and perspectives.
Chapter 4 of Business Succession Planning deals with Values. Advisors should encourage each owner to seek the resources, especially those available from counseling professionals, necessary to effectively think about and articulate his or her values. Ask each owner to work to define their values and then, as is appropriate in planning discussions, articulate relevant values. The planning results are much better where the owners are able to define and articulate their values.
While I was doing succession planning work with business owners, I had not been asking about the owner’s core values. I now ask the owners to be able to articulate their values as is appropriate in the planning process. I find this leads to some definitional work and then hard work. What we discover is that this is work of a lifetime, not just for a planning project, and that it is valuable and rewarding work that should be diligently continued.
A value is a guiding principle that informs and controls thoughts, desires, feelings, choices, and behavior. A value is not a preference, but an enduring and essential attribute of character. Most owners are only vaguely aware of the principles that comprise their personal value systems. Most unthinkingly embrace an array of concerns and standards to which they assume most caring and intelligent people adhere. Few have consciously attempted to resolve the tension that inevitably arises when those concerns and standards conflict. If an owner’s value system is to serve effectively as the framework for the formulation of a plan, the owner must first clarify and prioritize its components. To bring clarity and order to the owner’s personal value system, the owner should reflect on the circumstances and experiences that have informed and shaped the owner’s hopes, fears, and perspectives. The product of this reflection should be memorialized in writing. The writing should be reviewed and altered from time to time to reflect changing circumstances and perspectives.
Chapter 4 of Business Succession Planning deals with Values. Advisors should encourage each owner to seek the resources, especially those available from counseling professionals, necessary to effectively think about and articulate his or her values. Ask each owner to work to define their values and then, as is appropriate in planning discussions, articulate relevant values. The planning results are much better where the owners are able to define and articulate their values.
Tuesday, March 17, 2009
Critical Conversations
Most of the meaningful discussions concerning ownership of a business will be considered to be critical conversations. A critical conversation is one where a meaningful exchange of information or opinion occurs. Often there is an emotional context to the conversation.
It is very common to find that owners either avoid critical conversations or have difficulty conducting effective critical conversations. It is a skill which much be learned to plan effectively.
In Chapter 3 of Business Succession Planning there is an explanation of the methodology of conducting the critical conversation. Once this skill is mastered – and it does take some practice – owners can engage in critical conversations as a part of making good decisions in planning.
It is very common to find that owners either avoid critical conversations or have difficulty conducting effective critical conversations. It is a skill which much be learned to plan effectively.
In Chapter 3 of Business Succession Planning there is an explanation of the methodology of conducting the critical conversation. Once this skill is mastered – and it does take some practice – owners can engage in critical conversations as a part of making good decisions in planning.
Sunday, March 15, 2009
If It Were Not Mine, Would I Buy It?
The aspect of change is intimidating especially to the owners of a successful business. “If it ain’t broke, don’t fix it” is a mantra for many owners. Advisors will perceive opportunities for increased profitability, need for strategic planning, and deficiencies in entity maintenance leaving exposure to liability, and owners will have difficulty in appropriating resources and responding to these perceptions.
One of the best techniques to challenge the owner who is reluctant to change is to ask: “If this were not your business, as a savvy business purchaser, would you want to buy it? If not, why not?”
Perhaps the owner’s quick answer might be “Of course I would buy this business - it is a successful business with a good cash flow.” The follow up is to remind the owner what sophisticated purchasers do – they conduct a diligence investigation. Challenge the owner to conduct a diligence investigation and then answer the question.
It helps of course if you have a diligence checklist that provides the elements of a competent diligence investigation. As is known from most people’s personal experience, often things are in their best shape right before they are sold. Cars get detailed. House get painted and even remodeled to bring the desired sales price.
One of the best ways to manage a business is to prepare it for sale. To ask why a business would not be desirable to a purchaser is to begin on a valuable diligence investigation. It is an investigation most owners are not motivated to begin. But if they do the investigation, they find it is a valuable tool and motivator for executive management.
As advisors, we often perceive and indicate to owners certain areas of opportunity and deficiency to find that owners do not respond. There may be a variety of reasons for this, but we would be equally willing, and in fact enthusiastic, to respond to owner-perceived opportunities and deficiencies. Suggesting that the owner conduct a diligence investigation of the owner-managed business can be a good technique to stimulate the otherwise complacent owner.
One of the best techniques to challenge the owner who is reluctant to change is to ask: “If this were not your business, as a savvy business purchaser, would you want to buy it? If not, why not?”
Perhaps the owner’s quick answer might be “Of course I would buy this business - it is a successful business with a good cash flow.” The follow up is to remind the owner what sophisticated purchasers do – they conduct a diligence investigation. Challenge the owner to conduct a diligence investigation and then answer the question.
It helps of course if you have a diligence checklist that provides the elements of a competent diligence investigation. As is known from most people’s personal experience, often things are in their best shape right before they are sold. Cars get detailed. House get painted and even remodeled to bring the desired sales price.
One of the best ways to manage a business is to prepare it for sale. To ask why a business would not be desirable to a purchaser is to begin on a valuable diligence investigation. It is an investigation most owners are not motivated to begin. But if they do the investigation, they find it is a valuable tool and motivator for executive management.
As advisors, we often perceive and indicate to owners certain areas of opportunity and deficiency to find that owners do not respond. There may be a variety of reasons for this, but we would be equally willing, and in fact enthusiastic, to respond to owner-perceived opportunities and deficiencies. Suggesting that the owner conduct a diligence investigation of the owner-managed business can be a good technique to stimulate the otherwise complacent owner.
Saturday, March 14, 2009
Owners
Owners of an owner-managed business frequently do not prioritize planning and implement planning as a regularly scheduled activity. Moreover, they do not look at planning as a group activity.
Chapter 2 of Business Succession Planning deals with the planning process and how it involves the owners of a business. Most importantly it deals with how the advisor must control the owner’s expectation of what the planning process will produce.
Chapter 2 of Business Succession Planning deals with the planning process and how it involves the owners of a business. Most importantly it deals with how the advisor must control the owner’s expectation of what the planning process will produce.
Friday, March 13, 2009
Advisors
The first paragraph of Chapter 1 of Business Succession Planning states:
The universe of business succession planning is not the domain of one profession - it is not even under the influence or guidance of one profession over any other. There is no one person who can be "quarterback." There must be a team of advisors, and, to be as effective as possible, they must work together with the owners as a team.
Business Succession Planning was written for all advisors interested in business succession planning. That is also the intent of this blog - to reach out to all those advisors.
"The locus of points of the business succession universe may be visualized as being spherical – circular in all directions - multiple in tiers and dimension. One who would advise the business owner on succession must be familiar with the orbital issues involving business, estate planning, tax, valuation, and strategic planning. There is no one profession that may claim the universe as inherently its own or under its control. Each path influences the other. A change in one point necessitates a change in other points. The depth and complexity of the subject begs for collaboration. At the center of it all and most important, is the planning process."
The universe of business succession planning is not the domain of one profession - it is not even under the influence or guidance of one profession over any other. There is no one person who can be "quarterback." There must be a team of advisors, and, to be as effective as possible, they must work together with the owners as a team.
Business Succession Planning was written for all advisors interested in business succession planning. That is also the intent of this blog - to reach out to all those advisors.
Thursday, March 12, 2009
About the Book
This book provides all the necessary elements needed during the business succession planning process. The focus will be on the business, legal, and tax implications that need to be addressed. A CD-ROM will accompany the book that contains documents to enforce the plan with an emphasis on buy-sell agreements.
Did you know?
• 37% of all Fortune 500 companies are family owned;
• 60% of all public companies in the US are family controlled;
• 39% will change leadership in the next 5 years;
• 42% of CEOs who plan to retire in less than 5 years have not chosen a successor;
• 55% of CEOs 61 years or older have not chosen a successor;
• 36% have bought out a family member; and
• 37% have a written strategic plan.
Did you know?
• 37% of all Fortune 500 companies are family owned;
• 60% of all public companies in the US are family controlled;
• 39% will change leadership in the next 5 years;
• 42% of CEOs who plan to retire in less than 5 years have not chosen a successor;
• 55% of CEOs 61 years or older have not chosen a successor;
• 36% have bought out a family member; and
• 37% have a written strategic plan.
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