PASSING THE BATON: BUSINESS TRANSITION PLANNING

1. PASSING THE BATON: BUSINESS TRANSITION PLANNING Jonathan R. Bauer 208.388.4885jbauer@hawleytroxell.com

2. HAWLEY TROXELLIndustries Served / Practice Areas • Full Service Business Law Firm • Complex Commercial Litigation • General Business/Corporate Advisors • M&A • Estate Planning / Business Transition Planning • Real Estate • Employment Issues • Intellectual Property

3. BACKGROUND Jonathan R. Bauer • Business Law • Estate Planning/Probate • Business Transition • Real Estate Law

4. PRESENTATION OVERVIEW • Some Facts • A Few Brief Case Studies • Tough Questions and Answers

5. A FEW FACTS Jonathan R. Bauer

6. A FEW FACTS • What is business transition or business succession planning?

7. FEW FACTS • What is involved • Estate Planning • Business • Management • Financial Planning for owners • Tax issues • Life Insurance

8. FEW FACTS • Team Effort • Business Owners/Families • Employees or other successors • Attorney • Financial Advisor • Accountant • Sounds Expensive! • “I know a guy….”

9. FEW FACTS • Closely- held businesses permeate our economy • 90% of the 15 million businesses in US • 33% of Fortune 500 are family owned or controlled • 40% of GNP is generated • 78% of all new jobs • Virtually ALL lose primary owner to death or retirement

10. FEW FACTS • 81% of family owned businesses want/believe or plan for the business to stay in the family • 70% don’t survive first transition and almost 90% don’t make it to the 3rd generation • Why? ‘Cause its like fishing…

11. FEW FACTS (I must talk fishing) • Spin Rod/Entry Level Position • You cast and they reel/Early Successes • Read the water/Start educating them on the business • Let them cast and reel/Mistakes and problem solving

12. FEW FACTS (I must talk fishing) • Make them buy some of the first FF; Equipment/Skin in the game • They fish alone but with support/Board of Directors and President • Give them the keys to the boat and they will be landing the 180lb tarpon you never could catch – they are taking you fishing now

13. FEW FACTS • Specifically, why do it? • Business Continuity/Founder’s Dream • Family Continuity • Retain Key Employees • Tax implications • Retirement/Maximize business value • Capital and liquidity needs

14. FEW FACTS • Why Don’t They Just Do It? • Overwhelmed/Too Busy • Uncertainty • Denial • Lack of Control

15. FEW FACTS • Why Don’t They Just Do It? • Conflict Averse • No Perfect Answer • Fee Averse • Lack of Understanding Financial Resources

16. FEW FACTS • How do you get them to do something? • Education • Trust • Team Effort • Scare the heck out of them

17. FEW FACTS • Without a plan or process most business owners and management teams hope that succession will turn out ok.

18. FEW FACTS HOPE IS NOT A STRATEGY!

19. CASE STUDIES Jonathan R. Bauer

20. CASE STUDIES • Before • After (bad) • After (good)

21. CASE STUDIES (Before) • Husband and Wife owned • “Small/Mid-Sized” (about $2.5mm value) 30 year old business • Live nicely/modestly and work hard • Son in the business; really good at running the projects and crews • H&W run back office; bidding; bonding; business formalities; employment issues • Questions: when; how much; how pay; who’s in charge; who runs projects; relationships; value (tax reporting v. “real”)

22. CASE STUDIES (After- Bad) • Husband; Wife uninvolved • “Midsize” (about $4mm value) business • Started it from the ground up, very successful • Sold their share to key employee/part owner two years earlier • Payments slowed after a year, then stopped • Question (from them this time): What can we do? • Answer: Not much

23. CASE STUDIES (After- Good) • 2 Owners – One “project guy”; one “back office guy” • “Midsize-Large” (about $10mm value) business • 5 second generation buy in, came with cash • All new owners on board/now they have regular board meetings • Original owners still majority shareholders • Business growing (even a bit through the recession) • One fell out and was required to sell back shares • Remaining about to buy out original owners after 6 transition years

24. TOUGH QUESTIONS Jonathan R. Bauer

25. QUESTIONS • If you die or become disabled unexpectedly, can your family or partners continue to run the business without you?

26. QUESTIONS • If you die unexpectedly, and have partners, are you sure they will pay your family a fair price for your interest?

27. QUESTIONS • How do you protect your family in the event of your early death?

28. QUESTIONS • Will you have enough income when you retire?

29. QUESTIONS • Do you have a management succession plan in place?

30. QUESTIONS • Does your succession plan accommodate siblings with different skills or different interests in the business?

31. QUESTIONS • Are you willing to pay the costs of planning to protect your business and your family?

32. QUESTIONS (continued) • Are you willing to give up some control over the business and decision making?

33. QUESTIONS (continued) • Are you and your spouse in agreement on the ultimate disposition of the family business?

34. QUESTIONS (continued) • Are you willing to face the fact that at some point you will retire or die?

35. QUESTIONS (continued) • Are you willing to deal with a certain amount of complexity in your business succession plan?

36. QUESTIONS (continued) • Are you concerned enough to take action? • …you should be.

37. THE MOMENT OF TRUTH • “…The final test of greatness in a [business owner] is how well he chooses a successor and whether he can step aside and let his successor run the business.” • Peter Drucker

38. TEN STEPS • Face reality of constant change • Develop non-business interests • Establish outside resources • Prepare the business for transfer • Identify your ideal replacement(s) or concede there are none

39. TEN STEPS • Review your financial statements • Put aside your ego • Determine your businesses value • Seek and use advisors • Start sooner not later

40. REMINDER!! HOPE IS NOT A STRATEGY!

41. BUSINESS SUCCESSION PLANNING Questions?

42. ESTATE PLANNING & BUSINESS TRANSITION PRACTICE GROUP Thank you! Jonathan R. Bauerjbauer@hawleytroxell.com