Boating Industry

March 2016

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March 2016 | Boating Industry | 23 [ Best Laid Plans ] capabilities of the buyer and the risk the seller is willing to adopt. An exit plan should be flexible and adaptable so it can work seamlessly with the ebb and flow of market changes. Regardless of what method you choose, the biggest mistake owners make is focusing too much on the how of transitioning and not on the what. Spader says it is important to first identify what the goals are of both parties. "They get wrapped up in the mechanics in estate planning and avoiding taxes and a lot of other things that they forget to step back and say what are the key principles and goals and values around which you want this transition to occur. And those should determine the how instead of the how determining the what," Spader said. "When we go into organizations the first thing that we want to do is talk about what exactly do you want to have occur? What are the values involved? What are the most important goals we have? And after that we look at the various methods, because there are literally hundreds of different options to make a transition happen." Part of planning an exit strategy should be planning the life of the current principal post- ownership. Particularly in businesses that choose to transition ownership either to a family mem- ber or a key employee over time, one of the big- gest sticking points is the blood, sweat and tears the current owner has put into the company. They have invested quite a bit into the success of the business, so what does their new life look like after selling? Spader said any business planning an exit strategy should incorporate a plan for the cur- rent owner to have meaningful goals and activi- ties after ownership, as it will make the process happier and smoother for all parties involved. Family businesses have many struggles, but none so intricate as planning for a generational transition of ownership. Some 70 percent of family-owned businesses fail or are sold before the second generation gets a chance to take over, according to the Harvard Business Review. Those numbers only get slimmer as you move through the generations. Estate planning is very important for a family business, but life planning is even more so; while it is important for an owner to plan for the event of their death, the more likely event is that they live. "Lifetime planning defines the business owner's long term relationship with the business in terms of ownership, involvement and the controlling interest. This may involve the next generation family members, key employees and/or an external third party. It is not a matter of 'if', it is a matter of 'when' the relationship changes," said Bielen. "A detailed lifetime transition plan determines with how best to structure the ownership transition considering the owner's financial requirements,, how to prepare the next generation to assume the operational responsibilties, and who ultimately is best suited lead and control the business going forward." The lifetime transition plan shpuld take into consideration the business structure, tax implications; outlook, the skills and capabilities; and the passions, goals and interests of the next generation. The plan should do everything possible to align those respective elements, all while at the same time balancing the financial security requirements of the exiting shareholders and the business's capitalization and growth requirements. "One key tool that we believe is critical in the lifetime transition planning process is the application of detailed financial analyses of the business, its value, its cash flow, and the pre-cash available to fund an internal transition, relative to the individual's personal needs, considering all their assets and all their income sources: business income, real estate income, distributions for retirement accounts, earnings from investment accounts, and then determining how to meet those requirements relative to the transition and the growth perpetuating the family business," said Bielen. Owners who want to pass their business on to a family member need to begin planning at least 10 years in advance to ensure the success of the transfer, according to Spader. This gives business owners time to work with the family member purchasing the business and determine if that person fits the motivational profile. "There are several different methodologies we use and tools we can use to do that, and what we're finding more and more so is that there are many in the [next] generation that don't [have that motivation], and the sooner we can identify that they're not ready or that there's a significant question about whether they want to be the next owner, the better, because again the further out we do that, we can ask the right questions and make sure people are prepared for it," said Spader. In one case, Spader was working with a dealership that had an adult child who was confident he wanted to be the next owner. They began a coaching conversation for a period of three years to discuss all that was involved in owning the dealership and what the role actually looks like. That adult child came out three years later with a better picture of what it meant to be an owner and felt confident knowing he did not want it at all. As this individual was a strong performer in the dealership, any sane person who eventually buys the business will keep him on staff where he can work in a role he enjoys. "That was really helpful for his parents, because they then knew [it was] off the table," said Spader. "Because they were looking 10 to 12 years out, we had that two to three years to make that determination without a lot of pressure." How to execute succession If a family member is interested and does fit the profile, it is time to look at all of the gritty details of succession. There are three different values for the business to consider: the fair market value of a business, based on its earnings and equity; sustainable value, which is the value the owner needs to realize to meet their financial security requirements post-sale; and the transition value, which is what the business can afford in terms of financing an internal transaction. "With a family transition, you determine what mom and dad need for financial security, what the business is worth from a fair market standpoint, but also what value that the business can actually fund, because the second generation often times has inadequate resources to fund an internal purchase," said Bielen. "It's a balance between mom and dad's financial security, again what the business can afford and then also what FAMILY BUSINESSES REQUIRE EXTENSIVE SUCCESSION PLANNING "The odds are pretty good that if you start far enough out that you can make a successful transition." — David Spader, Spader Business Management FAMILY BUSINESSES… continued on page 27 BEST LAID PLANS… continued on page 24

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