Succession planning pointers and check list

Features Secrets of Your Succession By Steve Bergsman A succession plan protects the value of your business ANTHONY M. GRAZIANO, MAI, AND HIS 69-YEAR-OLD FATHER, ANTHONY S. GRAZIANO, MAI, have worked together since 1992. Six years ago, they hired a consultant to create a formal succession plan for their Toms River, N.J., appraisal and real estate firm. Across the state in Cranford, Joseph C. Baldoni, MAI, and his father, Joseph E. Baldoni, MAI, find themselves in a similar situation, but without a formal succession plan for their firm. At what point does a family business need to come up with a plan for family succession? The answer is very simple: immediately. When does it usually happen? Sometimes never, which can lead to a host of problems, both familial and financial. IMMEDIATELY, IF NOT SOONER “The best time [for succession planning] is now, and when people usually do it, it's too late,” warns Edward Rosenfeld, a New York City-based family business adviser and consultant. “I often see fathers, mothers or both, planning to go with their shoes on. They are into their 80s and the kids are already in their 50s and 60s and have never taken on [management] responsibility. If things have gone on that long, it's hard to help anyone,” Rosenfeld says. The Graziano family is on track, with Anthony M. now the managing director of Integra Realty Resources — Coastal N.J. “We have at this point clearly established my father's role in the company and the things he gets involved in,” Anthony M. says, adding, “The truth of the matter is, succession is never over until the very last day of the founder, but I think we are doing very well.” However, at Appraisal Associates, Inc., Joseph E. still serves as president while Joseph C. is vice president. “My father is 70 and the succession plan is very informal at this point,” Baldoni Jr. says. Age is definitely an issue in the appraisal world. In 2011, the Appraisal Institute reported that the average age of U.S. appraisers is 53, while the average age for AI's Designated members is even older. Many of these appraisers run small, family businesses and often they have children involved in the business as well. "The average age of family-business entrepreneurs who come to us for help with succession planning and succession management issues is 57, and they are looking to work another eight to 10 years,” notes Don Schwerzler, founder of the Family Business Institute Inc. and the online-based organization Family-Business-Experts.com, both of which are headquartered in Atlanta. “Generally, we find the transition process takes three to five years, although one trip to an oncologist or cardiologist can quickly change that timeframe.” TWO SIDES TO SUCCESSION There are two ways to consider the succession process for a family business: the hard (business) side of the equation, and the soft (family) side of the equation. The hard refers not to difficulty, but to numbers assessment, or in short, valuation — which typically shouldn't be a problem for appraisers. Still, Schwerzler says that his valuation expert reports that, on average, 50 percent of family-business owners underestimate the value of their business and 50 percent overestimate the value. “If that premise is true, family-business owners are wrong on the value of their business almost 100 percent of the time, yet knowing what the business is worth is a very important part of the succession process,” Schwerzler says. Graziano Jr. says that determining value is less of a problem for family appraisal businesses; rather, the main difficulties are estate and tax implications. The soft part is what Schwerzler calls the family business assessment, which is a series of confidential interviews with all family members and spouses. If you are going to create a succession plan for the business, first create a succession plan for the family, he advises. “One of the most difficult problems with family business succession is that the parents want to be fair and equal to all of the kids, which becomes especially problematic if there are kids involved in the business and kids who are not involved,” Schwerzler says. “Estate equalization can often be a stumbling block to the succession management process.” James Anderson, a consultant with BPM Accountants and Consultants in Santa Rosa, Calif., deals with a lot of complex family dynamics. And the result? “The families waited too long to plan and then they try to have ownership with their kids, but the kids don't like each other,” Anderson says. “The parents transfer ownership without buy/sell agreements or mechanisms for one to buy out the other. Then the kids go to war. There needs to be some way of achieving equality among the siblings.” Anderson's three overarching rules for keeping the peace: 1. Do not transfer ownership or employ a child if he or she does not have the skill set to be employed in that business. 2. Do not give up control of the company until you know you have a plan in place that is solid and working. 3. Do succession in small chunks until the subsequent generation is worthy of running the business. “The first thing you have to determine is which family members would truly be qualified to take over the business,” says Anderson. “If none of them are qualified, you might consider the possibility of hiring a general manager to train one of the children to be the candidate.” Anderson sits on the boards of two family businesses, and for both companies an interim CEO was hired. “The children are working underneath the CEO and will do so for about five years,” Anderson says. “The CEO will gradually be turning over the reins as they get trained. Management will go from father to independent CEO to the next generation.” Consultants or advisory boards are also ways to bring independent focus to the family succession process. DIVIDE AND CONQUER “I have been putting together a list of our 2012 goals,” Joseph C. Baldoni says. “And I'm putting together how responsibilities are divided between my father and me. It's interesting because I see my responsibilities doubling from two or three years ago, when he had two or three pages. Now I have two or three pages of responsibilities and he has half a page, but I still consult him daily for advice.” Baldoni says that “we've been doing succession planning in-house, between us, and there hasn't been any major friction, which is the reason we haven't stepped outside yet.” Across the state in Toms River, Anthony M. Graziano has benefited from a smooth succession. “What my father has been doing for 25 years, I do all of that now,” he says. “I just have the support and input from him. It's nice I have a sounding board, someone I can talk to with a lot of experience. He gave me the reins in 2005, but it all didn't happen in 2005 — it happened every day leading up to the day when we decided to stop having him do certain things.” Graziano's tips on what worked for their succession planning: ▪ Agree. The person who is being succeeded and the successor have to commit to the same goals. ▪ Understand. The successor needs to realize that every once in a while, maybe unintention ally, the person being succeeded is going to get involved. ▪ Trust. The person giving up control has to know that the person taking over can do the job but be prepared to allow the successor to make mistakes. There is just one other thing to remember about family succession: It sometimes doesn't come cheap, especially if there are attorneys, accountants or consultants involved. “The cost of succession will impact cash flow and that has to be accounted for in the marketing and business development plans,” Schwerzler cautions. “The family business needs to grow by about 15 to 18 percent a year to cover inflation and the costs associated with succession, and if it is not doing that, it will get you into trouble.” “One lesson that I have learned working with hundreds of family businesses over a career span of more than 40 years is that every family business is complex and unique in its own way,” Schwerzler says. “Each appraisal business is different, but one thing they all share in common is the need for a formalized succession plan.” Steve Bergsman is a freelance writer and author of several books, including his latest book, “Growing Up Levittown: In A Time of Conformity, Controversy and Cultural Crisis.” THE MAN WHO WOULD BE KING “I'm a member of the Appraisal Institute,” says Joseph C. Baldoni, vice president of Appraisal Associates, Inc. “At the first meeting I went to after I joined, the president of the Metro New Jersey Chapter presented me with my certificate on becoming an Associate member (he's now an MAI). As part of the speech, the president joked that I had become my father's 401(k) plan and everybody laughed. I didn't understand the true meaning at the time, but now that we've gotten to the point where we're transitioning, I do think I am his 401(k) plan. It's not that he's not financially secure for the future, but he could have sold the company and walked away years ago. I look back on the statement from 12 years ago when everybody laughed, and I realize how true it was.” HARD QUESTIONS Edward Rosenfeld, a family-business consultant, recommends families answer several questions on succession: 1 Is there an objective process for the younger family member to develop? L Is there a measurement for performance and accountability in place? 2 Is there a business plan in place that operates parallel with the succession plan? Succession and business planning need to operate hand-in-glove. If you want your 30-year-old to run the business, you want to know that it is going to be a healthy business in the long-term. 3 Pace yourself. The older, entrepreneurial owner often turns to his or her attorneys and accountants for advice, usually about gifting, tax consequences and similar topics. But if the entrepreneur hasn't developed a succession plan or developed the management skills of the successor, or if there are two children in the business who both want leadership roles, there can be problems. If one starts giving away shares of the business prematurely, the entrepreneur may be creating long-term problems.