Does Your Family Business Have a Succession Plan?

Retirement Daily Guest Contributor

By Mark Bordelove

I’ve often wondered about the dynamics of successful family businesses and how things really work from the inside out. The stories are many about families blown apart from internal strife, jealousy, and lack of structure. Often, the second generation is given “top” positions and “top” dollar without having earned the role or money. A lack of motivation, bad financial habits, and no sense of buy-in can be the result of the first generation making bad decisions as it relates to the second generation.

My friends and fraternity brothers, Jimmy and Jeremy, grew up in a successful family business that was recently sold by their father. The financial considerations and action plan we’ve developed will help guide them as they enter the next chapter of their lives.

The company began in 1969 as a partnership with another friend of their father. By the mid-1990s the company was doing $200-$300 million in sales annually and when it was sold in 2017, had reached approximately $2.2 billion a year with Jimmy as EVP of operations and Jeremy, a CPA by training, president.

They shared with me their views on things that went right. First, everyone had clearly defined roles and a hierarchy developed at the start of their careers in the business. This accomplished something so simple and important. “Everyone stayed in their lane”, according to Jimmy. Nobody tried to overstep their boundaries and create problems. Egos were checked. This was a fantastic strategic move by the father and kudos to the second generation for respecting the process and their father in this regard.

What was not defined, though, was what would happen to the second generation in the event of a sale. How would a succession plan or exit strategy look? The sweat equity they built up was not clearly accounted for. This was to become a challenge because the second generation was left to ponder their roles in any future ownership that would occur. Succession was a key issue which would have been best addressed in the mid-1990s when it was obvious the company was growing exponentially. Once a succession and exit strategy was defined in writing, it should have been reviewed annually with all the key players and the board of directors. This way, if wishes or goals changed the lines of communication are open and encouraged and the document can be fluid and easily adaptable.

The second generation told me that they always had good habits regarding savings and planning. They took advantage of the opportunity to buy into the business and receive equity early on. They never lived like “rock stars” and always were trying to put away extra dollars in some savings vehicle.

By 2014, Dad was 73 years old and had cut his workload significantly. He felt the time was right to explore an exit strategy. In late 2016 a preliminary deal was reached with a private equity firm and due diligence began. Jimmy told me that work was 24/7 for months, and the banking team really was not as involved as they had hoped. This challenge could have been eliminated or reduced significantly if, during the process of interviewing bankers, they had defined expectations for the level of assistance. It ultimately became a frustrating experience they managed internally.

Once the sale happened, Jimmy and Jeremy agreed to stay on and signed standard employment contracts which included 18 months of severance pay and 12 months of health care benefits. Employment agreements are signed in situations like these to maintain some continuity of management when there is new ownership. Jimmy and Jeremy fought to maintain their current pay structure after the sale. When they asked my opinion, I felt it absolutely imperative they hire employment attorneys to negotiate this for them. I always recommend independent counsel to take the emotion out of decisions and hopefully avoid any challenges down the line regarding issues that could arise.

Jimmy and Jeremy had bought into the business in 2004 when the company experienced tremendous growth. At the time of the sale, their initial investment was returned with no equity premium. A premium was not initially part of the succession plan when the sale was completed. This created another problem because the valuation of the company in 2016 was five to seven times what it was in 2004. They felt strongly this was a dramatic mistake that should have been discussed during the negotiations. It could have provided them some security and peace of mind. Once again, early discussion with open lines of communication could have eliminated a problem and ultimately some hurt feelings.

Jimmy humbly admitted that one of his regrets throughout the process was that he really didn’t work on a Plan B for when the end of his work with the company would come. This became a challenge for Jimmy mentally more than anything because he felt he was just somebody who had worked at a company and was now out of a job. To help him, I reminded him that he had taken a conservative approach with investments throughout his career, saved money and put himself in a position where he does not have to take a job just for a paycheck. And, he was part of building something very special with his family that not many people get the chance to experience.

The first step for Jimmy was to roll over his 401(k) and consolidate his investments under our management so that we could evaluate and begin a tactical investment strategy. He generally has a moderate risk profile so at this point he is not overly in love with the market. In this case, Jimmy was comfortable with a 65/35 split between equities and fixed income. One of his objectives is to be somewhat tax efficient so we do not have much turnover. He is also looking for income opportunities in non-correlated investments, so private REITs are also a consideration.

At 50 years old, Jimmy is not yet ready to retire. Maybe if this had happened at age 60 he would feel differently. He’s still highly motivated to contribute to a business but just not sure at what level or what industry. He considers himself a “grinder” with experience at all levels of business. My advice to him is to take his time. There is absolutely no rush to make a decision. He is fortunate that he does not have to run out and take a job for the sake of a paycheck. I told him to enjoy his time because for twenty-eight years he has not had enough of it.

Jimmy has put himself in a terrific position over the course of his career. He has built a terrific resume for future employment and has made smart, conservative financial decisions. I really look forward to seeing how the next chapters of his life play out for him not just as a client but as a friend.

About the author

Mark Bordelove became a licensed financial advisor in 2000 and co-founded Bordelove Foster Wealth Management in 2009. A devoted husband and father, Mark has also completed two Ironman competitions

Mark Bordelove offers securities and advisory services through LPL Financial, a registered investment adviser, member FINRA/SIPC. Mark Bordelove and LPL Financial are not affiliated with Jim Cramer or TheStreet. This material was prepared by Mark Bordelove.

This is a hypothetical situation based on real-life examples. Names and circumstances have been changed. The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual. To determine which investments or strategies may be appropriate for you, consult your financial adviser prior to investing.


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