Transcript Slide 1

Employment and Succession
Planning for your Organization
Wednesday, June 19, 2013
“Someone's sitting in the shade today because
someone planted a tree a long time ago.”
--Warren Buffett
© 2013 Berman Fink Van Horn PC
www.bfvlaw.com
3475 Piedmont Road, N.E., Suite 1100, Atlanta, GA 30305
Tel: (404)261-7711 / Fax: (404) 233 -1943
Internal Succession Planning
“By failing to prepare, you are preparing to fail.”
--Benjamin Franklin
• In the United States, 64 million people, or 40% of the US
workforce, will be poised for retirement by the year 2020.
• The resulting talent gap will directly impact the future
sustainability of every enterprise.
• It has never been more important to develop and retain talent
at every level of a company.
• Many companies see the value of building a succession
planning strategy but simply do not know where to start.
• The following questions can help start the process.
Internal Succession Planning
– What is the average age of your employees? What
percentage of your employee base is retiring within the
next five years?
– What is your current process for identifying employees
with a high potential to take on leadership roles?
– How do you identify internal candidates who may be ready
to step into key roles today?
– How do you ensure that you are training the right
individuals for the leadership roles and measuring them
accordingly?
– What if a key contributor or member of the executive team
left unexpectedly?
A Few Items to Benchmark Organization’s
Approach to Succession Planning
• Bottom-Up: Develop tools and metrics to track employees’ development
and to identify top talent in the organization.
• Bottom-Up: Design a strategy for growing people through regular
evaluation, individualized development plans, and formal or informal
training. Give them a clear view of where they can go in the organization.
• Bottom-Up/Top-Down: Create a succession pipeline as a function of the
current and future needs of the organization, the readiness of your
internal talent, and where that talent desires to go in the business.
• Top-Down: Place responsibility of CEO succession planning on the Board
and be intentional about routinely giving candidates for top positions time
in front of them.
• Top-Down: Finally, utilize the Board as a mechanism for continuity and
knowledge transfer. Successful CEOs and key leaders should have a place
on the Board after stepping down to continue to guide following
generations of leaders.
Internal Succession Planning Examples
• Microsoft: The departure of Bill Gates.
• McDonalds: One ready now, one ready future.
• Green Bay Packers: The departure of Brett Favre.
• UNC Tar Heels: Dean Smith to Bill Guthridge to Matt
Dougherty to Roy Williams.
• Rutgers University: Use of a Committee.
Exit Planning for a Business Owner
“I have a very strict gun control policy:
if there’s a gun around, I want to be in control of it.”
--Clint Eastwood
• Control over the Process: Eventually every owner will exit
their business voluntarily or otherwise. Proper Exit Strategy
Planning will enable the Business Owner to have an element
of control over the process.
Identify Exit Objectives
“If you don't know where you are going, you might wind up
someplace else.” --Yogi Berra
• The process begins with answering three questions:
⁻ How much longer does an owner want to work in the business before retiring
or moving on?
⁻ What annual after-tax income does the owner want during retirement?
⁻ To whom does the owner want to sell the business?
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Benefits to the Owner of Identifying Objectives:
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Clarifies priorities.
Facilitates progress by identifying a desired outcome.
Controls and defines the Exit Strategy Planning process.
Shift wealth to children.
Provide charitable gifts or transfers.
Reward employees.
Receive full value for the business.
Take business to the next level.
Advisory Team
• Attorney – Estate, Tax, Corporate
• Wealth Management Advisor, Financial Planner
• CPA
• Insurance Advisor
• Valuation Specialist
• Psychologist
8 Ways to Exit Your Company
1. Transfer Company to a Family Member
Family Succession Issues:
– Only one third of family businesses are passed to the second
generation
– Only 10% are passed to the third generation
– Less than 4% are passed to the fourth generation
Reasons:
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Children may not get along
Different career goals
Inability for parents to achieve financial goals
Little to no cash from closing available for retirement
Increased (and continued) financial risk
Unable to run the business
8 Ways to Exit Your Company
“Strategy is not really a solo sport – even if you’re the CEO.”
--Max McKeown, The Strategy Book
Ingredients of Successful Family Transfer:
• Involve Family Members in the strategy and start early
• A written plan
– Defines financial independence
– Defines fairness in distribution
– Creates a Timeline
• Only one child becomes sole successor or at least control
• Business transition plan is fair to all
• Parents achieve financial security independent of the business
• Business active child demonstrates the ability and willingness to run the
business
• There is a backup plan
8 Ways to Exit Your Company
2. Sell the Business to One or More Key Employees
The 5 Rules of Engagement for Insider Transfers:
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Do not take an inordinate amount of risk on the front end.
Do not give up control until receiving the last dollar.
Shorten the timeline as much as possible.
Minimize taxes for both parties.
Utilize the cash flow of the business as efficiently as possible since that
is the resource paying for the transfer.
8 Ways to Exit Your Company
3. Sell to Key Employees Using an ESOP
− ESOPs allow enable owners to convert illiquid assets into cash
post-closing.
− In the context of privately held corporations, owners can use an
ESOP to create a ready market for their shares of the company.
− The company can make tax-deductible cash contributions to the
ESOP in order to buy out an owner’s shares gradually (allowing the
owner to maintain some level of control over the company).
− The company can have the ESOP borrow money to buy out an
owner’s shares such that the ESOP can purchase larger amounts of
stock at one time.
8 Ways to Exit Your Company
4. Sell Company to One or More Co-Owners
“Agree while everyone is agreeable.”
-- Jeffrey N. Berman
Shareholder Agreements – Buy/Sell Agreement
• Death
• Disability
• Voluntary Transfer
• Involuntary Transfer
• Retirement
• Forced Buy/Sell
-Insurance
-Formula
-Payment Terms
8 Ways to Exit Your Company
5. Sell to Outside 3rd Party
- Plan for the Sale – Start Early
- Broker or Investment Banker
- Purchase Agreement
- Purchase Price
- Funding Mechanism - Cash vs. Note
- Remaining Employed
- Asset vs. Stock
Benefits to Owner:
- Cash at closing.
- Eliminate or reduce financial risk
- No family succession issues
- Speed of exit
8 Ways to Exit Your Company
6. Engage in an Initial Public Offering
Pros:
• High valuation
• Cash for the business
Cons:
• No liquidity or exit at closing
• Loss of control
• Additional reporting and fiduciary requirements
8 Ways to Exit Your Company
7. Retain Ownership but Become a Passive Owner
Pros:
- See how proposed successor will perform
- Ability to return
Cons:
- Conflict – growth vs. income
- Inability to give up control
- Continued risk associated with ownership
8 Ways to Exit Your Company
8. Liquidate
• Liquidation is not generally resorted to unless the owner wants to (or
has to) immediately leave the company and has no other alternative
exit strategy in place.
Pros:
– Speed
– Cash
Cons:
– Minimal proceeds
– Significant tax consequences
– Negative effect on employees/customers
Conclusion
“If at first you don't succeed,
destroy all evidence that you tried.”
--Steven Wright
Creating the Rules:
Drafting and Revising Handbooks
Tips to Drafting Employee Handbooks
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Rules must comply with federal and state laws.
Implement rules that fit your organization.
Implement rules you will actually enforce.
Publish and distribute your rules.
Have employees sign acknowledgements of receipt of the
handbook and policies, and maintain and track the signed
acknowledgements.
• Update your employee handbook and policies.
– Harassment
– Pay Policies– Off-the-Clock; Overtime; PTO
Enforcing the Rules:
Equal Enforcement of Company Rules and Policies
Tips to Ensure Your Company Makes and
Enforces the Rules Equally
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Review prior incidents and discipline.
Follow handbook policies on disciplinary procedures.
Limit “exceptions” where possible.
Examples to avoid:
– Top producer gets away with boorish behavior because he
generates $.
– Inconsistencies with granting of vacation days.
– Return to work and requirement of physician’s note.
Protect the Game Plan:
Confidential Information and Trade Secrets
Tips to Protect Your Company’s
“Game Plan”
• Have employment agreements with restrictive covenants
(NDA’s, NSA’s, NCA’s).
• Review all Agreements – especially prior to May 11, 2011.
• Covenants must be reasonable in duration, scope of
prohibited activities & Geographic Territory.
• Four common flaws:
– Scope of prohibited activities is too broad: “Any capacity”
– Restricted territory is “springing” and expanding.
– Non-Solicit is not limited to customers with whom
employee had material contact.
– Non-Solicit prohibits “accepting” of business.
Tips to Protect Your Company’s
“Game Plan”
• Limit access to databases, documents, or devices to
authorized employees.
• Require authorized employees to use passwords when
accessing sensitive information.
• Label sensitive documents as “Confidential”.
• Account for all company devices at all times.
• Issue Company devices or have a BYOD policy.
• Monitor email usage/unusual level of downloads.
• Conduct exit interviews and disable company devices at the
time of employment termination.
Tips for Using Severance Agreements to
Limit Exposure
• Give adequate consideration. Must give something above
what employee is already entitled.
• Can only waive claims that may exist up to date of signing.
• Make sure waived claims are clearly spelled out and broad.
• Special rules apply to waiver of age discrimination claims.
– 21 days to consider
– 7 day revocation period
– If group release 45 days and statistical data
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Confidentiality provision.
Non-disparagement .
Add restrictive covenants or reference existing covenants.
Choice of law and venue provisions.
Counterparts.
Confront Problems:
Don’t Drop the Ball
Tips to Prevent Liability
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Recognize “red flag” situations.
Notify the right management personnel.
Be selective as to handles complaints.
Properly Investigate the matter.
Consider bringing in an outside investigator if appropriate.
Issue appropriate level of discipline.
Document actions taken.
Follow-up to ensure problem is solved.
Additional Information
- bfvlaw.com
- Sportsfansguide2hr.com
Thank you!