Family Owned Business by Marian Matthis

OCTOBER 26, 2012 | A PROMOTIONAL SUPPLEMENT TO THE NASHVILLE BUSINESS JOURNAL

ROUNDTABLE ADVISORY TEAM

INSIDE TIPS FOR BUILDING YOUR ADVISORY TEAM PAGE 3

PLANNING FOR A SALE OR RETIREMENT

WHO WILL SUCCEED YOU? PAGES 5,14

HIRING:

FINDING TALENT FROM THE OUTSIDE PAGE 7

TAXES & REGULATIONS:

HOW TO NAVIGATE THE MAZE PAGE 8 PRESENTED BY

FAMILY-OWNED BUSINESS ROUNDTABLE ADVISORY TEAM

2 What if

you could be a fly on the wall in the room where some of Nashville's most trusted advisers were gathered to discuss topics important to your business? This publication is designed to offer an inside look at pertinent issues through the eyes of a variety of experts in many fields. This is your roundtable discussion with Nashville's Family-Owned Business Roundtable Advisory Team.

James M. McCarten, Burr & Forman LLP

George Mabry, CapStar Bank

Jim is a partner in Burr & Forman LLP’s Corporate, Trusts & Estate, and Tax practice groups. He is a Fellow in the American College of Trust and Estate Counsel and has a broad range of tax experience, including representing clients during audits by the IRS and/or Tennessee Department of Revenue; crafting tax structures for new businesses; counseling clients on the tax aspects of business exit strategies and business succession issues; designing tax-effective executive compensation packages; creating appropriate estate plans; and counseling families on special needs planning.

George is a Senior Vice President, Private Banking at CapStar Bank, having been Director of Private Banking for US Bank. At CapStar, Mabry specializes in personal and business lines of credit, construction loans and home equity lines of credit. He serves on the Steering Committee for the popular Thanksgiving Day fundraiser, the Boulevard Bolt, and on the board of the Episcopal Churchmen of Tennessee.

Steve Thorne, Family Wealth Management, LLC

Timothy Van Cleve, Rodefer Moss & Co, PLLC

Steve is Chief Manager of Family Wealth Management, LLC. Steve has been an owner, manager, and adviser to family businesses and individuals for over 25 years. He and the team at Family Wealth Management provide independent, multidisciplined financial services to families, businesses, non-profits and individuals.

Tim has more than 15 years of public accounting experience, all with Rodefer Moss & Co, PLLC. His experience includes financial statement assurance services, tax compliance and planning, and consulting for various tax, accounting and operational matters, although most recently he has focused on tax related services.

Jim Cumbee, Managing Director, Tennessee Valley Group, Inc. Jim is an astute businessman with 25 years of corporate and entrepreneurial deal making experience. As a lawyer and Harvard MBA, Jim brings a disciplined approach to helping business owners who want to sell and to meet investors who want to buy.

THE FAMILY BUSINESS OF TODAY

The Family Business: A Powerful Force in the Economy BY MELISSA WEBB Nashville area freelance writer and publicist

Family businesses continue to be a powerful force in the nation’s economy. In fact, according to the Small Business Administration (SBA), family-owned businesses account for 90-percent of all businesses in the U.S. (large and small). “When we talk about family-owned business, we are talking about a very big slice of the business world,” said Steve Thorne, Managing Director of Family Wealth Management, a boutique wealth management firm. “When you look across the country, 90% of all businesses employ 50 or fewer people. That same group provides employment for almost 25-30% of the workforce. It’s a big part of the world.” The family-owned business segment of today is stronger than ever due in part to recent changes in the U.S. economy that have made entrepreneurism the choice of more Americans. “At the end of the day, we are seeing the most significant increase in small business, which by definition is family-business,” 2|

OCTOBER 26, 2012

90 percent of all businesses in the U.S. are family owned

90%

said Jim McCarten, Partner in the Corporate, Trust and Estate and Tax Practice Groups for Burr & Forman LLP. “The increase is occurring because mid-level people who are getting cut out of business. You’ll see someone who has been ‘downsized’ and not ready to retire. They’re 45to 50-years-old, and they go out and buy a franchise and start a business. It’s not uncommon to see families with ownership of various percentages of 15 or 20 of those – same thing with any of the fast food chains. You see that kind of structure becoming more common, and I think we are going to continue to see that as people continue to become more entrepreneurial.” “In 2010, every category – in terms of size of employers – lost employees with the exception of the group that employs one to four people,” Thorne added. “They created jobs in 2010. I don’t know if it’s be-

cause people who had been laid off decided to start their own job and move into that category, but that is the only category that created jobs. They are a very important part of our economy.” With owning a family business becoming more of the “norm” for creating income in the U.S., issues that affect such businesses are getting more of the spotlight. Those issues include developing a longrange plan for the operation of the business, attracting and retaining top talent and succession planning. Family-owned businesses also face tough choices when it comes to providing healthcare and other benefits for employees. “Family business owners bear the burden of their employees’ welfare in a way that is different than larger companies,” said Thorne. “In a small company, everyone feels like family. The decisions made about important issues such as healthcare weigh a lot heavier.” The issues facing family-owned businesses make it more important than ever

Top challenges facing family-owned businesses of today: 1. Developing a long-range plan for the business 2. Attracting and retaining top talent (both family and non-family) 3. Succession planning 4. Valuation

for owners to reach beyond their organizations and to develop strategic relationships with experts in law, accounting, finance, business development and insurance. Having a strong team of advisers can play an important role in the long-term success of a business. Those advisers, in turn, play an important role in the nation’s economy as well. They help family business owners ask and answer the toughest questions they face today and for the future.

FAMILY-OWNED BUSINESS ROUNDTABLE ADVISORY TEAM

2Building an Advisory Board

No Business is an No family-owned business, regardless of its size, has to function as an island. Today’s marketplace offers many opportunities for businesses to reach beyond their own walls to find expert advice and even encouragement. Advisers from a variety of fields, including banking and finance, law, accounting and business development are at the ready to help business owners be successful.

BY MELISSA WEBB Nashville area freelance writer and publicist

xperts agree that building a team of trusted advisers can be a real difference-maker in the long term operation of a business. The team should be established as early on in the business as possible. If a business owner establishes a strong relationship with one adviser, that person can serve as the liaison to bring other experts to the table. This “board of advisers” can function much the same as a formal board of directors and become the guiding compass for decision making. Jim McCarten, Partner in the Corporate, Trust and Estate and Tax Practice Groups for Burr & Forman LLP describes the “board of advisers” as “the outside group that is objectively able to see what’s going on in the business and help a business owner make decisions based on what’s important to him or her.” Steve Thorne, Managing Director of Family Wealth Management, a boutique wealth management firm that offers a personalized set of financial services, stresses

ISLAND The advisory board prospective team members: 1. 2. 3. 4. 5. 6.

Accountant Tax attorney Valuation expert Investment banker Family business consultant Insurance expert

the importance of every business owner incorporating a broad group of advisers. “Small businesses face a host of issues that are very complicated in today’s world - from regulatory to employment law to general tax law,” Thorne said. “The legal environment in which we all work presents a host of issues for a business owner to deal with. Being able to draw on a broad range of advisers is very critical in a business being able to pass from one that employs 50 people to one that employs 100 and then 300.” Thorne points out that the issue of having an advisory team is even more critical for a family-owned business “One issue that is really difficult for a family-owned business is the question of how you form capital,” said Thorne. “For questions such as this, having relationships within an advisory team is a very critical thing. They understand business because these experts see so many different businesses.” Jim Cumbee, managing director of Tennessee Valley Group, a firm offering busi-

nesses brokerage and valuation services, recommends business owners start with someone they have an especially good relationship with who can serve as the “hub of the wheel.” In many cases, that person can be a CPA. “Almost all businesses have a CPA. They may also have an investment advisor, but they almost always have a CPA,” said Cumbee. “My view has always been that CPA’s often are the gatekeepers. In that case, having a business owner who will take the time to listen to what the CPA has to say – and hopefully has a CPA who will say it – and then expanding from there and growing that board is an opportunity.” “We all want to play a role,” said Kimbreley Eades, CFP for Family Wealth Management. “We can all offer that specialized level of support for business owners. The resources are available to them.” The team approach is essential to benefiting from the knowledge of an advisory board, but the business owner still stands as the final decision maker. The function of the team is to get all of the pertinent in-

formation in front of the business owner to help him or her make the soundest decision. “It’s got to be a team,” said McCarten. “Everybody has to be willing to share at the table and work together. If you don’t have that, you get problems. Our job as advisors is to get all of the information in front of the business owner and then allow them to work through a problem. For example, if you are going to sell the company, you need to have the banker and the business advisor because you’ve got to know how you are going to sell it, who you are going to sell it to and what the financials need to look like. You’ve got to have the accountant because you’ve got the tax issues, the tax returns, the income streams, etc… Then, you’ve got to have the insurance guys. Each of these resources has its place.” “Being part of an advisory board is an opportunity for us, as business professionals, to take care of people,” said George Mabry, Sr. VP of Private Banking for CapStar Bank. “We all want to see business owners be successful.” OCTOBER 26, 2012 |

FAMILY-OWNED BUSINESS ROUNDTABLE ADVISORY TEAM

OCTOBER 26, 2012

FAMILY-OWNED BUSINESS ROUNDTABLE ADVISORY TEAM

2 Succession planning

FIRST STEPS, FIRST “Yard by yard, Life is hard; But inch by inch, it's a cinch!” – Robert H. Schuller

ccording to numerous studies, over 50% of the owners of closely-held business are at least 50 years old. Like most in that age group, a majority would like to start "winding down" within the next 10 years. Unfortunately, those same studies reflect that three out of four business owners have not done much, if any, planning to make that goal a reality. Whether the planning is management succession or financial planning for their retirement or estate, few closely-held business owners have committed to a written plan. Business owners inevitably get sidetracked from this important planning for a number of reasons. First, this planning requires the business owner to take important time away from day-to-day management. Perhaps more difficult to overcome is the inertia created when someone is asked to contemplate an issue or she does not wish to face such as their death, a spouse's death, the disability of either, or “giving up the baby” (the business they have built). While business succession planning can include relatively complex and potentially difficult family dynamics, business owners should recognize that one way or another they will eventually leave the business and the failure to plan for the inevitable is likely to mean that they, or even worse, their family will lose a significant portion of the value of the business. This loss of value is often avoidable, but only if the business owner will take affirmative action.

What is succession planning? The best description for succession planning is that it is the strategic business plan which integrates a financial planning

for the family with the long-term plan for the continued growth of the business. It does not require the business owner to immediately name a successor. Nor does it require the business owner to immediately decide whether he/she wants the family to continue the business or to eventually sell the business. Like any strategic plan, it should identify the information needed for a successful transition, whether that transition is to a trusted manager, to a family member or to a buyer. It should also be flexible. A business succession plan will eventually include detailed discussions about each of the following: • How the owner intends to exit the company; • Who will run the business after the owner no longer can; and • Positioning the company to sell or to finance the owner’s retirement.

Equally important and perhaps easiest is to focus the discussion on minimizing estate and inheritance taxes. Focusing first discussions on how to avoid unnecessary taxes allows the succession plan to begin to move forward. In other words, taking first steps which are not permanent or overly controversial – but allow for the design of a structure which will maximize the

value of the company and minimize both income and estate taxes – helps business owners start the succession planning process.

Plan for the worst, Hope for the best Long-term planning in a short-term tax environment can be difficult. The Federal government's tax policies make long-term planning harder than it should be. For example, between now and the end of 2012, a business owner and his or her spouse has the ability to transfer up to $5.12M each (for a total of $10.24M) without incurring estate and/or gift taxes. Tennessee recently made gifting a much more attractive option when we repealed our separate gift tax this past May. Unfortunately, on January 1, absent Congressional and Presidential action, the Federal estate tax exemptions revert to their 2001 levels of $1M per individual ($2M per couple). The rates which then apply increase from thirty-five percent (35%) to fifty-five percent (55%) or more. While many practitioners believe that the exemptions will be retroactively increased next year, at least to a level of $3.5M, the fact remains that no one knows exactly what will occur after January 2013. That puts a premium on planning now

and, if an option for the client, using the $5M exemption while it still exists. Unfortunately, such planning is not a viable option for many closely held business owners. So, making sure that your estate is structured to minimize taxes is one easy way to begin the succession planning process. Among the issues that should be discussed: • Ensure that each spouse’s exemption is utilized. • Make sure that minority and other valuation discounts are available no matter the order of death. • Determine if the trustee controlling the business will be a family member, a partner from the business or a corporate trustee. • Establish how the owner and spouse can equalize inheritances between children who are active in the business and those who are not. Like any business plan, the business succession plan and the owner’s personal estate plan should be regularly reviewed to ensure that the plan is still appropriate for the family and for the business. Starting your business succession planning with estate tax effective wills and/or revocable trusts is a relatively easy way to take the first step toward ensuring that you have protected the long-term value of the business, but, recognize that these are only the first steps.

–– James M. McCarten, Burr & Forman LLP, 700 Two American Center, 3102 West End Avenue, Nashville, TN 37203, (615) 724-3200, jim.mccarten@burr.com

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FAMILY-OWNED BUSINESS ROUNDTABLE ADVISORY TEAM

2Conflict resolution “If it’s family, you can’t have that kind of dispassionate, objective perspective… you are always making decisions on behalf of the family, not just the business.”

FAMILY BUSINESS DECISIONS

DEALING WITH DYNAMICS BY MELISSA WEBB Nashville area freelance writer and publicist

The phrase “home is where the heart is” might be slightly skewed for family business owners whose hearts are very much a part of the family business they operate with the people they love the most. For those business owners, the lines separating home and work may blur more often than not. Setting boundaries between what is work and what is family may seem impossible even though quite necessary. Experts recommend setting clear goals and objectives to help everyone stay focused on the bigger picture. The greater good is in achieving success for the business; which ultimately benefits the family members as a whole. If personal feelings can be set aside in order to follow a sound business plan, a family-owned business has greater chances for success. “That’s the challenge for family business owners; making sure they are making business decisions and not family decisions,” said Jim McCarten, Partner in the Corporate, Trust and Estate and Tax Practice Groups for Burr & Forman LLP. “It’s that dynamic in the decision making process that makes it difficult for the family business.” Jim Cumbee, Managing Director of Tennessee Valley Group that offers businesses brokerage and valuation services points to conflict management as a key issue for family-owned businesses. “Some families have problems dealing with conflict. You take difficulty dealing with conflict and you put that into a business context, it magnifies the process greatly,” said Cumbee. 6|

OCTOBER 26, 2012

“The ability to have a defined process by which you handle conflict is a critical success factor. Chances are, issues that could potentially destroy a business can be resolved if those involved are committed to the process,” said Cumbee. Of course, human dynamics play a role in any business operation. The ability to deal with the complexity of those dynamics can be critical. “The issues that make it difficult to run a family business are universal; they are timeless issues,” said Cumbee. “The ability to deal with the complexity of family dynamics is what is most unique. The softer sciences related to conflict resolution come into play.” “It’s not peculiar to family business,” said Steve Thorne, Managing Director of Family Wealth Management, a boutique wealth management firm that offers a personalized set of comprehensive financial services. “All of us have been in the position where there is some unusual relationship with the supervisor that sort of got in the way of making objective decisions. It’s a personnel sort of issue that really is something you can encounter in all businesses. It’s just that family businesses can have those issues in spades,” said Thorne. Other issues outside of conflict management can also factor into the decision making process for family-owned businesses. The business owner may often be tasked with making decisions for the business that will also have an impact on his or her family, such as which healthcare benefits to provide. “If it’s family, you can’t have that kind of dispassionate, objective perspective,” said

The ability to have a defined process by which you handle conflict is a critical success factor. – Jim Cumbee, Managing Director of Tennessee Valley Group

Cumbee. “You are always making decisions on behalf of the family, not just the business.” “All of the questions involved become much more real,” said Thorne. “The way you structure compensation, the way you put together the entire benefits package and the dollars that are going to be tied to benefits. The person making the decision in a family-owned business is almost always colored by the needs of the people that are around them.” With high-stakes decision making or conflict management issues at hand, a family business owner’s team of advisors can be more important than ever. “It can be so helpful to have a panel of objective advisors and a management team involving people from the outside who can help you see the forest when you’re buried inside the trees,” said Thorne. “If everyone can remain focused on the big picture, they can see that by making decisions that are viable for the business, they create another level of wealth for the future.”

FAMILY-OWNED BUSINESS ROUNDTABLE ADVISORY TEAM

2Recruitment

THE OUTSIDERS Attracting and retaining talent in a family business

BY MELISSA WEBB Nashville area freelance writer and publicist

he very nature of family business relies on the time and talents of family members for its success. However, experts point to creating a management team that can stand alone as most important. “You’ve got to find a way to create that financial incentive to attract and retain the top kinds of talent,” explained Steve Thorne, Managing Director of Family Wealth Management, a boutique wealth management firm that offers a personalized set of comprehensive financial services. “If you want to ensure the success of the business beyond the person that started it, you need to find a way to attract, motivate and keep top talent – whether it’s family or not.” Jim Cumbee, Managing Director of Tennessee Valley Group that offers business brokerage and valuation services offers an example of a client that owns a $20 million distribution business and has struggled with recruiting outside talent. “An outsider could spot from a mile away the dynamics of being in that family business,” Cumbee described. “No talented outsider would want to come into the business. They could see that there was no progressive career path. In that situation, you’re not going to be able to get the best talent to come in and be the director of marketing or sales, for example. That’s a real unique problem with family business. There is almost always a need for outside talent in some aspect. You want to build the best team for the business no matter what.” Cumbee adds that the lack of ability to attract and recruit talent can compound existing weak links among family members who may not be “pulling their own weight.” “If it’s a family-owned business, there is an opportunity to have more allowances made for family members working in the business,” Cumbee explained. Cumbee warns that serious issues come into play when the business owner is facing a situation where one of the children involved in the business might not be em-

ployable outside of the family business. “I’ve seen situations where the owner doesn’t want to sell the business for fear of one of the kids losing his or her job,” said Cumbee. “That is different than the business owner whose kids are not involved in the business at all. That is the reality of not being able to attract and motivate top talent. As a practical matter, it reduces the value of the company because a buyer sees too many landmines. When you have a family-owned business, you’ve got to really be proactive about planning and making sure you create opportunities for family members as well as outsiders to be good employees and add value to the company.” George Mabry, Sr. VP of Private Banking for CapStar Bank agrees with Cumbee’s assessment that talent within the management team should be a priority for any business. “You’ve got to find a way to create that financial incentive and to attract the top

kinds of talent,” he said. “Outsiders know automatically the sorts of issues they are going to confront. If you want value, you have to find a way to create an environment that facilitates outside top talent succeeding inside the organization.” The talent present in an organization is a determining factor whether the founder wants to eventually sell the business or keep it going within future generations. “The strength of the management team determines the strength of your exit strategy,” said Jim McCarten, Partner in the Corporate, Trust and Estate and Tax Practice Groups for Burr & Forman LLP. “Whether you’ve got young family members that you are trying to groom to run the business eventually or if you are going to sell the business, the question is going to be ‘what’s the management team?’ If you leave, how is the business going to succeed? You will need some kind of continuity of leadership.”

Welcoming Outside Talent • Utilize the talents of family members within the business and then determine what outside talent is needed. • Have clearly defined roles for everyone in the organization so that family members as, well as outsiders, have the opportunity to be good employees and add value to the company. • Minimize “allowances” made for family members working within the organization so that everyone feels they are being treated fairly. • A progressive career path is an important motivating factor for attracting and retaining top talent. • Structure financial incentives to attract and retain top talent.

OCTOBER 26, 2012 |

FAMILY-OWNED BUSINESS ROUNDTABLE ADVISORY TEAM

2Tax planning

NAVIGATING THE MAZE Operating Your Family-owned Business through a Maze of Regulations and Taxes minister once said God called him and gifted him to preach and ended up giving him a church. I believe the same could be said for anyone starting a family business. The founder has a great idea which morphs into a business laden with mounds of regulations and taxes. As difficult as this environment can be when regulations are fixed and stable, the environment becomes even more difficult to manage when regulations are unknown or subject to constant revision such as uncertainty over the fate of the Affordable Care Act (ObamaCare) and federal taxation.

open from now until the end of the year as it is likely to be for some time. For family business owners who are looking to pass ownership of their business to the next generation, this is a good time to push aside a few of the other regulatory quagmires and concentrate on this one for the next few months.

Changing tax environment

Health care regulations

On the tax front, recent changes in Tennessee’s gift tax law coupled with the impending changes in federal tax regulations provide an interesting set of circumstances. Effective 2012, Tennessee repealed its gift tax. This year federal estate tax law permits a lifetime exemption of $5 million. The federal exemption reverts to $1 million on January 1 absent some action from Congress on the expiring Bush era tax cuts. Many experts in estate taxes believe the exemption will likely be increased above the $1 million limit but few believe that the limit will be as generous as it is today. Consequently, the window is as wide

Health care regulations are another prime example of how difficult it is to make decisions in today’s environment. For those employers with 50 or more employees the coverage that must be made available is so very complicated that even the largest employers, such as Sears, are choosing to pay the mandated fee and leave employees to Employers with fewer than 50 employees may not be subject to the same set of regulations, but compliance is no less burdensome. Insurance agents, mostly family businesses themselves, will necessarily become scouts guiding their clients through this regulatory forest.

Other regulations Our own small family business, Family Wealth Management, operates in a specialized regulatory niche since it is a registered investment advisor. Given that we provide advice and manage their most liquid assets, the public has the right to expect us to operate in a highly charged regulatory environment, and, in fact, we do. This gives us great appreciation for the burden of regulations a family business faces.

Let an advisory board help An advisory board, a common theme throughout this set of articles, can benefit the family-owned business by recognizing rare regulatory opportunities and identify regulatory burdens. This board acts much like the board of directors of publicly traded company. Regulatory burden and the rare regulatory opportunity help illustrate the importance of knowing your business, its operating environment and having good advisors in place to help navigate the maze.

– Steve Thorne, Chief Manager of Family Wealth Management, LLC. , Hill Center, 4015 Hillsboro Road, Suite 208, Nashville, TN 37215, steve@fwmllc.com, (615) 463-0658 8|

OCTOBER 26, 2012

FAMILY-OWNED BUSINESS ROUNDTABLE ADVISORY TEAM

2 Maximizing wealth To make the most of your bottom line

LOWER THE TAX BILL ncertain times are ahead for small businesses, including family-owned businesses. One reason: taxes. Taxes affect your bottom line and the amount of wealth you reap from your family-owned business. Regardless of the status of a business’s accounts receivable or payable, one creditor – the government – will get its money. Or else. You can’t evade taxes; that’s illegal. However, there is nothing wrong with a business and its owners doing everything possible, within the spirit and letter of the law, to minimize their tax liabilities. Two specific new taxes that will potentially influence small businesses and their owners go into effect in 2013. Both were enacted as a way of paying for the Patient Protection and Affordable Care Act, more commonly known as “Obamacare,” and both will impact the now familiar and routinely-targeted “high income” Americans, many of whom run family-owned businesses. These taxes are:

• 0.9 percent surtax on earned income • 3.8 percent surtax on unearned income The 0.9 percent surtax on earned income kicks in if your annual income is $250,000 if married filing jointly; $125,000 if married filing separately; and $200,000 for all other taxpayers (this is an additional tax on income is subject to the existing Medicare tax). The 3.8% surtax on unearned income applies if your adjusted gross income exceeds the income levels listed above and you have investment income such as interest, dividends, capital gains, rents, income from passive activities.

How to lower your tax bill?

• Establish accountable expense plans to reimburse employee business expenses; the reimbursements will not be income for purposes of regular income tax or the surtax. • If you own your building, maximize the rent your business pays - as long as it’s not inflated. The rental income will not be subject to the 0.9% surtax. • Accelerate or defer income and deductions, where possible, to lower your income below the threshold where the tax would apply.

Having identified the tax issues, let’s discuss how your tax liability might be lowered.

Reducing the 3.8% surtax on unearned income:

Reducing the 0.9% surtax on earned income:

counts to Roth IRAs. Future Roth withdrawals won’t be considered income and thus won’t be subject to the surtax (though this will increase 2012 income taxes, presumably it’ll cost less than at future rates). • If you’re thinking about selling stock in a closely held business or other capital assets, consider

• Maximize the use of fringe benefit programs such as education, child care, and medical flexible spending programs, employer-provided auto use, etc.

• Before 2013, consider converting retirement ac-

using the installment method, which will decrease your total income and possibly keep you under the surtax threshold. • Make the most of deferrals into retirement plans, to reduce adjusted gross income; future withdrawals from these plans will not be subject to the surtax. • Consider moving investments into municipal bonds, which in most cases would not be subject to federal income taxes, the surtax, or AMT. An additional area of discussion for family-owned businesses is what will happen if what are commonly referred to as the Bush tax cuts are allowed to expire or are extended. No one knows what will come out of Washington. If you expect the Bush tax cuts to expire at the end of 2012, consider accelerating income into this year and deferring deductions until next year. That way, more income will be taxed at this year’s lower rates. Family-owned businesses always have been, and always will be, under unique pressures. Doing the smart – and legal – things to reduce your tax liability is a way to relieve some of that pressure.

– Tim Van Cleve, CPA, CCIFP I Managing Director, Nashville MarketCertified Public Accountants I Business Advisors 3001 Armory Drive, Suite 225 I Nashville, TN 37204 Direct: 615.324.8267 I Main: 615.370.3663 I Fax 615.373.9917 I http://www.rodefermoss.com I AN INDEPENDENT MEMBER OF THE BDO SEIDMAN ALLIANCE

OCTOBER 26, 2012 |

FAMILY-OWNED BUSINESS ROUNDTABLE ADVISORY TEAM

2Succession Planning Floundering without the Founder Why succession planning is critical for family-owned businesses

10 |

OCTOBER 26, 2012

BY MELISSA WEBB Nashville area freelance writer and publicist

Many family businesses come into being as the result of the tenacity and character of one individual. That individual builds an empire –big or small - on the foundation of his or her own strength, talent and sheer will to make something happen. What happens, then, when that individual no longer desires to or is able to guide the reins of what he or she has built? For companies with no succession planning in place, the transition can be extremely difficult. “Business succession planning is strategic planning for those changes which inevitably occur in every family business whether the owners are prepared to face the inevitability of such changes or not,” said Jim McCarten, Partner in the Corporate, Trust and

Estate and Tax Practice Groups for Burr & Forman LLP. “According to the Small Business Administration (SBA), 40-percent of U.S. businesses face issues regarding the transfer of ownership. The primary cause for the failure of such efforts is lack of planning.” With so much at stake, it is vital for family business owners to make the tough decisions needed to ensure the continuity of the business. Still, many have not. The reasons a business owner may not have engaged in succession planning are vast and certainly include lack of time. Experts point to issues at the core of the decisions involved that do not leave room for easy answers. “I think it is most difficult when the business is wrapped up in the identity of the owner,” said Kimbreley Eades, CFP with Family Wealth Management, a boutique wealth management firm that offers a personalized set of comprehensive financial services. “It becomes nearly impossible to separate the business from the owner and vice versa.”

“I can count on one hand the number of business owners who are not type A personalities,” said McCarten. “The people who have started businesses come out with the determination to make something of the business. They are spending all of their time in the business, focused on the next crisis. Stepping back to say ‘what is the long term business plan?’… they just don’t want to do that.” “In a small business, you’ve got regulators calling, an examiner who’s walking through the door, an employee who needs time off…it’s just the ‘tyranny of the urgent’ staring that business owner in the face day after day,” said Steve Thorne, Managing Director of Family Wealth Management. “On top of that, the business owner knows instinctively that succession planning is going to cause problems and bring up issues that they don’t want to confront.” Despite the issues at hand, experts concur that succession planning is one of – if not the most – important planning a fam« Continued page 11

FAMILY-OWNED BUSINESS ROUNDTABLE ADVISORY TEAM

Important Questions for Business Owners in Succession Planning: 1. What do you want to have happen to your business when you are no longer around? Do you want to maintain it in the family? 2. Who are you grooming to come along behind you? How are you going to transition the leadership? If it is a family-owned business, how do you motivate that second tier to view it like their own business? 3. When do you want to retire? 4. How do you get your money out of the business to fund retirement? What are you going to do with the balance sheet? Are you going to take the balance sheet and sell it or build a team to carry the business forward?

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ily business owner can take part in. “The most important question a business owner can ask or be asked is ‘what is my plan for business succession?’” said Jim Cumbee, Managing Director of Tennessee Valley Group that offers businesses brokerage and valuation services. “In a family business they may push that off even further; they just don’t want to go there.” “It’s the whole issue of retirement; how you are going to fund it and how you are going to make sure that everyone is taken care of in a fair way,” said McCarten. Tim Van Cleve, CPA, CCIFP, is Managing Director for the Nashville area of Rodefer Moss & Co, PLLC, a group of certified public accountants and business advisors. Van Cleve upholds succession planning as one of the first areas to address when forming a family business. “If you look at the life cycle of any small business – formation, capitalization, the op-

eration and then the eventual exit strategy… you need to be thinking of the eventual exit strategy when you form the business,” said Van Cleve. “There are tax planning considerations and then the exit strategy which involves a lot of tax planning as well.” The succession plan of the business can determine the overall strategic plan. It can present a fork in the road for different paths in the operation of the business. “I remember one client that I worked with that came to the decision that he was creating the business for the value of the business; not for the family to be able to step in and run the business,” recalled Thorne. “He had grown the business to a point where he could objectively look at it and realize what he really wanted was to reap the value of what he had created for his family and not necessarily for his sons or his daughters to step in and carry on the business, but he had to think through that. It led us to a completely different solution

on what kind of structure we would put in place.” “A business owner needs to determine if they are building a business that is going to keep going for generation after generation or do they intend to sell the business in the next three to five years,” said Eades. “Depending on what the exit strategy is, you might arrive at completely different plans. The closing down planning involves estate and trust work. Succession planning is more about building the team to carry it forward.” Experts agree that building the team for the long-term success of the company is vitally important even if the owner intends to harvest the investment in the business. McCarten points to analysis from the Small Business Administration that estimates only one out of every four businesses sells after being put on the market. The market valuation of a family business can be difficult for outside investors to determine.

Having a strong management team in place can give investors confidence in the viability of the business. “There is still going to be a transition of the ownership of that business and - more often than not – that is being accomplished these days through a sale of whatever the patriarch or matriarch holds to various trusts for the benefit of the children,” said Van Cleve. “There is still a sale that is going to be funded by the profits of the business.” “The ultimate goal is really to make it possible to transition the business from an individual driver to something that has a life and ability to succeed outside of that individual,” said Thorne. “Sometimes a family business is so identified with one person that can be extremely difficult. The biggest loss would be if a lack of proper planning results in the wealth an individual has created being lost when he or she is no longer driving the day-to-day operation of the business.”

OCTOBER 26, 2012 |

FAMILY-OWNED BUSINESS ROUNDTABLE ADVISORY TEAM

2 Exit strategy Be Proactive to Deal with the Unique Challenge of

Selling a Family Business When Bob (not his real name) called me, I could tell he was tired. He wanted to sell his family business, but he didn’t know how to find the right buyer and make sure he got a fair value for his life’s work. Bob started his business in 1981 and built it into a thriving niche manufacturer of plumbing components. But at age 74, Bob was ready to sell his business and spend more time with his ailing wife. The business had taken some debt a few years earlier to finance a plant expansion, and Bob didn’t want that hanging over his head. He then said to me what I hear several times a week: “Can you tell me what my business is worth and how quickly can you get it sold? And oh, I don’t want my employees, much less my customers or competitors to know we’re having this conversation.” So far, so good, I was confident I could find the right buyer and get a good price for the business. But what Bob said next set me back: “By the way, my son is head of sales and my daughter’s husband handles the books, and I want them to be able to stay with the business.” Oops. While most buyers like for there to be a stable, experienced team with the business they are buying, they don’t like having staff forced on them, especially when that staff is family members of the seller. A situation like this will raise suspicion in the mind of the prospective buyer ….. “If this is a good business, why aren’t the family members interested in buying it?” “What if the those family members aren’t good employees, do I have to keep them?” Having family members in key positions will complicate the sale of your business because a prospective buyer will assume – rightly or wrongly — that the family members would want to buy the business if it was a good business. A prospective buyer will also be leery of a demand, or even suggestion, that the family members have to stay with the business. The prospective buyer will think the owner is protecting weak employees (who just happen to be family members). I had a client in another state with a very profitable business and the key employee was his 40-year-old son. When the owner asked my help to sell the business, I asked why the son wouldn’t buy it. He gave me the best answer I could expect under the

“By the way, my son is head of sales and my daughter’s husband handles the books, and I want them to be able to stay with the business.” Oops. circumstances and said, “The buyer does not have to keep my son, and there are other things he can go do. But, I’m sure a smart buyer will want to keep my son because he knows the business backwards and forward, and he loves being here. He just doesn’t want the hassle and responsibility of ownership that he’s seen me carry over the past years. My son tells me he is a great employee because he doesn’t have to worry about being the owner.” These recent real life situations give rise to three pieces of advice if you have family members in key management positions in your business. First, remember the time will come when you want to sell, so be proactive to

make your family members indispensible to the profitable operation of the business. How do you do that? You make yourself dispensable. Think in advance, three to five years before you want to sell, and begin to transition yourself away from daily operation of the business. When the time comes you want to sell the business, you are dispensable, but your family members are not. Second, if you think your family members might one day want to buy the business, make sure they have a strong relationship with several bankers because you don’t want to be totally reliant on one financing source. And finally, think proactively about how much you’ll want for the business when you sell it to your family members, then work toward having the business positioned to cash flow the amount necessary to fund a bank loan in that amount. After all, if you and the Mrs. want to finally take that RV trip to the Northwest then settle at the family beach condo, you’ll need the family members to complete an acquisition as would a traditional third-party buyer, and there’s no better way to do that than to be proactive well in advance of your need to sell. It will make the process faster and easier on everyone.

Selling a business is traumatic and can be time consuming. When family members are involved, you can add an emotional component that makes the process even more challenging. Planning in advance mitigates many of the unique challenges.

– Jim Cumbee JD, MBA, Managing Director, Tennessee Valley Group, Inc., 1550 West McEwen Dr., Suite 300-5 | Franklin, TN 37067 | Main: (615) 390-9966 | Email: jim@tnvalleygroup.com 12 |

OCTOBER 26, 2012

FAMILY-OWNED BUSINESS ROUNDTABLE ADVISORY TEAM

OCTOBER 26, 2012 |

FAMILY-OWNED BUSINESS ROUNDTABLE ADVISORY TEAM

2Succession planning ACHIEVING A

SUCCESSFUL SUCCESSION family patriarch can be so focused on the daily management of his company that the ultimate question is never faced: What will happen to my company when I’m no longer here to run it? Whether you want to keep it in the family or sell to an outside candidate, follow the advice of Stephen Covey to “begin with the end in mind.” Start by talking with a trusted advisor who is outside the family, and the earlier, the better. Ten to fifteen years before you think you’d like to retire, begin considering your exit strategy. Your advisor could be your lawyer, accountant or your banker—anyone you trust with the details of your business and dynamics of your family. As a banker, I’ll note that your banker doesn’t charge by the hour. The most successful banking customers walk into the meeting prepared to share the mechanics and the magic behind their businesses—key clients, the most profitable income streams, emerging leadership in the company, relevant long-term contracts. Patriarchs need to be able to discuss transition issues and explore how that might happen. Candor is vital since every solution is unique. CapStar Senior Vice Presidents Brad Greer and George Mabry have observed and helped business leaders through various business transitions over the years. “Typically, your banker will be familiar with the financial aspects of your business,” says Mabry, “as well as your personal history.” He cites Autow Nationalease Truck Rental as an example of a highly successful transition. The elements? Founder Howard Harlan involved son Lee early, getting him involved when he graduated from the University of Georgia. Lee worked in every aspect of the company, learning it from the ground up. Greer adds, “Howard didn’t hand it to him and leave. He stayed and consulted, but not all fathers and sons have that kind of relationship. Some would never sell to their kids. This was the ideal: sell and be there, help coach and mentor.” Today, Lee owns and runs the company, which celebrates its fiftieth anniversary this month.

There can be detours and multiple considerations on the way to a happy transition. Is one child more interested than others in the business? Who is prepared and able to lead the company into the future? Who has the skills, and who can afford to purchase the business? Leading families in Nashville whose fortunes rest on far-sighted strategies of global companies have carefully incorporated the leadership of generations of offspring in creative ways, often putting both genders to

work on the ground floor from a young age, from mailroom to product delivery to frontline customer service. Practices like that ensure that the rising generation both has empathy for co-workers and doesn’t take access to the leadership track for granted. Both Mabry and Greer emphasize the importance of preparation long before transition. Take extra care in keeping the financial balance sheet clean. For example, be sure that personal expenses like country club dues are not counted as business ex-

penses. The founder needs to develop a management team and identify potential leaders; otherwise, he limits his pool of buyers–and the value of his company. Greer says, “That can make it difficult for the founder to exit, from both a financial and a leadership standpoint. A family member has to be groomed just like any other professional before being given a chance to manage it. Otherwise, you limit the number of people eligible to buy your company.”

– Beth Alexander, Community and Investor Relations, CapStar Bank 201 4th Ave. N Suite 950 | Nashville, TN 37219 | Main: 615-732-6424 | Email: balexander@capstarbank.com 14 |

OCTOBER 26, 2012

FAMILY-OWNED BUSINESS ROUNDTABLE ADVISORY TEAM

OCTOBER 26, 2012 |