Putting the success in SUCCESSION - June Voice

Transition planning for business leadership

By Andrew Wright, Rockford Chamber of Commerce

Whether it’s the pomp and circumstance of the crowning of King Charles III or the political machinations of the Roy family in HBO’s popular show, “Succession,” one thing is certain: the idea of succession planning has taken center stage in history and pop culture.

But one doesn’t need to be a royal or a fictional media mogul to know the importance of having a succession plan. Business owners know that building a succession plan with qualified professionals can help create a smooth transition, allowing both for a satisfying retirement for the original owner and the continuity of a successful business for the next generation of leadership.

It’s never too soon to start

Stacey Curry and David Boulay from the Illinois Manufacturing Excellence Center have helped many regional manufacturers build plans for company growth, leadership training, management transition and succession planning.

Curry, a leadership coach with IMEC, has years of experience working with companies going through a transition.

“At a time of transition, people are in a very vulnerable place. There’s always anxiety when the original owner thinks of their company as ‘their baby.’ That anxiety can put ownership behind the curve when they finally begin to talk about succession planning,” she said.

Boulay, president of IMEC, adds that an important part of the time of transition comes from the vetting process of a potential successor to the business: “You’re simultaneously building a culture and working to ensure that the way of life at the organization has continuity. Owners will spend time to build a second level of the organization so that the culture sustains and carries the day. You’ll want to ensure that the subsequent buyer has common values and viewpoints on what the business can and should be.”

Assuming that the next generation of a family business will automatically want to take over is a common mistake.

“Have you talked about whether this is what your son or daughter wants to do? Do they intend to take over, or were they planning to move on?” Curry said. “If they do want to continue the business, building an intentional planning and training program will give them space to explore whether or not they have true aspirations with the company.”

Many business owners think about succession planning but never move beyond that point.

“Thinking isn’t planning,” Curry said. “A lack of planning and execution is a frequent pitfall to a successful transition.”

If you don’t know where to go, it’s a lot harder to get there

What do you do when an injury, illness or sudden loss triggers a succession crisis? Jim Reynolds, senior vice president of business banking at Blackhawk Bank, helps owners navigate through a step-by-step planning process.

“Often when people don’t know where to start, they freeze and put it off,” Reynolds said. “We start with an assessment tool that asks questions covering areas from legal to tax evaluation and personal planning. Our clients answer questions that help us identify the owner’s objectives, quantify the business and personal resources, maximize and protect the business’ value, plan for the transfer of ownership to insiders or a third party, build a business continuity plan throughout the owner’s lifetime and at their passing, and align those goals with personal wealth and estate planning.”

Reynolds looks at the process like an interactive road map: “It’s better to know where you’re going and the roads to choose from to reroute in the event of construction and have a clear destination. Our assessment tools help our clients define their destination. If you don’t know where you want to go, it’s a lot harder to get there.”

It’s common for owners to struggle with communication as they plan for transition.

“Be intentional about communication with any internal transfer opportunity. False assumptions are the most frequent

pitfall,” said Reynolds. “Is your valuation accurate? Is an offer good enough for the owner to be set for retirement? Does the owner have a written business plan for employees to understand and execute if a health issue keeps the owner from their business for three months or more? Who runs the business while they’re gone so that there’s a business to come back to?”

Handling legal challenges

“Business exit strategies for owners come down to three outcomes – fail, get sold to new owners, or be passed on to family. The element of a fully realized succession plan is dependent on the complexity of the situation,” said Jim Keeling, attorney and partner with Hinshaw & Culbertson LLP.

Keeling and Marcia Mueller, also of Hinshaw, have 75 years of combined professional experience working with locally-owned businesses. They know the importance of using various instruments to protect the financial interests of business owners addressing multiple interests.

“We help with setting up employment agreements with employees who may want to take over the business, building a buy-sell agreement, even deciding between an incorporation or an LLC to begin the process. We work with partners and consultants like accountants, bankers, insurance agents, lenders and investors. Sometimes multiple financial advisors are involved. Every situation has a different team make-up, and owners work with us to decide who is playing the lead role,” Mueller said Understanding the legal ramifications of a sale or transfer helps put those financial instruments to work.

“Tax impact planning is often important for senior members of a family business when the senior members have other significant financial resources but want to protect as many after-tax resources as possible for the family as a whole,” Keeling said.

Some companies will use life insurance to protect the assets in the case of an unexpected loss of leadership as part of their transition plan.

“The older you are, the more expensive life insurance is. If a client is planning to use life insurance strategies, it’s better to plan while younger and healthier and rates are lower,” Mueller said.

Likewise, when employees consider buying out original owners, interest rates can be significant in structuring a successful purchase. A seller may have to opt for a lower sale price or settle for a different buyer.

“This can affect a debt finance buyout of a family member,” Mueller explained. “With rates continuing to rise, waiting for a loan approval can have a significant financial impact.”

Having a strong successor who’s able to take the business forward can have a positive financial impact for both the seller and the buyer.

“Businesses can fail or succeed through the new ownership,” Keeling said. “Succession planning changes the ownership in an evolutionary way.”

Plans can change

Kika Young, president of Forest City Gear, is a third-generation owner and leader of the company. Her father, Frederic Young, took over from his parents, Steler and Evelyn Young, in the 1960s. He grew the company from a small mom-and-pop shop and took it to the next level.

As Fred started considering his retirement, he eventually took on the role of CEO in 2005, while Kika’s mother, Wendy, served as president.

“Mom was 10 years younger than dad, so when she took the reins, we all felt that was a good decision. I was too young and I wasn’t ready yet,” Kika said. “Dad had the plan to earmark me for taking over the business, because I had shown the most interest among my sisters. Appy (Mikel) and Mindy (Young) were pursuing careers in the arts. Our parents did a great job encouraging us to do things we wanted to do, to explore things we wanted to try.”

Wendy remained president of the company until she was diagnosed with cancer in 2020. With Fred semi-retired and Wendy focused on her health, Kika – who had been working at the company in one way or another since she was 13 – stepped up as interim president. But Wendy was concerned about how elevating Kika to president of the company might affect the dynamic with her sisters.

“Mom didn’t want our relationships to be compromised because of a family business,” Kika said.

Wendy started looking at options to sell the company to a third party after her diagnosis.

“We received offers from a handful of companies, another manufacturing firm, a couple of private equity firms. It wasn’t what I wanted or what dad wanted either,” Kika said. “In the face of her illness, this was something mom could do to give her peace of mind that the family would be taken care of financially and the business wouldn’t compromise our family relationships.”

Wendy Young passed away sooner than the family anticipated. With the offers on the table, Kika and her family considered the possible outcomes— what the companies might do to Forest City Gear, whether they could make the company better or worse, how the company would continue to support the community they grew up in and loved.

“Appy said, ‘Can we just not sell it and let Kika run it?’ Fred and Mindy both agreed. They looked to me, and I said, ‘Of course,’” she said.

Kika recommends working with a team of professionals to help set up a transition plan.

“We looked at several options, and the advisory team helped us pick a path that made the most sense from a legal and tax liability perspective,” she said. “You need advisors to navigate those parts of tax law and trusts. The whole financial picture is incredibly complicated. It doesn’t matter how smart you are, if you’re not dealing with this from day to day and you try to do it yourself, you’re going to make missteps. You’re going to open yourself up to higher burdens or levels of risk.”

Despite overcoming her parents’ differing visions on how to handle the transition of the business, and her mother’s concerns on the affect it would have on the family, Kika is proud of the state of both the business and the family.

“The relationship I have with my sisters has been great, because we are operating with the same end goal. We understand the importance of communications, and our relationships have benefited from that,” Kika said.

Business is booming at Forest City Gear. Recently, they invested in new machines to help address a growing stream of new orders. They continue to make precision parts for manufacturing, military, space exploration and more.