Planning In Family Firms Can Be Tough

April 17, 2002
| By Katy Rent |
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" align=right border=0>GRAND RAPIDS — Making business decisions with family members can be tough, but deciding to give up the family business can be an even harder decision.

With the aid of Plante & Moran partner Scott Carano and Corporate Finance Director Tom Doyal, family business owners can plan for the future of their company and feel secure in every step of the plan by marrying economics and emotions.

Carano says succession planning is becoming more of an issue as numerous owners of family businesses approach retirement age and start to think about succession planning.

“Typically you think about this five years ahead of time,” Carano said,  “and how do you position yourself for sale in five years?  Clients need to work with us and our corporate finance people to develop a strategy for that.”

And strategy seems to be key no matter which avenue a family business decides to take. “It is all in the planning,” Doyal said. “Any time can be a good time to sell or to buy if you follow the correct process and prepare yourself or your company for what is to come.”

Doyal highlighted three easy steps any company needs to follow when thinking of succession planning and planning for value.

First, the sellers need to understand what is motivating them to sell their company, and become familiar with the process of a sale and what it will entail.

“Companies need to take a look at everything behind the sale and even look a little ahead at results,” Doyal explained. “What will happen to employees? What will happen to the company’s assets and liabilities? And what will the entire process be like? These are all questions that need to be dealt with ahead of time so there are no surprises and the correct responses are prepared.”

If the transaction is going to keep the firm in the family, it is also important to identify the family member who will be the best successor. Plante & Moran offers psychologists on staff to evaluate family members to see who would be the proper choice.

“The parents and children need to be evaluated in terms of who has the right aptitude or interest level in running the business — and that is not always black and white,” said Carano. “With the help of our psychologists we can assist the family in an educated decision. Sometimes there isn’t an heir apparent, and that can be a very important piece of information.”

" align=right border=0>Secondly, Carano and Doyal say a company needs to submit itself to a deep analysis. It’s important to determine how the owners can maximize the company’s assets, and then look at the firm’s faults and determine what needs to be fixed so that the company can be more attractive to buyers.

“We call it looking at the good, the bad and the ugly,” Doyal said.

“Companies just need to clean things up and take a look at where the holes are so they can be fixed.

“It is like selling a house,” he added.  “You wouldn’t sell a house with a leaky roof; you need to fix it for sale. And just like selling a house, there are going to be certain people out there that love certain assets of your business and some who don’t. The key is to plan ahead.”

The third step is for owners to familiarize themselves with the valuation trends in their market.

“If companies make themselves aware of their competition, the banking industry, and just familiarize themselves with their surroundings, they will be more prepared to possibly approach the competition that is interested,” Doyal added. “Knowing your surroundings gives you control of how the rest of the market sees your business and of the entire process, and that will only drive up the value.”

With several options a company can take, including selling to a family member, transferring the company to a family member, selling to a group of employees through an ESOP, selling to the competition, selling to an outside buyer or merging with a member of the competition, the one common factor is that planning is key.

With 2001 being a very slow year and the fourth quarter alone being down 35 percent from the previous year, the two men said it is no wonder that family business owners have not been specifically looking to buy or sell.

Doyal explained that banks, which had previously been lending money at 3.3 times cash flow and 4.5 times on total debt in 1999, were lending on 2.4 times cash flow and three times total debt in October 2001.

“With banks cutting back nearly a third, the impact of that has been that sellers have been asked to participate in financing the transaction in many cases to fill in that gap.

“And they do that either by providing notes back to the buyer, who will take a note back for a period of time, or in some cases, because earnings have been depressed in acquisitions, they are being asked to take out what is called an earn out,” said Doyal.

“That means that the seller will get the pay based on the future performance of the company and will get a certain percentage of those earnings,” Doyal added.

While the sellers may get less money at closing, he said, they could possibly be selling the company for more than they originally expected, depending on the future of the business. It also works out for the buyer who, in turn, isn’t expected to pay as much capital up front.

Doyal said he doesn’t want to give the impression that it is a bad time to sell because of the depressed market. “Anytime can be a good time to sell, as long as the seller has done his homework and has strategically planned all moves,” he said.

And planning doesn’t end when the sale is complete, he said.

In the instance that the business is passed down to a family member, Carano said that a new trend, which he doesn’t see as completely feasible, is family planning. “The idea has been pitched as applicable in any situation, with the concept of mom and dad sitting down with daughters and sons and making family business decisions,” he said. “It takes a very unique relationship with mom, and frankly, children who are able to work with their parents and siblings on these types of issues, and it just doesn’t happen that often.”

Forbes magazine recently ran a cover story detailing how some unique family relationships have worked out the scenario with quarterly or yearly family business meetings.

In most cases each child holds stock and ownership in the company with mom and dad running the show. One example was the Zaslow family, two brothers now in their 70s, who own a 200-employee company that supplies uniforms and other goods to hospitals and the government.

The Zaslows pooled $1.4 million in their first limited partnership in 1997, and since then each brother’s offspring have formed their own partnerships and some of the brothers’ 13 grandchildren have pooled their money in a professionally managed account.

The family holds a dinner at least four times a year to discuss both investments and charity. One thing that helps this family stay together: keeping the lines of ownership and investments simple and clear. The Zaslows form separate entities to hold separate asset classes so they can all see how they are diversified and how each class performs.

Carano maintains that every instance is different but this is a special relationship and one he hasn’t seen much of in the West Michigan area. “One trend that may have spawned off of this is that our clients want to ease their children into this and not show them all of the financial information at once,” he said. “They want to take it slower, and they might take an entity where they may gift and become business partners with their children.”

No matter what the strategy, Carano and Doyal agree that succession planning is a touchy subject, one that must be a marriage of economics and emotions, and one that also requires careful planning to ensure success.

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