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FMI Quarterly/December 2013/December 1, 2013

Continually Evaluate Ownership Transfer Issues

getty_key_imageAll privately held E&C companies face transition as owners retire and new owners take over their responsibilities. This can be disruptive in the case of companies with a single owner or smooth in the case of a company with broad ownership structure with ongoing leader development efforts.

FMI recommends all companies continually evaluate ownership transition issues, including how stock will be transferred and, probably more importantly, how leadership will be transitioned. A continual review is recommended as tax laws and structural opportunities can change, current owner objectives evolve and development of successor leaders is always a work in progress.

Most companies do not make it past the first generation of ownership; some make it to the second generation and a few go beyond. The reasons vary. Many owners never create value in their companies beyond themselves; in essence, they make a conscious or unconscious decision that their company will end when they retire. Some do not prepare a realistic technical transition plan. Others do not develop the successor leaders to take the business forward. FMI’s experience is that companies that want to survive and prosper for generations can increase their odds of success with effective planning.

The questions those in charge of ownership transfer should answer on a regular basis are:

  • Have current owner objectives changed? Does the plan still fulfill the objectives for selling and buying owners?
  • Has the timing of expected sales by owners changed? Is the projection of stock sales and purchases updated annually?
  • Who is signing for bonds and banking relationships, and how long will they be willing to do so? Who is expected to sign when those currently do so stop, and will they?
  • Who are the immediate, five- and 10-year expected successors for key positions?Who are projected to take key leaders position if current leaders retire, leave, die or are disabled? Are the future leaders prepared?
  • What is the status of leader development plans for expected successors?
  • What is the emergency plan for ownership and leadership if current owners or leaders die or are disabled?
  • What are the M&A market trends affecting the company’s value and transition opportunities?
  • Are there any tax law changes that could affect the company structure or provide new transition opportunities?
  • Are there alternative transition structures to consider such as going public, creating an ESOP, using a financial partner (private equity) or setting up a sister company?
  • Are there acquisitions the company should consider that would enhance the ownership transition plan by strengthening the organization or providing growth opportunities for the upcoming leaders?
  • Does the company have the financial and organizational capacity to support growth and transition?
  • Does the transition plan attract talent to the company and support the company’s recruiting effort?
  • Does the company have relationships with appropriate outside advisors to implement and update transition plans?

Updating answers to these questions on a regular basis will enable your company to enhance its transition plan and potentially increase its transition options. It should also help you strengthen and create value in your business. Good luck with your transition!


Stuart Phoenix is chairman of the board at FMI. He can be reached at 919.785.9241 or via email at sphoenix@fminet.com.

 

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