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ADVeRTISInG SuPPLeMenT TO THe PORTLAnD BuSIneSS JOuRnAL

Pete Danko: Let’s dive right in by talking about why succession planning is so important for family businesses.Kathleen Kee: It’s because our economy is really built on small family businesses. There are more the 28 million small businesses with half the owners over age 50. So simply from a demographic standpoint, you can see there is a lot of succession planning on the horizon.Michael Lortz: It’s also, in many cases, going to be the largest financial

transaction in the lives of the people that it impacts.Jeff Cronn: One thing that makes it so important is that business succession is not like business operations. For many people it’s a once-in-a-lifetime event. The skills and orientation that go into successfully operating a business are not necessarily immediately transferable to what you need to be doing to transfer a business.Danko: When should a business

owner begin to think about succession planning? Is it only for people who are growing old?Kee: That’s generally what we see, but you could have a liquidity event at any point, depending on what the objectives of the business and business owners are. Cronn: If the orientation is toward continuing operations through the generations, it’s often a later-in-life process. For others who are running a business to sell or come to a point that

at a particular date they’d like there to be a sale, spending time ahead of that date makes a lot of sense.Danko: So a business owner comes to you and wants to plan for their business’ transition, what unfolds?Lortz: Well, I wish they came to me and said I want to form a plan. There are some clients who are planners, but more often it’s actually the role of the

PLanning now Can MaKe for a sMooth

transition Later

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sPonsoreD by

A family business can offer those in the family employment, fulfillment and financial security – all of which can be put at risk in the absence of sound succession planning. The Portland Business Journal recently gathered leading experts who approach this task from a range of angles, including business sale, tax implications and wealth management, to discuss what it takes to put a succession plan in place that

maximizes opportunities, protects assets and embodies the family’s values.

20 PORTLAnD Business Journal

Michael lortzsharehoLDer, geffen MesherMichael, CPA, LeeD AP is an experienced tax and accounting professional with significant experience working with family owned and other privately held businesses.  Some of the projects Michael routinely works on include advising clients on the purchase or sale of businesses, assisting business owners with ownership transition planning, analyzing a company’s entity structure with an eye toward tax and liability concerns, and participating in strategic planning conversations related to business expansion. He is a frequent speaker regarding tax updates and business transition planning. When he’s not working with clients, Michael enjoys spending time with his wife and 5 children as well as serving as a board member or volunteer for a variety of nonprofit organizations.

KathleeN KeePartner anD Ceo, ConfLUenCe weaLth ManageMentKathleen has more than 25 years of wealth management experience. She specializes in working with high net worth clients and their families, closely held businesses, executives and women of wealth.  As a trusted advisor Kathleen takes the time to fully understand her clients and guides each client in achieving their specific objectives.  She is passionate about each of her clients and is vested in their personal journey to success. Her prior experience includes working for a national bank, a regional accounting firm, as well as other private wealth management firms in Seattle and Portland.  She is extremely dedicated to her clients, her profession and her community. Kathleen currently serves on the boards of the Portland Business Alliance, Randall Children’s Hospital, and the Friends of the Children Foundation. Kathleen earned a BS in Finance from Oregon State university.

JeFF croNNPartner, tonKon torP LLPJeff has served as Chair of Tonkon Torp’s Business Department since 2008. His practice emphasizes merger and acquisition (M&A) transactions, shareholder disputes and a range of corporate and business matters. Jeff is a frequent speaker before industry, bar and professional groups on M&A, finance and corporate governance issues. He is a founding member of Marathon Scholars, a college access program for low income children, is a director and Treasurer of Oregon Humanities, and is actively involved with literary and other nonprofit organizations in the Portland area.

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Succession planning. Asset protection. Family values. Finding the perfect transition strategy in a family business can be difficult. We have the ability to

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June 24, 2016 21

advisor to initiate that conversation. Kee: Succession to a lot of people equates to mortality or estate planning and that’s just not as exciting as creating and running a business.lortz: It may be a topic that they actively avoid. Danko: Are people sometimes fearful of the process?Cronn: In my experience a primary hurdle is expediency. There are many folks that we work with who are great day-to-day operators and there’s always another fire. You may have the best intentions to set some long-range planning time aside, but it just doesn’t happen.Kee: The reason it’s vital though, is that there is so much that could be lost/surrendered from a tax standpoint, and from a wealth standpoint. If you don’t plan appropriately you leave a lot on the table. You want to deal with this from a proactive perspective, not because you’re in a crisis.Cronn: A business is going to transition one way or the other. It can be millions of dollars if you’re talking about the difference between a planned transition versus we have to do this deal now because we’ve run out of money, we’ve run out of energy, we’ve run out of employee resources.Danko: You’re searching for the perfect transition – how do you know you’ve found it?Cronn: The perfect transition is a transaction in which the family feels very good that the things that are most

important to it have been achieved. You can’t reach that result unless you’ve defined ahead of time what those primary goals are. Goals often change over time. Family may agree or disagree and that’s an ongoing conversation.lortz: Sometimes families forget about the more fundamental goals. The idea that the family is still happy and united afterward is not something that everybody identifies up front. I was at a family office conference last year and there was an individual who read in the paper that the business that his father had started was sold. That was how he learned about it. That caused a significant rift.Kee: Business owners often haven’t given thought as to their long term objectives because the focus has been on operating and growing the enterprise. Many might find it hard to separate their lives from the business. Frequently we see 90 percent or more of their personal net worth is tied to the business.Cronn: A key line of questioning to start with is how different will your financial results look to a neutral third-party? Often, they may look very different to an outsider. It may be that the CeO takes salary of $50,000 a year and to replace that person, that’s actually a $200,000 position. It may be that there’s a leasing company that charges half of market rent to the business. It may be that there are personal loans. When you get to the actual results of the business, you might see that they are very different than the numbers that the owners have been looking at for tax- filing purposes for many years.Danko: Let’s talk about the approach vis-à-vis taxes – particularly income tax and

inheritance tax.lortz: It’s important to look at those two taxes as integrated. Things that people do to reduce their income taxes, which tends to be their focus, may someday have positive or negative impacts on estate taxes. When we talk about common techniques – gifting for example, where we’re trying to use gifting to reduce estate taxes down the road – typically you do that while having income tax consequences very much in mind. So it is important to think about doing things like gifting in advance of an actual transition event.Danko: Several years in advance?Kee: It all depends on defining the objectives. If a business owner is charitably inclined, there are many strategies and techniques that could be employed. Part of the art is recognizing that there is not one best way to get to the solution, there are many different paths. It’s integrated, so you’ve got to look at all options at the same time in order to craft a plan/arrangement that meets all objectives.lortz: I’ll give you an example – something that doesn’t apply to many family businesses but for some it makes sense: forming a captive insurance company. That’s a strategy that people look at primarily for income tax benefits. essentially you are insuring your own business risks and claiming a deduction by paying premiums to your own insurance company. I’ve seen this technique used where the owners of the captive insurance company are future generations, so you’re able to build wealth that passes to future generations in a manner that is very efficient from an estate tax standpoint

in addition to the current income tax deductions.Cronn: This is a very broad stream. On my end of the stream, which is usually closer to the time of a transaction, primary goals are capturing as many of the proceeds as possible as capital gains and not ordinary income, and avoiding two levels of tax. And there, having even a couple of years can really have a significant consequence on the net proceeds that come out to the family at the end of the day.Danko: Are there implications specific to Oregon? lortz: I’m sure all of us have talked to a client who has said, “My buddy just sold his or her business and moved to Washington right before the business was sold to avoid paying any Oregon income taxes, so that’s how it’s going to work for me too.” Well, that is one possible technique for dealing with Oregon income taxes but there are others. In our office one of the strategies we look to occasionally are Delaware asset protection trusts and the state tax savings that can accompany them. For other clients we look to some of the Oregon tax credit programs so we can reduce the actual Oregon tax they end up paying. Danko: Related to the tax question, what are the pros and cons of doing an asset sale versus an equity sale?Cronn: From a seller’s perspective an equity sale can help you avoid two levels of taxation. Another thing that is useful from a seller’s perspective is that an equity sale can be a means to pass on the historic liabilities of the business. That is in

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tonkon.com • 503.221.1440

For over 40 years, we have provided trusted counsel to family businesses large and small. We’ve seen it all and know how to help.

• Family wealth and succession planning• Maximizing business value• Transaction structures and tax strategies• Financing• Sales to strategic and financial buyers• Sales to employees• Employment considerations

Call Tonkon Torp. Our lawyers will thoughtfully and efficiently guide you through your family business transition.

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22 PORTLAnD Business Journal

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Contact anne Van gordon at 503-219-3406 or avangordon@bizjournals.com. Future topics to include data centers, cybersecurity and affordable housing.

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FAMILY-OWNED BUSINESS & SUCCESSION PLANNING

almost all cases preferable from a seller’s perspective. You don’t want that legacy liability to follow you. There are techniques you can use in structuring an equity sale transaction that make it neutral to a buyer while maintaining many of the benefits to the seller. Danko: Let’s turn the focus to employees. Do business owners come to you with concerns about what the outcome will be for employees?Kee: I think it’s helpful to bring up issues that we’ve all seen in the past so that business owners can be thinking about the overall impact on their employees. Often employees are left trying to figure out their roles and responsibilities, as well as to whom they will be reporting. Communicating clear roles and responsibilities is very effective in addressing the concerns of key employees.Cronn: Owners are most often primarily concerned with net consideration to themselves. But there are things an owner can do ahead of time that provide comfort to employees and enhance value so that owner and employee interests are aligned. For instance, implementation of sale bonus or termination bonus contract provisions so that compensation is paid to key employees in connection with a completed deal to encourage them to facilitate the transaction and to address the fact that they might be out of job after the deal. Kee: especially with family succession, the issue around the next generation and non-family employees is really important. The next generation will bring different personalities, different objectives, potentially a lot of change. Any business owner knows it takes a team, so if you have key employees who are not family members, addressing these issues can be helpful for a successful transition.lortz: If the next generation has worked their way up in the company, that is often viewed more positively by key employees compared to somebody who is handed a senior title without really having to earn it.Danko: Is it sometime difficult for owners to see with clarity what the next generation might or might not be able to bring to the company?Kee: A lot of strategic planning goes into the transition process; Taking inventory of the new team’s skills, strengths and weaknesses, and working to fill the gaps. The desire to see the entity continue with the next generation needs be balanced with the needs and wishes of the owner.lortz: The issue becomes very difficult for owners to think through when they have some children in the business and some who are not. Owners struggle a lot over the question of how can I provide this blessing to my children and not leave

them with strained relationships as a result.Danko: As important as planning might be, what happens in situations where suddenly an unsolicited offer catches an owner’s attention? Kee: That can be a catalyst for people to start looking into business succession. For a lot of our clients, that opens the door to a business valuation, if they’re not already doing it on an annual basis or by formula according to their bylaws. So it can be the beginning of a larger discussion.lortz: The short answer is, do not sign the document that is presented to you without talking to some people! There are people in the business brokering world that will tell a business owner I know the perfect buyer for you. They will sign them to an agreement. Then they’ll try to figure out who’s going to actually buy this company because they have little or no idea. It pays to call your lawyer before you sign a document.Cronn: It can be very appealing to receive the blind offer, particularly if you haven’t planned: Here’s your out. You see a great big number, you might be tired, you don’t have a plan and you can’t muster the energy or the desire to go through a lot more – I see that a fair amount. But the number that you see on that first piece of paper is very likely the highest number you will ever see from that particular buyer. The actual amount paid by the buyer on closing may be substantially lower. Danko: What’s driving that price down?Cronn: Very often the conversation is this was our projected value of the business until we found you’ve got this exposure, until we’ve found out that these revenues aren’t going to be repeated, until we found out that you don’t own your intellectual property, etc. lortz: To illustrate that, last year we had a client accept an offer for $75 million. Then the due diligence process began in earnest and by the time the process was done, the offer had declined from

$75 million cash to $35 million, a portion of which was contingent on earnings.s. needless to say that sale did not go through. But our client had shared a lot of information with a major competitor, so there are potential negatives to going through the process.Cronn: If you have an operating business that hasn’t been through the process before, that’s not thinking of the transaction as an investment by the buyer, doesn’t understand the expectations of a transaction, the informational demands, doesn’t keep up with the process, all of those are going to result in diminished value at the end of the day.Danko: We talked about unsolicited offers.

At the other end of the spectrum is when a business has to sell, or find additional financing, in order to continue operations.Cronn: You could be looking at a business that may not have had sufficient investment, may not be staffed adequately, may not be primarily focused on ongoing sales. You have tired operators that are ready to be done, and from a value preservation perspective that’s a real bad result. lortz: You need to grow your people into key

positions so that somebody else could own the business and have it be worth something. I have seen circumstances where business owners have accomplished this and as a result have decided not to sell their business anytime soon. Because they got key people in place at high levels in the company, they were able to alter their lifestyle such that now it was great to continue owning the business.Danko: It sounds like a business that is well-planned for succession is a business that is functioning well.Kee: That’s true. By functioning well, the value of the business is enhanced. This in turn can lead to the fulfillment of the various objectives of the business owner and family.Danko: Kathleen, if you see a gap between

where an owner feels they want to be with a transition, what can you do?Kee: Most of the time it’s about helping them imagine life outside of the business. They might have ideas on how they want to approach the kids, extended family, and charitable interests. It’s a matter of identifying their objectives, putting costs to those objectives and through financial modeling arriving at a number that the owner needs from the business. From there it is up to the rest of the professional team to turn that into reality.Cronn: You can significantly affect transaction price by doing some things operationally – growing the business a bit, getting to more certain revenues. The number might not be attainable today but there are specific things that can be done to enhance performance so that a couple of years from now you can hit the number.lortz: For many businesses, diversifying their revenues can be a significant issue. When a significant portion of a company’s revenues come from a single customer, that can have a fairly negative impact on sale price and viability for sale.Kee: Along those lines, as we navigate the discovery process with family businesses, many times we find a subsequent generation will have new ideas with the potential to (reenergize/revitalize/revive) the enterprise. even though a senior person might be exiting the company, the next generation is eager to engage and explore different paths.Cronn: What’s often interesting about that contribution, too, is that it can be a real value driver.Danko: Any final thoughts on issues that haven’t come up?Cronn: One thing I see businesses do successfully, but that I also see frequent resistance to, is to bring in an outside person to provide a perspective. It could be a director – that’s a common technique – but somebody that has industry knowledge, someone that has business transition knowledge, to provide a perspective that is different from the long-time operators.lortz: It’s interesting to me that in our conversation none of us have mentioned life insurance yet. It is a tool that in some circumstances can be particularly helpful when dealing with these family succession plans.Kee: That is especially true if you have family members not involved in the business. It is a way to equalize value within the estate.lortz: exactly. It’s a great way to provide assets to family members who are not in the business, and I also have a lot of situations where owners say to me, look, I want to make sure that my children don’t have to sell any of this business or borrow money to pay estate taxes. Life insurance can be an effective solution.

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