When is the best time to develop a succession plan? Ten years before you want to exit the business. However, it is never too late to start planning your exit from daily decisions or from the business altogether, while preserving your legacy.

Part 2 of this two-part series discusses the final steps in preparing for succession, including integrating succession and estate plans; developing an implementation strategy; designing a contingency plan; and monitoring and adjusting the plan.

Go to www.RuralLifestyleDealer.com/SuccessionPart1 to read about how to complete the first 6 steps: 

1. Identify and prioritize your goals.
2. Identify and prepare your management successor.
3. Determine your retirement cash needs.
4. Review options for funding the transfer in light of required retirement funds.
5. Plan for ownership succession.
6. Identify options for transferring ownership.

Step 7: Integrate Succession & Estate Planning

Throughout this series, we have emphasized the distinction between ownership and oversight. As an owner considers succession, the distinction becomes critical, particularly when an owner wants to keep the business in the family, but does not have a family member willing or able to run it. 

Rex Collins is a principal at HBK CPAs and Consultants.

We’ve seen a lot of this in recent years, like this example: The dealership founder had not finished high school, but instead had gone to work in a dealership. Over the years, he became knowledgeable enough to start his own business and was granted a manufacturer’s line. His business was a success, and when he retired, his son, who did obtain a high school diploma, succeeded him. He, too, was successful, growing the business and sending two sons through college, then to law and medical schools, respectively.

Now working as a lawyer and a doctor, neither son can participate in, much less manage, the dealership. In this case, the sons could retain ownership as long as management is done by someone competent and knowledgeable in dealership operations.

There is clearly an overlap between a dealer’s estate plan and succession plan, so they should be done in tandem and recognize the unique aspects of the dealership business as well as the succession goals of the retiring dealer.

Even where a next generation will take over operation of the dealership, a comprehensive succession plan must include estate planning to ensure transfer of the dealer’s wealth in the most tax-efficient manner possible, minimizing estate and gift taxes. It also includes planning to ensure the dealer’s estate has sufficient liquidity to pay taxes and other expenses without forcing the sale of assets, including the dealership.

Estate planning as part of a succession plan involves many traditional estate planning techniques. However, many of these techniques are not available to dealers. As opposed to other business owners, generally, the dealer must obtain manufacturer approval for ownership transfers. This includes estate planning transfers.

Some of the most frequently implemented techniques used by dealers include:

• Annual gifting programs when the dealer begins succession planning early enough to transfer a substantial portion of the estate with no transfer tax.
• Family limited partnerships to transfer ownership to a next generation at a discounted value. The dealer retains control of the business so the value of transferred interest is discounted to reflect the economic reality that the next generation cannot control or market the business. 
• A grantor retained annuity trust (GRAT) allows the dealer to make large transfers of assets including ownership in the dealership to family members without paying gift taxes. In a GRAT, ownership is transferred to an irrevocable trust in exchange for annual fixed annuity payments based on the value of the business at the time of transfer. Payments are made over a specified time and any remaining value not paid out goes to the trust beneficiary along with ownership of the business.
• An intentionally defective irrevocable trust (IDIC) leverages elements of the tax code to take advantage of differences in how income and estate taxes are treated relative to the trust. This works well for assets that are appreciating, like a growing dealership. In an IDIC, the dealer, or grantor, transfers ownership to the trust in exchange for income, which is taxed as income. However, the assets in the trust are not included in the estate for estate tax purposes.
• Self-cancelling installment note is a technique whereby the dealer sells ownership to a family member or trust in exchange for a promissory note. The note includes a self-cancellation feature. The dealer receives payments while alive and the note is canceled upon his or her death. As a part of your exit strategy, these techniques can accomplish various goals, more than simply reducing transfer taxes. Estate planning helps ensure a successful transition of your dealership. However, an estate plan is not a succession plan.
  

  Getting Key Employees to Stay When You Leave

  Rex A. Collins, CPA, CVA

  From turning your dealership over to your son or daughter to selling it outright, it is in everyone’s best interests to ensure the business will continue to grow and prosper. Without retaining capable managers and other key employees, most dealerships don’t survive the departure of the owner. So, a critical part of any succession plan is a strategy for identifying and keeping key employees onboard.

  Key employees are not just those with the highest salaries or most elevated positions. They include experienced, dedicated people in operations, finance and all departments. Keeping key employees is a challenge. They will be concerned about the future of the business and for themselves under new, unproven leadership. They may be reluctant to work for a new boss, especially when the successor is the departing owner’s child or other family member.

  It often takes incentives to retain key employees after the owner departs the business. There are no “one-size-fits-all” incentives. Financial incentives are typically best, but a combination of monetary and non-monetary incentives are often best at uniting the needs of the dealership with the desires of a key employee.

  In our succession planning work with dealers, we consider seven components in customizing a retention strategy:

  1. Identify key employees and their goals. Key employees are those who are critical to the continued success of the dealership, in any department, at any level. These are people with valuable experience that the dealership doesn’t want to lose.
  2. Communicate with employees to lessen fears and concerns. Employees are unsettled by change and concerned about losing the rapport with leadership they have built over the years. We suggest open communication before and during the transition about changes as they occur.
  3. Point out the positives of continuing to work for the dealership. Explain the value of working with the new leadership and that their jobs are secure. Present a long-term view of the business and the decisions that are being made to ensure it.
  4. Give key employees responsibility for the dealership’s ongoing success. Involving key employees in strategy sessions and planning gives them a sense they are helping create the future and they will be more excited about staying to realize their vision.
  5. Reward them through incentives. There are many options when it comes to incentives, but the best is to incentivize with money. Ensuring key employees are paid at or above industry standards for their positions is one key to retaining workers. One of the biggest mistakes dealerships make is increasing an employee’s responsibility without adjusting compensation. Beyond base pay, you can offer bonuses for meeting short-term performance goals, deferred compensation for longer-term objectives, stock and phantom stock ownership, and retirement savings programs. Non-monetary incentives include benefits like time off, flextime, educational opportunities and other work-life balance programs. Our firm, HBK CPAs & Consultants, developed the Dealership Funding Formula (DFF), which combines elements of open-book management with bonuses for employees when the dealership is achieving its goals. Under the DFF, profits are divided among funds to be put back into the business, distributed to the owners (since the owners are looking for a return on their investment) and, ultimately, shared by all of the employees.
  6. Consider offering non-taxable fringe benefits. Medical reimbursement plans, group term life insurance and other fringe benefits can be provided tax-free to employees. You can target selected employees with “non-qualified” plans that are not subject to discrimination rules. (Email me at rcollins@hbkcpa.com for a list of these benefits that can be selective and do not increase an employee’s taxable income.)
  7. Explore the use of employment contracts. Employment contracts are rare in dealerships, but occasionally can be useful in retaining key employees. You can use a contract to tie monetary or non-monetary benefits to helping the business achieve certain performance levels. For employees, contracts can increase job security and guarantee salary.

  Often, the use of an employment contract actually increases the value of the business since the new owner has some guarantee that the key employee will continue with the dealership after the closing of the transaction. Contracts should contain details on compensation and the terms of any bonuses or other incentives, including severance pay. You can include a non-compete clause, non-disclosure or trade secrets clause, anti-moonlighting clause, and dispute resolution language.

  One drawback to a contract is that an attorney must draw it up, which can be costly. It can also lead to unintended consequences, like a lawsuit when an employee decides the contract has been violated.

  There are many different approaches to keeping employees under new leadership and keeping them enthusiastic and committed to the growth and prosperity of the business. It is important to think through the options and determine the best approaches for your dealership in advance of your departure — and retaining key employees an essential part of your succession planning process.

  An estate plan without succession planning is a recipe for disaster as it only addresses some of the financial concerns relative to succession planning. It doesn’t address issues such as retirement, disability or other potential life and business-altering occurrences. It also doesn’t address non-financial concerns, specifically leadership and management succession, which must be approved by the manufacturer whose products the dealership represents.

Step 8: Develop an Implementation Strategy

Just as there are many parts to a comprehensive succession plan, there are many areas of expertise required to develop and implement an effective plan. The importance of a team coordinator cannot be over emphasized, one who is experienced in the dealership industry and succession planning and is a trusted advisor to the owner. The coordinator will quarterback the team, oversee all initiatives and communicate with the owner as decisions are made and the implementation strategy is developed.

The use of written reports and memos to document the process and lay out the plan, step by step, is helpful in communicating with all interested parties. These reports can be used to:

• List all critical data relative to the client and the business.
• Reiterate goals and objectives.
• Communicate decisions and recommendations; what the plan is going to accomplish.
• Provide the action plan for implementation.
• Detail the implementation team’s analyses and findings. 
• Improve the dealer’s understanding of the plan and its impact.
• Provide a launching pad for implementation, that is, the detail of how you will proceed. 

Step 9: Design a Contingency Plan

The primary goal of a succession plan is to transfer ownership and management to a successor or successors during the dealer’s lifetime.

However, every succession plan should include a contingency plan should the owner die prematurely, become disabled or is otherwise unable to operate the business. The contingency plan answers, “What would happen to my family and business if I’m not here tomorrow?” 

Because a contingency plan considers the present, it needs to be monitored and adjusted regularly. A dealer leaving behind a child intended to take over the business but who is too young at the owner’s death, for example, might have a contingency plan to sell the business or provide interim management until the child is old enough to operate the business.

Whether the business is to be sold or transferred within the family is an important part of the contingency plan. Another consideration is the liquidity to provide for the family should something unexpected happen to the dealer. This could involve using insurance to provide for the family’s needs for cash. 

If an owner’s child is to be the successor, the contingency plan should include how to objectively determine if and when the heir is ready to assume responsibility. And, as always, a plan must recognize the manufacturer’s role in approving any successor.

Steps for designing a contingency plan include:

• Periodically review the owner’s will to ensure dealership assets are transferred in accordance with their wishes.
• Determine the family’s liquidity needs in the event of death or disability. 
• Identify prospective interim managers if the contingency plan is to wait until a child or other successor is capable of assuming management responsibilities. 
• If there are multiple successors, consider buy-sell agreements to address ownership succession.
• Purchase disability insurance where there are multiple owners to resolve disputes. The amount of the disability benefits are often less important than the ability to use the insurance company as a third-party to determine whether one of the partners is disabled. If the insurer will pay the disability claim, then the insured is considered disabled for purposes of ongoing management.

Step 10: Monitor & Adjust the Plan

Succession planning should be part of the dealership’s strategic plan, but it is also a dynamic process that needs adjusting based on the dealer’s changing goals and life circumstances.

The frequency of review varies, but we recommend at least an annual review. Changes in the owner’s personal life along with changes in tax laws, economic conditions and even in manufacturers’ sales and service agreements can create the need to redefine goals and adjust the succession plan.

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