CFMAAGC of America

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CFMA/AGC of America 12th Annual Construction
Financial Management Conference
October 24, 2008 Caesars Palace Las Vegas,
Nevada
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What Is Continuity Planning?

• Transition
• Ownership
• Management
• Current owners
• Remove equity
• Change role

• New owners
• Changed roles
• Who, when and how
• Company
• Strategic plan

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Galbraith Model
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Three Components of Continuity Planning

• Ownership transfer plan
• Management succession plan
• Red Truck or contingency plan

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Why Is Succession Hard?Owners Succession
Fantasies

• Live forever or get money cleanly
• Work indefinitely, periodically or absentee
• Getting paid indefinitely
• Successors will clamor for ownership
• We will make a lot more money in the future
• Remain in charge indefinitely
• Employees will develop a plan for me
• Family members will ultimately come into the
  business

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Key Facts and Assumptions (1 of 3)

• Alternatives for getting out
• Liquidate
• Sell to a third party
• Sell internally
• Few outside buyers
• Internal sale can maximize value
• B Y O W Y O

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Key Facts and Assumptions (2 of 3)

• Time frame of eight to twelve years
• People side is the hardest
• Says easydoes hard
• Most plans do not work because of
• Poor communication
• Inadequate profits
• Wrong people

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Key Facts and Assumptions (3 of 3)

• A lot of good/bad and bad/good advice
• ESOPs
• Family trusts

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The Process

• Defining the objectives and parameters
• Valuing the business
• Exploring and selecting the appropriate ownership
  transfer techniques
• Understanding and addressing the management
  succession issues
• Implementation and follow-through

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Surety Industry SurveyReasons for Clients
Continuity Plans Being Unacceptable
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Surety Industry SurveyMost Common Reasons for
Ownership Transfer Plans Not Working
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FMI Ownership Transfer andManagement Succession
Survey (1 of 4)
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FMI Ownership Transfer andManagement Succession
Survey (2 of 4)
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FMI Ownership Transfer andManagement Succession
Survey (3 of 4)

• Who will ultimately own the stock in your
  company?
• 67multiple owners, but one shareholder with
  control
• 27multiple owners, no control
• 6one individual will own all of the stock

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FMI Ownership Transfer andManagement Succession
Survey (4 of 4)
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Surviving the Corporate Transition
Private Firm Existing Ownership Existing
Management
Die
Live
New Ownership
New Management
New Ownership
New Management
Must plan for all four scenarios
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Why Owners Hesitate to Plan for Management
Succession (1 of 3)

• Management style not conducive to the development
  of competent successors
• Fears development of younger successor management
• Believes one person is better than a team or
  unwilling to share power
• Complete identification with business can result
  in few outside interests or hobbies

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Why Owners Hesitate to Plan for Management
Succession (2 of 3)

• Fears a lessening of importanceboth in the
  company and in the community
• Fears retirement will drop income and standard of
  living
• Reluctant to make decisions regarding family or
  key employees
• Unwilling to sell for fear of losing firms
  individuality

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Why Owners Hesitate to Plan for Management
Succession (3 of 3)

• Does not want others to learn companys true
  financial position
• Expectation that the value for a third-party sale
  should be equal to that in an internal
  transaction
• Unaware ofor misinformed aboutequity transfer
  techniques

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Effects of Inadequate Planning

• Key employees may leave
• Business may legally come to an end and be sold
  at a forced sale price
• There may not be sufficient capital to purchase
  the available shares of the business
• Unqualified heirs or employees may ruin the
  business and its value in the process

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FMIs Laws of Management Succession (1 of 8)
The number of family members employed in a
business is inversely proportional to long-term
profitability
Law 1
The number of family shareholders has a similar
relationship
Corollary
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FMIs Laws of Management Succession (2 of 8)
Never give up controlunless you really want to
and are fully prepared
Law 2
Do not give up control as long as you are at
great financial risk
Corollary
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FMIs Laws of Management Succession (3 of 8)
Business relationships caused by accidents of
birth have a low probability of success
Law 3
Children should be treated fairly and
equitablynot equally
Corollary
Never promote inter-family relationships over
competence
Corollary
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FMIs Laws of Management Succession (4 of 8)
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FMIs Laws of Management Succession (5 of 8)
People not employed in the business, including
family, should not be shareholders
Law 5
All employees and family members working in the
business should be paid what they are worth
Corollary
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FMIs Laws of Management Succession (6 of 8)
The people who own the business should run the
business (and vice versa)
Law 6
Minority interests may motivate some people some
of the time
Corollary
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FMIs Laws of Management Succession (7 of 8)
After age 35, age ceases to be a factor in
effectiveness maturity is the issue
Law 7
You never know if a dog can hunt until you put
him in the woods
Corollary
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FMIs Laws of Management Succession (8 of 8)
Parents are not capable of objectively evaluating
the competence of their children
Law 8
The offspring with a proven, unaided track record
has an excellent chance of winning the respect of
the employees
Corollary
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Thank you!
Landon R. Funsten Principal
FMI Corporation 5171 Glenwood Avenue Suite
200 Raleigh, NC 27612 Tel [phone] Fax
919.785.9322 E-mail lfunsten_at_fminet.com Web
site www.fminet.com