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UPFRONT: Succession Planning And Exit Strategies

Posted On: 3/10/2006

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Succession planning always has been an important topic in entrepreneurial industries. Whether or not the founder has children, or whether or not more or fewer family members want to purchase the founder/owner's interest in the business, the various "exit strategies" are long-time topics of operator conversation.

In fact, the case study given to participants in the National Automatic Merchandising Association's Executive Development Program seems to have been crafted, in part, to encourage such conversation. It presented an imaginary vending company founded by an entrepreneur who had expanded it steadily and successfully. His health and advancing age made it clear that he no longer could exercise the kind of hands-on management that had allowed the company to continue thriving despite a changing environment. His managers wanted to buy him out and keep running the company. The EDP students were instructed to work up a business plan for those managers.

The team I was on at the most recent EDP session (see VT, February) was inclined to see the "old man" as a potential obstacle or, at best, a passive element in the situation. So my teammates were astonished when I spoke up for that mythical pioneer. "After all, this business wouldn't exist in the first place, if it hadn't been for the imagination, hard work and dedication of its founder," I argued vehemently. Surely his achievement, the imprint of his life and personality on the thing he built, is worth something in its own right. He has won the respect and trust of the company's clients; surely this counts for something? If we are assessing the company's strengths and weaknesses, is not the fact that it is the founder's masterpiece to be considered one of the real strengths?

My teammates were surprised by my passion, but as a member of the much-discussed "second generation" as a daughter of the late, great Victor Lavay, my life experience has made me aware of the creative force, the uncommon imagination, of the business-builder. The animated discussion that took place among us may have been outside the strict scope of our assignment, but it certainly raised some important questions about transferring company ownership.

How do you pass the proverbial baton, ensure a smooth transition and protect the valuable employees who have worked with you to create something you love? If you don't have a buyer, how do you find one? Your objective is to establish a source of tax-deferred income for retirement; do you also want to give your employees a stake in the company? If the business itself represents the bulk of your assets, how do you arrange for fair inheritance by family members who are, and are not, involved? How do you do this without selling off or breaking up the business, and without provoking resentment?

Perhaps an Employee Stock Option Plan (ESOP) is the answer. This is an attractive option for the founder of a company who wants to keep it together and functioning after his or her retirement, while securing retirement income and taking care of the heirs. I'm not a financial advisor, but I do have a lot of personal experience -- and a tale to tell.

About 12 years ago, our majority stockholder and founding partner, Morris (Tiny) Weintraub, wanted to cash out his stock in VENDING TIMES and retire on the proceeds. My father, who then was serving as the executive publisher and minority partner, wanted to buy him out, but couldn't raise sufficient capital on his own. Weintraub had received several offers from prospective buyers interested in purchasing his stock, but my father knew that such a sale might put the jobs of several key employees in jeopardy. He also didn't want VT to become part of a large publishing group, which would impair its integrity. He needed a way to finance the acquisition, give VT the best chance for continued success on its own, plan for his own retirement, and provide for his family. He was, among many other things, a trained accountant who kept up to date, and recognized the ESOP as the solution to all of these needs.

Briefly, an ESOP transfers ownership of an enterprise to the employees by borrowing money with which to purchase stock for issue to them. The stock's value thereafter varies with the fortunes of the company, and the participants' control over their shares is limited to their right to sell them back to the plan when they retire, or if they leave. ESOPs came into their own in the mid-'70s, when the government recognized their value as employee benefits. The tax advantages of an ESOP are defined in the Employment Retirement Income Security Act of 1974. You can learn more at

 My father was able to raise enough money to purchase the majority shares of VT from Weintraub by mortgaging his home. He then held the controlling interest (51%), and the remaining stock was sold to the employees through a carefully-phased-in Employee Stock Ownership Plan financed by Merrill Lynch & Co., It took seven years for the employees' stock to be allocated. During that time, the principal remained in escrow, but Weintraub was able to begin enjoying the interest immediately, without the tax burden. That escrow account served as collateral for the loan, and the interest payments were a tax deduction for the business as it went forward.

A few years later, after the first ESOP was successfully paid off, my father was able to sell some of his stock back to the company. He wanted to pull some cash out of the business for estate planning purposes. My mother and I would inherit my father's stock, and my four older sisters would be given an equitable amount of cash. This was an effective way to provide for the child involved in the business, the children not involved in it, and good employees who aren't relatives. My father died suddenly 21⁄2 years ago, but because he had a well-thought out succession plan in place, we are able to continue the VENDING TIMES tradition, just as he had wanted. Today, my mother and I control the voting stock, and the majority of VT's stock belongs to the employees under the Plan.

So, if I went to bat for the "old man" in the fictitious case study, perhaps you will now understand why. I do feel very strongly that a business with a history of entrepreneurial imagination and achievement should regard that history as a source of pride and a strong point in its marketing, while at the same time working hard to secure its future. If you've done a good job of providing for your customers, your loyal employees and your heirs, you and they should tell the world about it. What's your company's legacy, and shouldn't those who inherit that legacy tell your story?