In 1994, years before he retired from GE, Jack Welch had started the succession planning process. He developed a list of qualities, skills and characteristics a CEO should essentially have. So, GE was ready for its next CEO, years before it finally had to make the decision in 1999. GE had three candidates - Jeff Immelt, W James McNerney and Robert L Nardelli. All three were ideal candidates and aspirants for the top job. All three exceeded every expectation required. Finally, the youngest of the three, Immelt was chosen. In November 2000, GE announced that Jeff Immelt would succeed Jack Welch as the chairman and CEO of the company. W James McNerney and Robert L Nardelli, moved on as the CEOs of 3M and Home Depot, respectively. All leaders and companies can take inspiration from the Jack Welch style.

Case Study

Family business executives in their 40's and 50's face real choices when it comes to succession. Who will take up the mantle? Will they want to do it? How will control be divided, if at all? Are there ways to protect family assets in the process? What are the tax considerations? Are my kids ready to take charge?
Such was the situation for a private company executive who had inherited a business from his father and turned it into a robust enterprise with double-digit growth and revenues in excess of $50 million. The owner was certain he wanted to pass the company down to his kids, but he wasn't sure when and how to do it. So he reached out to his financial planner, Peter, for help.

"His initial concerns were about whether his kids were ready to run the business, and what was going to be the mechanism to make that transfer. He wanted to know, 'How do I avoid this big estate tax that may cause my heirs to have to sell my company?'" recalled Peter "Yet at the same time, he wanted to remain in control of the business for as long as possible-perhaps for the rest of his life."

So Peter and his team worked to develop a succession plan that would lay the foundation for a handoff, yet keep control in the executive's hands. The team began by helping recapitalize the company into voting and non-voting shares. This would allow the owner to disperse the wealth of his company to the next generation in a tax-efficient manner over several years, forming trusts and protecting the assets from creditor or divorce claims.

The team also provided guidance to avoid the possibility of a sudden untenable tax burden for the executive's children upon his death - a surprise that often confounds other families who fail to plan ahead. Peter also encouraged the company to establish a true board of directors while the executive was still there so that the board would be in a position to offer unbiased advice to the next generation of company management.

During the next several years, the company performed extremely well, growing its revenues three-fold and expanding into other countries. Buyout offers poured in, and the business owner began to reconsider his succession plan.

He decided to sell the company. Because he still had control of the business, the executive was able to seize the opportunity and act on it without the possibility of derailment by family dissent. The owner sold 90% of the family stake. In doing so, he relinquished family control, but gained a healthy nest egg for his retirement and funding for the children's trusts through sale of their non-voting shares.

Throughout this process, a range of potential issues presented themselves: income and estate tax considerations, governance, and valuation, along with the myriad details of preparing a company to be sold and managing the wealth that results from the sale. Peter and his team were on hand to assist with all of them.

Today, the family remains minority shareholders with a 10% stake in their former company. Some of the children still work there, as do other key employees and stakeholders.

Because the owner had a well-considered succession plan developed and managed by an objective team of advisors, he was able to react and adapt to changing business conditions and make well-informed business decisions while preserving the value of his business both to himself and to his heirs.

"When we first began, he thought he was going to be getting primarily income tax and wealth transfer tax advice," said Peter. "Which, of course he did, along with advice and assistance in a great many other areas. But, over the years, he began to call and ask questions about things that he was thinking of doing in the business, to ask 'How will this impact my plan? What do you think of this?' He came to see our relationship as so much more than just taxes.

For the more information regarding this and other planning strategies, please visit www.wealthco.ca.

Random Stuff

Money fast facts

The average age of Forbes's 400 wealthiest individuals is over 60

Liliane Bettencourt, the daughter of L'Oreal's founder, has been the richest woman in the world for most of the past decade.

80% of millionaires drive second-hand cars.

A third of the world's people live on less than $2 a day, with 1.2 billion people living on less than $1 a day.

The NASDAQ stock exchange was totally disabled one day in December 1987 when a squirrel burrowed through a telephone line.

If your plan is to build a house, your need a blueprint and materials. The same is true for your financial plan.

Your blueprint is where you want to be in five or ten or twenty years from now. Will you be working or retired, living in the same house or somewhere else? Will your children be going to college? Will you own a different car, or a new boat? What kind of lifestyle do you want to lead? Although sometimes difficult, projecting into the future is stimulating. Visualize your goals if you want to reach them.

Feel free to call if you want more info on this month's topic or any planning or investment issue.

Succession Planning

Succession planning is about finding the right strategy for handing over or selling your business to someone else. It could be a staff member, one of your family, a friend or an entrepreneur, and being prepared for all that transfer entails.

Succession planning is a time consuming process as there are many complex issues involved such as business valuations, tax implications, family matters, as well as coaching successors. Planning ahead will help you make the best business decisions.

A well thought out succession plan will help make the transfer of your business go smoothly, and allow you to maintain good relationships with employees and business partners.

Succession planning helps you:

  • Protect the legacy of your business
  • Maintain a service for your community
  • Build value for your business
  • Provide financial security for your family and your stakeholders
  • Deal with unexpected events (illness, accident or death)
  • Prepare for the future

The use of professional services is essential to the success of a small business, including its transfer to another owner. Professionals can provide knowledge and expertise in areas where you may have little experience. They can also round out your management team to ensure that your business is operating efficiently.

As an entrepreneur, there are four main areas of professional services that you may wish to consult:

  • accountant
  • lawyer
  • banker
  • financial planner

When seeking professional help, choose carefully. Find someone with experience, a good reputation and someone with whom you feel you can establish a good working relationship.