Step back, step up

If you're a senior family business leader preparing for retirement, you likely have done a lot of thinking about choosing and developing your successor and transferring ownership of the company. Are you also planning what you will do after you step back from leadership?

In a feature article in this issue, I explore how business leaders plan for a fulfilling life after they leave the top job. Part of that planning involves letting go of the leader's role.

Stephanie Brun de Pontet of the Family Business Consulting Group says retirees who have the easiest transition are those who have developed an identity outside the family firm. If the only way that you define yourself is as the leader of your family business, Brun de Pontet says, "it's extremely hard to walk away" from that position.

The broader your network, the easier it is to find fulfillment after retirement, because you have more venues outside the family company where you're "already a known entity," Brun de Pontet says.

Phil Clemens, who stepped back from the CEO's role at the Hatfield, Pa.-based Clemens Family Corporation in 2014 and retired as chairman in 2015, compares a reluctant retiree to an aging athlete seeking one last major-league contract despite obviously declining performance. Rather than hang on and make the kind of errors that you wouldn't have made in your prime, "It's much better to go out on a high note—and then go do something else," says Clemens.

Those senior leaders who were successful and enjoyed their jobs might need to reframe their thinking. Dave Juday, who retired as chairman of Sycamore, Ill.-based IDEAL Industries in 2014, says he had to suppress the urge to keep control of pet projects and continue attending key meetings. "I had to keep saying [to myself], 'No, no, no; I'm not going to do that,' " he recalls.

Being away from the day-to-day running of the company "actually is pretty comforting," Clemens says. "You get to focus on what the next part of your life is, and not worry about what's happening" with the family business, he points out.

What's definitely not worth worrying about, according to Clemens, is how the sucessor CEO may have changed operations. Change is inevitable and does not equate to criticism of the retiree, he emphasizes; it just means the former and current leaders are different people and have different ways of doing things. "Accept change as the inevitable, not as the enemy," Clemens advises.

Sometimes the new leadership team is interested in their predecessor's input—but the retiree mustn't cross the line. "I'm available to both my successors, if they choose to ask me questions," says Jim Ethier, who stepped down as CEO of Chestnut Hill, Tenn.-based Bush Brothers & Co in late 2009 and retired as CEO in 2015. "I will share my thoughts with either of my successors, just between the two of us. But I won't go any further than that."

Copyright 2016 by Family Business Magazine. This article may not be posted online or reproduced in any form, including photocopy, without permission from the publisher. For reprint information, contact

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Life after leadership

About six or seven years before Dave Juday retired as chairman of IDEAL Industries in 2014, he decided it was time to make a major change—so he grew a beard.

Juday is the grandson of J. Walter Becker, founder of IDEAL, a Sycamore, Ill.-based maker of products and tools for the electrical and telecommunications industries. Seeing the beard in the mirror reminded him that " 'This is a different era; I've got to be a different person,' " explains Juday, now 72. He also began coming to work an hour later than usual.

What's more, he says, "I worked very deliberately to not only say—out loud with some frequency—that I needed to move on, but [also] to make myself believe those words."

Family business succession planning involves many steps and many complexities. A new leader must be identified and developed, ownership transition and estate planning sorted out and stakeholder buy-in achieved. Along with all that essential (and difficult) work, the future retiree must let go of key roles and pick up new ones.

Ignoring the introspective aspect of retirement planning can have dire consequences. A 2013 study by the U.K.'s Institute of Economic Affairs found that retirement increases the probability of suffering from clinical depression by about 40%, and decreases the likelihood of being in "very good" or "excellent" self-assessed health by about 40%.

If you're a family business leader, much of your identity is linked to that role, especially "if you've been at the head of the business for many years, and it's a central part of the community, and a central part of your family's narrative arc," says Stephanie Brun de Pontet, Ph.D., a senior consultant at the Family Business Consulting Group. "It's not surprising that it's very core to who you are and how you see yourself, and how others see you."

"Being the chairman of a company our size, no matter how humble you think you are, that's heady stuff," says Juday. (IDEAL has 1,200 employees and operates facilities worldwide.) "I knew it was going to be difficult to give up all of that," Juday recalls, "but I believed in my heart that [succession] was far more important than any discomfort I might feel."

Now what?

Phil Clemens, 66, a third-generation member who relinquished the CEO's role at the Clemens Family Corporation in 2014 and retired as chairman in 2015, advises those nearing retirement to identify "something else of meaning that's going to occupy their time and their focus" after they exit the family business.

"I'm somewhat startled by how much value it appears I can bring to startups, not-for-profits and even some medical people with my experience and background," IDEAL's Juday says. "The maturity and the years of hard knocks provide me with a background to be helpful in many arenas."

One of Clemens' current activities is family business consulting, an activity he began well before he retired. Clemens, who spent 20 years of his career in human resources, helped senior executives in his company transition to retirement and then began counseling those in other organizations. "By helping others, I was in a learning process," he says.

Juday says he learned a lot about transition issues from sitting on other family business boards and attending programs at Loyola University Chicago's Family Business Center; he also served on the Loyola center's board. Involvement with the center "was very beneficial for me, on a lot of levels," Juday says.

To prepare for his transition, Juday says, "I worked very diligently to identify things that would be fun for me to do, and at the same time take advantage of what I have learned over the years." Since his retirement, he has been actively involved with a business incubator in Wisconsin, an economic development group in northern Wisconsin and a workforce development program in Illinois, along with several philanthropic projects. He also is funding or advising several start-up companies.

Setting a timeline

Jim Ethier, 73, stepped down as third-generation CEO of Chestnut Hill, Tenn.-based Bush Brothers & Co., maker of Bush's Best canned baked beans and other products, in late 2009 and retired as the company's chairman in 2015. Ethier now does some family business consulting and holds several board directorships. "My exposure to family businesses in general indicated to me that one of the problems was when the senior generation didn't have a deadline" for retirement, says Ethier. "You tend to focus on succession if you know that you have a timeline."

Leaders should be transparent about their plans, says Brun de Pontet, who is writing a book on retirement in the family business. "Very often you'll have CEOs who have a retirement plan in their head, but they've not really verbalized it to anybody," she says. That causes confusion and uncertainty in the family and business systems, she says.

Brun de Pontet says a solid transition process involves "a minimum of five years of intentional planning." The board should monitor progress, she says. "The senior leadership team needs to be held accountable by the board for having a plan for continuity," she says, "and that should be a topic that comes up as part of the governance process on a very regular basis."

Sometimes leaders hang on too long because of "an unhealthy belief that they are more valuable to the company than they really are," Juday says. "We all like to think we work hard and create great value. Sometimes we work at trying to convince ourselves and others of that rather than doing the work that needs to be done."

Juday says senior leaders might worry whether their achievements meet standards set by previous generations. "If a person is approaching retirement with a sense that he needs to make a big splash to make up for lost time, it's highly likely to be a misguided effort," he warns. A strong, independent board can help prevent mistakes, he notes.

Juday says he lobbied for an acquisition that would have moved IDEAL, known for low-cost production of electrical connectors, into production of data connectors. "I was trying to push my preconceived notion farther than good business judgment would have it go," Juday acknowledges. IDEAL ended up not making the acquisition.

The importance of ritual

A retirement party is more than an occasion to raise a glass; it's a meaningful event for stakeholders, according to Brun de Pontet. A party gives attendees "permission to recognize and celebrate the change, as well as acknowledge the discomfort and the sorrow that also is part of that transition," she says.

Ethier says he was initially "not at all in favor of" the party Bush Brothers threw in his honor in late April 2016. "Finally, one of my senior executives simply sat me down and said, 'Jim, every once in a while a company needs a party, and you're the excuse.' And it became the 'Bush Prom,' and it was quite a party."

The year before the party—in late June 2015—Ethier created a symbolic ritual as he ceded the chairman's post to his cousin Drew Everett at a shareholder meeting, held at the MeadowView Conference Resort and Convention Center in Kingsport, Tenn. "I picked up a paper crown at Burger King on my way to the MeadowView conference center," Either says. He marked the passage by placing the crown on Everett's head.

"The family greeted him with wonderful applause, and recognized that he was ready," says Ethier.

He also had another successor: Tom Ferriter, previously Bush Brothers' president and chief operating officer, succeeded Ethier as CEO in November 2009. Ferriter is the company's first non-family chief executive.

Like Ethier, Clemens participated in a transition ritual. His second cousin and successor, Doug Clemens, assumed the CEO position in September 2014 and became chairman in September 2015.

To mark the handoff, Phil Clemens passed a commemorative baton to his cousin at the 2014 shareholder meeting and at a special year-end management event. All shareholders and management team members received batons, engraved with the saying, "Clemens Family Corporation, 2015—Passing the Baton to the Fourth Generation; The Legacy Continues."

Phil Clemens says members of his large family—about 680 family members and nearly 300 shareholders—no longer approach him with opinions or questions about the business, "because they know that I'm no longer carrying the baton," he reports.

The analogy can help senior leaders understand their roles at various stages in the succession process, Clemens says. "Once you pass the baton, you'd really look stupid [if you tried] to run after the guy you passed it to and grab it away from him," he says.

Some senior leaders try to "retire on the job," Clemens says; they cede key tasks to the next generation but don't vacate the top post. "People don't know: Are you in charge, or aren't you in charge?" Clemens says.

"To me, that baton becomes so important. Know when you're holding it; know when two of you are holding it together; know when you're letting it go," Clemens says. He notes that if a relay runner relinquishes the baton before the next runner is ready to take it, the baton falls to the ground. "Make sure that you are totally in sync with that person who's going to be picking up the baton," Clemens says.

'Going dark'

To prepare the company for the transition, advisers recommend a "weaning" period, with leaders taking extended vacations or shortening their workweeks as their retirement date approaches.

Clemens started this process in his last year of employment. "The first three months I took a week off; the second three months, two weeks off; the third three months, two consecutive weeks off; and the last quarter, three weeks off," he reports.

During that year, Clemens' company announced plans to build a new plant in Coldwater Township, Mich., representing a major expansion of the business. "I told my senior leadership team, 'I'm going to be staying totally out of the process,' " Clemens says.

He agreed to attend the groundbreaking for the new plant, under one condition: "that I have absolutely nothing to do." He insisted that his presence not be publicly acknowledged; he would attend solely to support the new leadership team, who would be the public face of the company.

"It was really nice to be there," Clemens says. "It was also nice to see the team picking up [the responsibility] and running."

After he officially stepped down, "I 'went dark' for a year," Clemens says. He stopped all business activity and relinquished board and committee memberships. He remained "on call"—that is, he would be available if the new leaders called him; he would not call them.

Clemens maintains an office at company headquarters, though he's rarely there. "It's interesting; when I do show up at the office to clean out my mailbox, oftentimes I hear people saying, 'Well, we had a Phil sighting; we actually saw him around here,' " he says with a laugh.

At Bush Brothers, "When I announced that Tom Ferriter would be my successor as CEO, it was virtually in conjunction with the initiation of a new strategic planning exercise," Ethier says. "That was very deliberate. And I didn't darken the door for three months. So that in creating the next strategy, the organization would not see me in the room and be looking to see what my expression was. They would have to look to Tom for leadership."

When Drew Everett was named his successor as chairman, "Again, I disappeared for three months," Ethier says. To reinforce the symbolism, the weekend after the announcement Ethier cleaned out his office and turned it over to Everett.

As Juday's retirement date approached, he stopped attending some key company meetings, including budget meetings and the annual planning meeting. He restricted his involvement to "high-level policy, and culture and family governance," he says.

Juday also changed the tone of his small talk with employees after it became evident that IDEAL's CEO, Jim James, was set to succeed him as chairman. Juday realized that questions he asked out of curiosity and admiration, such as "What are you working on?" and "What did you invent this week?," might be misinterpreted. "I had to back off of that, to be sure I wasn't seen as keeping track of what was going on—trying to get the skinny off the grapevine to check up on Jim," Juday explains.

Roles on the periphery

Fulfilling peripheral roles can be found that add value to the family business and don't step on successors' toes, retirees say.

Ethier has become Bush Brothers' historian and mentor to the younger generation. While the company published a history book to commemorate its centennial in 2008, Ethier says, "I'm trying to outline some history in terms of stories that are more personal because they are my recollections, or the recollections that have been handed to me regarding my grandfather and my uncles."

Ethier meets with interns, new employees and next-generation shareholders to discuss company history. "I've used a lot of these stories to illustrate why we have the culture that we have," he says. "And in the process of doing that, it finally occurred to me that I need to write some of those things down."

For the past 10 years or so, Ethier has hosted luncheons for small groups of Bush Brothers employees from different departments. The luncheons are held in the home, built by Ethier's grandfather, where his mother was raised and, a generation later, where he grew up. "They receive from me—usually as a result of [asking] questions—some insight as to why we do things the way we do them," Ethier says.

"I still am comfortable wandering around the organization; I just don't give any instructions," Ethier says. "And my two successors don't seem to be in any way threatened by it. If anything, they encourage more of it."

Clemens started working with next-generation members—representing two generations of his family—about 15 years before he retired. "We didn't call it succession planning; I called it 'Lessons in Leadership: What Do Leaders Need to Know?' " he says. As part of a lengthy training process, he shares his insights with promising young family members. The Clemens family prefers for a qualified family member to serve in the highest leadership position. "In order to make that a reality, I had to make sure that I had family members who were going to be qualified," Clemens says. "Our family is very resolute that if we don't have a qualified family member, we will go to non-family."

Dave Juday was asked by his successor, IDEAL chairman and CEO Jim James, to oversee construction of the company's new 222,000-square-foot manufacturing facility in Sycamore, Ill. Since the completion of the project, Juday has offered to take politicians and other visitors on tours of the new plant.

Juday says he's delighted to "show off all that we've done, and who we are, and the role we play in the community. I love that stuff. It does not get in the way of anybody else."


In counseling retiring CEOs, Clemens asks them to recall their first year in the job. "What were you prevented from doing because of somebody else being around?," he asks. "They'll all remember stuff that they want to do that they couldn't, because their predecessor was there." He then asks them to consider their successors. "Do you want them to view you like you saw your predecessor," he asks, "or would you like them to see you as a real asset, and not a liability?"

Juday says that after he stepped back, "I expected to feel a greater sense of loss. I expected to feel a need to check on people more than I did. And I was surprised to find out how busy I really could be with significant and major projects."

Moreover, Juday says, "It felt like a really good transition. I really did convince myself, deep in my heart and deep in my soul, that this was the right thing to do for the company and the family."

Consultant Stephanie Brun de Pontet says business leaders who shift smoothly into retirement tend to be "people who have consistently found ways to be engaged in their community—whether that be because they're very involved in their church or because they're very involved in some aspect of civic life."

"Be serious about the spiritual side of yourself," Juday recommends. "Playing golf or having lunch with the guys, while fun, does not provide that heartfelt satisfaction which is so important to us in our working years." He recommends contributing to worthy causes in a way "where your presence can make a difference"—not just by donating money.

Brun de Pontet suggests that competitive individuals seek out projects with measurable results, like non-profit capital campaigns. "Saying, 'I'm going to spearhead this project, and there's a metric that I'm going to go and hit' is similar to setting business objectives," she says.

However, Brun de Pontet cautions, "It's important not to rush into things. As we age, we want to continue to feel relevant and feel like our voice matters. So I think sometimes folks are too quick to say yes to opportunities that may come their way because they may have some fear that nothing else will come along. I think it's helpful to take a breath and be a little bit discriminating in terms of how you really want to spend your time, and be intentional."

Building a new routine

Brun de Pontet advises business leaders nearing retirement to talk with their spouses about their vision for this new phase of their lives together. Questions to explore, she suggests, include "What do we each, individually, want to spend our time and energy doing, and what might we want to do together?"

"You have to work on the relationship with your family in a very different way," Clemens says. "It's funny; when I retired, my wife told me I'd better go out and get a job. But now that I've gotten really busy, she [has asked], 'Aren't you going to be taking some time for us?' When you set your own schedule, you can make it as busy as you want."

Juday cautions retirees to pay attention to their health. Eighteen months into his retirement, he suffered a heart attack, which he attributes in part to stress from a complex estate-planning project and from another project he was pursuing outside the family business.

"I put myself in a stressful situation that I didn't realize was as demanding as it was," Juday says. "During our working years, we learned to manage the stress that came with our job. It is not uncommon for a retiree to assume roles that [involve] stress, but of a different level, which we have not learned to manage."

Often "a big piece of what is getting in the way" of succession is the senior leader's lack of a future plan, Brun de Pontet says. Nagging questions, she says, can range from the existential—"Who am I?"—to the mundane—"Who's going to manage my correspondence?"

Above all, Clemens says, "Don't be afraid to talk about this."


In some family companies, governance must be revamped in order to prepare the family and business systems for the senior leader's retirement. Such restructuring projects can take years.

Jim Ethier's retirement as chairman of Bush Brothers & Co. in 2015 marked the culmination of extensive governance work. Efforts to strengthen the family and the business were well under way when Ethier ceded the CEO title to Tom Ferriter in 2009.

Family education was a high priority. There are about 100 Bush family members, 60 of whom are shareholders. "The family was resolute that they didn't want to sell the company, so it seemed to me that that meant we needed to educate them as to their role in governance," Ethier says.

In 2005, Ethier began sending family members to an executive education program on family business governance offered by Northwestern University's Kellogg School. Over a ten-year period, 43 family members attended the program, as well as about a half-dozen senior executives and three independent board members, Ethier says.

A Bush family council had been created in the 1990s, but the effort failed after a few years. Starting in 2007, the family revived the idea, establishing a new body they called the "family senate." That project "needed some nurturing," Ethier says. "And then we worked to develop a shareholders' agreement, and that took considerable time and education."

Separating the roles of chairman and CEO, Ethier says, involved "articulating what each of those roles were responsible for" and ensuring that family members understood the distinction. With Ferriter running the company, Ethier turned to mentoring future chairman Drew Everett and to his agenda for the family: "creating a new structure—not just of a family company, but a family enterprise."

In 2010, shortly after he stepped down as CEO, Ethier focused on creating a private trust company. That involved two years of work; Shoebox Private Trust Company was chartered in Tennessee in October 2012.

The initiative was undertaken to simplify many aspects of communication with trustees, Ethier says. "A substantial amount of the ownership of the company was held in some type of trust, and those trusts were distributed among a great many institutions," he explains.

Creating the private trust company—the state's second—involved establishing relationships with the Tennessee Banking Commission and pursuing some state legislative changes, Ethier says. "You might say that gave me something to do when I wasn't taking a nap," he adds with a laugh.

The roles of the operating company board, the family senate and the private trust company had to be clarified and communicated to the family, Ethier says.

At IDEAL, the appointment of non-family member Jim James as chairman and CEO represented a departure from the tradition of having a family chairman and a non-family chief executive. Prior to the hiring of James, IDEAL underwent a management change that required former chairman Dave Juday to delay retirement. The tumultuous period helped him clarify the qualifications needed in a new CEO and in the person who would succeed him as chairman, Juday says.

Juday's daughter Meghan had taken the lead in revamping the family council to meet the needs of the fourth generation; she also joined IDEAL's board.

Dave Juday says a major turning point came when he realized that, because of a changing economy and an expanding family, each generation would have a more difficult job than the previous one. He had to pick a successor with "significantly greater ability than mine," he says.

"I was the last of the benevolent dictators," Juday says. "I realized that the governance model I inherited wouldn't work." The family council model that he and his sister had created was too formal to function well in the fourth generation, he says. "[It] was very structured, very rigid; it was very policy- and procedure-driven. We had terms and term limits, and succession plans for our family council chairs, and [formal] membership... It was very, very prescriptive."

Meghan Juday spearheaded the family council's shift to a focus on process, centered on task forces of family volunteers who research ways to resolve disputed issues. "It was clear to me that the direction she was going was exactly where we needed to go," her father says.

A little over a year into his retirement, Juday began working to resolve a complex estate-planning problem. The family needed to create a trust to replace the trusts that had owned the majority of the company's stock. Those trusts, formed in the 1950s, were due to dissolve because of "rules against perpetuities."

The previous generations' estate planning essentially had assured an income for them while passing on the growth of the business to succeeding generations; however, the entities they created would work for only a single generation.

In June 2015, Juday began drafting plans for a set of new trusts to replace the previous trusts and resolve the issue for the long term. The new plan results in assured income for the older generation with the growth accruing to younger generations, while avoiding the "rules against perpetuities."

"The entire project was premised on paying capital gains up front," Juday says, "That is counter to everything that lawyers, accountants and bankers preach day in and day out. We have invested a lot in our family governance and believed that we could take the risk of paying the tax now, which implies that we aren't going to be facing any pressure to sell the company in the foreseeable future. That part was easy for us. We came together nicely as a family. However, the professionals needed convincing."

A lot of work went into explaining the elaborate plan to the family. "Of course, with this many people, we had some different interests," Juday says. "We had a total of 25 webinars on five topics, each building on the previous, and getting buy-in with each one" before proceeding to the next. "After all the webinars were completed and bought into, we created an individual model so each shareholder could see a very specific 'before and after' of their holdings and cash flows."

Shareholders, company officials, trustees and attorneys have signed off on the documents, Juday says. "There are many hurdles to be overcome in this kind of transaction. We have conquered most," he says. Transactions must be monitored to make sure the transfers are being properly executed, he says. "But, for now, we are confident that we have what we need in place." — B.S.


1. Recognize that it's wise and healthy to step down from leadership well before you're on your deathbed. If you're not convinced of this, seek out stories of succession crises by networking with other businesses, attending conferences and programs or reading the family business literature.

2. Be serious about preparing for life after retirement. Start early; don't relegate your life plan to the bottom of the succession planning priority list.

3. Assess your interests and tap your network to find meaningful projects that are a good fit with your passions and your talents. Don't jump at the first opportunity; take time to think about the most rewarding ways to invest your energy, and how much time those projects will require.

4. Be transparent with stakeholders about your plans and your timeline. Ask your board to hold you accountable for meeting that timeline and alert you to red flags. Allot at least five years for the transition process.

5. Discuss with your spouse or partner how you plan to spend your time. What will you each do separately? What will you do together? How much traveling would you like to do together? Will your spouse join you when you travel for board meetings, speaking engagements or consulting assignments? Is there a major project you might tackle as a couple?

6. Consider peripheral roles you could play in the business or the family. Discuss these with your successor to ensure you won't be stepping on his or her toes.

7. As your retirement date approaches, begin taking longer vacations or working fewer days per week. Don't call in or check email on your days off. Allow the future leadership team to function without your interference.

8. Don't meddle; allow your successors to make mistakes. They will learn from them. If you have an effective board, the directors will steer your successors away from grievous errors.

9. After you leave, don't offer an opinion unless you're asked.

Copyright 2016 by Family Business Magazine. This article may not be posted online or reproduced in any form, including photocopy, without permission from the publisher. For reprint information, contact

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Not the retiring sort

At the recent Wharton Economic Summit, stock guru Jeremy Siegel, Wharton's Russell E. Palmer Professor of Finance, noted that in the coming years the Baby Boomers—those born between 1946 and 1964—will be approaching retirement. This development will dramatically change the retirement landscape for a long time to come. With the average retirement age dropping to 62 today from 67 in 1950, this cohort will face a variety of issues, such as how to support themselves through an extended retirement period and, as Siegel posits, who will buy their goods and assets when they are ready to sell.

As the average retirement age has dropped, life expectancy has risen to an average of 77 years. Baby Boomers, many of whom are family business leaders, are beginning to ask what will give meaning to their lives in retirement. Many patriarchs are reluctant to let go of the reins until the last possible moment. They see themselves as irreplaceable and omnipotent. In addition to concerns about financial security, some are delaying retirement because they doubt the competency of the next generation.

But retirement does not have to be feared. It can be an exciting time to switch gears and develop new interests. When my father, Paul Uhlmann, and his brother, Pat, transferred control of the family flour and grocery products business to their children, my dad was in his mid-70s. “Retirement” was not in his vocabulary. He had long been involved civically, and he continued to stay active on committees and boards, while supporting the performing and visual arts. With more time on his hands, he was able to become involved with a quarterly publication, eventually becoming chairman of its advisory board. Now 86, he divides his time between Scottsdale and Kansas City, where he comes into the office every day, giving advice when asked (and sometimes when not asked), working on investments and helping to look for new business ventures.

At age 64, my father-in-law, Milton Rock, former managing director of the Hay Group, an international consulting firm, transferred leadership control of the family business to my husband, Bob. After setting aside funds to support his lifestyle, Milt sought to invest in and build intellectually challenging businesses that did not carry the same financial risk as he faced in previous executive positions. He, too, focused on the non-profit world, where he could impart his business expertise, meet interesting people and make a difference in the lives of Philadelphians. This was accomplished through his chairmanship at the Curtis Institute of Music, the Pennsylvania Ballet and Temple University Hospital. Now 86, Milt stays active in the business and cultural communities while spending part of the year in France.

As William Alexander, a professor of family business at Wharton, acknowledges, “It is better to retire to something rather than from something. And that something can’t be golf, the beach or travel. It must be stimulating and challenging, which will result in making a difference wherever you devote your time and energy.” In both sides of my family, a fine example has been set.

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They never ask me!

Many business owners who have turned over management duties to younger family members expect to play a role as valued senior advisers. A large number among this group find themselves waiting in vain for requests for help.

These folks—primarily but not exclusively males, and usually over age 50—are treasure houses of experience, good judgment, broad acquaintance and special know-how in the industry or marketplace in which they've worked. They're eager to share what they know and what they've learned with their younger relatives and protégés. Most still have some financial interest in the business and want it to continue to be successful for lots of good reasons.

In many cases, they're simply ignored. In others, they're actively resisted. Efforts are made to deprive them of information, contacts with people or involvement in management.

The young people who consciously deprive themselves of these resources often wind up presiding over calamitous outcomes that could have been prevented. Recent examples in which I've become involved include disastrous extensions of credit, badly planned or poorly executed business expansions, disruptions of relationships with key customers or suppliers, frequent shifts in operating hours or pricing models that cause serious retail customer dissatisfaction, and a host of problems involving long-time employees.

What's going on? The younger executives are neither stupid (if they were, they wouldn't have been selected as successors) nor evil. For the most part, they are uncomfortable about excluding older relatives. The common thread here is that assistance from the senior executive would entail extra aggravation that the younger folks deem unacceptable. They'd rather take their chances and forgo the help.

The seniors often fail to perceive these roadblocks. Even when they're told—in detail, often during tension-filled or angry conversations—they don't get the message. It's a classic case of blind spots. And we all have some.

Causes of trouble

Some common difficulties involve differences in generational outlook or managerial style. The senior folks often allow their comments to expand into lectures or drone on about issues that may be of special interest to them but have no place in a management discussion.

Public disapproval of the younger executives—whether spoken, hinted at or expressed in body language—should be an absolute no-no. Usually the senior person understands this; when such incidents occur, they arise out of accumulated frustration or as a deliberate tactic born from anger. Expressions of disapproval can be especially damaging when the senior person is visiting with customers, suppliers or other outsiders who disagree with a particular company action or policy.

In other cases, successors may be reluctant to ask questions for fear that the senior's answers will go on too long. (We asked the time and he explained how to make a clock.) Worse, he may answer questions that nobody has asked. Legitimate desires to educate or be helpful must be expressed at the right time; otherwise, they might be perceived as intrusive.

Seniors are particularly susceptible to griping by old pals who are long-time current or former employees. Accepting their story as the entire story, becoming their advocate or promising them results without checking with the active managers usually ends up exacerbating problems rather than solving them.

A serious, frequent sin of retired or semi-retired folks is tapping of the company grapevine. This may be a way to obtain information they've been denied, check up on how the troops really see things or rally opposition to a change they don't support. But it undercuts and weakens the present management. And the younger managers may retaliate by further isolating the former chief.

Seven suggestions for seniors

1. Provide unwavering support. Of course, the kids will make some mistakes. Do and say nothing to criticize, except in private talks with them, with the board or with your outside advisers.

2. Stay out of their personal lives. You may be bothered by the way they spend money on spouses, houses, cars or personal interests. So long as it's their own money, and not from the business, leave it alone. Some of them will make serious mistakes with marriages or wealth, but they're adults and should have that freedom. If you insist on holding control, however, well-intended, you will not help them to learn. The result will be resentment and more trouble.

3. Ask questions. Asking questions will encourage the kids to explain and sell their ideas. Your questions should focus on what, where, when and how much. These types of questions help make general goals and ideas more specific. Avoid asking “who” and “why” questions, which tend to produce defensive reactions and don't reveal the quality of their thinking. When they answer you, listen—without interrupting.

4. Focus on the future. Too many seniors review the past to point out the lesson learned and predict that a similar situation will arise again. Better to accept the young people's plan as presented. Then focus on helping them manage potential problems. What do they think could go wrong with their plan? What would be the worst problems? What's the probability that such problems might occur? With these questions, The Old Man has quietly led the young managers through useful thinking. No answers. No nagging. Then the kids may ask if The Old Man has ever encountered anything like this before and will be glad to hear about his experience.

5. Build on small successes. A series of small triumphs builds the confidence to take on larger challenges. Look for opportunities to encourage the younger folks to take on small risks. Building genuine self-confidence is a vital contribution. Tearing it down doesn't help anyone.

6. Reroute complainers and follow up. Senior family members have established valued, long-time ties to many people. When those people complain about the younger executives, The Old Man should follow this procedure: Thank them for their comment, and then direct them to take it up with the young executive who's now in charge. Tell them that if they can't get satisfaction there, you'd like to hear from them again. After a decent interval, follow up to ask whether they spoke to the successor and how everything turned out. After a while they'll learn that they can't get action from you without following the proper channel, although you're still interested.

7. Don't whine. At any age we can slip into this mode. Watch for it.

If you follow these seven suggestions, the kids will be glad to have you around, and you won't be complaining that you're never asked. You'll have completed your transition to the role of useful senior family member.

James E. Barrett ( heads the family business practice of Cresheim Inc. in Philadelphia.

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Time to start thinking about your retirement

Workaholic Walt has no interests beyond his business, so why should he set a retirement date? He works every Saturday, whether he needs to or not. During his rare rounds of golf, he obsesses about inventory, receivables and any conceivable disaster that might occur.

Florida Fred, by contrast, was cajoled by his wife into buying the condo in Sanibel. But Fred expects daily calls from the “kids” running the business back North, because deep down he fears they lack what it takes. Unable to stand the uncertainty, after three months Fred shows up at the office unannounced and takes over again.

Then there's Worried Wendy, who spent a lifetime devoting herself to her family and the business she inherited from her father, now worth about $3 million. On the advice of her financial planner, Wendy began gifting stock early and often to her three children and seven grandchildren, never expecting that, at age 57, her M.D. husband would seek a divorce, splitting their assets in half. She doesn't know whether she can ever afford to retire.

Or perhaps you're like Outdoor Oscar, who'd really rather be fly fishing in Montana or snorkeling in Cozumel. The fire in his belly is gone, and he spends less and less time at the office. But Oscar hesitates to designate any one of his three sons as president, fearing fallout from the other two. Secretly he admits he should have retired three years ago and appointed a strong executive from the outside, but he keeps delaying the tough decisions.

The 19th-century German Chancellor Otto Von Bismarck established the traditional retirement age at 65 after asking his ministers what age government workers could be expected to die. Happily, family business owners don't have to answer to anyone like Bismarck. Some choose to retire in their 40s; others are still working in their 70s. There's no “one size fits all” retirement plan. What matters is having a plan.

The owner's retirement sets a standard for those who come after. There are many ways to do it right.

Consider the simple practical plan developed by Dan Leonhardt of Leonhardt Plating Co. in Ohio: Each year for five years he has worked one less day per week, first staying home Mondays, then adding Tuesdays, etc. At the beginning of each year he delegated another set of responsibilities to his brother/partner, Kerry, one of his three sons or his nephew, saving the tasks he enjoyed most (in his case, finances) for last.

If a family entrepreneur wants to sleep well and enjoy a happy retirement, there are a number of practical steps to take before leaving the business:

1. Work hard to select the most competent leaders available who are capable of taking the company to the next level. If no family member rises to that standard, pick an executive from the outside, hold onto the Golden Goose until the next generation matures and enjoy the fruits of your labor.

2. Define the core competencies that the retiree provides to the company by keeping a log for two weeks in 30-minute increments of what he or she actually does. What percent of the week is spent dealing with banks? Personnel problems? Production? New ventures? Trade associations? Prioritize your interests in each area, and write down the sequence by which you will delegate these responsibilities to your successors—saving the best for last, of course.

3. Even if the current economy forces you to delay retirement, set a date to turn over your responsibilities, so successors can prepare themselves systematically.

4. If you want to gift company stock to the next generation, focus first on establishing control of the company in the hands of those who will manage it, rather than dispersing ownership to all heirs. Equal isn't always fair.

5. If (like most founding entrepreneurs) you gave little thought to funding your own retirement plan, get your assets out of the family business and transfer the risk to your successors. Then you can truly be financially independent, whatever the successor generation does. There's nothing like signing a bank note to sharpen a successor's motivation and unearth entrepreneurial drive.

6. Clarify the right role to play regarding the business—for instance, acting as chair of the board, receiving monthly (not daily) financial reports, attending regularly scheduled (at least quarterly) meetings, requiring business-like accountability from the next generation and incorporating other business leaders as members of the board.

7. Stop giving advice unless asked, especially about details of the internal operation of the company, except at board meetings.

8. Design a plan for the next chapter of your life, in which you learn new skills and meet new people, even while you cherish time to enjoy that second cup of coffee in the morning.

Ellen Frankenberg, Ph.D., is a family business psychologist in Cincinnati.

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Save for Retirement When at Your Peak

An urgent message to business leaders in their 40s and early 50s: Pay the price of succession during your peak years. Make plans now to finance your retirement outside your company. Don’t plan to keep on tapping company cash flow after your successor is in place.

Recently, I participated in a panel discussion on business compensation in which we were asked to discuss a hypothetical case. The entrepreneur in the case had “retired” in his early 50s after turning the business over to his children, who were in their 20s. They were struggling to keep the business going.

At first we panelists complained that the case was unrealistic, that the succession issue wouldn’t happen in the real world until the family members were at least 10 years older—the founder in his 60s, his children in their 30s or 40s. Our hypothetical founder’s retirement was premature. He would be back to “rescue” his children from their inexperience. Real succession would then occur much later.

But as we worked through the case, we realized that the real issue was not so much making succession work as paying the financial price of eventual succession. Many business owners I know balk at securing their retirement income in their 40s or 50s. They are preoccupied with building the business and becoming “wealthy,” according to their (often grandiose) expectations.

My favorite definition of “wealthy” is: the financial ability to maintain a relatively high lifestyle—indefinitely, without working, and with little risk.

Most of my neighbors who are retired corporate executives fit my definition of wealthy. As they age, their net worth becomes less important than reliable retirement incomes. Their financial security is less vertical (balance sheet) and more horizontal (cash flow statement).

But aging business leaders who must depend upon the uncertain future profitability of the family company to finance retirement are not wealthy, regardless of net worth. It’s the risk that disqualifies them. That risk arises out of their declining physical and mental ability to run the business, combined with the unproven acumen of their successors.

It may be difficult for a gifted entrepreneur, at the peak of his or her success, to take money out of a business that is growing at the rate of 20 percent to 30 percent per year, and invest it in retirement assets that—according to the numbers—may be much less attractive. In their 40s and early 50s, most entrepreneurs can’t yet think realistically about retirement, and may not listen well to appeals to put significant wealth outside the company in less risky investments. To him or her, this may not make economic sense.

But given the price of future family succession, a very important case can be made for deferred compensation. Unless the business leader provides for retirement outside the family company, he or she is violating Rule One of estate planning: Never make the parents dependent upon the children.

Like it or not, the aging business leader is becoming increasingly dependent on grown children to finance retirement. Of course, there are alternatives:

•Sell the business to third parties and finance retirement out of after-tax proceeds.

•Sell the business to the children, if they can find and live with outside financing.

•Sell to the children directly on the installment basis, but remain dependent on them to run the business well enough to make the payments. Rule One would be violated until the children repaid the purchase price.

But why engage in retirement planning that would require sale of the business? When the time for succession comes, selling may make good sense or it may be a terrible idea. It makes much more sense to provide now for retirement outside the company, without regard to the unpredictable needs of the business when the time comes to retire. Why risk having to hang on because you can’t afford to let go?

The advisers on that business compensation panel passed along a wake-up call. The time to lock in deferred compensation for leaders of family owned businesses is long before the family begins to focus on management succession. There are a number of vehicles, including:

•Maximum contributions to a 401(k) or other qualified retirement plan.

•Investment of after-tax income in the securities markets, real estate, or other promising ventures unrelated to the family business.

•A non-qualified plan funded with company-owned and purchased life insurance that can be tapped to pay retirement income benefits and eventually reimburse the company from the death benefits. Under current law, premiums aren’t deductible to the company, but the payout of retirement income is a deductible expense. And the cash value of the policy builds up tax-deferred.

Don’t violate Rule One of estate planning. Pay the price of succession during your peak years.


Gerald Le Van is managing director of the Le Van Co., with offices in Charlotte, NC, Houston, and Phoenix, and author of The Survival Guide for Business Families (Routledge, New York, 1998).


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When Old Soldiers Don't Just Fade Away

It's every successor's nightmare. Dad has been calling nearly every day from Palm Springs. He'sheard through the grapevine that sales are down and inventory is piling up. He's been told suppliersare complaining about unpaid bills. Employees are in revolt over the new marketing plan. "Son, maybe Ileft too soon, before you were ready," Dad announces. "I'll be back in the office next week to helpget things back on track."

The successor, however, is likely to have a wholly different picture of the way things are going. Thesales figures his father cites may be, in his view, only a temporary blip in a strategy designed tobring the business into the modern world. The rumors about unpaid bills and employee unrest may becoming from some old-timers who are adamant in resisting the new order.

We read many stories in the Wall Street Journal about retired CEOs who return to theircompanies to rescue them from what they see as dire straits. In his book about retiring CEOs, TheHero's Farewell (Oxford University Press), Jeffrey Sonnenfeld of the Emory Business Schooldescribes a type of ex-CEO called "the General" who never really is able to retire and itches toreturn to power.

What is the truth in family companies? What impels a retired business owner to come out of retirementand take back command of "his" ship — a drastic step that has caused long-lasting, bitter divisions insome families? Is it ever justified? Can it ever work?

Good succession planning, of course, can avoid the need for parental heroics. If the successors havebeen properly trained, if the business has an able, professional management team and a truly objectiveboard of outside directors capable of exercising independent judgment — in short, if the parent has doneeverything right — Mom and Dad should be able to sit poolside without a care in the world.

But some business owners never quite get over the blow to their pride and egos that comes from havingto give up power and position. That can twist their interpretation of the "facts" that they receiveabout the status of "their" business. Boredom is also a major factor for retired owners who have notfound satisfying, challenging new interests. Idle minds fill up with a thousand imagined terrors.Concerns about money may be only rationalizations.

All his life the former CEO has been a problem-solver, and old habits are hard to shake. Even inretirement, when he hears of a problem in the business, or of what he perceives to be a problem, he'sready to charge in and solve it.

The founder may sincerely believe that the business is in trouble. In one company a father who hadturned the running of the business over to his two sons saw signs that the company was going to hellin a handbasket. Yet by any objective measures, the sons were doing a great job. Profits were neverbetter, market share was never higher. Management was becoming much more professionalized, newproducts were being introduced, employment was up, and an atmosphere of exciting change pervaded thecompany. Yet the father, who still retained a controlling stock interest "for tax reasons" continuallycomplained to his board that "We're not paying attention to the things we used to." At every meetinghe questioned the wisdom of letting his sons run the company.

What upset the father most were reports that the company no longer seemed to care as much about itsemployees because "the boys" (ages 36 and 33) had established performance goals for the company anddemoted some senior people unwilling to upgrade their professionalism.

The sons had also taken away some customary perks. For example, they had eliminated privileged parkingspaces at headquarters, taken away a company car from a purchasing agent who never traveled, and solda lodge where inactive shareholders liked to spend their vacations.

These profound changes to a leaner management style, so usual when a new generation takes over, canoften trigger a founder comeback, or provide an excuse for one. Many business owners facing retirementdon't want to sell their companies because they feel a strong obligation to the employees and thecommunity to retain the company's strong "family atmosphere" and values. When their own familysuccessors seem to be betraying that very legacy, old-timers are ready to mount their horses and comeback to slay the Philistines and restore the status quo.


What can a successor do to avoid this melodrama? The answer is to keep the retired owner fullyinformed of what's going on in the business. If there is an outside board, Dad should be encouraged toattend the meetings and participate in discussions of major policy issues.

When the parent still controls the stock, you are remiss, dear successor, if you fail to keep themajor shareholder informed. If the stock has been transferred to you, you may legally ignore your Dadbut still be remiss in your duty as a son. The worst thing you can do when your father is concernedabout a specific issue is to keep him in the dark, to ignore his concern and say: "Don't worry, I'mtaking care of it."

Some founder comebacks, however, may justifiably involve close calls. The first task of the retiredparent who's genuinely worried about what's happening in the business should be to ascertain thefacts. The parent who wants to do the right thing must understand, first of all, that his own motivesmay be mixed. He needs to seek the advice from the best people possible to help provide an objectiveview of the situation.

Obviously, if the company has truly installed an impartial board, the directors are the best source ofcounsel. If there is no outside board, the major stockholders should create one, even if it's onlyadvisory. What parent and successor should avoid is turning to attorneys to resolve their differences.Lawyers are accustomed to taking adversarial positions on most issues and may well deepen the disputeand turn family members against one another.

If a fair, impartial group of people determines that the successors are truly incompetent, that theyare steering the ship into an iceberg, then they may well have to be dumped. If the successors don'ttake advice willingly, they should be replaced quickly by leaders who will.

A founder's re-entry into the business can work if it is viewed as temporary help, motivated by a realdesire to strengthen the next generation's chances for success. Successors, in turn, must have astrong sense of self-worth and an appreciation of the parent's experience and interest in preservingwhat he has built.

When parents and successors feel their relationships are worth preserving, problems get solved. Whenthere's a willingness on both sides to work together to fix problems, they usually get fixed. It isnever too late to build a working partnership between parents and children, based on love, trust, andmutual respect.

Léon Danco is the founder of the Center for Family Business in Cleveland, and theauthor of four books on family business.

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How to Set Up Your Own Income Retirement Plan

One of the main reasons that older business owners are reluctant to give up control of their companies is that they don't want to ever have to ask their children for financial help.

If you are thinking of transferring control of your company to your children and have a similar concern, you might consider establishing an income continuation plan. To illustrate how such a plan works — and its advantages — let me tell you about a good client of mine, Mr. C, who is weighing this option.

Mr. C is in the process of passing his corporate culture, goodwill, and ownership to his son and a key executive — both of whom are quite competent. Due to the efforts of all of the parties involved, the company is thriving and growing in value. Despite a fairly aggressive gifting program, Mr. C still owns approximately 60 percent of the company stock. He would like to gradually reduce his involvement in the firm so that in seven or eight years, when he will be 70, he can retire completely. The firm's qualified retirement plan is primarily for the benefit of the rank-and-file employees and will not provide Mr. C with as much income as he feels he needs to comfortably retire.

As is true of many successful entrepreneurs, much of his financial worth and most of his psychic worth are tied up in the business. In the past, the gifting has been fun for Mr. C. He has enjoyed sitting down with his designated successors and advisors to value the company and to make his gifts. This year, however, he feels a little older and, as his share of ownership moves closer to the magic 50 percent mark, it's not quite as much fun. What can he do?


Of the potential solutions, one of Mr. C's best choices is an income continuation plan. Basically, the plan is a written agreement between a company and an executive in which certain rights and obligations are spelled out. In big public companies these plans are called SERPs (supplemental executive retirement plans). In the closely held company, the payments called for in the agreement must be "reasonable" when compared with the owner's past and anticipated future earnings together with all other forms of compensation from the company such as car and housing allowances. If it is not reasonable, the IRS will likely claim that the company has paid a dividend to the owner and therefore cannot deduct it from taxes.

Mr. C and his company can enter into an employment agreement under which he will be employed at no less than his current compensation — about $100,000 — until be reaches age 70. When he retires at that age, he will begin receiving $60,000 a year for as long as he lives and, if he dies before his wife, she will receive the payments for the balance of her life. If he dies prior to age 70, his spouse will receive a lump sum (the amount is specified in another agreement) from an employer-funded life insurance benefit. If he is disabled before age 70, he will start receiving his $60,000 a year at that point; and he and his wife will be entitled to the benefit for as long as either lives.

Now some business owners may ask why all this is necessary; you may feel that you and your successors can simply wait until you reach retirement, and then they can just keep paying your salary. Many owners have done that or are doing it now for their parents.

This seemingly simple approach brings with it significant income, FICA, and succession tax risks. More important, you're not going to know if you're wrong until it's too late to correct the situation. The retired owner's salary may not be picked up in a tax audit ' But when he dies, any payments of the salary to the spouse would almost certainly be discovered and considered dividends that cannot be deducted by the company.

Let's look at the potential tax advantages of an income continuation plan:

Income Taxes. As noted earlier, if the compensation is "reasonable" when the plan is established, the company can deduct payments to the retiree from its income taxes. Generally, when trying to decide what is reasonable, the IRS considers such things as length of past service; number of years to retirement; current and past compensation; current and past company profitability, and so on.

The payments must, of course, be included for tax purposes in the income of the retired executive. Since the payments are not related to stock ownership, however, the owner doesn't have to be concerned about disguised dividends.

FICA. As most employers are painfully aware, payroll taxes are growing more rapidly than income taxes. Neither employer nor former employee is subject to FICA taxes on benefits paid by reason of retirement, however. Also, if the executive retires before age 70, there is no earned income offset against his Social Security benefits.

Estate and Inheritance Taxes. If an executive dies leaving his spouse a benefit that will be paid to her only for as long as she lives, there will be no estate tax on that benefit since it goes to his spouse and disappears when she dies, leaving nothing to be passed or taxed.

Besides the possible tax advantages, Mr. C may feel a little more comfortable giving up control of his company when he knows he has a contractual relationship with the business to continue his income. Nevertheless, under the income continuation plan, Mr. C becomes dependent to some extent upon his successors to continue his flow of income; he has moved from being an owner to being a general creditor.

Every planning device has its tradeoffs. This is just another example of the TINSFAAFL Theory — There Is No Such Thing As a Free Lunch.

Under the income continuation plan, the owner trades some degree of security for substantial tax savings. From a practical point of view, Mr. C must face the fact that he will eventually have to rely on someone else to run the business, even if he retains full control. If he does not come up with a succession plan that satisfies his son and key executive, they will not stay around to provide him with the security he seeks.

An income continuation plan can be a useful tool in the right situation. The expense and risk of such a plan is relatively small compared with the increased comfort and security it offers aging business owners.

David J. Downey is president of Downey Planning Services Ltd. of Champaign, Illinois, which specializes in wealth creation and preservation for owners and executives of family businesses.


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Tough Love and The Buyout Agreement

“Trust in God, but tie your camel first” is an old Sufi proverb that family business owners should heed when considering an ownership transfer. Even when giving the business to your children or selling it to them, you should exercise extreme care and negotiate safeguards that will protect you and your spouse from a disastrous loss of income. Your successors should understand that such precautions do not imply lack of trust or love but are necessary in case things go wrong after the transaction is completed—because they often do.

Take the case of the funeral home operator who I will call Don Smith. Don transferred the business to his son, Lowell, as part of an overall estate and succession plan but remained owner of the funeral home property, which he leased back to the company. The father believed that the fixed rent he received from the property would be sufficient to provide him and his wife, Martha, with an income for the rest of their lives. And since the rent he charged was below the prevailing market rate, the deal would help Lowell keep down costs and succeed in an increasingly competitive business.

What the parents hardly expected was that Lowell would turn around and sell the business; no provision restricting such a sale was written into the transfer agreement. When the son sold the company to a large, Midwestern acquisition firm for $5 million, there was little the parents could do. Lowell and his wife are now enjoying Florida, while Don is locked into his fixed rental income and a long term lease with a new, non-family owner.

Consider, too, the case of Lanson Morris and his sister, Laura, who sold their family business to three key employees in a leveraged buyout. Their family's building supplies distribution business had always been profitable, and so the Morrises agreed to accept some of the value for stock in future installment payments. In the sale negotiations, they did not, however, think to restrict the buyers from expanding the company.

After the transaction was completed, the employees promptly opened a new distribution center and have now run into financial difficulties. Lanson and Laura are hoping that the new center will be successful. But in the meanwhile they are wondering whether their retirement income and the value of the business that is due them are in jeopardy.

As in the Morrises' case, most ownership transfer plans involve some form of deferred payout, which creates a risk that promised and expected funds may not be collected. Often the seller transfers stock in exchange for an interest-bearing installment note. Or he may be given a supplemental pension plan with payments to be funded by future earnings of the business. Whatever the terms of the transaction, the sellers take on some risk—and the business owner facing retirement wants security, not risk.

There are a number of security measures that sellers can insist on to legally ensure that the proceeds from a sale or income from a pension will not be interrupted. The hard call is: How far can you go to protect yourself without strangling the golden goose? If you put liens on all business assets to secure collateral, that may prevent the company from obtaining needed capital and defeat your purpose, which is to perpetuate the family business and secure your future income.

The big question is what happens if the business is mismanaged by the successors and defaults on obligations to the seller. In the case of a leased property, the owner simply reclaims the property; whether it's a building, a piece of land, or a forklift truck, the property owner simply reclaims it. But protecting the seller after stock ownership has been transferred is much more complex. The sellers' rights to reclaim assets in the business may be secondary to rights of other creditors such as the company's bank.

When a seller steps back into the business after a default on payments, it is usually a last resort. A retired seller who is enjoying life outside the business doesn't want to come back to a mismanaged company and bail it out or turn it around. To avoid such a circumstance, the seller can negotiate protective covenants that give him the power to sell the business to a third party, in the event of non-performance by the new owners, before the damage becomes too severe. An outside owner may then even hire and manage the inexperienced family members.

Of course, the owner can reduce or eliminate the risk of non-payment by pre-funding the transaction. He can begin setting corporate cash aside for himself well before the sale is to take place. Five- to seven-year lead times in succession can also help the owner assemble and groom the next generation of owner-managers.

One way to pre-fund the arrangement is through a supplemental pension plan used in conjunction with a grantor or “rabbi trust” (so named because the first IRS ruling on such trusts involved a retirement fund for a rabbi). An employer puts funds in a rabbi trust to help satisfy non-qualified, deferred compensation obligations to employees—in this case the owner himself. If the company puts $100,000 a year into the trust and it earns 8.5 percent interest a year, at the end of seven years there will be approximately $1 million in it for the benefit of the current owner.

Corporate funds deposited in a rabbi trust are earmarked and set aside for the participants but actually remain a corporate asset. To protect these benefits, the participants may negotiate a “call-down” provision in the pension plan document. This feature establishes that if the company falls below a certain measure of performance, the participants have a right to “call down”—collect —the present value of all benefits in a lump sum. (The plan usually provides for a forfeiture of 5 percent to 10 percent of the benefits if the call-down right is exercised; otherwise, the Internal Revenue Service would consider money in the fund taxable, since the participants would have a right to collect it at any time.)

Most family business owners, unfortunately, are not foresighted enough to set up such funds in advance. Or they find better things to do with income from the business that, at the time, seem to be wiser investments. But when these owners get older and are ready to let go, they find all the birds in the bush, so to speak, and none in the hand.

For business owners who do not want to place burdensome liens on the company but do want to protect their retirement income, there are some alternative ways in which they can secure their rights. These legal security devices are much the same as the ones used by any lender, which is, in effect, what the seller holding an installment note becomes.


  1. Personal guarantees from the buyers. If the kids are not willing to put up their house or bank account or car as collateral, then they are not ready to be entrepreneurs. By insisting on such guarantees, the parent gives his successors a strong incentive to keep the business on course.


    One 63-year-old owner who insisted on such a guarantee learned a lot about his son's lack of dedication. The owner was selling the business to the son on an installment note; the son had put no money down. At our recommendation, while the owner was at his attorney's office ready to sign the agreement, Dad asked his son to sign a personal guarantee. The son refused and “walked the deal.” The father later confided that he was glad to discover that his son did not have the needed commitment before it was too late, since his retirement income would have depended on the son's efforts. Instead, the father sold the business to a third party, receiving half the amount in cash and placing the other half in a secured installment note.



  2. Compensation/bonus caps. The first two or three years will be the toughest for the new owners. If they expect to take the same income out of the company as the parents did, to equal the parents' lifestyle right away, they may not be able to make a go of it. To keep sufficient cash in the company and to be sure the new owners have a long-term view, the parents may want to have a provision in the sale contract requiring the new owners to maintain existing compensation levels for two or three years or to restrict bonuses and perks.


    Of course, the level of compensation established for the new owners should be fair. It should cover the jobs that they had been doing before the sale and will continue to do afterward, plus an increment for any new responsibilities that they assume following the sale.


  3. Restrictions on dividends during the deferred payout period. If the business is a C corporation, it's unlikely that it pays dividends. However, if it is an S corporation —as many family companies are—stockholders often receive dividends to pay income taxes on the profits that are passed through to them. The sellers in this case may want a provision in the agreement that prevents larger dividend distributions until the new owners have finished paying for the business.




  4. Measures to restrict the buyers from taking on new debt. In the event of a business default, some methods of deferring payment in a sale have a higher claim on the business's assets than others. It is therefore in the seller's interest to prevent the buyer from taking on debt that might subordinate what is owed on the installment note.


    The holder of an installment note that is secured with collateral is typically in a more senior position to collect money owed than a general creditor (such as the participant in a supplemental pension plan). On the other hand, the company's bank may require the business to maintain a specific debt-equity ratio in order to avoid having the bank call inventory loans, working capital loans, or other borrowing. If the ownership transfer is structured as a long-term installment note, this additional debt may tip the debt-equity ratio unacceptably and result in a not-too-friendly visit from the banker.

    In contrast, bankers view a supplemental pension plan as a junior obligation that is subordinated to their loans. In their debt-equity calculations, the pension plan is often considered to be “above-the-line equity” instead of long-term debt. So if the bank objects to a long-term installment note, the owner who wants to be sure the business remains viable may have no choice but to opt for the non-qualified pension plan, which offers less protection in a default because it is not secured by any collateral.

    Even if the bank raises no objections, sellers will want to install other devices to protect what is owed on the note. In any default, the sellers usually occupy a second position after the company's regular lines of credit. They may therefore want to prevent the new owners from incurring further indebtedness that subordinates them to a third or fourth position on collateral. In the sale agreement, they will typically ask the new owners to pledge that existing lines of credit will not be expanded without their (the sellers') consent for as long as they remain creditors of the company.

    Another sound safety feature is a cross-default provision, whereby a default on any obligation throws all obligations into a default. This covers situations in which the new owners are meeting their financial obligations to sellers but default on other debt, say, a bank loan; if the bank then moves against the company's assets, the sellers' income is in jeopardy and they may thus want to also assert their claims to collateral.

    If the seller still has personal guarantees on any corporate indebtedness, those guarantees should be removed before the sale or as part of the sale agreement. If for some reason they cannot be removed, the buyers should provide indemnifications that assure the seller that they (the new owners) will cover any claims against him by a third party—even though such guarantees may be difficult to enforce once the business has changed hands. Another reason for removing such guarantees is that if they are passed on to the new owners, according to a recent IRS opinion, their value may be regarded as a gift subject to tax.

    One caveat: Don't expect a bank to automatically accept substitute guarantees from the new owners. It may take a banker several years, and many visits, before he develops the same confidence in the new owners that he had in the old.


  5. Establish cash-flow coverage requirements for the deferred payout period. The sellers, of course, have a stake in seeing that cash flow in the business is adequate to pay off a note. The sale agreement should establish a mutually agreed-upon coverage requirement. If cash flow falls below that, it would constitute a default by the buyers. Usually, the sellers require the buyers to maintain the company's historical cash flow, which can be determined by the accountants. But there are a number of different ways of calculating cash flow. What is important is to determine cash flow—defined as earnings before depreciation and interest payments on mortgage and other borrowing, and taxes (EBDIT). The company should be obliged to maintain at least 1.0 times EBDIT coverage. For greater security, some banks and other lenders require 1.25 to 1.5 times EBDIT.


    So, for example, if a company's cash flow is only $500,000 and the agreement requires 1.25 coverage, the company would have to increase EBDIT to $625,000 or face default. To do that, the new owners might have to delay plans for growth such as expansion to new locations or purchase of new equipment.

    A seasonally low cash flow can accidentally trigger a default. The accountants can usually spot such trends in historical cash flow or they can sample cash flow in selected periods. Then the sellers can have written into the sale agreement the criteria for judging when the business will be in default—for example, four or more quarters below the norm.

    The cash-flow coverage requirements normally factor in the indebtedness to the sellers. The more that the new owners pay to sellers as tax-deductible expenses (in royalties, consulting fees, as income from a supplemental pension plan, or compensation for a non-compete clause) the better their company's cash-flow picture and the easier it will be to meet the EBDIT requirement.

    But too many payouts of that sort can be a burden to the business. Keep in mind that the purpose is not to make the requirements so tough that the new owners will fail. The purpose is to assure the older owners that if the new owners do not succeed, they can get their company back before it is wrecked and then sell it to a third party.



  6. The holders of long-term notes should have the right to review the company's financials periodically. After the transfer takes place, the sellers' accounting firm should receive the company' regular internal monthly and annual statements. The sellers should track industry norms (debt-equity ratios, expenses) and compare them with data in the company's reports. The performance criteria in the sale agreement should perhaps also include measurements important for success in the industry, such as length of time given to customers for payment on receivables and how often the company takes advantage of discounts from suppliers.




  7. Balance sheet requirements. If an existing lender such as a bank requires a company to maintain debt-equity ratios, along with working capital ratios, these same requirements should be written into the sale agreement.


    The remedies for a default or cross-default may vary, depending on the terms of the agreement. With an installment note, a breach could cause foreclosure on collateral. With a non-compete clause, a breach might void the covenant without guaranteeing the seller he'll get paid the balance of what is owed. With a supplemental pension plan, a breach of the agreed-upon financial criteria may trigger a call-down of funds in a rabbi trust (if the trust was, in fact, funded; many are set up with just a token deposit of $1; a “springing” provision enables the participants to require the company to fund the trust under certain circumstances).



  8. Put stock in escrow until the buyer pays off debts related to the buyout. This is fairly standard practice. Typically, the attorney for the seller or an escrow agent holds the stock until the debt is paid. If there is a business default, this presumably makes it easier for the seller to reclaim ownership of the business.


    But this “stock pledge” does not prevent the buyers from dramatically changing the financial condition of the business. By the time the former owners take back the stock, it may be too late to save the company. Also, this security device is of no use when the former owners have gifted the stock to their successors and receive their income through a nonqualified retirement plan.



  9. Ask the buyers to obtain a letter of credit. When a financial institution issues a letter of credit, it in effect shares the risk with the seller. The institution issues a letter stating that the buyer is creditworthy and guarantees the loan.

    This device, more common in transactions involving a third-party buyer, has a number of drawbacks for internal buyouts by family members or key employees. First, letters of credit are expensive for the company—costing 1 percent to 2 percent each year for the amount being guaranteed. Second, letters of credit are usually good for only one year at a time; they don't cover the entire period of indebtedness. Third and probably most important, to secure a letter of credit a company may be required to set aside a portion of its existing line of credit as collateral. For the family business that is dependent on a line of credit, this could be a disaster.



  10. Get the new owners to sign a non-compete covenant. If the business doesn't succeed under the new owners, they should not have the option of being able to leave and set up shop elsewhere, taking advantage of the experience they have gained at the old owners' expense. This may seem to be a heartless provision for parents to insist on when they wish their children well, unless you have seen—as I have—family vendettas in which offspring purposely set up competing firms to drive their parents or siblings out of business.




  11. Require the new owners to carry life and disability insurance. If the new owners die suddenly or are disabled, the former owners may have to step back in. With the proceeds of insurance that has been collaterally assigned to them, the former owners can be assured of collecting any amounts due them. Insurance thus prevents one tragedy (the new owner's death) from becoming two (the former owners' loss of everything).




  12. Prohibit the new owners from selling assets, making acquisitions, or getting into an entirely new line of business. The buyout agreement should keep the new owners focused on productively using the assets they have acquired and discourage them from spinning off assets for quick profit. The same goes for acquisitions and expansions.


    Some owners approve of such risk-taking, at least within limits, and may not care to protect themselves against them in the agreement. However, the risk-averse owner will want to ensure that the new owners pay him off before embarking on any corporate expansion or acquisition program.

    A client of mine had just such a requirement written into a sale agreement made with his son: If the son wanted to make an acquisition, he could do so under the contract, but payments to Dad had to be completed on an accelerated schedule and be all paid up as soon as the acquisition went through.

    In fact, the son found an acquisition that was sufficiently attractive to pursue. He closed on the deal, thus triggering Dad's payoff. Everyone was pleased: Dad got his money earlier than expected, Son was able to buy the new company that he wanted, and the new company's cash flow helped pay off the debt Son incurred when he cashed out Dad.

Although this list of security devices is not exhaustive, it underscores the importance to the sellers of getting up-front protection in the transaction. Some changes in the company's bylaws may also be required if the sellers are to retain a minority interest.

For example, the seller could amend the bylaws to include a “supermajority” provision that would require more than a simple majority for approval of changes in the direction of the business. If, for example, Dad retained 20 percent of the stock, such a provision could require a vote of at least 81 percent of all stockholders for major decisions. Such a provision could, in effect, give the minority holders a veto over a sale, a merger, or a recapitalization.

Another option is to have a “windfall provision” in the agreement, so that if the new owners sell the business within a few years for more than they paid for it, they would have to share the excess proceeds with the former owners.

If the seller feels the need for such guarantees, however, it may be that neither he nor the buyer is yet ready for the transaction. The process of negotiating these security devices often brings out hidden concerns of the people sitting on both sides. When an owner wants to perpetuate a family business, he has to cut some strings. There is a fine line between what is a fair and justifiable measure to protect the retirement income of the aging owner and his spouse and what is demanded because the owner is not really willing to let go.


Mike Cohn is president of The Cohn Financial Group, a family business consulting firm in Phoenix. This article is adapted from a new, revised edition of his book, Passing the Torch: Transfer Strategies for the Family Business, ©1992 McGraw Hill, which will be published this summer. Adapted with permission from McGraw Hill.

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Make a Career of Retirement

T0 THE YOUNG, retirement means clearing away a roadblock, says Leon Danco; to the old, it's equated with euthanasia.

Danco, who has worked with family businesses for more than 30 years, now feels he has found one solution for aging founders who refuse to let go: create and manage your own private foundation. You don't have to be a Ford or a Carnegie to do it, he insists. About 90 percent of the 30,000 or so independent grant-making institutions in the United States give away less than $100,000 apiece each year.

The 67-year-old consultant and his wife have already created their own foundation, the Katy Danco Foundation. He wants to help family business owners establish theirs, and envisions that such foundations can ultimately create a pool of $1 billion for charitable causes in American communities. Danco sees the creation of a foundation as a meaningful second career for the successful business owner-an "adjunct to the dream" that inspired so many family businesses.

In October, Danco, whom many consider the founding father of family business consulting, spoke about this third career at a conference in Atlanta held by the Family Firm Institute, which honored him for his contributions to the field. Recently, Family Business consulting editor Howard Muson visited Danco at his home in Pepper Pike, an affluent Cleveland suburb, to explore his views on retirement, the private family foundation, and ways in which owners can craft a second career.

FAMILY BUSINESS: Leon, why is retirement a special problem in family businesses?

LEON DANCO: The ultimate distinguishing characteristic of the family business is the succession rite. The flip side of that is retirement. But the business founder generally has no models of retirement. He has never had to face the issue and is usually frightened to death of it.

Most of his career has been on an upward curve. During his twenties and thirties he was learning how to do it; then, in his forties and fifties, he was learning to do it really well. But after 60, the curve levels off and begins to decline. At that point the business owner should be teaching others how to carry on. He should be developing a sense of stewardship, a contributory role, instead of continuing to beat up on life. Otherwise, he can destroy on the way down what he built on the way up.

FB: He continues to "beat up on life?" What does that mean?

Danco: There is a Hebrew word, dayenu, which means "Enough!" It suggests that at some point you should enjoy what you have and start to share, give something back The antonym is "More!,'; which can only bring unhappiness.

I deal every day with people who have accumulated money far in excess of their own needs. What are they going to do with all of it? Are they really going to leave untold millions to their children and ruin what chances the kids have to be self-reliant?

FB: You've found there's a lot of money out there looking for good causes?

Danco: I have had 20 people in the last 12 months tell me, "The reason I don't sell my business is that I don't know what to do with all the money."

Sadly, there are many businesses that should be sold, for the usual reasons-no known heirs, no willing heirs, Their owners don't realize that selling would give them huge opportunities to support meaningful philanthropic activities with the proceeds.

FB: In most cases the funds for a foundation will come from the company, at least in the beginning, right?

Danco: It can come from company profits, from surplus company cash-it can even come from debt. Most businesses that are run by old-fashioned rules are almost debt free. You can accumulate some debt, take the cash, and pass the company on saying, "Son, you are going to have all the fun of paying back the debt!"

FB: Many companies already give a percentage of profits to charities. Why not just write a check and be done with it?

Danco: There's certainly no satisfaction in writing a check. Also, I don't think most business owners are generalized do-gooders; they usually have a few pet causes they feet passionate about.

When they do want to put their personal stamp on something, a private foundation may be the way to do it. Firstly, it helps solve the estate problem, because money put into the foundation isn't taxed. Secondly, it gives them something to do after they retire, so they won't continue to meddle.

FB: When should the business owner who's interested in a foundation start thinking about it?

Danco: In your fifties and sixties. You need time to plan and years to fund it gradually. A business that makes $1 million a year can afford to set aside $50,000. If you do that every year for 10 years, you have half a million to get your foundation started.

FB: Are there any models of what a small family foundation can do with limited funds?

Danco: I know one family that spends a million and a half dollars a year to educate the children of Salvation Army officers. The family felt that the Salvation Army does so much good and its officers get so little pay that they wanted to make scholarships available to their children.

The range of charities is enormous. The Coleman Foundation, for example, was started by people who founded Fannie May Candies; they had lost several family members to cancer and so wanted to support cancer research.

FB: Do some foundations promote the same business values as the company?

Danco: Absolutely. There's a foundation that grew out of a successful mail order company that sells safety equipmentgoggles, gloves, extinguishers, and so forth. The owner set up a foundation to do research on occupational safety. And the grants help to enhance the image that the family business is vitally interested in protecting workers from injury.

FB: How did your own foundation come about? What did you have in mind when you started it?

Danco: Our foundation was created by my wife, Katy, and me as a long-term vehicle to implement our family values. We put a quarter of a million into it in 1986-it was a good thing for us to do in that year for tax and estate purposes. We are very interested in the welfare of children and small animals. We thought we would give the money to needy but unpublicized children's hospitals, animal shelters, and other humane organizations that are overlooked.

FB: How did that lead you to the idea of making this a "third career?"

Danco: Going back over my first career, I thought: I didn't invent the family business, I merely rediscovered it. I came upon this forgotten instrument, became its champion, and articulated its purpose and credo.

Likewise, I didn't invent the board of directors. It had been there all along as an instrument through which shareholders could have a voice in management. But as I went around to family businesses, I discovered that few had viable boards-just groups of conspiratorial relatives, hangers-on, and fading employees who were adding no value to the business. In my second career I helped clarify the purpose and importance of boards to family businesses.

Now, in my "third career," my wife and I are going to enlarge our foundation's purpose to help others set up foundations of their own.

FB: How will it work? What role do you see for yourself?

Danco: I see myself as the evangelist. You can get a lawyer or accountant to take care of the mechanics, which are minimal-it cost us only $900 to set up our foundation.

What I would like to do is to get a lot of 50- to 60-year-old active business owners to setup foundations. I would like to help them create a mission statement and a structure. The business could fund the foundation out of earnings as an ongoing charity.

FB: I suspect a lot of business owners distrust "do-gooder" causes. How many do you feel are really touched by the notion of a social mission?

Danco: Many. Almost all the ones I know, in fact.

FB: I suppose not everyone will want to set up a foundation.

Danco: There are men who can retire and go fishing. They can come and go at the company, talk to their sons and daughters, stay involved, and that's great. Some people are good with their hands. But what can the business owner do whose only strengths are management and an understanding of the business world?

FB: Some business owners, I'm told, retire to Florida and sit around country club locker rooms swapping stories and plotting to take back control of their companies.

Danco: Yes. Swapping stories, swapping wives, swapping all sorts of things. They're bored. Few people can make a life of golf or traveling, reading books, writing memoirs, or watching old movies. The challenge of a foundation is in spending the money wisely, in finding the best people to spend it on-not just writing a check for the first guy who comes through the door. You get involved, your children can get involved. It also gives you another incentive to make money, so you can spend more on worthy causes.

FB: What about starting another business after retiring?

Danco: That's an option-but not one I think much of. Most people who try don't succeed.

Often people don't realize that timing and circumstance and often luck had much to do with their success. It's like the guy who has three sets of twins and someone asks: "Do you get twins every time?" "No," he answers, "most times we get nothing." One success in business doesn't mean you will necessarily succeed again.

FB: Isn't there a retired businessmen's organization that advises small companies?

Danco: Yes, Senior Corps for Retired Executives (SCORE). The approach there, in some cases, is, "Sonny, let me tell you how I did it."

When advising becomes a substitute for watching the grass grow, then nobody benefits. A retiree often gives advice not because the business needs it, but because he feels he's got to give it. It's not a matter of age, though; some 80-year-olds really have something to contribute.

FB: How do you think the kids will feel if Dad forms his foundation, then starts taking money out of the business? Isn't there a potential for conflict?

Danco: You don't go to your successor all of a sudden and say,"Well, I'm sorry, Harry, but I'm taking $10 million out of the business to give away to people who want to build bird feeders for the community."

When you reach 55, tell your kids: "We're going to set up this foundation and between now and my 70th birthday we'll put so much in each year." You think, you plan, you spend a few dollars on research. You ask yourself: What do I know about birds and their feeding habits? What makes a good bird feeder? What can I do to help people who are making them?

FB: Do kids in the business know what a parent facing retirement goes through?

Danco: Not really. Too many of them can't talk to their parent about it; they both avoid the subject

FB: Is there anything the kids can do to help him get over the hurdle?

Danco: I give them a little button that reads, "Solve Dad's Problem First." I urge them to stop worrying about their own careers and start worrying about his, because be has only a little time left. Kids tend to be critics; that's their nature. I ask: Why should you have an adversarial relationship with Dad's advisors? Or be down on all his employees? Don't add to his problems; try to understand his needs and his viewpoint and add to his solutions. Above all, communicate.

FB: And one solution is the family business foundation.

Danco: There's a fascinating field out there just waiting for the business owner-untouched, undiscovered. Just think of the joy an executive facing uncertain retirement can experience when he finds that his skills and talents can be focused on a new arena: cost-effective philanthropy. That's exciting!

-- H.M.

The seasons of a founding father

Back in the late forties, Leon Danco was in the bar of the Harvard Club in New York City when a man of about 50 struck up a conversation, telling him how he had kicked the winning field goal against Yale in 1916. A photo of the helmeted young hero hung on the wall above the bar. The old grad bent Danco's ear with a rousing, second-bysecond replay of his feat,

"This man told anyone who would listen about his success almost 30 years before, 11 Danco recalls. "He couldn't forget those 10 seconds, Clearly, he also couldn't move on in life."

Leon Danco believes in moving on, As a leading counselor of family businesses, he is accustomed to teaching different generations of people that "to every thing there is a season."

At 67, the white-haired patriarch of family business is an engaging blend of Old Testament lawgiver, wise uncle, senior statesman, and highpriced kibbitzer.

Though Danco maintains a small, wood-paneled office in a shopping center over a vacuum Cleaner store, he meets clients in the same yellow, wood frame house that he and his wife, Katy, have lived in since they moved to Cleveland from Connecticut in 1457. His off ice in the house looks out on an idyllic six acres of grass and woods, tall hickory trees, and, in summer, a blaze of flowers,

At his desk, Danco is surrounded by family portraits, medals, and diplomas. After graduating from Harvard, Danco was a Navy off officer during World War It, on a supply ship in the South Pacific. The captain was a drunk, and Danco, a 21 -year-old lieutenant junior grade, boldly took command of the ship one day off New Guinea, risking courtmartial, He was not charged, however, and ended up becoming captain instead.

The basics of Danco's vitae are well known-a degree in the classics from Harvard an MBA from the Harvard Business, School. a Ph.D. in economics from Case Western Reserve. Less well known is his serendipitous discovery of family businesses as a promising consulting field.

After working in the chemical and metal-working industries, Danco came to Cleveland to teach in an advanced management program at Case Institute of Technology. When demand for the course slackened during the 1959 recession, the program was shut down, and Danco was out of work.

He taught economics at the Cleveland Art School for a While, and advised local businesses that were hungry for professional help. They were mostly small family businesses run by immigrants drawn to Cleveland by the auto, steel, and ship-building industries. Danco became a trusted counselor to "the children of immigrants, the first generation that didn't have to work with their hands."

The letterhead of Danco's Center for Family Business shows an hourglass with the sand running down-a reminder that time is short and business owners need to prepare for succession. He himself has had several memento mori in his life, The worst of them occurred when he and Katy crashed in his Beechcraft Bonanza off the Florida Keys in 1971, The plane became lodged on a reef, They were rescued, but Leon was badly hurt: His jaw had to be wired and his face rebuilt by plastic surgery.

Some have called Danco a dinosaur. They say that he speaks the language of the older business owner but has difficulty communicating with younger people. "Trying to be understood by the young is a real challenge," he admits.

Danco was able to talk to his father only after the war. "Before that, my father thought I was a spoiled kid. But I got banged up pretty good; I had paid my dues. After that we got along well,"

The Dancos have a son, Ty, an investment banker in New York City, and a daughter, Suzanne, who's married and lives in London. The son calls often, Danco says proudly.

When dealing with the young, Danco measures everything by where they are on the generational curve, where he was at their age, and where they can be in 10 or 20 Years. He looks for reference points, a common vocabulary. "You're going to run the world I die in," he tells them, "and I don't want you toscrew it up."

Want to start a foundation?Here are some answers to the basic questions.

How much of my contributions to a foundation are tax deductible?
Up to 30 percent of your income if you give cash, or 20 percent if you give appreciated property.

What will taxes be on the foundation's investment earning?
Two percent. One percent if certain conditions are met.

Do I have to make distributions every year?
Yes, the law, requires foundations to distribute at least 5 percent of their assets annually.

ls there a legal limit on administrative expenses?
The law allows you to deduct expenses incurred by the foundation that are "reasonable and necessary."

Can a foundation donate to any cause I would like it to?
Yes, as long as it is a charitable activity. If you wish to support a nontraditional charity that's not listed in the tax code, you can ask the IRS for a ruling on whether it qualifies.

Is it necessary to hire a staff?
Most smaller foundations do not have full-time staff people and probably will not need a professional administrator. Usually the work can be done by the benefactor himself or another family member.

-- H.M.

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