For the past 36 years, the six-time Super Bowl Champion Pittsburgh Steelers have sold out every home game and have a national following rivaled by few NFL teams.
But the team's longtime family ownership was recently in turmoil. Chairman Dan Rooney, whose father Art was the original owner, wanted to keep the Steelers ownership within the Rooney family. However, disputes over valuation of the business interests pitted brother against brother and almost allowed a third-party billionaire investor to gain control of the team, who may have moved the team away from its rabid Pittsburgh fan base.
Not all businesses have the glamour, money and star power of an NFL dynasty, but too many have had similar issues and problems to resolve regarding business succession and estate planning. If anything, the Steelers scenario personifies the challenging issues many family owned businesses face when planning for the future. Ninety percent of businesses in the United States are closely held, and only 25% to 30% of them have a succession plan in place. As a result, only 30% continue to the second generation, and less than 10% make it to a third.
No family wants to be in the fateful position of the Rooneys, struggling to maintain control of the business they've worked hard to build, or worse, experiencing the loss of family ownership. The Steelers' story represents a common scenario of the frequently overlooked need to develop a sound business succession plan.
The game plan
On July 7, 2008, the Steelers issued a press release wherein Chairman Dan Rooney stated, "I have spent my entire life devoted to the Pittsburgh Steelers and the National Football League. I will do everything possible to work out a solution to ensure my father's legacy of keeping the Steelers in the Rooney family and in Pittsburgh for at least another 75 years."
Art Rooney Sr. purchased the franchise fee for the team that would become the Steelers for $2,500 in 1933. Upon his death in 1988, his 80% ownership interest in the team passed to his five sons, Dan, Art Jr., Timothy, Patrick and John. For the past two years, the Rooney family discussed restructuring the family's ownership in the face of several challenges. The Steelers must comply with two NFL ownership policies: One that requires the primary owner to have at least a 30% ownership interest; the other frowns on certain forms of gambling. The Rooney family was involved with forms of gambling that are inconsistent with NFL policy. In addition, age and estate tax issues are not on their side. All of the Rooney brothers will be 70 or older this year.
Their biggest challenge was addressing the buyout proposal presented by Chairman Dan Rooney and his son, Art Rooney II. Dan and Art II maintained the management of the team and sought to purchase the remaining brothers' shares. Those brothers believed the proposal undervalued their interests. An independent firm was hired to conduct a valuation, which could have caused Dan and Art II concern, as their proposal involved financing a significant part of the deal without violating the NFL's ceiling on ownership debt. The resulting family disagreements made the negotiations difficult.
The defense
Taking time to develop a business succession plan may save a family business in a time of future transition. A buy-sell agreement is the cornerstone of a business succession plan. It sets out the rights and responsibilities of the parties and addresses timing, terms and funding of the purchase and sale.
Valuable components of a buy-sell agreement include:
o A predetermined method of valuing the business interest to be transferred;
o Terms under which the interest is to be transferred (e.g. rights of first refusal, priority purchase rights, and restrictions on who can purchase the business interest);
o Predetermined circumstances that trigger a transfer (e.g. death, divorce or retirement); and
o The financial ability to purchase the interest. A buy-sell agreement is typically funded with life insurance policies which can provide liquidity through death benefits or cash value.
The play: Types of buy-sell agreements
There are several ways to structure a buy-sell agreement to meet the individual needs of the business owners. The following two arrangements are examples of helpful planning for businesses encountering many of the challenges the Rooney family faced.
Cross-Purchase Agreement. The owners enter into an agreement with each other wherein each owner agrees to sell his or her interest to the remaining owners upon a triggering event specified in the agreement. The agreement is funded with life insurance policies that are owned by each business owner on the other owners' lives. The owners use the life insurance death proceeds or the policy cash values to purchase a departing owner's interest.
A business with multiple owners like the Steelers could benefit from a Trusteed Cross-Purchase agreement whereby a trust owns the policy on each owner. The trustee then uses the death proceeds or policy cash values to execute the transfer of the owner's interest upon a triggering event.
Stock Redemption (Entity Purchase) Agreement. The owners enter into an agreement with the business wherein the business buys the owner's interest upon death or departure. With this type of agreement, the business owns the life insurance on each owner and uses the death proceeds or policy cash values to effect the buyout of each owner's interest.
Winning the game
In late December 2008, the NFL approved a plan that consolidated ownership of the Pittsburgh Steelers in the hands of Dan Rooney and his oldest son, Art Rooney II. Under the terms of the plan, Dan and Art II will own a 30% interest in the team, as required under the NFL rules. The breakthrough in the restructuring came in mid-November when the brothers agreed on a sale price of $800 million, which was on the low side, but enabled the Rooneys to maintain control and keep the Steelers in Pittsburgh.
A sale of the Pittsburgh Steelers to a third-party could have had a significant impact on the Steelers' community. As in any business, it is not uncommon for a new owner to ultimately make the decision to move the organization to another location. Once that happens, the financial loss to the community and neighboring businesses can be devastating. It typically takes time and a substantial investment to bring a new team into the community. Los Angeles lost the Raiders back to Oakland 12 years ago and has yet to secure another team.
Emotional loss can be just as devastating as the financial loss. The Steelers have been a part of the Pittsburgh community for over three quarters of a century. The community's identity is tied to the Steelers and their fans are fiercely loyal. Losing this major NFL team -- or any community's flagship family business -- could result in a loss of civic pride by the community and outrage from loyal fans.
The Rooney family's circumstances are not unique. Many families wish to maintain continuity in family ownership and will face similar issues they may not be able to overcome without the help of a good succession plan. Unfortunately, planning for the succession of a business is often overlooked by busy owners who lack the time to focus on this aspect of future planning. This translates to an abundance of opportunities to craft buy-sell arrangements funded with life insurance, which play an important role in the overall estate and financial planning of the family business owner.
Deborah Moon, Esq., CLU, is Director, Advanced Markets for Sun Life Financial U.S.
Jerry Weihs, JD, CPA, MBA, CLU, ChFC, is Director, Advanced Markets for Sun Life Financial U.S.
