Transfer of Ownership to a Business-Active Child

All business owners will need to answer these three questions at some point:

1. What is my desired date of departure or exit?

2. How much $$$$ will I need for my goals and for life after the business?

3. To whom will I sell my business?

For many business owners, the preferred answer to the third question is a sale or transfer to my child, or children, that are active in the business. In such cases, the owner would have legacy or values-based goals that would be realized with a transfer of the business to their children. And, it’s not uncommon for these goals to be as important to the owner as their financial goals.

First steps in deciding if this is your best option for exit would include the following:

• Does my child want to be an owner? It can be surprising for an owner to discover that their business-active child has no desire to own “the family business”.

• Is my child capable or have the temperament for business ownership? Owning a business is quite different than having even a significant leadership role in the business. And, as parents, we can be very generous in the evaluation of our children so it is wise to obtain an expert assessment.

• Should my child pay for the business interest? Would I want them to pay for all or some of the business? Do I want them to experience the financial challenges that often occur in the early years of owning a business?

• Is minimizing the overall estate, gift, and income tax burden important to me?

• Am I concerned about the “fair distribution” of my entire estate to all my children including those not active in the business?

• How soon do I want to transfer meaningful ownership interest to my business-active child?

• Quantify available assets and resources to accomplish financial goals:

  • Estimate the value of the business.

  • Project future net cash flow of business available for planning.

  • Value and income from non-business assets.

  • Calculate any gap between the current value and what will be needed post-exit.

Following are the most common methods for transferring a business interest to a business-active child:

• Sale of stock

• Gift of stock

• Bonus of stock

Each of these methods has advantages and disadvantages, but a good place to start is having your Wealth and Tax Advisors conduct an analysis of the tax consequences of each scenario for your specific situation.

Please contact us if we can be of service to you in helping plan for a transfer of your business to your business-active child. Also, consider investing 15 minutes in our FREE exit readiness assessment.

Trust the Process of System Documentation

In business, one key aspect often separates successful ventures from those that struggle to thrive: systems documentation. It's the roadmap, the blueprint outlining how a business operates, from its day-to-day processes to long-term strategies. In a recent ExitReadiness® PODCAST episode with guest Jason Henderberg, we discussed how meticulous system documentation can significantly enhance a business's value, ultimately paving the way for a higher sales multiple.

With over 30 years of experience, Jason has witnessed firsthand the transformative power of systematizing business operations. His advice? "Trust the process."

During our conversation, he emphasized the importance of documenting systems comprehensively and likened it to crafting a playbook encapsulating every facet of your business, from customer interactions to backend processes. This documentation serves as a tangible asset, offering prospective buyers a transparent view of how the company functions efficiently and profitably.

But why does this matter? It's all about perception and value. Businesses with well-documented systems exude reliability and scalability, qualities that are immensely appealing to potential investors or buyers. When every operation is meticulously outlined, it instills confidence in a prospective buyer and mitigates risk, two factors that can significantly impact the valuation of a business.

Moreover, Jason highlighted the operational efficiencies that stem from system documentation. By streamlining processes and clearly defining roles and responsibilities, businesses can operate more smoothly, increasing productivity and profitability. This, in turn, enhances the industry's attractiveness to potential buyers who seek revenue streams and sustainable and scalable operations. He also pointed out that system documentation is not a one-time task but an ongoing endeavor. As businesses evolve, so too must their systems. Regular updates and refinements ensure that the playbook remains relevant and reflective of the current state of the company. It's a continuous improvement journey that pays dividends in the long run.

But how does one go about documenting systems effectively? It starts with a systematic approach. Strategically identify critical processes within your business and break them down into manageable steps. Document each step meticulously, leaving no room for ambiguity. Visual aids such as screen recordings or diagrams enhance clarity and comprehension. He also emphasized the importance of involving key stakeholders in the documentation process. Who better to provide insights into day-to-day operations than the individuals directly involved? By soliciting employee input at all levels, businesses can ensure that their systems documentation accurately reflects reality while fostering a sense of ownership and employee engagement.

In essence, Jason advises to "Trust the process of system documentation." It's not just a mundane task; it's an investment in the future value of your business. The sooner you start developing a company-wide culture of following best practices, the sooner you will have a safety net in case you need to sell your business during an emergency. So, roll up your sleeves and get to work following his proven methods. The value of your business depends on it.

Year End Action: Sole Owners Should Review Business Continuity Instructions

The end of each year is an ideal time for a sole business owner to review and update their Business Continuity Instructions. An owner’s death or permanent incapacity often leads to the failure of a business, resulting in very difficult consequences for the family, employees, and customers. Written and distributed Business Continuity Instructions will provide those left behind with essential short-term and long-term instructions regarding the continuance of the business.

Very practical short-term information needed on day one, such as…

• Bank account information

• Insurance coverage and location of policies

• Location of spare keys, security codes, and passwords

• Who has the authority to make immediate decisions? Operations? Finance? Administration? Etc.?

• What Key Advisors need to be contacted and engaged?

Long-term information about the continuance of the business, such as…

• Who comprises the Board of Directors (if applicable)?

• How do you want the business transferred? Sale to third-party? Sale to family? Sale to insiders? Liquidated?

• Do you have a current estate plan?

• Is there long-term debt and/or lines of credit that you’ve personally guaranteed?

• What are the sources of working capital during the time of transition?

• What agreements are in place with key employees? Employment Agreements? Stay Bonuses?

Having data like the above current and readily available for those left to continue the business could be the difference between the business continuing for as long as needed and being liquidated at a fire-sale price.

As we approach the end of this year and the start of 2022, we suggest investing time in creating or modifying your written instructions. Contact us today for a free copy of our Business Continuity Instructions fillable PDF.

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How to Identify Your Key Employees: A Key Business Value Driver

Identifying Key Employees is a Crucial Task for Any Organization.

Key employees are the driving force behind a company's success, and recognizing and nurturing their talents is essential for sustained growth and value acceleration. In this blog post, we will explore the importance of key employees, the characteristics that define them, and how you can identify them within your organization.

Why Identifying Key Employees Matters

Key employees are pivotal in achieving your organization's goals and maintaining a positive workplace culture. Identifying them is essential for several reasons:

1. Consistent Performance: Key employees consistently perform at a high level, ensuring your organization achieves its objectives.

2. Leadership Potential: Key employees often exhibit leadership qualities that can be harnessed for future growth.

3. Knowledge Transfer: Key employees possess critical knowledge and skills that are often difficult to replace.

4. Cultural Ambassadors: They embody your organization's values and culture, setting an example for their peers.

5. Employee Retention: Recognizing and rewarding key employees can help retain top talent and reduce turnover.

Characteristics of Key Employees

Key employees exhibit specific characteristics that set them apart from their colleagues. Here are some traits to look for:

1. Consistency: Key employees consistently meet or exceed performance expectations. They deliver results time and time again.

2. Leadership: They demonstrate leadership skills, even in non-managerial roles. They inspire and motivate their colleagues.

3. Problem Solvers: Key employees are adept at finding solutions to complex problems. They tackle challenges with creativity and perseverance.

4. Commitment: They are committed to the organization's goals and values. They go the extra mile to ensure success.

5. Team Player: While they may stand out individually, key employees also work well with others, fostering a positive team dynamic.

6. Adaptability: They can adapt to changing circumstances and are open to learning and growth.

How to Identify Key Employees

Identifying key employees within your organization can be challenging. Here are some strategies to help you pinpoint those who are genuinely indispensable:

1. Performance Metrics: Review performance metrics and appraisals to identify employees consistently achieving and exceeding targets. Look for a track record of excellence.

2. Peer and Supervisor Feedback: Seek input from both colleagues and supervisors. Key employees are often praised and admired by their peers and leaders.

3. Leadership Potential: Identify employees with leadership potential by assessing their ability to influence and guide others, regardless of their official title.

4. Problem-Solving Skills: Pay attention to individuals who consistently find creative solutions to challenges, both big and small.

5. Cultural Fit: Evaluate how well employees embody your organization's culture and values. Those who align most closely are likely key contributors.

6. Commitment and Initiative: Recognize those who consistently demonstrate commitment, take initiative, and contribute to the overall success of the organization.

7. Succession Planning: Consider which employees could fill critical roles in the future and invest in their development.

Summary

Identifying key employees is a critical process for any organization. These individuals are instrumental in driving success, maintaining a positive workplace culture, and ensuring continued growth. By recognizing the characteristics that define them and using specific strategies to identify them within your organization, you can invest in their development and ensure long-term success. In the end, the success of your business is closely tied to your ability to recognize and nurture your key employees.

If you need help identifying and equipping your future successor(s) contact us about our STRATEGY RENOVATION® Successor Coaching service.

What are The Critical Elements in Training My Business Successor?

Training your Business Successor is crucial in ensuring a smooth transition of ownership and leadership. The following are critical elements to consider when preparing your Business Successor:

Knowledge Transfer:

1. Identify the knowledge and skills necessary to run the business effectively.

2. Document and share critical information, processes, and best practices with your successor. This includes financial management, sales and marketing strategies, operational procedures, customer relationships, vendor management, and industry-specific knowledge.

Mentoring and Shadowing:

1. Provide your successor with hands-on experience by allowing them to shadow you and observe your day-to-day activities.

2. Encourage them to ask questions, participate in decision-making, and gradually take on more responsibilities.

3. Act as a mentor, providing guidance and sharing insights from your experience.

Delegation and Autonomy:

1. Gradually delegate tasks and responsibilities to your successor, allowing them to practice decision-making and leadership skills.

2. Start with smaller tasks and gradually increase their level of autonomy as their competence and confidence grow. This will help them develop their management style and take ownership of their role.

Communication and Collaboration:

1. Foster open and transparent communication with your successor.

2. Encourage them to share their ideas, concerns, and observations about the business.

3. Establish regular meetings or check-ins to discuss progress, challenges, and future plans.

4. Involve them in important meetings with key stakeholders, such as clients, suppliers, and employees, to develop relationships and gain a broader understanding of the business ecosystem.

Strategic Thinking:

1. Provide exposure to strategic decision-making by involving your successor in developing business plans, goal setting, and long-term strategies.

2. Discuss market trends, competitive analysis, and growth opportunities.

3. Encourage them to think critically and creatively about the future of the business and how to adapt to changing circumstances.

Building Relationships:

1. Introduce your successor to essential stakeholders in the business, such as key clients, suppliers, and industry contacts.

2. Help them establish and maintain relationships, as these connections can be valuable for the business's future success.

3. Encourage networking and participation in industry events and associations to expand their professional network.

Emotional Intelligence and Leadership Development:

1. Focus on developing your successor's emotional intelligence and leadership skills.

2. Help them understand the importance of effective communication, empathy, conflict resolution, and team management.

3. Provide opportunities for leadership development through training programs, workshops, or executive coaching.

Continual Learning and Adaptability: Encourage your successor to embrace continuous learning and adaptability. The business landscape is ever-changing, and staying updated on industry trends, technological advancements, and best practices is essential. Encourage them to attend relevant seminars, conferences, and workshops and engage in professional development activities.

Remember that the training process should be tailored to your successor's specific needs and capabilities. It's essential to be patient and supportive and allow for a gradual transition of responsibilities. By investing time and effort in training your successor, you increase the likelihood of a successful handover and the long-term sustainability of your business.

Learn more about our ExitReadiness® Successor Coaching service HERE.

Understanding the Taxation of Key Person Insurance

Key person insurance plays a vital role in protecting businesses from the financial impact of losing key individuals within the organization. It provides a safety net by compensating the company for the loss incurred due to the death or disability of a key employee. While key person insurance is a valuable risk management tool, business owners must understand the taxation aspects associated with these policies.

Tax Treatment of Premiums

Generally, the premiums paid for key person insurance policies are not tax-deductible as a business expense. The Internal Revenue Service (IRS) considers key person insurance premiums as a capital expense rather than an ordinary and necessary business expense. As a result, the premiums are typically not deductible from the company's taxable income.

Tax Treatment of Proceeds

When a key person insurance policy pays out due to the death or disability of the insured employee, the tax treatment of the proceeds depends on various factors. Generally, the insurance proceeds the business receives are not considered taxable income. Therefore, the payout is not subject to income tax.

However, there are situations where tax implications may arise. For instance, if the business has previously deducted the premiums paid as a business expense, any insurance proceeds exceeding the total premiums paid would be subject to income tax. Additionally, if the business has transferred ownership of the policy to the key employee, the proceeds may be taxable to the employee.

Tax Treatment of Cash Value

Some key person insurance policies, such as whole life or universal life insurance, accumulate cash value over time. The growth of this cash value is tax-deferred, meaning that the business does not have to pay taxes on the growth of the policy's cash value until it is withdrawn.

However, suppose the company surrenders the policy and receives the cash value. In that case, any amount received above the total premiums paid is subject to income taxes. It is important to note that withdrawing cash value from the policy can have tax implications, and consulting with a tax professional is recommended.

Tax Treatment of Premium Financing

Premium financing is a strategy where a third party provides a loan to the business to cover the premiums of a key person insurance policy. The company repays the loan with interest over time. From a tax perspective, the interest paid on the premium financing loan may be tax-deductible as a business expense, subject to certain limitations and restrictions.

Conclusion

Key person insurance is essential for businesses to mitigate the financial risks of losing key individuals. While the premiums paid for key person insurance are generally not tax-deductible, the death benefit received by the company upon the insured individual's death is typically tax-free. Businesses need to be aware of the potential tax implications of key person insurance, especially regarding cash value growth, policy transfers, and premium financing. Consulting with a qualified tax professional can help ensure compliance with tax regulations and maximize key person insurance benefits while minimizing tax burdens.

Contact us at email@ennislp.com or 301-859-0860 if we can be of service in reviewing your key person insurance program.

INVEST 12-15 MINUTES IN THE FREE EXITMAP® ASSESSMENT AND GET A 12-PAGE REPORT SCORING YOU IN FOUR KEY EXIT PLANNING AREAS: FINANCE, PLANNING, REVENUE/PROFIT, AND OPERATIONS.

The Emotional Aspects of Your Eventual Business Exit

“The emotional aspect of an exit and transition is what’s hardest (paraphrased)”. This was a statement made by one client to another at a recent charity golf event. While listening to the conversation I was freshly reminded about what’s at stake when and how an owner leaves their business, that perhaps took them decades to build.

The client making the statements described in some detail how the “emotional piece” resulted in inertia and procrastination around creating a plan for his eventual exit. He knew he needed to put a strategy in place, but was simply having a difficult time facing tough transitional realities. Emotional realities included his brother (partner) who helped him build the business transitioning out now, and in a few years exiting the business completely himself while transferring ownership to his two children. That was a lot of “emotional stuff to work through” and he was having a hard time getting his mind around it all. What they learned during our planning process was that the practical or technical elements of their exit plan were “the easy part” compared to the emotional challenges of leaving a business that had become “a big part of who they were.”

He went on to say how essential our ongoing conversations were that clarified his dreams and desires while helping to navigate the emotional “roller coaster”. Having an objective third party to help him and his brother think through all aspects of the different transitions and conduct the “emotional conversations” was essential for their respective goals for exit to be accomplished. For quite some time they had talked about doing something but it wasn’t until they engaged in third-party coaching and assistance that they were able to move the ball down the field toward the goal line.

The moral of the story is to expect that there will be significant emotional considerations that can be the source of inertia in creating a plan for one of the most significant and impactful events of your life. You will be wise in getting the skilled planning assistance required to help you move forward emotionally and practically in accomplishing your exit dreams and goals.

For assistance, you can reach us at email@ennislp.com or 301-859-0860.

Planning Ahead for Exit has Many Benefits

The truth of the matter is, every small business owner will eventually transition from the business.  While most have spent much time working in the business, and at times on the business, they have not given much thought to what to do after the business.

Whether you love your work so much that, in a manner of speaking, you’d be happy to die at your desk, or you’d like to devote much more time to your golf game, every small business owner needs to consider how they plan to exit.  And planning ahead has significant benefits.

There are three major objectives that a business owner should consider prior to reaching the point where they must exit the business.

• Timing of your exit – When do you want to leave?

• Financial needs after exit – how will you support the post-exit lifestyle you desire?

• Who's going to take care of your baby and run the business when you're not there?

1.     When do you want to leave the business? Unless you want to die at the desk, you’ll want to consider at what point you desire to make the transition.  Pick a time frame and begin considering the implications of that time frame.   When do you back out of the day-to-day operations?  How long do you take to do this...years or months?  Can I effectively transfer the company to whom I wish to transfer it within that period of time?  How long will it take to train my successor or children to be owners?  Will I be able to realize my financial goals within that time frame?  Will market conditions lend toward a successful sale to a third party?  The time frame you decide on is a key driver.  And, it's essential to establish at least a target date, or you could end up on the perpetual "I'm going to leave in around five years..." merry-go-round.

2.  What income do you need?  Depending upon the success of the organization, answers to this question vary widely. You may not require any income from the business and would happily pass on the business to family members or key employees without any benefit to yourself.  However, The large majority of owners require some type of income either from the business at the sale or a residual income stream from the ongoing operations of the business. There are a wide variety of approaches to defining how a payout can occur, as well as the timing of it. Engaging tax lawyers and accountants at this point is significant to walk alongside your financial planner to plan out the remaining years so that you can enjoy the standard of living that you desire as well as pass on value to your children, your state, or your favorite charity.  As much as we all enjoy supporting our local and federal governments, wise tax planning in this phase is very significant. Making the wrong choice can result in significant tax consequences, hindering your ability to use the value that you have built into the company.

3.  Who's going to watch over your company?  Hopefully, you have enjoyed working in your business and there is a sense of giving up "your baby" to someone else.  The choice of a successor is a significant, and often emotional decision.  There's the emotional aspect of giving up your hard-won successful business, as well as a desire to take care of those faithful employees who have served over the years in your company.  Several options exist, from passing the business on to two children, selling it to key employees, selling it to a trusted third party, or even an employee stock ownership program.  So significant factors come into play here - the most critical being who actually has the skills, knowledge, and temperament to own and run the company as well as you have.

Should a business owner have family in the business, the above questions become even more significant. Taking the time to thoroughly discuss your goals and desires with your spouse, children in the business, and children not in the business are all very significant.  It's often been said, that on our deathbed we do not desire to have another day in the office, but another day with our family.  Planning ahead enables conversations to be had so everyone's expectations are clearly understood prior to the day when the transition actually occurs.

Invest 12-15 minutes in the FREE ExitMap® Assessment and get a 12-page report scoring you in four key exit planning areas: Finance, Planning, Revenue/Profit, and Operations.

Seven Questions Every Small Business Owner Should Answer

A company with strong value drivers can demand (and receive) a higher multiple on the same amount of EBITDA than can a company with average value drivers.  — John Brown, The Business Enterprise Institute (BEI)

Almost all of us consider the future and invest in the stock market either directly or through retirement plans to position ourselves and our families for the inevitable future.  While the above quote refers to investing in the stock market, the principle applies to your small business.  As you look ahead to the future, every small business owner should pay careful attention to the value drivers behind the business – ensuring the business portfolio increases over time.

In their book Execution, Ram Charan and Larry Bossidy speak about successful execution as “exposing reality and acting on that reality”.  So, as you consider your business investment, ask yourself the following “Value Driver questions:

 1.         Do I have a healthy management team?   It's often been said that people are our most valuable resource. Experienced leadership, that understands the business, as well as the culture of the organization, are critical to the ongoing success of the business. This is also one of the key factors behind developing business value when it comes down to selling your business.   Cultivating these employees, and ensuring that they remain even after you sell the business is significant to the events or buyer/owner of the business

2.         How effective are my operating systems?  Human resources, personnel recruitment and training, asset control, production control, and performance reports are all the key ingredients of healthy operations within any organization. If these internal mechanics are not running well, this could have significant negative consequences on the value of the organization.

3.         Are my margins equal to or better than the industry average?  If not, what actions can will it take to get them there?

4.         How diverse is my customer base?  Having one's eggs in one basket is always a risk. Having a key single customer that has more than 10% of total sales obviously is a downside for a business. Long before being ready to sell it is helpful to take a look at this and pursue diversification.

5.         Is my facility in “ship-shape”?  - keeping our home reflects our values, and our priorities. Similarly, keeping our business facility in sharp condition reflecting professionalism and effectiveness is critical to establishing business value. It was so into an outside third party, first impressions are significant. They were plucked attention to the small details.

6.         What is my growth strategy?   The roadmap for growth needs to clearly laid out, risks identified, and goals established.  Future cash flow, value and well-being of your employees is dependent on a vision for the future codified into actionable steps.  The plan alone will not get you there, but no plan will get you no-where.

7.         Do I have control of my numbers?  At the end of the day, you need to understand the financial health of your business.

Exit planning should begin the day you start your business.  And, at the core, or center of exit planning is maximizing the value of your business.  Just as you manage the value of your 401k or investment portfolio, investing time, energy and thought into building the value of your business will position you to exit in the manner you desire.  Get started today by exposing reality and assessing your business value drivers.

Invest 12-15 minutes in the FREE ExitMap® Assessment and get a 12-page report scoring you in four key exit planning areas: Finance, Planning, Revenue/Profit, and Operations.

Will You Be As Responsible Exiting Your Business As You Have Been Building It?

One of our clients had built a thriving service business over 20 plus years and was able to exit successfully a couple of years ago.  When we first met to discuss his desire to exit about 5 years ago, we discussed his time frame and financial needs, but also his outside interests such as his basketball outreach to a local underprivileged neighborhood.  Many years ago, very discreetly, he began renting a gym weekly for teenage and college-aged kids in a low-income neighborhood and faithfully ran it at his own expense for years.  He lived life "others-focused" in both his personal and business life and we find that to be true for most successful owners.

Like other successful business owners, our client worked hard for decades withstanding downturns in the economy and persevering through other tough times while managing to build a profitable business.  A business that many people had come to depend on including employees, customers, vendors, suppliers, his family, as well as charities he supported. He had been deeply committed to his responsibility as a business owner, and now realizing all that was at stake, he wanted to be as responsible in how he left the business as he had been in building the business. And, he understood that it would require time and planning if he were to experience the same level of success.

Will you be as responsible in planning your exit as you have been in building the business?  In our client’s case, the business has been sold to insiders and has realized continued prosperity serving all stakeholders, while our client is flourishing in his well-planned and meaningful “life after the business”.

Plan now so that you are as responsible and successful exiting your business as you've been in building it. You can get started today with our free exit assessment. We do not request any confidential information, it requires 15 minutes of your time, and you will receive a 12-page report scoring you in four key planning areas.

email@ennislp.com | 301-859-0860

Understandable Reasons for Owner Exit Plan Procrastination

There have been not a few surveys of small business owners conducted that revealed a majority of the owners polled believed they needed a strategic plan for their eventual exit. Over 75% indicated they wanted to sell in the next 10 years, 90+% knew they needed a plan, while only about 20% had a written plan for what is inevitable…their eventual exit from their business.

So, why the procrastination? Well, we’ve observed the following reasons for putting it off, or not planning at all. And frankly, the reasons are understandable.

• The owner’s current advisors may not be raising the issue. So an owner understandably questions how important it is to plan, or as a result, they don’t know who to talk to.

• There are common misperceptions about an owner’s business and exit including:

  • Their business being attractive and worth more than it is, and easily sold.

  • The assumption is that sale proceeds will be enough for what’s next after the business. Often not adequately taking into consideration tax ramifications.

  • Business cash flow will be sufficient for supporting any future sale transaction.

  • The successor (s) are ready and willing to take over the business and that it will be a simple process to make that happen.

  • How long it would actually take to design and execute a plan for a successful exit.

• Uncertainty or fear:

  • Exposing and facing reality about the value and transferability of the business.

  • A needed change in the role of the owner. Delegating to others.

  • Life after the business. What will I do next? The business is a big part of my personal identity.

  • Fear of not being able to find a willing buyer or successor.

  • Fear of making a bad exit decision.

• The time and financial investment required to design and create a plan.

  • I need to focus on building and growing the business today! (NOTE: this is actually a core focus in a successful exit plan.)

So, in that there are many understandable reasons, including these and others, not to plan or to put it off, an owner needs to decide if the benefits and return on the investments of time and money would outweigh their reasons for procrastination. They need to think through what would be at stake in their particular situation.

Such as:

• Life after the business…

  • Financial security? Time with the family? Travel? Personal goals? Health and wellness? Launch a new business/enterprise? Social impact? Other?

• As the owner exits…

  • Maximizing value and minimizing taxes? Leaving on your own terms? A tangible expression of care and gratitude for employees? Family harmony? Social impact? Other?

• Life in the business…

  • Freedom and control? Income and/or building wealth? Influence? Social impact? Other?

If you conclude that you will plan, but not right now, then be aware also of the age old problem of “not knowing what you don’t know” as it pertains to the time it takes to design and implement a plan that will successfully and comprehensively accomplish your goals. The following quote by John Brown in his book EXIT PLANNING: THE DEFINITIVE GUIDE supports the exhortation to begin planning now:

“I can almost guarantee that it will take far longer to prepare and implement your successful exit strategy than you expect.  Only a few businesses (I calculate 200,000 out of 7,000,000) are capable of being transferred today in a manner that achieves the Owner’s goals and objectives.” 

If you are uncertain about the need for planning, we will begin with helping you decide if what’s at stake outweighs your reasons for not planning. This is important because it will help you strengthen your conviction one way (plan) or the other (not plan).

Contact us today if we can help you in deciding if planning is right for you.

Invest 12-15 minutes in the FREE ExitMap® Assessment and get a 12-page report scoring you in four key exit planning areas: Finance, Planning, Revenue/Profit, and Operations.

A Month on the Beach - A Key Measure of Business Value

Can you leave your business for a month, sit on the beach and leave your phone in the beach bag?  If so, you have attained what few business owners do – a business that can run without you!  Aside from sound cash flow, the creation of a management team is the most significant driver of business value.  When the time comes for you to leave for good, a buyer wants your team, not you!  If you can’t yet take that month, here are a few simple thoughts:

 What is a management team?  This will vary dependent on business size – but it is simply a key group of leaders who can run the day-to-day operations without your oversight.  While they may seek your INPUT, they can sell, and deliver service on their own.  They hold your values, pursue excellence and treat the company as if they owned it!

 The need to delegate.   This is the tough part – you must give responsibility to others.  Every business has four basic functional roles – Executive, Sales, Finance/Admin, and Operations.  Often owners fill each of these roles and thus are critical to everything.  If you can successfully delegate these roles (except perhaps the executive function) to others, you will create a team. 

 Who do you add to the team?   Chik-Fil-A has succeeded by carefully choosing leaders who possess three “C’s”  - character, competency, and chemistry. 

Character – this is the most crucial.  The manager must hold their values and live them out in their daily work. 

Competency  - this is less about specific skills and more about the ability and desire to learn. Environments change and learners adapt.  This trait should also have a dash of “fire in the belly” – the drive to build something.

Chemistry – do they play well with others?  Team members must be team players – readily partnering with others to build a company, and able to lead.

 Look for employees who possess these traits, empower them, and test them.  Slowly give them responsibility and look for the ones that you can’t hold back.  Help them succeed, give routine feedback and get out of their way. 

 How do I build a team?  The first ingredient is time – don’t rush – build slowly and intentionally. It is an ongoing, iterative process.  Here’s where to start:

         Step 1 – make a list of roles you fill / what you do.

         Step 2 – identify what ONLY YOU can do and what you are best at – these may be different.  Identify what you can most easily delegate or are not good at; transfer these responsibilities first. 

         Step 3 – find the right people/teammates – this can include current employees, new hires or reliable vendors.

         Step 4 – prioritize and make a plan to transfer the responsibilities over time.  Seek to remove yourself from all but the Executive function. 

         Step 5 –develop a potential successor – this final step is not for everyone – however it can enable you to sell the business to an insider, or remain as a passive owner.

         Step 6 – invest in the team, measure progress and adjust course as needed.

 Giving up control is difficult but a necessary part of business maturity.  Even if you never get to the “month on the beach”, taking these steps over time will increase value of the company, provide motivation for your staff and give you more options in the future.  It’ll enable you to work ON your business and not just IN your business.

 So, make a plan, start the transition and contact your travel agent!

Invest 12-15 minutes in the FREE ExitMap® Assessment and get a 12-page report scoring you in four key exit planning areas: Finance, Planning, Revenue/Profit, and Operations.

Salary (Wage) Continuation or Deferred Compensation?

Non-Qualified Deferred Compensation (NQDC) often plays a role when structuring either a sale to insiders or a transfer of the business to children in the business. It is a type of retirement plan that allows highly compensated employees (in this case the exiting owner) to realize tax advantages by deferring a percentage of their compensation (and current income taxes) beyond what is permitted by the IRS in a qualified retirement plan (i.e., 401K). In essence, it is paying out INCOME EARNED at some point in the future, with a primary goal of minimizing income taxes.

A Salary, or Wage, Continuation Plan, however, is used to ensure personal financial stability for an owner, or key employee, during a triggering event such as death, disability, or retirement. It is a plan for continuing income NOT YET EARNED after the trigger event having the following goals:

• Ensuring salary for a set period of time (typically 60 days to 12 months) when unable to work

• Bridge the gap until insurance benefits begin

• Protect from personal/family financial loss

The following are pertinent questions in deciding whether a Salary Continuation Plan should be considered:

• What are the short-term gaps in your personal insurance/benefits package?

• If you die or become disabled, is it important for your spouse/family to continue to receive your salary for some period of time? For how long?

• Would the company be able to continue your salary if you are not working? For how long?

• Are you relying on your co-owners verbal commitment to provide ongoing payments?

If you think a Salary Continuation Plan could be helpful in your situation, your Business Attorney, Employee Benefits Advisor, or Insurance Advisor, could be of assistance in the analysis and execution of a plan. And, as always, please contact us if we can be of assistance.

Take our FREE ExitMap® Assessment and get a 12-page report scoring you in four key planning areas: Finance, Planning, Profit/Revenue, Operations. It will take about 15 minutes and we do not ask for confidential information.

ennislp.com | email@ennislp.com | 301-859-0860

Before Moving Forward with a Sale to Key Employees...

If you’re a business owner with a desire and vision for selling to key employees who have helped you build the business, the following is a short list of important issues to seriously consider prior to moving forward. And, the sooner you begin the greater chance of a successful transition.

• Identify and test your assumptions. For example, it’s not uncommon for owners to assume that employees want to buy and own the business. Often this simply isn’t the case due to differing values, life goals, risk tolerance, etc. You and they will be better served if this is established sooner rather than later. It’s not unusual for key employees to prefer a cash-based incentive plan such as Phantom Stock, particularly if they are approaching an age for retirement.

• Employees may be enthusiastically willing to become owners, but perhaps not equipped or even well suited to become owners. Facilitating an objective evaluation of their skills and characteristics, and professional coaching if needed, early on in your process is advisable.

• Avoid making premature and unsubstantiated promises about ownership, either written or verbal, that can result in employee expectations of ownership.

• Be clear on common mistakes to avoid such as selling too much too soon and giving up control prior to realizing goals or including employees in the buyers’ group that will not work well as partners (see the Partnership Charter).

• Be clear on your own risk tolerance. For example, how much $$$$ of a deal would you be willing to self-finance, and for how long? Forecasting business cash flow with a “sanity check” on how the business would financially support the transaction will help you decide how much risk you’re willing to take on.

These are things you could do on your own without assistance, but a safer and risk-averse way to proceed is to engage professionals who can identify and test your assumptions, what you know and don’t know, and then provide advice as to how to proceed wisely.

Invest 12-15 minutes in the FREE ExitMap® Assessment and get a 12-page report scoring you in four key exit planning areas: Finance, Planning, Revenue/Profit, and Operations.

Will Your Buy-Sell Agreement Solve Problems or Cause Problems?

The most important business planning document that multiple owners of a business can have is a buy-sell agreement.  A buy-sell agreement provides direction to owners and other stakeholders when certain events trigger the transition of an ownership interest in a business. 

These agreements can be very effective in minimizing uncertainty and indecision during challenging and emotional times.  However, it’s not enough to simply have a buy-sell agreement, it needs to be written skillfully to accomplish the desires and goals of the owner(s).

Buy‐sell agreements, in some situations, can create as many questions, problems, and conflicts as they seek to address.  A primary benefit of having this agreement is to avoid having to make decisions that could lead to disagreements at an inopportune time.  Unanswered questions, outdated agreement language that no longer represents the goals of the owner(s), an agreement that is not comprehensive and too simplistic or was poorly implemented can render the buy‐sell agreement ineffective and fail to accomplish the intended purpose.

Opening questions:

• Do you need a buy-sell agreement, and if so, do you have one?

• Is your buy-sell agreement outdated?  When was the last time your agreement was reviewed to ensure that it still well represents your goals? 

• Will your buy-sell agreement cause more problems than it would solve in its current form?

Too often buy-sell agreements have one or more of these planning gaps:

1. Ignores lifetime trigger events such as divorce, bankruptcy, voluntary exit, and involuntary exit.

2. A simple valuation method that does not consider the ever-changing dynamics and growth of the business. 

3. The timing of valuation is not adequately addressed.

4. When buy-sell agreements are not regularly reviewed, they can become outdated and result in unpleasant surprises when they are needed. Owners rely on Buy-Sell Agreements to manage emotional situations, and if those agreements don’t account for changes in their goals as well as the business, they can cause significant problems for everyone involved.

5. Many buy-sell agreements are too simplistic to manage the personal complexities of the individual owners who sign them, and their relationships with each other. For example, companies with multiple owners often don’t want to treat all owners similarly, or one owner subject to the agreement may be uninsurable. In family businesses, non-business considerations may affect the design of buy-sell agreements.

6. Fails to address threats to business continuity.  Most buy-sell agreements don’t address the challenges that the business, surviving owners, and deceased owner’s family will face after an owner exits. Too often they only address the transfer of ownership upon an owner’s death or permanent incapacitation. For example, if the surviving owner does not have enough assets to satisfy the personal guarantees previously made by the deceased owner, once that financing is pulled, the business may not be able to continue. Likewise, if the deceased owner was the company’s rainmaker or COO and no one can step into those roles, the business may be unable to survive.

7. Buy-sell agreements are typically deficient in considering the financial security of the decedent’s family. 

Questions your buy-sell agreement should answer include the following:

• Are “lifetime triggering events” addressed as well as death and disability?  Divorce?  Bankruptcy?  Voluntary exit?  Involuntary exit?

• What type of valuation estimate is required?  Book value?  Fair market value?  Fair value?  Investment value?  Agreed upon value?

• What is the desired timing for the value calculation?  Date of the trigger event?  Subsequent event?

• Does the entire business need to be valued, or a partial ownership interest? 

• What method of funding will be used to complete the transaction?

  • Cash – Requires sufficient cash flow or reserves to pay the full sale price in a lump sum.  May not be available when needed.

  • Loan – Future credit availability and cost of borrowing are factors. 

  • Installment Sale – Requires repayment from earnings and is contingent upon the future growth and success of the business.

  • Insurance – Provide liquidity when needed for either death or disability trigger events.

• Should the buy-sell agreement method of funding be taken into consideration in the value?

• What method will be used for valuation?  Fixed price?  Formal valuation?  Formula-based?

• Is there clarity as to what is mandatory and optional regarding the purchase or sale of an ownership interest?

• What goals for your spouse and family do you want to be realized if you die, become incapacitated, or otherwise exit the business unexpectedly? 

Contact us today to learn more about our STRATEGY RENOVATION® Business Continuity Plan if you need help creating or “renovating” your plan for the unexpected.

How Will Selling (Or Not Selling) Your Business Impact Your Lifestyle In The Future?

Our fictional business owner, Baby Boomer Jane Doe, is like most owners in that her business is her largest asset and will play a central role in achieving future financial security, goals, and dreams.  Jane has been in business approximately 25 years and, as a result of the steady stream of business revenue, she has experienced a very comfortable lifestyle that includes two homes, private education for the children, annual vacations, and plenty of discretionary income.  

But now Jane wants to plan for "what's next" as she now has grandchildren in different states she wants to visit regularly and has lost the passion once enjoyed in owning and running the business.  In conversation, Jane says with a level of exasperation, "I'm just ready to leave the business...I'm done".  Jane doesn't have management or children interested in purchasing the business, no longer wants to be an owner and thinks the best exit route would be a third-party sale.  

After engaging an exit planner to lead the design and implementation of her plan to leave, Jane is alarmed and disappointed to learn that her business is worth quite a bit less than what she had estimated and that a significant increase in her investable assets will be required to do all she wants to do post-exit.  Her financial planner assessed that her "plan for life after the business" would have a price tag of at least $4 million, while her business is really worth $1 million (Note: Jane had estimated a $2 million value), she has current investable assets of $1 million, representing an "asset gap" of $2 million.  And again, Jane wants to leave now!

As Jane's exit planner continued to "expose reality" regarding her business readiness for a successful third-party sale, Jane also had to come to grips with the reality of her business not being as sellable as she had assumed.  The planner pointed to a number of "value drivers" that needed strengthening (i.e., EBITDA, capable management team, plan for growth, etc.) to make her business more attractive to either a strategic or financial buyer. 

So, if Jane chooses to sell now and is able to, all indications are that she would not receive a sufficient amount of net proceeds to facilitate her post-exit life plan.  She will either need to begin now to execute a plan to accelerate the value of her business and sell at a later date or significantly reduce her post-exit goals and lifestyle...neither of which are attractive options.  Jane is not feeling at all good about her limitations and lack of control over her current options.  

It is now clear to Jane that it would have been wise years ago to assess both her personal and business readiness and put a plan in place to accelerate the value of the business.  If the business was more sellable and highly valued she would have more options for when and how she exits.

Have you conducted an accurate financial gap analysis including an objective estimate of business value and personal financial plan?  Do you have a plan in place to systematically maximize the value of your largest asset?  Will selling (or not selling) your business affect your future lifestyle goals?  Will it be sellable as more and more baby boomer business owners put their business on the market in the next decade?

Take control of your plan now so that you exit on your own terms and conditions.  Contact us for assistance with any of these critical planning issues.

Invest 12-15 minutes in the FREE ExitMap® Assessment and get a 12-page report scoring you in four key exit planning areas: Finance, Planning, Revenue/Profit, and Operations.

Preparing a Successor...How Long Does It Take?

It’s an important question to answer. The company’s future, the successor’s success, and the ability to make buyout payments depends on it.

When it comes to learning the business and the industry, an owner probably knows best as to how long that will take. Generally, this will take anywhere from 3-15 years. However, learning the mechanics of a business does not necessarily make someone a good leader nor a good owner. (After all, most successors have only been an employee.)

Clearly, some people are more natural at leading than others, but one thing is sure. We're not very good at self-assessment (especially when it comes to leadership). Assuming a successor understands the business, their effectiveness as a leader and as an owner needs to be objectively assessed and their weaknesses improved.

A leadership assessment followed by a program of executive coaching will accomplish this. After 20 years of developing leaders, I can say that the process generally takes about 6-12 months.

But a major challenge can arise. What if that successor turns out not to be competent as a leader and an owner? By way of example, years ago I had a client who kept bringing on potential successors (without my help, by the way...), only to have each of them fail. One after another (three in total), each failed and either left the company or had to be fired. Before they found a suitable successor, almost 4 years had transpired.

The bottom line is that it's better to start the leadership development process sooner than later. Don't hand over the keys to your business before your successor's competence is assessed, their weaknesses addressed, and their leadership and judgment demonstrated.

————————————————-

Michael Beck is an executive coach, business strategist, author, and president of Eliciting Excellence.  His 20 years as a professional executive coach has helped leaders improve interpersonal skills, sharpen strategic thinking, and enhance judgment.  He has worked domestically and internationally with a wide range of clients from diverse industries including technology, manufacturing, professional services, healthcare, financial services, and not-for-profit.  Michael has held executive positions ranging from CEO to  VP of Business Development and has a background in engineering (BS, MS – University of Pennsylvania) and finance (MBA – Wharton School of Business). Michael is the author of the book “Eliciting Excellence”, has a Black Belt in self-defense,  and is a competitive dart player.

Low Employee Engagement or High Turnover and Building Business Value

There may not be a greater management challenge in building the value of your business than engaging and retaining your employees. 

It is not unusual to hear business owners, with frustration, express as one of their greatest ongoing concerns the engagement and retention of their employees.  And it’s costly if you don’t do it right. A few years ago, The Society for Human Resource Management (SHRM) reported that on average it costs a company 6-9 months of an employee’s salary to replace the employee.  For example, for an employee earning $60,000 per year, the costs of recruiting, training, etc. would be in the range of $30,000 - $45,000.  These figures are probably higher today.

Business owners typically understand from experience that low employee engagement and high turnover are financially expensive, but sometimes they’re not aware of how costly these challenges can be to the business culture they have worked so hard to establish (which is also financially expensive).  We’ve all heard the Peter Drucker quote, “Culture eats strategy for breakfast”, implying that the culture of your company always determines success regardless of the impact of your business strategy.  So, culture is clearly very important for building and protecting business value, and a key driver of a strong culture is employee engagement and retention. 

Low employee engagement and high turnover are costly on all fronts.  What can a business owner do about it?

Our firm does not currently have a practice area or special expertise in employee engagement and retention, but we have observed some common practices among business owners who have a track record of success in it. 

• Clearly established vision, mission, and values that are continually communicated and modeled by leadership/management, which serves to facilitate a strong corporate culture.

• Clearly defined growth and succession plan that involves the retention of key employees.

• Clearly defined and communicated employee incentive (rewards, retention) plans that are aligned with corporate goals for growth.

•  Employee expectations are clearly defined and communicated.

•  Employees are held accountable and receive regular feedback on their performance.

• There is an employee selection and onboarding process in place that is well-defined, disciplined, and values-based.

For most small business owners, employees represent their greatest asset as well as their largest expense.  And hence, it is imperative that employee engagement and retention should be a high priority in managing toward a sellable business with maximum value.  It should be so valued by the business owner and management that it is seen as a significant aspect of the business culture by the employees. 

So, if you are in need of assistance in this area, it is well worth the investment of time and finances to get professional help as soon as possible.  The right advice can save you both money and time.

Invest 12-15 minutes in the FREE ExitMap® Assessment and get a 12-page report scoring you in four key exit planning areas: Finance, Planning, Revenue/Profit, and Operations.

A Succession Plan or an Exit Plan? Savvy Business Owners Have Both!

One of the questions we often hear from business owners is, “What is the difference between Succession Planning and Exit Planning?  Aren’t they the same thing?”  Surprisingly, they are not.  The next question usually is, “Which one do I need?” The answer is simple.  Whether the business is small or large, family-owned or not, astute business owners always need both.

Nearly $10 trillion dollars in business assets will be transferred globally in the next decade, according to Forbes Magazine.  Baby Boomers selling privately owned businesses or transferring them to family members will comprise much of that $10 trillion dollar transfer.  As the market becomes crowded with owners ready to sell, the advantage will go to those owners who have done their due diligence, considered all of their options, and planned for unexpected contingencies.

Succession Planning

Succession Planning focuses solely on transferring leadership inside the business from one generation to the next.  Succession plans identify key individuals within the organization who can be trained and mentored to someday take over as the existing business leaders exit.  Succession Planning is just one necessary aspect of a more comprehensive exit plan.

Exit Planning

Exit Planning incorporates succession planning with strategies for building transferrable value, reducing tax liability, preparing for unexpected contingencies, minimizing family stresses, and increasing the likelihood of a successful business transfer.  Exit plans also incorporate the personal and financial goals of the business owner, their spouse, and their family.  A prudent exit plan starts and ends with the long term business and personal objectives of the owner.

Plan Ahead for A Successful Exit

Succession plans and exit plans so share an important characteristic – neither should wait.  Business owners who eventually want to sell for top dollar with the least amount of trouble must start the planning process early enough to give it the thought and consideration it requires.   With the proper plans in place, you, the business owner, gains the ability to make critical long-term decisions that will significantly increase the likelihood of selling or transferring the business when you want, to whom you want, and for the price you want.

Take our FREE 15-Minute ExitMap® Assessment and find out how ready you are to exit successfully.