An Often Neglected Means Of Protecting Business Value

One of the compelling and common characteristics of successful owners is their optimism.  Their “glass is always half full” attitude results in the risk-taking, perseverance, and innovation it takes to build and grow a successful business.  And, like it is with any personal strength, this strength of optimism can quickly become a weakness when there is a need to plan for the gloomy business contingencies of death and disability.  What happens to the business due to either of these less than optimistic events is probably the last thing an owner wants to think about. 

And, perhaps some business owners don’t care if the business fails as a result of one of these events.  Though, our experience has been that most owners do very much care about what happens to the business and all its stakeholders.  We’ve also observed, however, that the planning needed is often deficient.  And, one area that is most often overlooked is an owner’s potential permanent disability.

Whereas it’s fairly common for a business owner to have a level of life insurance protection (although often outdated in need of review) to benefit their business as well as their family, in the event of death, it’s not nearly as common to see the risk of permanent disability addressed adequately, if at all. 

And, becoming disabled for more than three months are greater than the chances of dying at every age: 

• Over one in four 20-year-olds will become disabled before reaching age 67. (1)

• Age 30 - the chances of disability are approximately 2.3 times greater than death

• Age 40 - the chances of disability are about twice that of death

• Age 50 - disability is 50 percent more likely than death (2)

• Not only does the risk of disability rise as we get older, but the severity of any disability that is incurred also tends to increase with age (3)

Your permanent disability (or death) and incapacity would most likely have the same impact on your business as the loss of any key employee.  All that you bring to the table in making the business a success, your experience, talents, knowledge, relationships would all be tough to replace.  And, there could be additional challenges such as the loss of concerned stakeholders, weakening financial strength of the business, bank financing re-examined, bonding capabilities interrupted, potential non-renewal of personally guaranteed leases, etc., etc. as a result of you not being able to work in the business.

The bottom line is this, that the value of your business could decrease significantly in the event of your premature permanent disability and incapacity.  All stakeholders would be impacted, and perhaps your family as well if financially dependent upon the continued success of the business.  Make sure you’ve thoroughly thought through this risk with your insurance professional.  Too often it’s neglected entirely.  You can also contact us for any assistance needed.

Invest 15 Minutes and take our FREE Exit Readiness Assessment.  We do not request any confidential information.

Endnotes:

(1)     The Facts about Social Security’s Disability Program, Social Security Administration Publication No. 05-10570, January 2018.

(2)     1985 Commissioners’ Disability Individual Table A and 1980 Commissioners’ Standard Ordinary Mortality Table.

(3)     Americans with Disabilities: 2010, U.S. Census Bureau, Current Population Reports, July 2012.

Planning For Exit During A Crisis

Prior to the crisis, there were owners planning to exit their business. There will be owners who plan their exit after the crisis, and owners who are now wondering when and if they will ever be able to leave. The following are accounts of three owners whose businesses have been impacted negatively by CV-19.

Jim has been planning for the last three years to sell his business in five years to a third party and move south. He knows how much money he will need for life after the business and what his financial gap is. His financial gap has grown significantly in the last month as his business would be valued by a buyer for much less if he’s able to sell. Now he’s not sure when his goals of fishing and golfing in Florida will be realized.

Susan, who has been in business for 20 years, has been thinking she’d initiate her plan for leaving next year when she reaches age 60. To this point, she’s done nothing to assess personal or business readiness for exit and has no real objective idea as to what her business is worth. Susan also really doesn’t know what exit route would be best as she has key employees who have expressed interest in eventual ownership, but she’s also thought about selling to a third party.

Until now, exiting her business wasn’t at all on Sarah’s mind. She’s well past the 5-year hurdle with ten years in business and is highly prosperous and profitable. Prior to launch Sarah had a successful corporate career that she finds herself missing more and more each day. It’s a lot different going to sleep each night owning the risk of a business, and with this crisis, she’s not sure how much longer she’s willing to do that. Thoughts of exiting are new to Sarah but frequent.

Each of these business owners has “exit on their mind” while working around the clock to manage and lead through a crisis with a goal of lasting. Following are a few baseline exit planning steps Jim, Susan, and Sarah can take now, in the midst of the chaos. And, at least one of these actions is needed for planning to make it through the crisis.

• Project cash flow for the next 12 months. Strong cash flow is a key ingredient for planning a successful exit. You can access spreadsheets for free at https://ennislp.com/corona-virus-resources. Effective cash flow management will also be critical for making it through to the other side of CV-19.

• Request an updated Financial Needs Analysis from your Financial Advisor calculating how much money you will need post-exit and whether or not you have a financial gap.

  • You will need an objective Estimate of Business Value for the Financial Needs Analysis to be meaningful. We could help with that if needed.

  • You may find that the results of your analysis demands a change in your departure date, your goals, and/or your planned exit route.

• Review your plan for the unexpected events of death or disability or Business Continuity. These times are difficult for you as an owner but would be even more challenging for those left behind if you were suddenly unavailable to work in the business.

• Begin to assess personal and business readiness for your exit. Invest 15 minutes and complete this free exit readiness questionnaire which will score you in areas of Finance, Operations, Planning, and Revenue/Profit. You will NOT be asked to submit any confidential financial information.

Please contact us if we can be of help in any of these steps. You can also access online resources at https://exitreadiness.com

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.

COVID-19 Relief: Overview of the New CARES Act

The Coronavirus Aid, Relief, and Economic Security (CARES) Act was signed into law on March 27, 2020. In addition to giving people access to health care treatments, the new law will provide roughly $2 trillion in much-needed financial relief to individuals, businesses, not-for-profit organizations, and state and local governments during the coronavirus (COVID-19) pandemic. Here are some of the key financial relief provisions.

Advance Rebate Payments

The CARES Act provides one-time direct “rebate” payments to individuals and families. These payments are considered advances for a new federal income tax credit that’s subject to phaseout thresholds based on adjusted gross income (AGI). The following table summarizes credit amounts and phaseout thresholds:

Credits for Individuals and Families:

Filing Status - Single = $1,200 Rebate w/ Start of AGI-Based Phaseout Threshold = $75,000

Filing Status - Head of Household = $1,200 Rebate w/ Start of AGI-Based Phaseout Threshold = $112,500

Filing Status - Married Filing Jointly = $1,200 Rebate w/ Start of AGI-Based Phaseout Threshold = $150,000

Families will receive an additional $500 credit — subject to the same phaseout thresholds — for each qualifying child under 17. The credits are phased out by $5 for every $100 of AGI above the thresholds. For example, the credit for a married couple with no children would be completely phased out when AGI reaches $198,000. The credit for a head of household with one child is completely phased out when AGI reaches $146,500.

Many individuals won’t need to do anything to receive the advance credit payment. If you previously signed up to have your federal income tax refunds deposited into a bank account, your advance credit payment will come to you that way. The allowable credit amount will be based on your 2019 federal income tax return or your 2018 return if you’ve not yet filed for 2019. Adjustments can be made when you file your 2020 return. You can claim any credit underpayment at that time, but the IRS won’t claw back any overpayment. The credit is fully refundable for individuals and families with low or zero federal income tax liabilities. In fact, you need not have any taxable income to collect the credit.

There are still some details about the payments that are unknown at this time. We will keep you updated as information comes out.

Modifications of TCJA Provisions

The CARES Act rolls back several revenue-generating provisions of the Tax Cuts and Jobs Act (TCJA). This will help free up cash for some individuals and businesses during the COVID-19 crisis.

The new law temporarily scales back TCJA deduction limitations on:

·         Net operating losses (NOLs)

·         Business tax losses sustained by individuals,

·         Business interest expense, and

·         Itemized charitable deductions by individuals and charitable deductions for corporations.

The new law also accelerates the recovery of credits for prior-year corporate alternative minimum tax (AMT) liability.

To encourage charitable giving, individuals who claim the standard deduction (rather than itemizing) can claim an above-the-line deduction of up to $300 for cash contributions to charities for tax years beginning after December 31, 2019.

The CARES Act also fixes a TCJA drafting error for real estate qualified improvement property (QIP). Congress originally intended to permanently install a 15-year depreciation period for QIP, making it eligible for first-year bonus depreciation in tax years after the TCJA took effect. Unfortunately, due to a drafting glitch, QIP wasn’t added to the list of property with a 15-year depreciation period — instead, it was left subject to a 39-year depreciation period (as under prior law). The CARES Act retroactively corrects this mistake and allows you to choose between first-year bonus depreciation for QIP expenditures or 15-year depreciation.

QIP refers to any improvement to an interior portion of a nonresidential building if the improvement is placed in service after the building was first placed in service. But it doesn’t include any improvement for which the expenditure is attributable to:

·         Enlargement of the building,

·         Any elevator or escalator, or

·         The internal structural framework of the building.

Contact your tax professional for more details and to evaluate whether you should file an amended return to take advantage of the new availability of bonus depreciation or 15-year depreciation for QIP expenditures in prior years.

Employee Retention Credit

The CARES Act creates a new payroll tax credit for employers that pay wages when:

·         Their operations are partially or fully suspended because of the COVID-19 pandemic, or

·         Their gross receipts decline by 50% or more compared to the same quarter in the prior year.

Eligible employers may claim a 50% refundable payroll tax credit on wages (including health insurance benefits) of up to $10,000 that are paid or incurred from March 13, 2020, through December 31, 2020.

For employers who had an average number of full-time employees in 2019 of 100 or fewer, all employee wages are eligible, regardless of whether the employee is furloughed. For employers who had a larger average number of full-time employees in 2019, only the wages of employees who are furloughed or face reduced hours as a result of their employers’ closure or reduced gross receipts are eligible for the credit.

Other rules and restrictions apply. Contact your tax advisor for more information.

So Much More

The financial relief package under the CARES Act also includes provisions to:

·         Significantly expand unemployment benefits for workers,

·         Allow IRA owners and qualified retirement plan participants who are adversely affected by the COVID-19 pandemic to withdraw in 2020 up to $100,000 and then recontribute the withdrawn amount within three years with no federal income tax consequences (same as with a withdrawal and a subsequent tax-free rollover),

·         Waive required minimum distributions (RMDs) from IRAs and retirement plans that would otherwise have to be taken in 2020 to avoid an expensive penalty,

·         Allow for a recipient employee, tax-free treatment for up to $5,250 of employer payments made on the employee’s student loans, for payments between now and year end,

·         Allow employers to defer their portion of payments of Social Security payroll taxes through the end of 2020 (with similar relief provided to self-employed individuals), and

·         Delay implementation of the current expected credit loss (CECL) standard for large public banks until the earlier of the end of the COVID-19 crisis or December 31, 2020.

The CARES Act also expands access to capital for businesses adversely impacted by the COVID-19 crisis. Many of the loan programs will be administered by the Small Business Administration (SBA) and the Federal Reserve. Some loans will be subject to a special oversight board to ensure adherence to the rules — including a ban on stock buybacks — set forth under the new law.

Need Help?

The COVID-19 pandemic has affected every household and business in some way. If you or your business have suffered financial losses, at least some relief may be on the way. Contact Walter Deyhle, CPA at GRF CPAs & Advisors to discuss resources that may be available to help you weather this unprecedented storm.

LEADERSHIP DURING A CRISIS: Leadership, Engagement and Culture

How do we lead employees in times such as these? Even without a global pandemic, leading employees can be a challenge that requires much time and energy. But now, in addition to trying to lead well, you are trying to keep your business afloat in a way that you have never had to do in the past. No doubt these are difficult times to be a business owner. The following are a few tips to strengthen your Leadership, Employee Engagement, and Culture in the midst of this crisis.  

Golf Bag Leadership

The first area of focus is Leadership. Invest a few minutes right now and assess your current leadership “style.” You may at times be democratic or a delegator, a pace-setter, or any other number of styles, but more than likely you have a “go-to” style. The recommendation is to move away from a singular style or “golf club” during this time of crisis and instead think of your leadership as a “golf bag” carrying different leadership styles for various situations.

In the great game of golf, you want to select the right club once you have assessed the lay of the ball, the distance, and various other factors. The same should be true for our leadership styles. For most of us, the lay of the ball has shifted — our environment has changed dramatically in the midst of this crisis. You need to now feel empowered to “select a different club” or style than you normally would because everything happening is unprecedented. That might mean you are a lot more directive and commanding in your leadership style for the sake of saving the company. Communicate this shift in your leadership style to your people. It certainly will not be like this forever, but this is how we will survive today. As a leader, you have the freedom to change that style in order to combat the present circumstances.

Your Employees’ Connection With You Drives Their Engagement

The second focus area is Employee Engagement. In the best of times, when employees are engaged, research shows that it leads to higher profitability, productivity, customer satisfaction, and lower turnover. An engaged employee gives their discretionary effort and goes well above and beyond what is required of them. That’s important during normal times—now, it is essential. As a leader, you have been pouring into employees, paying their salaries, and showing up for them. Now is not the time to abandon those duties. Your employees are on the same boat that you are on. You must step out onto the deck and continue to engage with them as you’re all fighting for the same thing; you all want your ship to stay afloat. This is crucial because we know that 47% of an employee’s connectedness to their work is directly correlated to the connectedness they feel to their leader. Therefore, in whatever bandwidth you have, you must make an effort to continue to connect and engage with your employees.

Culture Is Forged In Times Like These

The last area of focus is Culture. Organizations with strong cultures consistently outperform organizations with weaker cultures.  Culture is simply the values, beliefs, and experiences that a group of people demonstrate and enjoy collectively. In these unprecedented times, our values and beliefs are being tested, and new experiences are being created. Most importantly, your people’s beliefs about you as a leader and your company are being solidified.  As leaders, it is crucial that we step up right now and demonstrate intentionality in shaping those experiences. This will be a defining moment in the history of our country and your company. Your people are judging you and your response to it.  It is essential to respond well.

Summary

·       Feel free to lead differently. These are different times.

·       Engage with your employees. They need you and you need them.

·       Be intentional about your company culture. We will get past this and when we do, your employees will remember how you responded.

I wish you all the best. If there is some way I can help you avoid damaging your human capital as we get through this very difficult season of business, please call me and I’ll be happy to share openly with you.

Alan Kemper, DBA

678.346.1186

Alan@LEADWorkforce.com

Survive and Advance

In 1983, the NC State Wolfpack, coached by Jim Valvano, “survived and advanced” during March Madness by winning nine must-win games in a row (seven of which they were losing in the final minute) and having one of the most exciting runs to victory any team has ever experienced. On their unlikely journey, they had to beat Michael Jordan and three-time National Player of the Year Ralph Sampson. And then, this team that barely made it into the tournament now had to go up against “Phi Slama Jama”….the No. 1 team in the nation…Houston. A team loaded with talent including NBA Top 50 all-time players Hakeem Olajuwon and Clyde Drexler. Throughout this journey, their leader “Coach Jimmy V” consistently and passionately stated his mantra, “Survive and Advance!”. They indeed did survive and advance, as NC State, one of the biggest underdogs ever, went onto win the game that is considered by many to be the best college basketball game in history.

As a business owner in the midst of the Covid-19 crisis, you need to lead in both surviving and advancing. The normal course of life for you as an owner includes the ongoing challenges of increasing sales and growth of revenue and profitability, staffing decisions, cash flow and debt management, risk management, just to name a few. In the midst of this crisis, these routine challenges become even more intensified and worrisome as you do all you can to simply “survive”. And, the key to your survival will be a vigilant approach to cash flow and debt management. To assist you with staying on top of that crucial survival task we have created a Cash Flow Management Spreadsheet that you can access for free on our homepage along with a video tutorial.

This crisis will end at some point (hopefully soon), and life as your business has known it may need to change its mission, purpose, products, and product delivery. Some businesses simply will not be able to do “business as usual” going forward as the behaviors, desires, and needs of your customers may have changed as a result of the crisis. The owners who understand that possibility and begin to plan now will have the best chance of surviving, and also “advancing” and thriving in the future.

Any thought of “strategic planning” for the future currently can result in even more sleepless nights —“If we don’t do everything to survive today, there may not be a tomorrow!!!”. And certainly, there is truth in that. For some businesses, simply surviving will be enough when competitors are not able to make it through. However, a visionary leader will not leave that possibility to “chance” and will take the initiative to plan now and be more in control of future outcomes. There is a need for a “Level 5” (Jim Collins - Good to Great) leadership that can lead through the daily burdens while simultaneously planning for the future and the overall good of the organization. You would be wise to act now in adjusting, where needed, your strategy for the future.

This “strategy renovation” does not need to be a long and complex process. Following are areas that you could address with a measured investment of time while continuing to stay on top of crisis management:

• Forecast Future Products. Same? Add? Remove?

• Team. Who will be the key people needed to survive and thrive in the future?

• Markets. What customer segments will we market to in the future? Same? Different?

• Competitors. Who will be our competitors? Same? Different?

• SWOT Analysis. Strengths, Weaknesses, Opportunities, Threats.

• Goals. What should be our 3 big strategic goals coming out of the crisis?

• Financial Forecast. What do we project for sales, expenses, and profit over the next few years?

As Jimmy V and his squad survived, they also advanced. If you need any assistance in renovating your strategy for either survival or future advancement, please contact us at either 301-859-0860 or email@ennislp.com. We want to help you survive and advance.

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.