Assigning Value to Key Employees

Key employees are “key” because they have a significant impact on the current and long-term success of the business. Hence, the business owner(s) will want to be intentional and strategic in aligning compensation and incentive plans for those key employees with the owner’s goals for business growth and exit. Owners should also protect against the potential loss of these valued employees due to death or disability, as their loss can be quite damaging and even destructive to business value and future growth. Following are suggested steps to take in assigning value to your key employees.

First, it’s important to identify the key employees of your business. An employee should be considered “key” to the success of a business if they:

• make a substantial business contribution (i.e., marketing, sales, administrative) and/or…

• possess critical knowledge or information (i.e, products, service, customers, operations) and/or…

• maintain and develop key contacts and relationships (i.e., customers, suppliers, vendors, etc.)

Once key employees are determined, an insurable value must be assigned to each, which is generally more difficult than assigning value to physical, financial, or real assets. A value must be estimated for the amount of insurance to be purchased by the business on the employee’s life. The value of the key employee to the employer combined with the employee’s anticipated replacement costs equals the amount of insurance that should be purchased.

There are a number of methods that can be utilized in determining the value of a key employee or manager. Following are methods most often used:

• Multiples of Income Method: The easiest and probably the most common method used. Insurance companies often estimate the amount of key insurance needed on a multiple of 5-7 times an employee’s total compensation.

• Replacement Cost Method: The cost to locate, recruit, and train a suitable replacement.

• Employee’s Contribution to Earnings Method: The earnings of a business, for purposes of estimating the insurable value of a key employee, come from its return on invested assets and the skill of the management team (plus expenses for recruiting and training replacement).

• Present Value of Lost Earnings Method: Estimate the business’ lost earnings resulting from the loss of a key employee. The present value of the lost earnings plus the expense of recruiting and training a replacement becomes the insurable value of the key employee.

• One Year’s Business Earnings Method: This method is generally considered to have the least credibility as it is not based on the actual or perceived value to the employer. But instead, it simply determines insurable value by assigning an amount equal to the total of the prior year’s before-tax earnings (plus expenses for recruiting and training replacement).

Protecting the value of your key employees is a critical step in protecting the value of your business. Oftentimes, until a sellable business value is built and realized, the most key employee is the owner(s).

For assistance, contact your insurance professional or contact us at email@ennislp.com or 301-859-0860.

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.

Internal Sale with Modified Buy-Out

This internal sale method works best for most owners who have the following goals:

• Transfer their business to key employees

• Motivate and retain key employees

• Receive full value for their business

Let’s look at a short case study regarding the concept of Modified Buyouts.

Donna is age 52 and wants to remain in her business for at least 5 more years.  She would like to “handcuff” her senior managers and salespeople to the company (making it economically rewarding for them to stay with the company) and at the same time, explore his own exit strategy. Her plan is to accomplish both goals by beginning to sell her company to the key people.

A draft Exit Plan was prepared for Donna, listing three primary goals:

1. Establish a plan for the eventual buyout of all of Donna’s ownership of the business.

2. Begin the buyout of a portion of her interest by selling to two existing key employees, Michael Brooks and Alice Patton. Donna would select additional key employees at a later date.

3. Have the plan in place and effective as of March 1st of the following year.

The Exit Plan recommended that Michael and Alice purchase up to a total of 10% of the ownership of EPD (represented by non-voting stock). In the future, other key employees (as yet unidentified and probably not yet hired) would participate in the stock purchase plan. The plan also included a two-phase sale of the business.

Phase One: Sale of Initial Minority Interest. Donna will make a pool of 40% of EPD’s total outstanding stock (converted to non-voting stock) available for current and future purchases by key employees. Initially. Michael and Alice would each own 5% of the outstanding stock (non-voting).

For purposes of the initial buy-in (and any future repurchases of that stock), the value of EPD is based on a valuation (with minority and other discounts) provided by a Valuation Specialist. In EPD’s case, those discounts totaled half of the true fair market value. A lower initial value is necessary to make the purchase affordable for the employees and to provide them an incentive to remain with the company. The initial purchase price will be paid in cash. If either key employee needs to borrow funds to secure the necessary cash, EPD will be willing to guarantee the key employee’s promissory note to a bank.

Phase Two: Sale of Balance of Ownership Interests. At the end of Phase One (three to seven years), Donna will choose one of the following courses of action:

• Sell the balance of her interest to the key employees at the true fair market value by requiring the employees to finance an all-cash purchase.

• Finance the buyout by means of a long-term installment sale to the key employees at true fair market value. Alternatively, Donna may decide to sell to an outside third party. In either a sale to employees or to an outside third-party, her intention is to retire from the business and not to continue to maintain ownership in the business and continue her management and operational involvement.

Benefits to Employees. Even though the key employees will not receive voting stock, there will be sufficient benefits to them in purchasing non-voting stock, as they will be able to do the following:

• Enjoy actual stock ownership in EPD and the ability to receive any appreciation in the value of their stock.

• Participate (pro-rata) based on their stock ownership in any S-Corp distributions made by EPD.

• Receive market value paid by a third party for their percentage of stock (if EPD were to be sold to a third party).

• Participate more directly in day-to-day operating decisions.

• Initially, be appointed as directors to serve under the terms of the bylaws (such positions not be guaranteed).

• Participate in determining which additional key employees will be offered stock out of the 40% pool. This determination will be based on written criteria developed by all three shareholders.

 As each key employee purchases stock, they will enter into a stock purchase agreement with the company that provides for the repurchase of their stock in the event of death, long-term disability or termination of employment.

Contact us if you would like to discuss this option or any strategy for an internal sale to insiders or family.email@ennislp.com | 301-859-0860

Sole Ownership and Planning for The Unexpected

A sole owner of a business who has a spouse and/or family has not a few key planning issues that need to be addressed before it’s too late.  “Too late” being the unexpected events of death or permanent incapacity or disability.  To illustrate, let’s use the following story that is based on real life events…

John Doe owned a very successful commercial real estate development firm.  He regularly met with his Business Advisor and they “game planned” aggressive growth strategies that were proving to be successful in building the value of the business.  To the point where John was seriously considering expansion into other geographic areas.  Life was good and the business was growing rapidly!

One evening after meeting with his advisor, John experienced a sudden heart attack and died later in the hospital.  At age 55 he still had family financial responsibilities, yet he had not been as thorough in his personal and family financial planning as he had been in planning to build the business.  It was time of extreme grief and mourning as well as uncertainty for Jane…

• She didn’t know what to do next.

• She didn’t know if John’s salary would, or could, continue.

• Employees and customers started to leave as there was not a plan, and so the business became less valuable and sellable.  This was problematic as Jane was dependent on the sale value of the business as John had limited life insurance and investable assets.

• Due to the high level of uncertainty, there was a lack of peace and stability for Jane and for everyone who was at all dependent on the business.

There were too many things that John didn’t do, and should have been done, to mention in a short blog post. So, highlighted here are just a few (not an exhaustive list) of the key planning solutions that, if John had put in place, would have helped in minimizing the agony that Jane and the family experienced…

• Clear written instructions that were aligned with updated and adequate estate planning documents as to how to continue the business.

• A personal financial plan that included a cash flow analysis of how much money Jane would need both short-term and long-term in the event of John’s early death. 

• A written resolution for Jane to continue to receive John’s salary until insurance proceeds were received.

• Plans for the business bank line of credit to continue uninterrupted.

• A current and adequate personal life insurance program.

• Key person life insurance on John that would have provided needed liquidity for the business to provide key employee stay bonuses, etc.

Subscribe to our podcast (scroll to end of homepage) and get a complimentary copy of our Business Continuity Instructions fillable PDF . 

Aligning Employee Incentive Plans with Owner Goals

Sarah wanted to exit in 5 years and had learned through planning and analysis led by her exit planner what “her number” was, as well as an objective estimate of the value for her business. She was pleasantly surprised to find that the financial gap for making her post-business dreams happen is not insurmountable. At the same time, she is aware that growing the value of the business (Sarah’s largest asset) will be necessary to close the existing gap.

With her newly designed comprehensive exit plan, and a decision to exit with a future sale to an unidentified strategic buyer, Sarah now has a crystal clear picture of what is needed to maximize and preserve the value of the business and attain her post-exit goals. Following are a few of the key value-driver action items identified during the analysis of Sarah’s situation:

• Strengthen Management Team

• Improve Financial Performance

• Establish and document a Growth Plan

• Increase Recurring Revenue

Now that Sarah knows how much she needs to grow the value of the business within her planned time frame for an exit, and what needs to happen to facilitate the required growth, she needs to take action in aligning employee incentive compensation with her strategic goals. For example, there is a need to increase EBITDA so she will implement an added incentive for the Chief Operating Officer that is tied to profitability. Currently, all that’s in place is a year-end bonus simply based on Sarah’s generous nature and whether or not they “had a good year.” She will do likewise for other employees who help drive the performance needed to accomplish her goals.

Sarah also now knows that it will be essential for these key employees to stick around during, and after, a sale transaction if the transaction is to be successful. Key employees who are not incentivized to remain through the owner's exit can seriously impact the owner proceeds at the sale and even destroy the deal.  

So, what does Sarah do? Stock Option Plan?  Phantom Stock Plan? Restricted Stock? Cash-Based plan? Stay Bonus? What plan or plans will be the most effective, easiest to implement, and cost-efficient?  Incentive planning can be complicated requiring deep expertise in statutory and technical requirements, tax planning, and other areas.   The Certified Exit Planner has made sure that the right experts have been involved and coordinated in designing and implementing Sarah’s new incentive plan, and so she is quite confident in the final plan.

In summary, be intentional in aligning your employee incentive compensation plans with your strategic owner-based goals for growth and exit, and get the needed expertise on your advisor team to help design and implement the plan. Effective incentive planning can play a key role in helping you attain exit goals within your desired exit time frame.

Contact us today for an exploratory conversation if you want to exit within the next 10 years. Don’t wait until you feel pressure to leave your business to begin planning. Plan now.

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.

State Death Taxes and Exit Planning

We continually communicate to clients and prospective clients that as a business owner “you cannot do exit planning without doing estate planning, and you cannot do estate planning without doing exit planning.” Meaning that, as you plan your estate preservation and transfer in life and death, your business certainly needs to be under consideration, and if you are in the midst of creating your business exit strategy, you will quickly find that you will need to create or review your estate plan.

One of the many reasons to regularly review your estate plan is to be clear on death taxes (estate, gift, inheritance), and how your estate could be impacted. The current good news is that most small business owners don’t need to be concerned about federal estate taxes. For 2020, your estate would need to be worth $11.5 million or more ($23 million or more for a married couple) to be affected by federal estate taxes. For this reason among others, not a few owners choose to neglect estate planning, while there are other important factors to consider (i.e., asset protection; medical directives; lifetime transfers, etc.).

One such additional factor is the potential estate tax bill assessed by the state you reside in. For example, in Maryland, the estate tax exemption is less than half ($5 million for 2020) than the federal exemption, and the tax rate assessed can be up to 16%. Massachusetts has the lowest threshold of any state in 2020 of $1 million. The point is, you really need to understand, not just how you could be impacted on a federal level but also your state death tax structure. If you’re unclear, contact your estate planning attorney for a plan review.

Following is a link to a related Kiplinger article dated November 2019 (note: some states listed may have made changes in 2020) on the “18 States With Scary Death Taxes”.

Again, if you are at all unclear on your situation and how you could be impacted, contact your estate planning/tax advisor.

Please contact us for assistance in building sellable business value or planning your eventual exit. You could also check out our virtual planning solutions at exitreadiness.com.

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.

"I'm Not Ready to Sell My Business and Retire..."

In my past life, when working in the financial services/wealth management industry, we helped individuals and families create financial plans for their goals such as college education or retirement.  It was very unusual to have a conversation with a client or prospective client who did not already understand that the sooner they began planning the better chance they would have in achieving their goals. They seemed to "get it" that planning, building, and saving for their goal(s) would take time and they could not simply begin planning when suddenly they were ready to send the kids to school or retire from their job.  For example, when encouraging someone to get started saving for retirement as soon as possible, we did not often hear, "I'm not ready to retire yet."

Interestingly, it is not unusual to have a business owner respond to inquiries about their exit and legacy with, "I'm not ready to sell my business", or, "I'm not ready to leave my business and retire".  The inference being, that planning isn't needed until they are actually ready to leave the business (Or, maybe we simply did a poor job describing what we do...as we do not sell businesses).  As this conversation continues, it becomes clear this owner is assuming they will be able to sell their business when they want and for the money they want, and that any planning involved really only amounts to some legal stuff regarding the sales transaction.  These are very faulty assumptions.

For most small business owners, the future business value will play a key role in their retirement planning, financial security for their family, and their desired legacy.  Like an investment portfolio of stocks, bonds, and mutual funds, there are specific things that can be done to maximize value and minimize risk but each takes time (often years) and financial resources that need to be budgeted and planned for.  But because a small privately-held business is typically not as liquid as financial assets in an investment portfolio, long-term planning can be even more imperative. Particularly, if your desire is to sell to insiders or children.

Is your business the largest asset in your investment portfolio?  Do you know what you will need your business to be worth in the future, what it's really worth now, and a plan to increase its value?  Do you have a long-term planning perspective on what might possibly be the largest and most impactful financial transaction of your life?

Don't wait until you're "ready to retire" to begin planning your business exit or you won't be ready.  Instead, have the same long-term perspective in planning your exit as you do in making contributions to your 401k/retirement plans.  

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

The Importance of Estate Planning for Business Owners

It is not uncommon for the business to be the largest asset in a business owner's estate, while also being the primary source of income for their family.  As estate planning is essentially taking control of how property is managed during life and distributed and transferred at death, a business owner cannot do exit planning without estate planning, or estate planning without exit planning.  Exit goals, such as transferring a business to children, always impact an owner's family and estate.

An example of where an owner's estate and exit plans intersect would be in the area of business continuity.  Sarah, a widow of five years, owned a large women's apparel retail store.  She started the business twenty-five years ago and remained as sole owner as the business continued to grow and realize success.  Sarah's daughter Sue graduated from college three years ago with a degree in design, and both she and Sarah had a vision for Sue eventually taking over the business. Sarah's son Jack, and another daughter April, have no involvement in the business.  

Tragically, Sarah passed away suddenly a year ago causing great distress to her children.  The fact that she passed without having finalized her estate plan resulted in even more hardship for her family.  It was one of those things that she knew she needed to do, but just never could "get around to it" due to the day-to-day trials of running a thriving business.  She had a will but it hadn't been reviewed in over fifteen years.  

The consequences of not having designed and coordinated an estate and exit plan, Sue did not end up owning the business as both she and her Mom desired, the business was sold at a deep discount due to uncertainty among employees and customers, other assets also had to be sold to pay high taxes and estate settlement costs, and there was resulting tension between the siblings due to a disorderly distribution of assets.  This is a shortlist of the potential consequences of the deficient and disjointed estate and exit planning for a business owner.  

Like our fictional character Sarah, most business owners lead busy and full lives.  They can understand that estate and exit planning are important, but it can be difficult to plan the time to make it happen as it represents even more work.  So, it can be very easy to procrastinate.  

The focus of an impactful estate plan is not simply death but also the arrangement of assets (ownership and utilization) in ways that will help estate holders achieve financial goals in a tax-efficient manner during life while providing for survivors’ needs and the disposition of property at death. A successfully implemented estate plan can:

• Minimize estate taxes and estate settlement costs

• Ensure that cash is available to pay estate taxes and costs

• Provide for an orderly transfer of assets that meets the estate owner’s objectives and intentions

• Preserve assets during life

• Protect business and ensure its successful transfer or sale

• Provide peace of mind and family harmony

A well-thought-out and executed estate plan, as part of a comprehensive exit plan, will be instrumental in ensuring that the right person takes over a business when the current owner dies. Other issues that would be addressed in a comprehensive estate plan would include the appropriate business valuation, equitable estate distribution among children, a properly drafted buy-sell agreement, tax, and philanthropic planning.

As a business owner, it is wise to regularly review your estate plan to ensure that it represents your current desires and goals for your personal and business asset distribution. Please contact us if we can be of service to you in the review of your estate plan.

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.

5 Ways To Get Your Business To Run Without You

Some owners focus on growing their profits, while others are obsessed with sales goals. Have you ever considered making it your primary goal to set up your business so that it can thrive and grow without you?

A business not dependent on its owner is the ultimate asset to own. It allows you complete control over your time so that you can choose the projects you get involved in and the vacations you take. When it comes to getting out, a business independent of its owner is worth a lot more than an owner-dependent company.

Here are five ways to set up your business so that it can succeed without you.

1. Give Them A Stake In The Outcome 

Jack Stack, the author of The Great Game of Business and A Stake In The Outcome wrote the book on creating an ownership culture inside your company: you are transparent about your financial results and you allow employees to participate in your financial success. This results in employees who act like owners when you’re not around.

2. Get Them To Walk In Your Shoes

If you’re not quite comfortable opening up the books to your employees, consider a simple management technique where you respond to every question your staff bring you with the same answer, “If you owned the company, what would you do?” By forcing your employees to walk in your shoes, you get them thinking about their question as you would and it builds the habit of starting to think like an owner. Pretty soon, employees are able to solve their own problems.

3. Vet Your Offerings

Identify the products and services which require your personal involvement in either making, delivering or selling them. Make a list of everything you sell and score each on a scale of 0 to 10 on how easy they are to teach an employee to handle. Assign a 10 to offerings that are easy to teach employees and give a lower score to anything that requires your personal attention. Commit to stopping to sell the lowest scoring product or service on your list. Repeat this exercise every quarter.

4. Create Automatic Customers

Are you the company’s best salesperson? If so, you’ll need to fire yourself as your company’s rainmaker in order to get it to run without you. One way to do this is to create a recurring revenue business model where customers buy from you automatically. Consider creating a service contract with your customers that offers to fulfill one of their ongoing needs on a regular basis.

5. Write An Instruction Manual For Your Business

Finally, make sure your company comes with instructions included. Write an employee manual or what MBA-types called Standard Operating Procedures (SOPs). These are a set of rules employees can follow for repetitive tasks in your company. This will ensure employees have a rulebook they can follow when you’re not around, and, when an employee leaves, you can quickly swap them out with a replacement to take on duties of the job.

You-proofing your business has enormous benefits. It will allow you to create a company and have a life. Your business will be free to scale up because it is no longer dependent on you, its bottleneck. Best of all, it will be worth a lot more to a buyer whenever you are ready to sell.

Take our Free ExitMap Readiness Assessment.  You could also visit exitreadiness.com for Online Learning and Education.

Successful Business Owners Have Great Impact

In our work, we are constantly aware of the incredible influence and good that result from the efforts of a successful business owner and their business.  Just a few of the good works include:

• Quality services and products.

• Empowerment of others.

• Creativity and innovation.

• Wealth and value creation.

• Peace, flourishing, and prosperity for communities.

• Charity and philanthropy.

And then there are common characteristics and principles often demonstrated by high-impact business owners in building a successful business:

• Integrity.

• Responsibility.

• Excellence.

• Diligence.

• Service to others.

• Building and leaving a legacy.

Successful business owners who embody such characteristics have a huge impact on many "stakeholders" when they responsibly and diligently build and sustain a successful business.  Impact on their family, employees, customers, suppliers, economy, and community.

As a business owner, will you have as great an impact when you leave the business as you have in building it?  Will your legacy as a business owner, and family legacy, be your desired legacy?  Are you being as responsible and diligent in planning your exit as you have been in building your business?  Will there be flourishing and peace for your many stakeholders as you leave?  

All of the tremendous good produced by you and your business are at stake when (and how) you leave your business.  The more time you have or take to plan for this most significant and impactful event, the greater potential for success and attainment of your goals and desires.  

Design and implement a plan to have a great (or greater) impact when you leave as you have in building the business.  

Contact us today for an exploratory conversation about your impact when exiting.

email@ennislp.com | 301-859-0860

You could also get started with our FREE Exit Readiness Assessment.

Business Valuations and Buy-Sell Agreements

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 it is not comprehensive, too simplistic or was poorly implemented can render the buy‐sell agreement ineffective and more problematic than helpful.

One of the most important elements of a relevant Buy-Sell Agreement is the issue of assigning value to the business at a “trigger event” (i.e., death, disability, lifetime transfer, divorce, bankruptcy, etc.). Following are some of the questions pertaining to business valuation that business owners should answer with assistance from their Advisor Team in creating their agreement:

• The type of valuation that will be required — Will you choose book value, fair value, fair market value, investment value, historical value, agreed-upon value?

• The method to be used in calculating value — Will you use a formula-based method, a formal valuation conducted by valuation specialist, or a fixed-price?

• The timing of the valuation — Will you value the business on the date of a trigger event, as of the last valuation, each year with a formal valuation, or at some other point?

• The entire business or partial ownership interest — Should the entire business be valued or a partial ownership interest when there are multiple owners? Should discounts (i.e, minority, lack of control, lack of marketability) be applied?

• Valuation perspective — From what perspective will the business be valued…a hypothetical buyer, the majority owner’s perspective, other perspective?

• The method of funding the Buy-Sell Agreement — Owner buy-outs can be funded in various ways including insurance proceeds, debt proceeds, and cash flow of the business. Should the chosen funding method be considered in the business valuation?

Too often Buy-Sell Agreements are written without these questions and others being adequately addressed with the assistance of experienced advisors (valuation specialist, business attorney, CPA, exit planning advisor) and result in poor execution and relational conflict requiring extensive investments of time and finances.

In addition, your Buy-Sell Agreement should be drafted in light of your financial and estate plans which requires a coordination and collaboration of corporate and personal advisors. For example, your financial planning “number” you need for financial security at a trigger event should be coordinated with possible estate planning goals of tax minimization and transfer of your business interest to family members. NOTE: The role of an Exit Planner could be likened to that of a Project Manager or General Contractor, coordinating the planning efforts of experts in the design and implementation of an owner’s plan. And, this might be a plan for Business Continuity which includes the drafting of a Buy-Sell Agreement and/or a Comprehensive Exit Plan.

Contact us today for a comprehensive review of your Buy-Sell Agreement and a copy of our Business Continuity Instructions.

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.

email@ennislp.com | 301-859-0860

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.

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

Would Your Business Need To Continue Without You?

“It’s time to get the boat in the water!” is what Joyce has heard Jim say around this time for about 30 years now. Jim & Joyce and their five kids have many wonderful memories boating and fishing on the lake through the years. Now that the kids are all older, and there is a growing number of “grand-babies”, Jim and Joyce have been checking out larger homes on the lake with a vision of many more years of even bigger family gatherings.

Jim loves everything about the times at the lake, and is much looking forward to when he will have freedom from the business to “make it up there more often.” He’s says that “my goal is to pull back in five years so that I can spend more time with Joyce and the family” (Note: but he really hasn’t put a plan in place to ensure that happens). During the summer, Joyce is there most of the time, with the kids and their kids coming and going, but Jim is still greatly needed at the business and only makes it up occasionally.

As a successful business owner, Jim has been able to provide numerous lifestyle privileges for his family that they’ve all come to appreciate and expect. His income from the business has grown through the years to become more than enough to accommodate the way of life the family has become accustomed to. If Jim has any regret, it’s that he’s placed “most of his eggs in one basket.” In other words, most of his net worth is tied up in his business. And, more and more, in his solitary moments, he can feel concerned and anxious about what would happen if he could no longer work in the business. It would be unimaginable at this point for Jim and Joyce (and their kids) not to have these long summers at the lake as well as all the other life luxuries they’ve come to know and love.

Jim lacks freedom because his business cannot run without him. Too many customers still want to deal directly with him, he still needs to make too many of the day-to-day decisions, and if Jim’s not there “the place simply doesn’t run well.” Jim has at least two significant strategic planning issues he’s yet to address (he actually does more planning around getting the lake house open and the boat in the water):

1. If he’s going to “pull back in five years”, things need to change starting with his role. He needs to assess his current list of responsibilities and then who to delegate to. He may need to further develop current members of the “management team”, or he may need to get new next level managers on the bus. The goal is that the business becomes less dependent on Jim.

2. And with even more urgency, Jim needs to review his plan for the unexpected…his plan for business continuity…considering questions such as these with the appropriate advisors:

   • How much $$$ would Joyce need to continue our current lifestyle (with kids and grandkids) if I were to die or become incapacitated unexpectedly?

   • Where would these $$$ come from? Would the business be sellable? If so, for how much considering I’m no longer working in it? Would it be enough (net of taxes) to produce our same standard of living for Joyce? If not, how do I fill the gap…insurance?

   • What would Joyce want to do with the business? She doesn’t want to own the business without me, and none of the kids want to work in the business…what would happen and how would it happen?

   • What would keep employees on board if I’m not there? They will need to think of their futures, and if I’m not there will they see any kind of future for my business? Would the business need additional cash to incent them to stay and to operate effectively until a sale can happen?

These are among the many questions Jim needs to be considering in planning for his financial, values-based, and legacy goals as a business owner. After completing the needed analysis, Jim learned that his business “would need to continue without him” in order for Joyce and his family to be provided for in the ways he desired. But now, he’s got a plan in place to work toward the business growing less dependent on him, while at the same time being assured that in the short-term, if the unexpected happens, Joyce would still realize their life and family goals without the business having to continue.

What about you? Have you adequately addressed the all-important question of “Would your business need to continue without you?” To help you get started, please contact us for a FREE copy of our ExitReadiness® Business Continuity Instructions.

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.

Creating Business Value Through Your Key Employees

A key driver of the value of your business will be how much the business does or does not run through you the owner. The more essential you are to the business, the less value you can expect when you leave. It is actually your key employees and their involvement in the business that creates value. It is not an exaggeration to state that the future value of your business, and the level of success you realize when exiting, is largely linked to your key employees.

Let’s define which of your employees would qualify as a “key employee”. Employees that are key to your business success take initiative in their work, they want to see the business grow and prosper, they embrace challenges, are exceptionally skilled and knowledgable, and demonstrate intentionality toward personal and professional growth. Because they are on your team your business is thriving, and if they weren’t “on the bus” your business would suffer significantly. You would realize great pain if they were to leave, and key employees can be easy to identify as they typically act like owners of the business.

When you consider what will be critical for building the value of your business, a key value driver is hiring, motivating and retaining your key employees. Following are common elements of impactful plans for incenting key employees to build and remain with the business:

• Provide financial awards that are meaningful and attractive.

• The plan is specific as to the expected performance of the key employee.

• The plan is structured to build the value of the business and align with the growth and exit goals of the owner.

• Plan rewards are vested-payments tied to the tenure of the employee facilitating retention of the employee. Often referred to as “Golden-Handcuffs”.

• The plan must be in writing and clearly communicated to the employee.

Then, there is the decision as to whether to install a plan that is cash-based or equity-based, or a combination of both. Too often owners, due to their generous nature, offer an equity-based plan without thinking through the potential ramifications. For example:

• Provisions for buying the stock back from the key employee if things don’t work out as expected or hoped for.

• A method for valuing the equity interest/shares in the case of a repurchase.

• Offering stock to an employee when a cash bonus would have been sufficient.

• Not having an understanding of the substantial rights a minority shareholder has in the business.

• Awarding equity to an employee, who at yesterday’s size of the business, was considered key, but now at today’s level (i.e., three times the size) they are more of a detriment to growth than a key employee.

So, there is much to think through when it comes to effectively implementing employee incentive plans. And, you would be wise to get expert advice prior to moving forward as you will want to make well-informed and confident decisions pertaining to timing, structure, tax planning, and the type or types of plans to install. To obtain an initial idea as to whether you should consider a cash or equity-based plan, the professionals at VisionLink have created a decision-tree tool that is quite helpful.

Hiring, motivating and retaining key employees is just one of the many key planning areas for building sellable business value and a successful exit. Contact us today to learn more about how we can help you in designing and implementing your comprehensive exit plan. You can get started today with our FREE Exit Readiness Assessment.

How Long Does It Take to Prepare a Successor?

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.

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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.