Do You Suffer From Decision Addiction?

The typical business owner lives on dopamine.  According to WebMD:

Dopamine is a type of neurotransmitter. Your body makes it, and your nervous system uses it to send messages between nerve cells. That's why it's sometimes called a chemical messenger. Dopamine plays a role in how we feel pleasure. It's a big part of our uniquely human ability to think and plan.

Feeling the Rush

That’s what business owners do; think and plan. Their lives are a chain of thought processes that go “What if I do this? How will it affect the business? Then what would I do next? What would be the effect of that?”

An owner’s brain is trained to generate dopamine. That “What if? What if? What if?” chain is actually pleasurable. It’s the same neurotransmitter that is triggered by nicotine and alcohol, and the craving for that dopamine rush is the driving force of addiction.

That is why so many owners complain that their employees can’t make decisions and can’t think critically. They understand consciously that their businesses would run better if they groomed decision-makers, but unconsciously they are addicted to making decisions.

Every time an employee asks, “What should I do about this, boss?” there is a little rush. It’s like an old cartoon. The good angel is sitting on one shoulder saying “Make them go through the thought process themselves.” The little horned devil is on the other shoulder saying “Go ahead. Tell him just this once. It’s faster, and it feels good.”

Answer given. Another challenge surmounted. Pop! The little rush.

When the Rush Gets in the Way

Advisors are frequently frustrated by a client’s reluctance to implement their advice. They spend time and effort developing a course of action, and more time and effort explaining it to the client. The business owner client listens, agrees, and then does…nothing.

“I’m too busy running the business,” is a frequent excuse. What is really happening is that the owner is too busy feeding his or her dopamine rush. Owners are more likely to take action on their own decisions. Implementing someone else’s idea is antithetical to why they became entrepreneurs in the first place.

It feels good to be needed; to be the one who knows. Unfortunately, the more you run your business based on owner centricity™ the harder it is to sell, and the less it is worth. Like any addiction, it's a tough habit to break

Breaking Decision Addiction

This is where I should offer a twelve-step program for breaking yourself of decision addiction. That's pushing the analogy just a bit too far. I can. however, offer one tip that can get you started on the road to a more valuable company and more peace of mind for you.

Offer an enticing incentive for anyone making a decision for you. It should be instant, and worth a little effort. One possibility is to keep a stock of ten or twenty dollar bills in your desk. Anyone who comes to you with an issue and a proposed answer gets a bill.

The answer had to be sensible and practical. You could require it to be SMART (Specific, Measurable, Attainable, Resourced and Timely,) or you could set your own standards. You will, of course, have to retain the final say over what qualifies. No one should earn a ten spot for deciding whether to make the background on a flyer blue or yellow.

An answer doesn't have to be the answer, but if it is unworkable, at least you have the opportunity to communicate your thought process, and at least the employee tried. He or she should still get the incentive for an honest effort.

Try it. You may be surprised at how much better it feels than that little bit of decision addiction.

This is an excerpt from John Dini’s upcoming book The Exit Planning Coach's Handbook, coming this fall.

Negotiating an Exit Strategy with Business Partners

Sarah and Jane founded their business 15 years ago, when Sarah was age 45 and Jane was 30. Now, at age 60, Sarah is beginning to think about “what’s next” and how much longer she wants to remain in the business. She very much wants more time to spend with her new grandchildren, and her husband Jack, age 65, who recently retired from the government would like for them to travel more and spend more time at their beach house.

Meanwhile, Jane at age 45, has a vision for massive growth over the next 10 years and is fully engaged in making that happen. She has no plans to leave anytime soon, and actually now has her son Sam working in the business who has expressed interest in one day owning the business.

Fifteen years ago, Sarah and Jane shared a common vision for the business as their personal goals were much more in alignment. Things have now changed as their personal goals and dreams have shifted. And, at times these differences result in tension and relational conflict. What is good and promising is that they both realize their situation has indeed changed, and agree that they will need outside help in planning a way forward that considers their respective interests and goals.

Too often owners, in a situation like the one here with Sarah and Jane, quickly move to the tactical or practical before first doing the difficult but critical work of clarifying interests and goals while considering all possible solutions thoroughly and objectively. Emotions can begin to drive actions and reactions motivated by a sense of urgency to “just finalize something and be done with it.” Whereas, if adequate time was invested, with skilled help facilitating a thorough process of negotiation, both Sarah and Jane’s interests would be clarified and addressed in a mutually satisfactory manner, while the process would also be much more productive and less antagonistic.

Following are key steps, often neglected, that Sarah and Jane would be well advised to take in deciding on the strategy they could both be excited about:

• Clarify their own interests and goals: personal, financial, values-based, legacy.

• Seek to understand the interests and goals of one another.

• Identify and clarify alignment and misalignment of interests and goals.

We have found that most business partners will require, and desire, professional assistance to ensure a thorough, peaceful, and effective process. And, in that there is typically not be one perfect strategy that will meet all interests and goals of each partner, there will probably be a need for negotiation.

In their book, GETTING TO YES: NEGOTIATING AGREEMENT WITHOUT GIVING IN, Roger Fisher and William Ury propose an effective method of principled negotiation developed at the Harvard Negotiation Project. Fisher and Ury describe the following as basic principles of this method:

1. People: Separate the people from the problem.

2. Interests: Focus on interests, not positions.

3. Options: Invent multiple options looking for mutual gains before deciding what to do.

4. Criteria: Insist that the result be based on some objective standard.

Because Sarah and Jane cared much about each other and preserving their much-valued relationship, as well as doing what was absolutely best for the business they had both worked so hard to build, they readily agreed to commit both time and finances to ensure a mutually beneficial and effective process.

There is much at stake on both sides of the table, as well as with the business itself, when negotiating strategies and solutions for partner exits. Make sure you invest adequate time and resources in getting it right. GETTING TO YES is a highly recommended resource, and engage the professional assistance you know you need. You can reach 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.

Expensive Sentences When Planning Your Business Exit

Following is a post that we’ve published in the past that we believe is good to be reminded of annually.

Following are just a few examples of “Expensive Sentences” mentioned by my friend Jack Quarles in his book, Expensive Sentences, Debunking the Common Myths that Derail Decisions and Sabotage Success.

“It’s too late to turn back now.” 

“We’re too swamped for that now.” 

“We can probably do that ourselves.” 

“It’s too crazy busy around here to make changes.” 

Jack explains how conversations and discussions containing expensive sentences most often lead to decisions that negatively impact the future of businesses, families, individuals, and nations.  And, how the faulty logic and false constraints of expensive sentences can lead to derailed and expensive decisions.  He describes how conventional wisdom such as “You get what you pay for” or “We can’t change horses in mid-stream” can be a costly and destructive trap.  Jack paints a picture as to how we can over time drift away from a disciplined analysis of a decision, and instead be drawn by a “particular idea as if pulled by gravity.” 

When it comes to Exit Planning, or designing and implementing a plan to successfully and responsibly exit from a business, there is a seemingly endless list of expensive sentences….

“I’m not ready to exit yet…I will begin planning when I’m ready “ 

“I have a pretty good idea of how much I’d pay in taxes”

“I am confident my key employee would be a good owner”

“I am confident I can sell my business for enough to live on for the rest of my life” 

“Yeah…I think we arranged it so that my spouse will get the business if I die” 

“I’m not worried about my employees leaving if I die or sell the business…I have been good to them and they’re very loyal”

“One of my friends, who is in the same business, sold for $$$$...I’m sure I will be able to sell mine for at least that much…I don’t need an outside valuation”

“I don’t need a personal financial needs analysis.  I have a good idea of how much $$$$ we would need”

“I am confident I can sell my business when I want or need to”

It’s expensive sentences like these that result from common owner misperceptions and can result in bad and expensive exits.  The author of EXIT PLANNING; THE DEFINITIVE GUIDE, and Founder of the Business Enterprise Institute, John Brown, says the following: “…your misperceptions create complacency and inaction when you should be pedaling as fast as you can.” We would agree with John Brown and would add that complacency and inaction are always expensive and at times destructive when it comes to a business exit.

Business Owner Exit Planning employs a process of assessment and analysis that will reveal expensive sentences and owner assumptions (that are then tested) helping you to instead leave on your own terms and conditions and realize a successful exit. Start planning today.

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.

Do I Really Need a Transaction Intermediary???

Should I engage a business broker or M&A professional to sell my business, or should I go at it alone?

Our firm is agnostic as to how a business owner exits their business.  The mission is designing and implementing a plan for the exit route (sale to a third party, sale to insiders, transfer to children, ESOP, absentee owner) that will give the owner the best opportunity to attain all their goals (financial, values-based, legacy).  That’s a key value-add when engaging our firm.

Often the best exit strategy is a sale to a third-party buyer.  That’s when we suggest to our client engaging a transaction intermediary (Business Broker, M&A Professional, Investment Banker), and that’s when they ask the obvious question, “OK, why do I need a transaction intermediary?

In his book, “The Art of Selling Your Business”, John Warrillow provides helpful advice to a business owner who is pondering the question“Should I just go at it alone?”.  In Chapter 13, Bidding War, Warrillow shares the following reasons for engaging a transaction intermediary to market and sell your business:

·      Create competition:  A good intermediary will create competition for your business and ensure that you’re getting a fair price and terms.

·      Keep acquirers interested:  Typically, it is a challenge to keep potential acquirers interested during a broad auction. 

·      Provide a buffer:  A skilled intermediary will act as a buffer between you and the buyer(s) as the deal progresses and your business is scrutinized by the buyer.

·      Be the bad cop:  They can be your “bad cop” pushing back on deal points, allowing you to maintain a positive relationship with the buyer.

·      Time the reveal:  A skilled and experienced intermediary will know how to package and reveal information to keep the maximum number of buyers interested.

·      Receive services (mostly) for free:  Even though they are expensive, you’re probably better off financially (on a net basis) using a good intermediary.

We highly recommend Warrillow’s book to any owner thinking that a third-party sale is their best route for exit. Our experience has proved his propositions above to be accurate.  This is yet another key area in exit planning where a business owner will greatly benefit if conscious of the oft-quoted phrase “I don’t know what I don’t know” and proceed to wisely engage an expert.  That owner will significantly increase their chances of avoiding a bad exit and having no regrets.

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.

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.

Build To Keep As An Exit Route

Helping business owners clarify and establish their post-exit bucket list, financial, values-based and legacy goals, and choosing an exit route that provides them with the greatest opportunity to realize their goals, is what we most enjoy about the work we do. 

Establishing clear goals is essential and foundational for a successful exit plan.  For example, if an owner's passions now fall mostly outside of the business, selling to a third-party or an ESOP might afford them the most time and money, sooner rather than later, to pursue those non-business related interests.  Or, perhaps a sale-to-insiders or children could make the most sense if an owner has strong desires to transfer the business to those who helped build it, or to keep the business in the family. 

But what about "keeping the business"?  Is keeping the business a legit exit strategy?  And, could keeping the business best help me realize all my goals and objectives? 

First, keeping the business is indeed an exit strategy in that you would simply own the business until it was transferred, or shut down, upon your exit at death.  Too often this an exit route by default, due to a lack of strategic planning, not resulting in the true desires of the business owner being fulfilled.  However, with the right planning, keeping the business and transferring it at death, may certainly be the strategy that will prove most impactful in goal attainment. 

We have found that an owner who builds their business to keep it with the flexibility to accomplish all of their non-business goals and objectives, can end up having the greatest number of options for their eventual exit.  Let me explain.  If an owner builds in a way that allows them to realize their goal of traveling the world most of the year, and the business continues to prosper and grow while they're away, they have built a business others will want to own.  This owner would have the ability to attract third-party buyers and possibly have them bid for their business in a controlled-auction (depending on the size of the business).  However, this same owner may have an exit goal of transfer to key employees who have been instrumental in its growth.  Because the key employees currently run the business and it's very profitable, the owner is able to seriously consider the sale-to-insiders option, or perhaps an ESOP.  Or...now that this owner much enjoys owning their business (that has been "built to keep") and all of their goals are best attained by keeping it, their exit strategy might become keeping the business and transferring it at death.  This owner has more options because they have built a business that others want to own, but that they don't have to sell in order to accomplish their personal and financial goals.  They built it so they could keep it (if desired) and still pursue all of their non-business goals and dreams.

If you "build to keep" in a way that affords you the time and money to accomplish your non-business goals and objectives, you can increase your options for a successful exit.

Contact us through ennislp.com if you need help in clarifying your goals and objectives or building to keep.

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.

2022 Exit Planning Checklist

Like any strategic plan, it can be difficult to know how and where to begin strategically planning for your exit.  To help you along, the following is a baseline "2022 Exit Action List" meant to serve you in planning for that most significant event as a business owner...your future exit. 

DECIDE WHERE YOU WANT TO GO.  Establish Clear Goals and Objectives for Exit and Your Life After Exit.

• When do you want to leave the business? Whom do you wish to transfer/sell the business to?

• What are your values-based and legacy exit goals?

• What is your post-exit "life-plan"? Business owners can often regret leaving when lacking a plan for life that replaces the sense of purpose and meaning they experienced in building their business.

• Update your Personal Financial Plan. Find out how much $$$$ you will need post-exit to do all you want to do. Is there a gap?

ASSESS WHERE YOU ARE.  Without Accurate Data All Planning Becomes Meaningless.

• Get an accurate Estimate of Business Value. If the business is your largest asset, shouldn't you know what it really is worth to potential buyers?

• Assess your business Value-Drivers and areas of Risk.

• Review your Business Continuity Plan for life transitions and unexpected death or disability to include written instructions. Co-Owners should include a review of their Buy-Sell Agreement to ensure alignment with the current goals of all owners.

• Review your Estate Plan to ensure alignment with exit goals.

DESIGN AND IMPLEMENT A PLAN.  Build Transferable Value and Enjoy a Future Exit on Your Own Terms and Conditions.

• Which Exit Route will best accomplish your goals? Sale to Third-Party | Sale to Insiders | Transfer to Family Members | Sale to ESOP | Absentee Owner.

• Focus on growth and profitability today. At the core of tomorrow's successful exit plan is today's profitability and plan for growth.

• Strengthen business value drivers. An owner with a sellable business will have more freedom in life and options for exit.

• Update a strategic financial plan for business growth.

• Do you have the right Team of Experienced Advisors in place for your plan design and implementation?

• Who will Manage the Exit Planning Project? You, a current Advisor, or an experienced Exit Planner?

The most important thing you could do in 2022 would be to GET STARTED AND GET HELP if you have yet to do so.  If you wait until “you're ready to exit” to begin planning, you won't be ready, and neither will your business.  Keep in mind, that "You don't know what you don't know" and like in all other areas of life, that could end up being disastrous. 

There is much at stake during this most significant event in your life as a business owner.  Take steps in 2022 to be as successful in planning your eventual exit as you have been in running your business. 

Following are some easy Next Steps:

Contact Us Today for a No-Obligation Exit Planning Exploratory Meeting. 

Take the Free ExitMap Readiness Assessment and get Online Learning and Resources at exitreadiness.com.

“Thanksgiving” and A Successful Exit

“I’m grateful that we’re finishing the year strong!”

“I’m thankful we’re going to make it through another year”

“I’m grateful for our team!”

One of the key reasons we enjoy working with business owners is that we generally find them to be charitable, others focused, and grateful.  Sure, like the rest of us, they certainly have their days of complaining about things like lack of sales or “people problems”, but overall, our experience has been a mindfulness of all they’ve been “blessed with” and can be grateful for.

We regularly hear expressions of gratitude for…

·      “Our customers”

·      “Our sales”

·      “We made it through the crisis!”

·      “Our employees – the people who have helped me build this business”

·      “We’ve seen tremendous growth!”

·      “Success beyond my expectations and what it means for my family”

·      “We are still in business after all these years!”

·      “For our reputation and role in the community”

 As Exit Planners, it’s important to listen to what Owners are thankful for, because at the same time we learn what they most value and care about.  Understanding an Owner’s “personal core values” is key to effective planning for their eventual (and inevitable) business exit.  For example, if care for employees and their future is a PRIMARY goal in an Owner’s exit, a sale to a third party may not be the best route for their exit.  The owner-based goals, values-based (what they are most grateful for and care about) and financial, should have impact on what exit route they choose.

You can make much progress in deciding how and when to exit when you gain clarity in what you most value.  And there is no better time than the week of “Thanksgiving” to consider what you are most grateful for pertaining to your business. 

A suggested exercise is to ask yourself (and your spouse if applicable) the following simple question during this week of thanksgiving: “As a business owner, who, and what, am I most grateful for?”  And record your thoughts and responses. Then when your Exit Planner presents questions pertaining to your core values and values-based goals, with a goal of helping you decide on the best exit route to accomplish your goals, you will have clear answers with conviction.

 Happy Thanksgiving!

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 Common Cold That's Double-Pneumonia

In a conversation with a friend who was asking about our business, I shared with him that business owners "don't know what they don't know" when it comes to planning a successful exit and how ignorance can result in either procrastination or no action at all until it's too late.  I went on to describe some of the severe financial and relational consequences due to inaction.

My friend's response was "That sounds like my brother who thought he had a cold but was diagnosed with double-pneumonia."  He went on to explain how family and friends were encouraging his brother to get to the doctor for a diagnosis but his brother "knew better" and continued to resist their strong exhortations.  He resisted until a few men that he worked with eventually took him to the hospital where he learned that he had double-pneumonia...which could have killed him.  He was in a coma for a month and ended up having to be in the hospital for almost two months.  Due to his lengthy stay in a hospital bed, he needed physical therapy to learn how to walk again. 

This gentleman was confident in his own diagnosis while what he did not know, that he had double-pneumonia, could have killed him.  With an early diagnosis, he could have avoided a near-death experience, a lengthy stay in the hospital, and weeks of physical therapy learning to walk again.

Business owners often "don't know what they don't know" as it pertains to planning their inevitable and eventual exit.  Professional Advisors often hear from owners, "I'm not ready to begin planning because I'm not ready to exit yet."  The owner may be aware of a "common cold" so to say, and not realize they're walking around with double pneumonia that could be disastrous for themselves, their family, their co-owners, and their employees. 

Don't be that business owner who isn't listening to Professional Advisors who are strongly encouraging you to get "diagnosed" NOW.  Listen to your advisors and act now to get an "exit readiness check-up" and create a plan before it's too late.  You may have double-pneumonia and don't know it. 

Get started today with this Free Exit Readiness Assessment.

Key Employees and Building and Protecting Business Value

You may have people working in key roles who are instrumental in growing and building the value of your business. These key people can be identified as having the following characteristics:

• makes a substantial business contribution

• possesses critical information or knowledge or

• maintains and nourishes key contacts and relationships

In helping clients plan to build a business that’s sellable, and then eventually exit on their own terms and conditions, we emphasize that “key people are a key value driver “ in realizing success in both of those strategic goals. And, we find it helpful for owners to have two categories in mind when considering key employees:

1. Building business value

2. Protecting business value

Key people help owners build value and exit successfully as their roles serve in removing the owner(s) from the day-to-day management of the business, and by accomplishing objectives and key results for growing the business, that are aligned with the exit goals of the owner(s). An important planning focus for the owner(s) in building value, as it pertains to key employees, would include alignment of the employee’s performance goals with the exit goals of the owner(s), and a well-defined key employee incentive plan that provides impactful awards for goal attainment and retention.

Owners need to be aware, that there is also inherent risk related to key employees. Risks involving departure and competition, solicitation of customers and/or employees, and disclosure of confidential information. There is also the risk of losing a key employee due to unexpected death or disability. It can be costly to recruit, train, and compensate for a replacement in such a situation, as well as makeup for any loss in corporate earnings. Important planning areas in protecting business value, as it pertains to key employees, would include: Well-written and regularly reviewed employee documents (i.e., Employment Agreement; (listen to ExitReadiness® PODCAST Episode 43 w/attorney Marc Engel) and adequate life insurance coverage on the key employee (listen to ExitReadiness® PODCAST 54 w/Bill Betz of Betz Financial Advisory).

Check out our virtual exit planning resources and solutions at exitreadiness.com

Customers Want to Be Treated as Individuals

I recently participated in an ExitReadiness® Podcast episode hosted by Pat Ennis and Walter Deyhle and our topic was “When You Start Making a Big Decision, First Talk with The People Involved.”  The high-level summary of the conversation is when you must make a major decision regarding your products and services, talk first with the people who will be impacted by your decision.  Otherwise, if the decision goes against what the stakeholders consider to be in their best interest, the outcome will fail to achieve your objective.

 Climate Control

Consider this example.  If I have power over climate control, you can count on the thermostat set at 70 or 71 degrees.  In our home, this results in many discussions, as my wife prefers the temperature at 73 degrees and my daughter at 68 degrees year-round.  Fortunately, we’re able to move ahead with a shared willingness to communicate and make appropriate compromises. 

But what if this were my office environment? If I’m the one person permitted to adjust room temperature, I may lose some key or important employees if they don’t feel their needs are being seriously considered and accommodated as room temperatures are consistently not to their liking.  The same could happen if my business depends on customers entering my place of business and spending a fair amount of time inside, they might just give up on visiting the store. 

In that there is much competition in attracting both key employees and customers, both may end up leaving my business for greener pastures without even sharing with you the reason why. 

Proactive Problem Prevention

Be proactive in preventing this problem with “The Platinum Rule” investing the time to find out how your customers, employees, and all stakeholders want to be treated.  And then create a plan and execute it.  Being considerate about how you treat customers and employees will go a long way in making your business more valuable.

About Sam Klaidman

Sam has consulted with Fortune 500 companies like GE, Pfizer, Corning, and Honeywell as well as many small and midsize businesses in a broad range of industries. Many of his SMB clients are privately held and still controlled by members of the founding family.  Sam and his firm Middlesex Consulting specialize in helping service businesses grow.

Adopt A Scientific Approach To Planning Your Business Exit

In his book, “Think Again, The Power of Knowing What You Don’t Know,” New York Times bestselling author Adam Grant makes a compelling case for “the critical art of rethinking: learning to question your opinions and open other people’s minds, which can position you for excellence at work and wisdom in life.”

In Part One: Individual Rethinking, Grant explains how we often assume the roles of Preacher, Prosecutor, or Politician rather than Scientist in a key decision-making process and how that is often detrimental. Grant describes the following cycles while recommending the RETHINKING CYCLE as a scientific approach:

THE OVERCONFIDENCE CYCLE: Pride > Conviction > Confirmation & Desirability Biases > Validation

THE RETHINKING CYCLE: Humility > Doubt > Curiosity > Discovery

We have found that owners planning for exit who adopt a scientific or “rethinking cycle” approach are much more likely to experience a successful transition out of their business. They indeed humbly realize and proclaim that “they don’t know what they don’t know” and engage help in discovering what they should do and how they should do it. They understand what’s at stake and have intentionally questioned or doubted their convictions and biases, and, with humility and curiosity, they seek knowledge and wisdom from others who can challenge their current thinking. As a result, the chances for a successful exit and the owner’s peace of mind are greatly increased. The opposite almost always proves true on some level for an owner who moves forward adopting “the overconfidence cycle”.

One of Grant’s recommended “Actions for Impact” is to “Build a challenge network, not just a support network.” For an owner planning their exit, this could include business owner peers who have already walked the exit walk, as well as an expert advisor team (those who know that the owner doesn’t) who could serve in challenging the owner’s assumptions, convictions, biases, while providing needed knowledge and insight.

In planning for the most significant event as a business owner, your inevitable exit from the business, you would be well-served in reading Mr. Grant’s book and adopting his proposed RETHINKING CYCLE. Please consider contacting us about playing a role on your “Challenge Network.”

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.

Exit Plan Critical Element: An Accurate Financial Gap Analysis

A critical and foundational element of your successful exit plan will be the calculation of any gap you might have in the value of your current assets (business and personal) and how much money you will need when you leave the business. This is your financial gap analysis.

The reasons for ensuring an accurate Financial Gap Analysis include:  

• Provides you with a starting point and an endpoint needed for achieving your goals.

• Serves as motivation for you to design and implement a plan to "close the gap" and increase the value of the business.

• Where there is not an asset gap, you're afforded opportunities to increase goals, or possibly leave sooner than you were originally planning to.

• An accurate Financial Gap Analysis provides a more realistic view of your situation and how much still needs to happen, or doesn't need to happen, for you to accomplish your goals.

Take these steps to make it happen:

• Clarify your owner-based post-exit goals and objectives.

• Arrange for an accurate and objective Estimate of Business Value.

• Arrange for Financial Needs Analysis, based on your goals and objectives and using current and accurate quantitative data (business and personal resources).

• If there is an asset gap, conduct a thorough assessment of your business value drivers, and create a plan to close the gap.

For example, let's say that your current personal financial plan, which includes all of your future goals, indicates you will need $5,000,000 to do all you want to do after you leave the business.  If the current accurate value of your business is $2,500,000 and the value of all other assets is $1,000,000, then you have an "asset gap" of $1,500,000 ($5 mill - $3.5 mill = $1.5 mill).  

You may be surprised to hear that typically the most challenging, time-consuming, yet rewarding aspect of performing a Financial GAP Analysis is establishing your post-exit goals and objectives. Contact us today for assistance with establishing your goals and performing a financial gap analysis.

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 Successors Be Good Partners?

Deciding on an exit route of a sale to insiders or children can be more complicated and less expedient than a sale to a third party. There are not a few key planning issues when considering this exit option SUCH AS:

• Will the owner’s financial goals be achieved?

• Is the business cash flow strong enough to support a transaction?

• How can the transaction be structured to minimize taxes?

Along with questions like these, that can be more directly related to the owner, there are issues pertaining to the successor or successors that can at times be somewhat taken for granted, or assumed, by the current owner:

• The willingness of the successor(s) to be an owner

• The readiness of the successor(s) to be an owner

It is not uncommon for an owner, who has assumed both the willingness and readiness of a successor(s), when eventually proposing a potential ownership transition, to learn those successor candidates either don’t want to own the business, or they’re far from ready to be owners. This of course can completely derail the hoped-for exit timing and plans of the current owner. And, it can result in the owner being required to come back into the business if indeed the transaction moved ahead without these issues being thoroughly addressed prior.

The successor(s) willingness and readiness questions are often neglected, but not always. There is another successor issue however that is almost always overlooked, and it is fundamental for the future success of the business and ownership transition: Can the successors (if there is more than one) be successful as partners in the business?

If an ownership transfer involves more than one insider (key employees and/or children), the fact that they’ve worked well as co-employees does not ensure they will be as cohesive and collegial as co-owners. When we raise this issue with owners, they immediately “get it” as they often have had their own experiences with partners or they’ve heard stories. This is important because in most insider sale transactions the selling owner needs the business to continue to do well, as part of the sale price is almost certain to be self-financed. And, if the business falters or fails the selling owner may not get paid. So, it is essential that the new owners function well as partners.

Following are a few key areas for potential successor partners to consider prior to moving ahead in purchasing the business:

• Alignment of vision and direction for the business

• Personal core values

• Roles, authority, accountability, and expectations

• Contributions and rewards

• Governance

• Personal styles, strengths, and weaknesses

• Managing conflict

• Money

A process to discuss these issues, which are central to any partnership, would benefit the successor partners but also the selling owner who has a vested interest in seeing the new owners and the business continue to prosper. The Partnership Charter provides such a framework for discussions, negotiations, and agreements. Please do not hesitate to contact us for further information.

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

Living Trusts and Avoiding Probate in Estate Transfer of Your Business

Probate

Probate is the legal process through which property is transferred after a property owner’s death. Generally, the probate process requires the gathering of all assets, paying off debts, and distributing the remaining assets in accordance with the deceased person’s estate plan and the law. The probate process is facilitated by a court-approved, or appointed, a person known as the administrator, executor, or personal representative of the estate.

If a person passes away with a will with assets held in his or her sole name, the estate must go through probate. The court will oversee the distribution of assets according to the terms of the will. As you might imagine and may know from experience, probate can be a tremendous burden and very expensive as the personal representative of the estate deals with the technicalities of the court system. 

Following are some key disadvantages of having an estate go through probate:

·       The time required for probate and administration of the estate

·       The cost of estate administration is significantly increased with an additional cost of probate

·       Court involvement is time-consuming and expensive

·       The probate process is public

Living Trusts and Avoiding Probate

If a business owner’s goals include the stable and uneventful continuance of the business and a peaceful and expedient transfer of ownership in the event of their premature death or permanent incapacity, the owner should, with legal counsel, consider a Living or Revocable Trust as a planning tool in their overall estate plan.  Living Trusts can help in minimizing taxes and legal fees, affording privacy and flexibility, avoiding probate, and making the entire process of business transfer and continuance much easier.  If a business owner passes away with their business titled in the name of the Living Trust, the distribution of assets will go much more smoothly.

With all the positives, there are reasons that a Living Trust may not be the best solution for avoiding probate in the estate distribution of your business.  They include the following:

·      Transferring S-Corporation business interests to certain types of trusts could result in negative tax consequences.

·      Once your business passes to your heir(s), planning steps must be taken to prevent the S-Corporation from reverting to a C-Corporation.

·      Some business interests may lose marketability when transferred to a trust.

·      It could become more challenging to secure bank debt.

·      Depending on the type of trust selected, your interest in the business might be diluted.

·      Transferring interests to a trust could possibly trigger provisions in your buy-sell agreement (if applicable).

In summary, if a smooth and expedient transfer of your business at death or your permanent incapacity is a goal, a Living Trust may be the solution. As with all legal matters, we advise that you seek legal counsel as to the pros and cons and whether it would be a wise strategy for your plans for business continuity and estate distribution.

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

Characteristics of an ESOP for an Owner's Exit Route

As an entrepreneur who has spent years working to grow a privately held business, you are left with many questions about transitioning to the next stage of your life.  The biggest question usually is, "what is the most efficient way for me to sell my business?"  Since the increase in capital gains taxes and surge of baby boomers retiring, the use of Employee Stock Ownership Plans as a monetization strategy has been a growing trend.

An Employee Stock Ownership Plan (ESOP) is a flexible, tax efficient exit strategy that offers a variety of advantages to successful business owners.  ESOPs provide a unique way for business owners to sell a portion or all of their stock on a tax-advantaged basis, while simultaneously rewarding loyal employees.   In certain cases, with the right structure, the sellers can avoid the capital gains taxes from the sale.  After a transaction, if so desired, the selling owner has the ability to retain control of the company.  The company can also operate on a tax-advantaged basis with the right structure.

When considering an ESOP, it is important to understand what features make up a good candidate.  When having this conversation with clients and prospects, we like to break this down into quantitative and qualitative characteristics. 

What makes a good ESOP candidate?     

Quantitative characteristics:

·       The company must have positive cash flow and the ability to take on additional debt.  An ESOP is a leveraged buy-out and you need cash to repay the debt associated with the transaction.

·       The company should have at least 20 employees

·       The enterprise value of the business should be greater than $5 million

Qualitative characteristics:

·       The selling shareholder(s) should be prepared to stay on with the business for some amount of time to help with the overall transition

·       There should be a strong management team in place to help take over and run the business after the selling shareholder(s) leave

In conclusion, when used effectively, an ESOP is a powerful, flexible, tax and business succession tool for privately held companies.  We would welcome the opportunity to discuss ESOPs and the pros and cons with you or your clients.  Please call us at 202-585-5358.  Sincerely - Keith Apton, Managing Director-Wealth Management, UBS Financial Services.   

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.

Five Warning Signs Your Business Is Too Dependent On You

If you were to draw a picture that visually represents your role in your business, what would it look like? Are you at the top of an organizational chart, or stuck in the middle of your business like a hub in a bicycle wheel? 

The Hub & Spoke model is a drive that shows how dependent your business is on you for survival. The Hub & Spoke model can only as strong as the hub. The moment the hub is overwhelmed, the entire system fails. Acquirers generally avoid these types of managed businesses because they understand the dangers of buying a company too dependent on the owner.

Here’s a list of the 5 top warning signs that show your business could be too dependent on you.

1. You are the only signing authority

Most business owners give themselves final authority… all the time. But what happens if you’re away for a couple of days and an important supplier needs to be paid? Consider giving an employee signing authority for an amount you’re comfortable with, and then change the mailing address on your bank statements so they are mailed to your home (not the office). That way, you can review everything coming out of your account and make sure the privilege isn’t being abused. 

2. Your revenue is flat when compared to last year’s 

Flat revenue from one year to the next can be a sign you are a hub in a hub-and-spoke model. Like forcing water through a hose, you have only so much capacity. No matter how efficient you are, every business dependent on its owner reaches capacity at some point. Consider narrowing your product and service line by eliminating technically complex offers that require your personal involvement, and instead focus on selling fewer things to more people. 

3. Your vacations… don’t feel like vacations

If you spend your vacations dispatching orders from your mobile, it’s time to cut the tether. Start by taking one day off and seeing how your company does without you. Build systems for failure points. Work up to a point where you can take a few weeks off without affecting your business. 

4. You know all of your customers by first name 

It’s good to have the pulse of your market, but knowing every single customer by first name can be a sign that you’re relying too heavily on your personal relationships being the glue that holds your business together. Consider replacing yourself as a rain maker by hiring a sales team, and as inefficient as it seems, have a trusted employee shadow you when you meet customers so over time your customers get used to dealing with someone else. 

5. You get cc’d on more than five e-mails a day 

Employees, customers and suppliers constantly cc’ing you on e-mails can be a sign that they are looking for your tacit approval or that you have not made clear when you want to be involved in their work. Start by asking your employees to stop using the cc line in an e-mail; ask them to add you to the “to” line if you really must be made aware of something – and only if they need a specific action from 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.

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