What Business Owners Assume About Financial Planning Hurts Them

One of the most important goals of Exit Planning is to position business owners for post-exit financial security. To do that, business owners and their advisors must have several pieces of information: how much the business is currently worth, how much money the owner will need to live the post-exit lifestyle they choose, and which non-business assets the owner has.

In our experience, business owners tend to overestimate how much their businesses are worth, overestimate how much their investment portfolios will grow, and underestimate the amount of money they need after they exit. Unless a financial planning expert tells them otherwise, many business owners often try to exit their businesses using faulty information. Consider the example of Lynn Setum, a business owner who nearly courted disaster by making incorrect assumptions about her financial planning.

Lynn Setum was approaching her 65th birthday, and she wanted to exit her business by the time she was 70. She had spent over 30 years creating comfortable outerwear for people with mobility issues, both a passion and a business, growing the company to a 65-person powerhouse in 7 different locations. She had spoken to two of her business-owning friends who had similarly sized businesses in distribution and manufacturing. They had managed to sell their businesses to outsiders for $8 million and $13 million, respectively.

Lynn figured that because her business was comparable in size and had a distinct competitive advantage, she could probably get about $10 million by selling. She lived a modest life in a state with no income taxes.

Her children were grown and successful. She still had sizable medical bills to pay off for her recently deceased husband’s care. But combined with the $250,000 she had invested in various funds, Lynn thought she was in good shape. But ever the cautious owner, she decided to speak with an Exit Planning Advisor, Taunya.

Taunya came from a financial planning background. She learned that Lynn’s management teams usually only followed Lynn’s orders, and Lynn had the final say in all major decisions. Also, the business consultant that Taunya worked with noted that most of Lynn’s locations were using inefficient systems in both production and accounting. These systems would take at least two years to update.

Based on this information, Taunya’s business valuation colleague did a “back of the napkin” assessment and valued Lynn’s company at $5 million if she left today. Based on Lynn’s own health issues and her husband’s outstanding medical bills, Taunya calculated that Lynn would need about $15 million pre-tax to live comfortably after her exit.

Lynn was initially crushed, but Taunya reassured her. “You’ve given yourself enough time to fix these issues,” Taunya said. “We can start installing appropriate management without firing the managers you have. We can begin updating your production and accounting systems. And I am sure there are buyers who would love to own your business for what it does: We just need to make it less reliant on you.”

Over the next five years, Lynn, Taunya, and her Advisor Team installed strong management teams, updated the company’s systems, and pursued buyers interested in Lynn’s products. She ended up selling the business for $18 million, as more companies vied for space to serve customers with mobility issues.

Whereas Lynn believed she could get $10 million for her business, it turned out she would have only gotten $5 million in the best conditions. She also underestimated what it would take for her to live a comfortable life without the business. But by speaking to a qualified professional in Taunya and working with her Advisor Team, Lynn gave herself a better chance to avoid a potential disaster and improve the business. By confronting her assumptions, Lynn positioned herself to exit the business on her timeline and terms.

If you’d like to discuss how you can bring together financial, operational, strategic, and other business issues to achieve your goals or learn more about how you can minimize the effects of these common assumptions, please contact us today. Don’t let assumptions about financial planning hurt you.

The information contained in this article is general in nature and is not legal, tax or financial advice. For information regarding your particular situation, contact an attorney or a tax or financial professional. The information in this newsletter is provided with the understanding that it does not render legal, accounting, tax or financial advice. In specific cases, clients should consult their legal, accounting, tax or financial professional. This article is not intended to give advice or to represent our firm as being qualified to give advice in all areas of professional services. Exit Planning is a discipline that typically requires the collaboration of multiple professional advisors. To the extent that our firm does not have the expertise required on a particular matter, we will always work closely with you to help you gain access to the resources and professional advice that you need.

This is an opt-in newsletter published by Business Enterprise Institute, Inc., and presented to you by our firm. We appreciate your interest.

Any examples provided are hypothetical and for illustrative purposes only. Examples include fictitious names and do not represent any particular person or entity.

A Surefire Method of Creating Conflict Among Co-Owners

The Importance of Buy-Sell Agreements When Disability or Other Lifetime Ownership Transfer Events Occur

When co-owners are united in striving toward common business goals such as growing revenue, business value and cash flow, the business dynamics can be wonderfully positive and strong. The owners are moving forward together to reach common goals.

Contrast that bright picture with what can happen when, suddenly perhaps, the goals of the owners diverge.

Owner Disability and Other Lifetime Transfer Events

Most closely held business owners are full-time employees (and more) in their businesses. What happens when one of the owners wants or needs to leave the company? The possible reasons for leaving are many, ranging from boredom to more dramatic and unexpected events such as the sudden disability of an owner. Let’s use owner disability to illustrate some of the significant issues raised when ownership goals are no longer aligned. When disability strikes an owner, the company will endure substantial hardships, both economic and operational. More importantly, in the absence of a buy-sell agreement, the disabled owner’s income stream from the company also may evaporate. This problem confronted Steve Hughes, one of three equal shareholders in a growing advertising agency.

At age 38, Steve suddenly had a stroke. As with many stroke victims, his recovery was incomplete. Physically, he was the picture of health (his golf game even improved!); but he totally lost his ability to speak and read. Doctors told him he would never be able to return to work. Steve’s firm had a buy-sell agreement, but it covered only a buyout at death and an option for the company to buy his stock if he were to try to sell it to a third party. Trying to find and sell closely held stock to a third party is a difficult proposition anytime; his disability made it impossible. Even if his fellow shareholders had wanted to continue his salary, they did not have the resources to do so indefinitely.

As a result, the company and Steve were left in a classic dilemma – the company, or rather the remaining shareholders, wanted to purchase Steve’s stock so that its future appreciation in value, due now to their efforts alone, would be fully available to them. Conversely, as Steve’s family soon realized, the owners of closely held stock rarely receive current benefits in the form of dividends. The profits of a closely held

corporation are either accumulated by the company or distributed to the active shareholders in the form of salaries, bonuses and other perks.

In short, Steve’s family would not get what it needed most – cash – to replace the salary Steve was no longer earning, while his partners faced the prospect that their efforts to increase the value of the business would reward Steve as much as themselves. This dilemma could be solved only by a buyout of Steve’s stock. His family then could receive a fair value for his business interest when they otherwise would receive nothing until the company was eventually sold or liquidated. Meanwhile, ownership would be left with those responsible for the company’s success.

As illustrated in the Steve Hughes hypothetical case study above, the Hughes buyout faced several problems. These problems resulted from the now divergent goals of the owners. Prior to the unexpected disability event, joint contributions of time, effort and capital created unanimity among owners. Now, one owner needs cash, while the company and the other owners want to retain earnings for growth – other than

income paid to active owners as salary. Also, when owners were in alignment, there was a common goal to increase business value. Now, the departed owner, Steve in our example, wants and perhaps needs to be paid his full share of that increased value as soon as possible. The remaining owners, because either they or the company will pay for acquiring that value with after-tax dollars (and in any case want to preserve, not spend capital on a non-productive asset such as stock of the company), want to pay as little as possible over as long a time period as possible. Where before the event there was mutual agreement and understanding, now there are radically different owner wants and needs. Discord can easily result in situations such as these and when ownership is in conflict, the business suffers.

Typically, three major issues arise in situations like we illustrated with the Steve Hughes case study:

• Agreement on the business value

• Funding for the buyout

• Agreement on the payment terms of the buyout

Each of these problems should be anticipated and dealt with by drafting and funding (where possible) a buysell agreement before such transfer events occur and when all owners are united by mutual ownership objectives.

The information contained in this article is general in nature and is not legal, tax or financial advice. For information regarding your particular situation, contact an attorney or a tax or financial professional. The information in this newsletter is provided with the understanding that it does not render legal, accounting, tax or financial advice. In specific cases, clients should consult their legal, accounting, tax or financial professional. This article is not intended to give advice or to represent our firm as being qualified to give advice in all areas of professional services. Exit Planning is a discipline that typically requires the collaboration of multiple professional advisors. To the extent that our firm does not have the expertise required on a particular matter, we will always work closely with you to help you gain access to the resources and professional advice that you need.

This is an opt-in newsletter published by Business Enterprise Institute, Inc., and presented to you by our firm. We appreciate your interest.

Any examples provided are hypothetical and for illustrative purposes only. Examples include fictitious names and do not represent any particular person or entity.

3 Things to Remember About Third-Party Sales

As a business owner, you’re likely used to having as much control over how the business functions as possible. You’re the go-to person for big decisions and you own the consequences of those decisions, whether they’re good or bad. This attitude is often good and sometimes necessary for the business’ success. But when you begin to consider how you will plan for your business’ future, you might be positioning your business poorly, especially if you have any intentions to one day sell your business to a third party.

In this article, we’ll outline three facts about third-party sales and present a few consequences you might face if you aren’t aware of these facts.

1. Buyers Want to Buy the Business, Not the Owner

A mistake many owners make as they consider a third-party sale is that they should remain heavily involved in business operations. However, staying too heavily involved in how the business runs is the last thing a buyer wants to see. Buyers prefer businesses that run smoothly without the owner because they usually don’t want to commit the time and capital necessary to replace the owner after the owner sells the business. This is even true of financial buyers and private equity groups: They may be more likely to support continued owner involvement, but too much owner involvement can have a negative impact on the overall value of the business.

When planning for your business’ future, it’s important to position your business to function well whether you are present or not. If the business’ performance relies directly on you, you can negatively affect your business’ transferable value, which is what the business is worth without you. If you ever plan to sell your business to a third party but are also crucial to the business’ success, you will likely need to work for the buyer for a few years until they’ve found or trained people to replace you. If you do some of that work before the sale, it gives you more options and potentially more value.

If the idea of selling your business only to work for the buyer is unpalatable, you aren’t alone. Many owners share this distaste. However, this brings up another consequence of being too consequential to your business. If you put your business on the market, find that buyers require you to stay for a few years because you’re too important to leave, and you then take the business off the market, you can permanently damage your business’ value. In third-party sales, there’s no such thing as “testing the waters.” Buyers want to buy businesses that other buyers want to buy. If a business comes off the market without being bought, it’s called tainting the marketplace, and it can damage your prospects.

2. Buyers Want Your Key Employees

Key employees tangibly contribute to the success of the business in ways that go above and beyond expectations. Given this definition, it’s obvious why buyers want them to stay with the company after you sell it. However, it’s your responsibility to incentivize those employees to stay with the business as and after you leave.

If key employees feel that you haven’t properly recognized their contributions to the business’ success, they can negatively affect your plans for a sale to a third party. In a best-case scenario, they’ll simply leave for greener pastures, which can negatively affect business operations and value. In the worst cases, they’ll work for a competitor, take clients with them, or demand a cut of your final sale price at the 11th hour.

Formal incentive plans can keep key employees tied to your company as you complete the sale process.

However, formal incentive plans must do four things to be effective:

1. Be tied to performance standards.

2. Be clear, consistent, specific, and in writing.

3. Create substantial bonuses (in the eyes of the employee).

4. “Handcuff” the employee to the business.

3. Buyers Want a Documented, Proven Growth Strategy

Providing a documented, proven growth strategy to buyers can make the sale process easier for you in two ways. First, having a documented growth strategy positions you to grow your company more effectively than owners who don’t have documented growth strategies, possibly making your company more valuable.

Second, having a documented growth plan eases the transition between your exit and your next-level management team’s entrance as the decision-making body for the business. Getting them involved in setting business strategy and action plans to implement the strategy brings in new ideas, enthusiasm, and commitment to seeing the processes through to success. This can make the business more valuable to buyers because they will have to put minimal effort into absorbing the new business. It also positions you to move toward only doing things that you want to do within the business, rather than acting as the decision maker for every little issue.

If you’d like to discuss how you can prepare yourself for a third-party sale or do any of the things buyers tend to look for when buying a business, please contact us today.

The information contained in this article is general in nature and is not legal, tax or financial advice. For information regarding your particular situation, contact an attorney or a tax or financial professional. The information in this newsletter is provided with the understanding that it does not render legal, accounting, tax or financial advice. In specific cases, clients should consult their legal, accounting, tax or financial professional. This article is not intended to give advice or to represent our firm as being qualified to give advice in all areas of professional services. Exit Planning is a discipline that typically requires the collaboration of multiple professional advisors. To the extent that our firm does not have the expertise required on a particular matter, we will always work closely with you to help you gain access to the resources and professional advice that you need.

This is an opt-in newsletter published by Business Enterprise Institute, Inc., and presented to you by our firm. We appreciate your interest.

Any examples provided are hypothetical and for illustrative purposes only. Examples include fictitious names and do not represent any particular person or entity.

3 Value Drivers You Can Start Installing Right Now

An important aspect of growing a successful business Is creating transferable value. Transferable value is what your business is worth to someone else without you at the helm. Whether you plan to retire or die at your desk, transferable value is what increases business value. To create transferable value, you’ll need to install several Value Drivers. Here are three important Value Drivers that you can start installing right now.

1. Next-level management: The Mother of All Value Drivers

A next-level management team is the most important Value Driver of all. This is the team that takes the business to new heights and executes on your vision. Without it, it’s extremely difficult to create transferable value.

A common mistake business owners make is assuming that whoever takes over their business when they leave will bring their own management team with them. That’s usually not the case, as potential buyers prefer businesses with strong management teams already in place.

It’s imperative that you begin building a next-level management team regardless of to whom you want to sell it  or when you plan to leave. To do so, you’ll need to take a few steps.

1.     Determine whether your current managers can take the business to the next level.

2.     If they can’t, you may need to look outside the business for these managers.

a.     This doesn’t mean you must fire your current managers.

3.     Once you find next-level managers, create strong incentive plans that encourage them to achieve ambitious goals that contribute to your vision of a successful future.

A next-level management team often determines whether your plans for a successful future become reality or not.

2. Operating systems demonstrated to increase cash flow sustainability

It’s nice when the business operates well while you’re running it. It’s even better when the business operates well regardless of whether you’re in the office or Aruba. A strong way to position your business for success—with or without you—is by creating operating systems that are proven to increase cash flow sustainability.

Operating systems include things like marketing and sales, accounting, production, and CRM systems. As your business grows, you’ll likely have less time to consider how each of these systems functions. Nonetheless, these systems must be able to provide consistent performance and meet or exceed stakeholder expectations.

In short, if operations always run through you, then your business can only grow based on the time and resources you personally have. With operating systems that your next-level managers can successfully choose, use, and control, you have a better chance of growing your business beyond your personal bandwidth.

3. A solid, diversified customer base

As in many aspects of life, diversification is key to risk reduction. A diverse customer base is imperative to growing the value of your business. That’s especially true if a handful of larger customers work with your business because they like you personally.

When businesses rely on just a few large accounts, their transferable value can suffer greatly. One major reason is that a large account may not want to work with anyone but the owner. In cases like these, the owner must always have a presence to keep the account. As we’ve discussed, this can reduce your control over your future.

Creating a solid, diversified customer base typically requires next-level managers with the talent, skill, and foresight to identify and attract new clients. Once those teams have enticed those customers to do business, strong operating systems play a crucial role in retaining those customers.

And in the longer term, a diversified customer base shows insiders and outsiders that the company is strong and isn’t likely to be devastated by normal retention churn. This can further increase business value, as next-level managers and key employees are more likely to stay with companies that consistently exceed customer and employee expectations.

We strive to help business owners identify and prioritize their objectives with respect to their businesses, their employees, and their families. If you are ready to talk about your goals for the future and get insights into how you might achieve those goals, we’d be happy to sit down and talk with you. Please feel free to contact us at your convenience.

The information contained in this article is general in nature and is not legal, tax or financial advice. For information regarding your particular situation, contact an attorney or a tax or financial advisor. The information in this newsletter is provided with the understanding that it does not render legal, accounting, tax or financial advice. In specific cases, clients should consult their legal, accounting, tax or financial advisor. This article is not intended to give advice or to represent our firm as being qualified to give advice in all areas of professional services. Exit Planning is a discipline that typically requires the collaboration of multiple professional advisors. To the extent that our firm does not have the expertise required on a particular matter, we will always work closely with you to help you gain access to the resources and professional advice that you need.

This is an opt-in newsletter published by Business Enterprise Institute, Inc., and presented to you by our firm.  We appreciate your interest.

Any examples provided are hypothetical and for illustrative purposes only. Examples include fictitious names and do not represent any particular person or entity.

The Common Element Among Unique and Successful Businesses

Successful business owners may face a conundrum as they pursue success. “Though my competitors do something similar, they don’t do it the way I do it. So, how do I know the right way to achieve success, especially if I don’t do things their way?”

It’s a bit of a paradox: How can you build and enhance your company’s unique qualities while adhering to commonly followed best practices? The key is having a planning process. Here are some of the things you should consider to position your unique business to achieve generally agreed-upon standards of success.

Your Unique Goals

Though all businesses are unique, one common element that successful businesses have is setting goals. Without goals, businesses are aimless, which makes it practically impossible to determine whether they’re successful.

On the other hand, a common feature of goal-setting is the ability to change them. A goal you have now may change five years later. Successful business owners have the ability to pivot.

While setting goals and changing them when necessary are commonalities among successful businesses and owners, it’s the kinds of goals that speak to each business’ uniqueness. As you build your company’s success story, you’re finding the combination of specific goals that make your company unique.

Leveraging Your Resources

A potentially more obvious example of uniqueness among business owners is the resources they have outside the business. You’ve likely heard the story of the business owner who pours everything they can into their business. And there are business owners who sweep out all of the profits their business creates and use them to build an unrelated enterprise or asset.

Regardless of the outside resources you have, a common element of business success is leveraging what you have to create what you need. 

With proper planning, it’s more likely that you’ll accurately assess what you have. That can allow you to determine the actions to take to leverage those resources into what you need to achieve your goals.

Becoming Inconsequential

If you create a business that provides for your family but that would fold if you are not at the helm, have you created a successful business?

Many business owners define success as the ability to leave the business when I want, to the person or group I want, for the money I need to live a fulfilling life. This necessarily implies that unless the business can run without you, it may not be successful.

This applies whether you intend to leave your business during your lifetime or at death.

If you plan to leave during your lifetime, you may not want to work for whomever you sell to. Creating a business that doesn’t rely on you can position you to avoid this fate. In turn, this can allow you to leave your business on your terms, rather than someone else’s.

If you plan to work until you die, you’ll likely have people who rely on your business, such as family or employees. Having a plan to allow the business to continue running if you were to die or become incapacitated unexpectedly is crucial to supporting them in your absence. 

Although each business has a unique reliance on their owner, one thing is common: Unless the business is ready for a future without you, it can be difficult to achieve your goals, such as financial security, a comfortable financial situation for family, or charitable goals.

Choosing Your Successor

Whether you hope to transition ownership to a third party, an employee, or a family member, one thing applies to all business owners—the time to take the steps to achieve that goal is while you own the business and well before your ideal transition date.

Owners who methodically build their business with an intention to create success for their desired successor owner make decisions today with that future in mind. Developing systems, product lines, customer relationships, and team members that best suit a transfer to the target successor are all deliberate choices you can make. 

In short, having an idea for whom you want to succeed you can give you more control over the company’s future. It helps you plan and execute with your intended successor in mind.

Planning: A Common Bond in Successful Companies

All owners and companies are unique. It's the consistency of a planning process that can address your uniqueness within the general context of success. You may have unique goals to achieve to define your success. But it’s hard to guide your success if you submit your future to fate over planning.

We strive to help business owners identify and prioritize their objectives with respect to their business, their employees, and their family. If you are ready to talk about your goals for the future and get insights into how you might achieve those goals, we’d be happy to sit down and talk with you. Please feel free to contact us at your convenience.
 

The information contained in this article is general in nature and is not legal, tax or financial advice. For information regarding your particular situation, contact an attorney or a tax or financial advisor. The information in this newsletter is provided with the understanding that it does not render legal, accounting, tax or financial advice. In specific cases, clients should consult their legal, accounting, tax or financial advisor. This article is not intended to give advice or to represent our firm as being qualified to give advice in all areas of professional services. Exit Planning is a discipline that typically requires the collaboration of multiple professional advisors. To the extent that our firm does not have the expertise required on a particular matter, we will always work closely with you to help you gain access to the resources and professional advice that you need.

This is an opt-in newsletter published by Business Enterprise Institute, Inc., and presented to you by our firm.  We appreciate your interest.

Any examples provided are hypothetical and for illustrative purposes only. Examples include fictitious names and do not represent any particular person or entity.

How to Plan When You’re Too Busy to Plan

Your daily responsibilities as a successful business owner can make planning for a successful future seem impossible. But with the right process, you may find that this planning is both achievable and a means to give you even more time to do what you want. Consider this three-step process for how to plan when you’re too busy to plan. 

1. Find people to plan for you 

A big misconception is that you must do all of your business planning by yourself. Under this mindset, planning for a successful future is indeed challenging to fit into your daily routine. 

Instead of trying to plan everything by yourself, consider planning for a successful business future by letting other experts do it for you. 

This doesn’t mean that you hand over your vision of success to other people. Instead, find advisors who can help you bring your vision of success to life. And a piece of good news is that you likely have some of these experts on your team already—perhaps in the form of your financial advisor, CPA (or CA), and business attorney. 

The key is to begin creating a longer-term plan that your Advisor Team can execute while you commit to your daily routine. In many cases, this team is led by an Exit Planning Advisor, who has expertise in leading Advisor Teams toward a business owner’s longer-term goals. 

In many cases, working toward your longer-term goals means that your Advisor Team takes steps to make you inconsequential to your business.  

2. Make yourself inconsequential 

Some business owners find it challenging to imagine business success without themselves at the helm. However, one of the most important parts of planning for a successful future is having a business that runs well without you. 

Many business owners want to one day leave their businesses during their lifetime. To do this, it’s critical for them to achieve financial independence upon leaving the business (unless you want to work for someone else . . . which isn’t common among business owners).  

But it’s exceedingly difficult to leave your business with financial independence if the business relies on you for success. Quite simply, buyers are unlikely to give you the money you need if they need you present for the business to continue to succeed, which means you never truly get to leave. 

So, becoming inconsequential is important to planning for a successful future. Fortunately, a dedicated Advisor Team can help you create a process to do exactly that, by using some of the following strategies: 

1.     Finding and implementing a next-level management team. This team takes your business to the next level by optimizing daily routines, giving you more time to focus on your plans for a successful future. 

2.     Helping you determine what you want and need. Business owners tend to underestimate how much they need to live the life they want after the business. An objective Advisor Team can both help you define these things and help you achieve them on your terms.  

3.     Planning for the unexpected. All business owners eventually leave their businesses, whether they expect to or not. An Advisor Team helps create plans to mitigate the likelihood that an unexpected event (e.g., death, incapacitation) will completely derail your life’s work.  

3. Implement your plan to pursue what you want 

Once you’ve outlined your goals, your Advisor Team takes the reins to implement the steps necessary to achieve them. As you and your team implement these steps, it’s likely that you’ll find that you have more time to dedicate to the things you want to do, as opposed to the things you must do to keep the business running. 

And even if you plan to die at your desk, creating and implementing a plan for a future without your business could improve its efficiency and the effectiveness of operations. This can help you strengthen your business to the benefit of the people who will still rely on its success after you die. 

Conclusion 

Creating a plan for a successful future often means delegating at least some of your responsibilities to experts, giving you more time to do the things you want to do. As these experts do what they do best, your business is likely to rely on you less and less, which makes it more valuable to potential buyers. As this is happening, you can still reap the benefits of what you’ve built while reducing the time you must spend to assure the business runs smoothly. 

We strive to help business owners identify and prioritize their objectives with respect to their businesses, their employees, and their families. If you are ready to talk about your goals for the future and get insights into how you might achieve those goals, we’d be happy to sit down and talk with you. Please feel free to contact us at your convenience. 

The information contained in this article is general in nature and is not legal, tax or financial advice. For information regarding your particular situation, contact an attorney or a tax or financial advisor. The information in this newsletter is provided with the understanding that it does not render legal, accounting, tax or financial advice. In specific cases, clients should consult their legal, accounting, tax or financial advisor. This article is not intended to give advice or to represent our firm as being qualified to give advice in all areas of professional services. Exit Planning is a discipline that typically requires the collaboration of multiple professional advisors. To the extent that our firm does not have the expertise required on a particular matter, we will always work closely with you to help you gain access to the resources and professional advice that you need.

This is an opt-in newsletter published by Business Enterprise Institute, Inc., and presented to you by our firm.  We appreciate your interest.

Any examples provided are hypothetical and for illustrative purposes only. Examples include fictitious names and do not represent any particular person or entity.

Ready or Not: Why Planning Now Beats Planning Procrastination

All successful business owners must eventually face a stark reality: One day, they will no longer run their business! If this idea makes you uneasy, you aren’t alone. Today, we’ll show you how preparing for a future you may not be ready for now can benefit you both today and when you are ready.

Overcoming ‘I’m Not Ready’

If you’re like many business owners, your business likely relies heavily on your presence for success. Your business may also support your family and non-business-related goals. This may make the idea of preparing the business for a future without you seem preposterous, especially if you have no plans to leave your business anytime soon.

But consider the other side of the coin: If your business, family, and personal goals rely on your presence as a business owner, what happens if you were unexpectedly forced from the helm—by death, injury, or otherwise?

In other words, if you’re indispensable to your business, it becomes extremely challenging to leave it, even when you are ready.

To reduce the likelihood that you’ll face this fate, consider taking the following actions, which can benefit you and your business now and in the future.

Hire Next-Level Management

It’s hard to overstate the importance of next-level management. Next-level management can provide the expertise that shores up your business’ strengths, improves its weaknesses, and directly contributes to your most important goal: financial independence.

Better still, next-level management teams can help you focus on what you want for yourself, your business, and the things that matter most to you in the future. That’s because next-level managers can take your business’ most pressing issues off your plate.

Finally, next-level management is crucial to growing the value of your business. Next-level managers have track records of growing businesses to achieve ambitious goals. This growth can have a cascading effect, giving you more freedom to determine what a successful future looks like.

In short, next-level management can give you more control over your goals, both now and in the future.

Create Business Continuity Instructions

Business Continuity Instructions are another crucial aspect of planning for a successful future. These instructions can provide guidance to co-owners, managers, family members, and advisors in case you are no longer able to run the business (e.g., unexpected death or incapacity). This can help mitigate risks and offer solutions for the people who rely on you and your business to maintain their lifestyles.

Additionally, Business Continuity Instructions can help you uncover weaknesses in your business and improve upon them. For instance, a key aspect of Business Continuity Instructions is determining how to handle future contracts with important clients. In the process of creating these instructions, you may find that your company relies heavily on just a few large clients. This, in turn, can help you determine how to diversify your clientele, which can strengthen your business in the short and long term.

Looking to the Future Can Benefit You Now

Even if you aren’t ready for a future outside your business just yet (and even if you plan to die at your desk), taking steps toward planning for that inevitability can provide important benefits for you right now. By confronting the reality that no business owner owns their business forever, you can create plans to maximize your success while you are at the helm, while simultaneously giving yourself more freedom to pursue your goals inside and outside the business.

We strive to help business owners identify and prioritize their objectives with respect to their business, their employees, and their families. If you are ready to talk about your goals for the future and get insights into how you might achieve those goals, we’d be happy to sit down and talk with you. Please feel free to contact us at your convenience.

The information contained in this article is general in nature and is not legal, tax or financial advice. For information regarding your particular situation, contact an attorney or a tax or financial professional. The information in this newsletter is provided with the understanding that it does not render legal, accounting, tax or financial advice. In specific cases, clients should consult their legal, accounting, tax or financial professional. This article is not intended to give advice or to represent our firm as being qualified to give advice in all areas of professional services. Exit Planning is a discipline that typically requires the collaboration of multiple professional advisors. To the extent that our firm does not have the expertise required on a particular matter, we will always work closely with you to help you gain access to the resources and professional advice that you need.

This is an opt-in newsletter published by Business Enterprise Institute, Inc., and presented to you by our firm. We appreciate your interest.

Any examples provided are hypothetical and for illustrative purposes only. Examples include fictitious names and do not represent any particular person or entity.

©2022 Business Enterprise Institute, Inc. All rights reserved

Building an Advisor Team That Works for You (Not Against Each Other)

Building a business is challenging enough as it is. With the right Advisor Team, you can focus on business challenges while your advisors create strategies that help you compound your success in the future. But how do you build an Advisor Team that works for you instead of against each other?

Consider the story of a fictional but representative owner who learned how important it is to have an advisor who can lead the charge.

Animus at AniMals

Annie Mahl was in a bind. Her company, AniMals, which produced specialty dog toys under the tagline “Tough Chew Toys for Rough-Chewing Boys,” had grown into a pet-care powerhouse over the last 20 years. Her financial advisor Grover and business-growth consultant Oscar had served her for most of the company’s history.

When Annie told each advisor that she wanted to sell her business in the near future, they had vastly different reactions.

Grover began researching what Annie would need to sell her business within three years and gain financial independence. He presented Annie with spreadsheets of information about the best strategies to pursue, many of which Annie found overwhelming.

Oscar tried instead to convince Annie to stay at the business longer. “You’d be leaving right before the biggest boom. Let me show you how much more you could make if you stay longer.”

The deeper Annie got into planning with each advisor, the less comfortable she became about their strategies. She loved her business and wanted to find a buyer who loved its mission just as much as she did, but she also wanted to sell for enough money to retire comfortably.

Grover and Oscar began openly butting heads, with Grover trying to help Annie sell as soon as possible and Oscar trying to help Annie make as much money as possible.

Though she initially felt a little guilty (Grover and Oscar were always her go-to guys), she decided to seek the advice of a professional business-and-exit planning advisor, Burt.

Follow the Leader

Annie shared her goals with Burt. She wanted to sell within six years, but she wasn’t sure what her business was worth. She told Burt that it was hard to plan with her trusted advisors disagreeing about strategies so vehemently.

“I trust them and could never let them go. I want them to be a part of this planning. I think they have good intentions, but I’m not sure which strategy is the right one,” she said.

“The right strategy is the one that helps you achieve your goals, not what they assume is best for you,” Burt said.

Annie let out an exasperated laugh.

“Try telling them that,” she responded sarcastically.

“I’d love to,” Burt said. “Can I show you what I have in mind?”

Pulling the Advisor Team Together

Over the next month, Burt met with Annie, Grover, and Oscar. With Annie’s input, Burt laid out Annie’s goals and what it would take to help her pursue them.

“She wants to sell her business within six years. We need to figure out how to make that happen so she can achieve all of her goals.”

“We can do it in three if she would just . . .” Grover began.

“Three years? There’s so much more money to make!” Oscar interjected.

Before they began fighting again, Burt stepped in.

“Our job is to help Annie achieve her goals. And neither of you can help her do that if you think you know what she wants better than her.”

Grover and Oscar sat in silence before Burt continued.

“The first thing we need to do is figure out what this business is really worth. Then we can talk about timelines and payouts.”

Burt presented each step of his planning process, showing Grover and Oscar how they fit into it, and what they’d need to do to fulfill their obligations.

With Burt leading the charge and finding all of the appropriate advisors for Annie’s team, Annie felt more confident in her direction. She hired a business valuator, a tax professional, and an attorney based on Burt’s recommendations.

While she continued to run the business, Burt and the Advisor Team worked together toward Annie’s goals. Grover and Oscar focused on what they needed to do instead of trying to control the process themselves.

The result was a successful sale on Annie’s timeline to a buyer Annie trusted for the amount of money she needed and wanted.

You Aren’t Alone in This

Your advisors must work toward your goals to help you achieve your vision of success. One of the best ways to position your Advisor Team to do so is to work with a dedicated business-and-exit planning advisor. These advisors can guide the process based on what you want and need, and assure that your team works for you, not against each other.

We strive to help business owners identify and prioritize their objectives with respect to their businesses, their employees, and their families. If you are ready to talk about your goals for the future and get insights into how you might achieve those goals, we’d be happy to sit down and talk with you. Please feel free to contact us at your convenience.

The information contained in this article is general in nature and is not legal, tax or financial advice. For information regarding your particular situation, contact an attorney or a tax or financial professional. The information in this newsletter is provided with the understanding that it does not render legal, accounting, tax or financial advice. In specific cases, clients should consult their legal, accounting, tax or financial professional. This article is not intended to give advice or to represent our firm as being qualified to give advice in all areas of professional services. Exit Planning is a discipline that typically requires the collaboration of multiple professional advisors. To the extent that our firm does not have the expertise required on a particular matter, we will always work closely with you to help you gain access to the resources and professional advice that you need.

This is an opt-in newsletter published by Business Enterprise Institute, Inc., and presented to you by our firm. We appreciate your interest.

Any examples provided are hypothetical and for illustrative purposes only. Examples include fictitious names and do not represent any particular person or entity.

©2022 Business Enterprise Institute, Inc. All rights reserved

Becoming More Recession Resistant Through Planning

The last two-and-a-half years have been tumultuous, and owners of small to mid-sized businesses have borne the brunt of the pain. Though few people could have predicted the effects of the pandemic, business owners with plans for a successful future tended to feel more comfortable confronting the challenges they faced.

Now, as whispers about a recession grow louder, business owners are taking stock of what to do next. Let’s look at how planning for a successful future can make you more recession-resistant.

Handcuffing the Great Resignation

One of the most intriguing narratives surrounding the current market is the Great Resignation. More employees have resigned their positions for greener pastures, putting the onus on employers to more readily meet their demands. This is a challenge under normal circumstances. But finding and retaining talent is even more challenging in the midst of a potential recession.

However, business owners who have begun planning for a successful future typically have a built-in solution to issues like this. The solution is golden handcuffs.

The golden handcuff is a concept in which business owners incentivize next-level managers and key employees to stay with a company long term. These managers and employees have tangible effects on business performance, and their absence would have a noticeable negative effect.

Including golden handcuffs—in the forms of exceptional pay and benefits, opportunities for ownership, and other perks—is crucial to having a plan for a successful future. After all, these are the managers and employees who will take your business to the next level, allowing you to one day leave it on your terms (or die at your desk on your terms).

It can also help you weather the storm of recession-based resignations. Your most important employees are more unlikely to leave for greener pastures if your pasture is indeed the greenest.

Diversifying Your (Client) Portfolio

When recessions hit, they tend to affect most, if not all, of your clients. This can lead to lower demand and smaller margins. However, as is the case in so many other areas of business, diversification is key to long-term success.

In fact, having a diverse customer base is one of the most important drivers of your company’s value. It’s also a key element of planning for a successful future, both inside and outside of your business.

If you rely on a handful of clients to guide your success, you may be boxing yourself in. Ask yourself: What would happen if I lost just one or two of my biggest clients?

If the answer to that question makes you anxious or nervous, you aren’t alone. However, you may need to begin taking steps to widen your range in terms of clientele. There are a couple of ways to begin doing so.

• Create a competitive advantage within your products and services

• Find and hire next-level management to break through to new prospects

Defending What’s Yours

As interest rates begin to rise, so do the costs of business. This means that protecting what’s yours—especially against the drain of taxes—takes on even more importance.

Nearly all business owners love the idea of paying as little in taxes as legally possible. But fewer owners actively take steps to minimize their tax obligations. While there may not be as many tangible effects to forgoing tax minimization when times are good, during a recession, it can have different effects.

Business owners who can minimize their tax obligations could free up more money for business operations, investment, and even next-level management. Though many tax-minimization strategies can take years to implement, savvy business owners start as soon as they can.

Conclusion

Planning for a successful future and preparing for a potential recession have a lot of overlap for business owners. Taking steps toward planning for a successful business future can also have tangible effects on how your business weathers the storm of a possible recession.

We strive to help business owners identify and prioritize their objectives with respect to their businesses, their employees, and their families. If you are ready to talk about your goals for the future and get insights into how you might achieve those goals, we’d be happy to sit down and talk with you. Please feel free to contact us at your convenience.

The information contained in this article is general in nature and is not legal, tax or financial advice. For information regarding your particular situation, contact an attorney or a tax or financial professional. The information in this newsletter is provided with the understanding that it does not render legal, accounting, tax or financial advice. In specific cases, clients should consult their legal, accounting, tax or financial professional. This article is not intended to give advice or to represent our firm as being qualified to give advice in all areas of professional services. Exit Planning is a discipline that typically requires the collaboration of multiple professional advisors. To the extent that our firm does not have the expertise required on a particular matter, we will always work closely with you to help you gain access to the resources and professional advice that you need.

This is an opt-in newsletter published by Business Enterprise Institute, Inc., and presented to you by our firm. We appreciate your interest.

Any examples provided are hypothetical and for illustrative purposes only. Examples include fictitious names and do not represent any particular person or entity.

©2022 Business Enterprise Institute, Inc. All rights reserved

Why You'll Need an Advisor Team

Exit Planning can be complex. Between setting your exit goals and transferring your business, you’ll attempt to build business value, find an appropriate successor or buyer, navigate perplexing tax implications, and keep your key employees onboard. And that’s just a few of the things you’ll do! With so many considerations surrounding your business exit, you may want to consider creating an Advisor Team.

Simply put, no single advisor has sufficient expertise to create and implement all of the activities required in a typical Exit Plan. To give yourself the best chance to exit your business on your terms, you’ll likely require the services of several advisors from different fields. These may include a CPA, a financial advisor, a business lawyer, an estate planning lawyer, an insurance professional, a business valuation specialist, an Exit Planning Advisor, and others. Depending on the size and complexity of your business, and the requirements you set to consider your exit successful, you may need anywhere from two to seven different advisors on your Advisor Team. That’s perfectly normal. The diversity of expertise will work to your benefit.

What If You Have Advisors Already?

As a successful business owner, you likely have advisors you work with and trust. Creating an Exit Planning Advisor Team does not mean you must get rid of those advisors. In fact, if your current advisors have the skill and expertise to address issues about your business exit, it’s usually a good idea to make them a part of your Advisor Team. After all, they presumptively know your business better than a new advisor would.

What Makes a Good Advisor Team Member?

Although the advisors on your team will have different responsibilities—and thus different ways to judge whether they’re “good” team members—there are five general qualities to look for in any Advisor Team member.

1. Best of the Best: Best-of-the-best advisors focus on addressing specific planning or transactional issues related to their well-defined expertise. They are the known experts in their fields.

2. Collaborative: Advisor Team candidates should work well with other advisors. They should be able to contribute to the group discussion and give constructive feedback to other advisors.

3. Timely: Exit Planning relies heavily on meeting established deadlines. Only the timeliest advisors should be considered, because whether your Exit Plan is implemented correctly may depend on it.

4. Willing to Learn: There’s little room for stubbornness on an Exit Planning Advisor Team. Prospective advisors should be willing to learn about the Exit Planning Process, both in general and their roles in it. At the end of the day, they will represent your interests, no one else’s.

5. Willing to Spend Time: Before and after they join the Advisor Team, advisors should understand that brainstorming with you and other advisors is a necessity to best represent you. Spending time with you and other team members gives them the nuance, priorities, and sense of balance that you’re looking for in your planning solutions.

How Can You Find the Right Advisors?

There are several ways to construct an Advisor Team. You can seek each out individually, holding interviews with each over weeks or months. You can ask advisors you work with for referrals to other advisors, but there may be no guarantee that they’ll know any. You can ask your friends or friendly competitors, but there’s no way to judge the quality of the advisors they recommend.

As a firm specializing in Exit Planning, we adhere to the philosophy that business owners have the best chances of exiting their businesses when they consult multiple advisors with proven track records of success. If you’d like to discuss how you can build an Exit Planning Advisor Team without dedicating all of your time and efforts to Exit Planning, contact us today.

The information contained in this article is general in nature and is not legal, tax or financial advice. For information regarding your particular situation, contact an attorney or a tax or financial advisor. The information in this newsletter is provided with the understanding that it does not render legal, accounting, tax or financial advice. In specific cases, clients should consult their legal, accounting, tax or financial advisor. This article is not intended to give advice or to represent our firm as being qualified to give advice in all areas of professional services. Exit Planning is a discipline that typically requires the collaboration of multiple professional advisors. To the extent that our firm does not have the expertise required on a particular matter, we will always work closely with you to help you gain access to the resources and professional advice that you need.

This is an opt-in newsletter published by Business Enterprise Institute, Inc., and presented to you by our firm.  We appreciate your interest.

Any examples provided are hypothetical and for illustrative purposes only. Examples include fictitious names and do not represent any particular person or entity.

Creating Value in Your Business to Get Top Dollar When You Leave It

Did you ever wonder why one business has buyers lined up willing to pay top dollar while another sits on the market for months, or even years? What do buyers look for in a prospective business acquisition?

There are many opinions about what attributes or characteristics buyers seek, but here’s what we know: the characteristics buyers seek must exist before the sale process even begins and it is your job as the owner to create value within your business prior to the sale. We call characteristics that impact value “Value Drivers.”

Walk A Mile In A Buyer’s Shoes

To get an idea of the importance of Value Drivers when preparing to sell your business, it is important to put on the buyer’s shoes for a minute. Let’s look at a hypothetical case study that illustrates how a buyer might compare two similar companies with a different emphasis on Value Drivers.

The A Factor Company has EBITDA (Earnings Before Interest, Taxes, Depreciation and Amortization) of $2 million, an owner who runs the business and the systems and processes that create growth. The A Factor Company doesn’t have a real management team in place and the owner generates a majority of its sales. The owner is the center point of the company, holding both the CEO and CFO positions. With this level of responsibility, the owner is burning out quickly.

In comparison, The B Factor Company also has EBITDA of $2 million and a solid management team that runs the business, systems and processes. The management team creates efficiencies within the business and the owner vacations for six weeks a year.

If you were a buyer comparing these two companies, which would provide a more attractive business opportunity? How much more would you pay for a business with a strong management team (one of the most important Value Drivers)? Would you even be interested in buying a business whose management team (the owner) walks out when you walk in?

Investment bankers understand that companies that lack strong Value Drivers also lack a bevy of buyers. Those buyers that do come to the table do not arrive with pockets full of cash.

Let’s look at several of the more important Value Drivers common to all industries:

• A stable and motivated management team. If you can wait a year to sell your business, we suggest that you consider an incentive compensation system, cash or stock-based, that rewards key employees as the company performs (usually measured by increases in pre-tax income). Sophisticated buyers know that with a solid management team in place, prospects are good for continued business success. Without a strong management team, it may be very difficult to sell your business to a third party or transfer it to an insider.

• Operating systems that improve sustainability of cash flows. Operating systems include the computerized and manual procedures used in the business to generate its revenue and control expenses, (i.e. create cash flow), as well as the methods used to track how customers are identified and how products or services are delivered. The establishment and documentation of standard business procedures and systems demonstrate to a buyer that the business can be maintained profitably after the sale.

• A solid, diversified customer base. Buyers typically look for a customer base in which no single client accounts for more than 10 percent of total sales. A diversified customer base helps insulate a company from the loss of any single customer. If the majority of your customer base is made up of only one or two good customers, consider reinvesting your profits into additional capacity that will make developing a broader customer base possible.

• A realistic growth strategy. Buyers tend to pay premium prices for companies with realistic strategies for growth. Even if you expect to retire tomorrow, it makes sense to have a written plan describing future growth and how that growth will be achieved based on industry dynamics, increased demand for the company’s products, new product lines, market plans, growth through acquisition, and expansion through augmenting territory, product lines, manufacturing capacity, etc. It is this detailed growth plan, properly communicated, that helps to attract buyers.

• Effective financial controls. Financial controls are not only a critical element of business management, but they also safeguard a company’s assets. Effective financial controls support the claim that a company is consistently profitable. The best way to document that your company has effective financial controls and that its historical financial statements are correct is through a certified audit or perhaps a verified financial statement by an established CPA firm.

• Stable and improving cash flow. Ultimately, all Value Drivers contribute to stable and predictable cash flow. It is important, especially in the year or so preceding the sale of the business, that cash flow be substantial and on an upswing. You can begin increasing cash flow today by simply focusing on ways to operate your business more efficiently by increasing productivity and decreasing costs.

You can install these Value Drivers and better position your company to secure a premium price upon your exit with the help of a trained Exit Planning Advisor.

If you have any questions about increasing the value of your business prior to your exit, please contact us to discuss your particular situation. We can help you identify and strengthen the current Value Drivers in your business, install additional Value Drivers, and create a road map to meet your overall exit objectives. We also have additional resources that explain Value Drivers in more detail and help you apply these concepts to your business.

The information contained in this article is general in nature and is not legal, tax or financial advice. For information regarding your particular situation, contact an attorney or a tax or financial advisor. The information in this newsletter is provided with the understanding that it does not render legal, accounting, tax or financial advice. In specific cases, clients should consult their legal, accounting, tax or financial advisor. This article is not intended to give advice or to represent our firm as being qualified to give advice in all areas of professional services. Exit Planning is a discipline that typically requires the collaboration of multiple professional advisors. To the extent that our firm does not have the expertise required on a particular matter, we will always work closely with you to help you gain access to the resources and professional advice that you need.

This is an opt-in newsletter published by Business Enterprise Institute, Inc., and presented to you by our firm.  We appreciate your interest.

Any examples provided are hypothetical and for illustrative purposes only. Examples include fictitious names and do not represent any particular person or entity.

Eight Ways to Exit Your Company

According to Paul Simon, there are 50 ways to leave a lover. Not being as creative as Mr. Simon, we’ve only come up with eight ways for owners to leave their companies:

• Transfer the company to a family member

• Sell the business to one or more key employees

• Sell to key employees using an Employee Stock Ownership Plan (ESOP)

• Sell the business to one or more co-owners

• Sell to an outside third party

• Engage in an Initial Public Offering

• Retain ownership but become a passive owner

• Liquidate

Given the right circumstances, one of these paths may be appropriate for you. The process of determining exactly which path is best presents an obstacle to many owners. If, however, you wish to "leave your business in style," we suggest that you work through this three-step path selection process.

Establishing thoughtful objectives lays the foundation for an Exit Plan. Doing so well in advance of your departure gives you and your advisors the time necessary to make your goals a reality. As you work through this path selection process, you will synthesize or harmonize your exit objectives with the characteristics and capabilities of your company as well as with the external realities of the marketplace.

Choosing a Path

Step One

First, you, as an owner and with the help of your advisors, identify your most important objectives. These objectives are both financial ("How much money will I need from the transfer of the business to assure my, and my family’s, financial security?") and non-financial ("I want the company to stay in the family," or "I want to remain involved").

Internal and external considerations also impact an owner’s choice of exit path. For example, the owner who wishes to transfer the business for cash, but is unwilling to trust his company's and his employees' fate to an unknown third party, may decide that an ESOP or carefully-designed sale to a key employee group is the best exit route.

Exterior considerations that may impact the choice of exit path include business, market or financial conditions. For example, the option of selling your business for cash to an outside buyer may be eliminated because of the anemic state of the M&A market.

Step Two

As you develop consistent objectives and motives, you then must value your company and determine its marketability. This analysis usually provides direction and can eliminate potential exit paths.

For example, if the value of a company is high and its marketability is low (perhaps because of weak conditions in the M&A market), an owner may decide that a sale of the business to an outside party is impractical. Instead, selling to an "insider" (co-owner, family member or employee) may be a better option.

Step Three

The final step in choosing a path is to evaluate the tax consequences and strategies of various exit paths. Many tax-minimizing techniques require, literally, years to fully implement. Remember too, that appropriate tax-saving strategies are often linked to the person or entity you wish to transfer the business to.

Using these three criteria (objectives, value and tax consequences), owners can begin to narrow the list of exit routes. It is far better for you to choose the appropriate exit path than to delay and allow circumstances to force you onto a particular path.

If you have already decided on a path, perhaps to transfer your company to your children, but have failed to implement the appropriate transfer and tax decisions, you have delayed your departure. Likewise, if you have decided to sell to a third party, but haven’t prepared your company to go to market when the time is right, you have not taken advantage of the tools that can make your company valuable in the eyes of a third party buyer. And as the economy has clearly demonstrated through its swings and cycles, postponing decisions can increase business risk.

If you have not yet chosen a specific exit path, we encourage you to conduct open and frank discussions with your advisors about which path to take and when. Feel free to contact us for further suggestions on the pros and cons of each exit path. You can also request a copy of our Exit Routes White Paper, which discusses these issues in more detail.

The information contained in this article is general in nature and is not legal, tax or financial advice. For information regarding your particular situation, contact an attorney or a tax or financial advisor. The information in this newsletter is provided with the understanding that it does not render legal, accounting, tax or financial advice. In specific cases, clients should consult their legal, accounting, tax or financial advisor. This article is not intended to give advice or to represent our firm as being qualified to give advice in all areas of professional services. Exit Planning is a discipline that typically requires the collaboration of multiple professional advisors. To the extent that our firm does not have the expertise required on a particular matter, we will always work closely with you to help you gain access to the resources and professional advice that you need.

This is an opt-in newsletter published by Business Enterprise Institute, Inc., and presented to you by our firm.  We appreciate your interest.

Any examples provided are hypothetical and for illustrative purposes only. Examples include fictitious names and do not represent any particular person or entity.