Reducing Taxes Via Exit Planning

Yeah, Iʼm the taxman. And youʼre working for no one but me. -George Harrison

Selling your business comes with major tax implications. You likely donʼt want to pay any more than the minimum in taxes when you sell. With planning, itʼs possible to reduce your tax burden and reap the most out of a business sale. It can also help you reduce the likelihood of a larger-than-expected tax bill negatively affecting your post-ownership plans. But what kind of planning might it take to do so?

Know the Value of Your Business

Knowing the value of your business will play an important role in determining the sale price of your business. In turn, the sale price of your business will likely play a role in how much (or little) you pay in taxes.

So, an important first step in reducing your tax burden is to acquire a professional business valuation. It may be tempting to take a best guess at what your business is worth, based on what other, similar businesses may have sold for. Itʼs prudent to avoid this temptation so that you can use the most accurate measures of your companyʼs value to then potentially reduce your tax burden.

Knowing your companyʼs value may allow your negotiation team to create more leverage to sell your business at the price you want while your Advisor Team proactively addresses the tax consequences that the sale price creates.

Consider Whom Youʼre Selling To

The entity that buys your business may also play a role in your tax responsibility.

For example, if you choose to sell to a third party, that third party will likely work to reduce their tax burden for purchasing the business. They may do so by hiring a high-quality negotiation team to reduce the sale price, which may affect your financial security.

This may mean that to lower your tax responsibility, you also need a strong negotiation team to find ways to reduce your tax burden and still complete a sale that allows you to sell your business and achieve financial security, along with your other goals.

As another example, if you choose to sell your business to insiders, you may want to consider strategies such as an employee stock ownership plan (ESOP) to potentially reduce capital-gains taxes. Such plans may require you to potentially change how your business is set up in advance (e.g., “S” corporation vs. “C” corporation).

Take Advantage of Tax Codes

You may be able to take advantage of current tax codes to reduce your tax liabilities as well. For example, investing in a Qualified Opportunity Zone may allow you to defer capital-gains proceeds from a business sale for a set amount of time.

Hire a Professional to Help

The US Tax Code can be complex. A tax professional can play a crucial role in helping you find ways to minimize your tax liabilities in the context of selling your business and achieving your goals after you leave your business.

Building your business to the point where you can sell it and achieve financial security is a huge accomplishment. Many business owners want to keep as much of the value they built as possible, rather than having to pay a sizable sum in taxes. Installing a strong tax-minimization strategy could help you do exactly that.

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.

Taking Care of Your Business Family

Many business owners eventually reach a crossroads where their families want them to slow down and take it easy, even if they arenʼt ready to. This can be even more challenging if, as one business owner put it, you “feel more appreciated at the office than at the dinner table.”

In these situations, committing to planning for a successful future could help keep you stay active in running your business, take care of your business family, and address family desires for you to begin thinking about a future outside the business (whether by choice, death, or otherwise).

How Planning Can Keep You Active

If youʼre still at the helm of your business, you might think, “Iʼm already busy enough. Why would I want another activity?”

A key benefit of strong planning is that it could help you reduce your activity in parts of the business you may not enjoy and increase the parts youʼre most passionate about.

For example, if youʼre a sales rainmaker at heart and are less interested in internal operations, part of your planning could be to find a next-level management team to run operations while you dedicate more time to what you love in the business.

On the other hand, if youʼve already begun reducing your responsibilities in your business, planning for a successful future could be a way for you to reengage in an aspect of building the business. In many cases, planning for a successful future involves taking steps to strengthen the business for your eventual exit. In addition to installing next-level management, this could also involve creating written, scalable processes; diversifying your customer base; and increasing business value.

The strategies required to achieve these goals could present new, invigorating challenges for you, along with new ways of defining business success.

Taking Care of the Business Family

For some business owners, the business is actually like a family—full of people they want to care for, help succeed, and protect. In these cases, it can be tempting to think, “I need to be here for them always.”

But as is the case with many families, constantly solving everyoneʼs problems can stunt development. It could be the case that for the family to truly thrive, others in the family may need to learn to begin to do things themselves.

If you feel more appreciated at the office than at the dinner table, planning could help you develop those in the office to keep your business successful and perhaps even take it to new heights.

A fairly common example of this is when business owners sell the business to insiders. In many cases, the sale happens over the course of years and allows the owner and insiders to take on new responsibilities at an appropriate pace. The owner is still ready and willing to guide the insiders when necessary while the insiders learn the ropes, develop their skills, and eventually run the business successfully (and allow the business owner to achieve financial security in the process).

This planning scenario could let business owners continue to feel the appreciation of their employees while also helping them develop into successes in their own right. Many business owners find that planning helps set expectations and ground rules for success without forcing them to give up everything theyʼve built.

Addressing Family Desires

When family desires for your career donʼt align precisely with yours, planning can help you find a happy medium.

For many business owners, planning for a successful future involves setting their families up for success after they leave the business, by choice, death, or otherwise. It also may require the business ownerʼs involvement over a certain period of time to achieve the planʼs goals for the family (e.g., making the business valuable enough for a sale to allow the family to experience financial independence).

In this way, planning could show your family that you are actively working to address their desires for the future while still fulfilling your personal and business goals.

For example, your family may want you to retire within two years, but your planning may show that it takes five years to allow you to achieve financial independence. In this situation, you can actively do whatʼs necessary to remain active in your business (executing on the plan) while also working toward your familyʼs desires and expectations (retiring, albeit on a longer timeline).

We strive to help business owners identify and prioritize their objectives with respect to their businesses, their employees, and their families. If you have questions on this topic, we can help with more information or a referral to another experienced professional.

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.

3 Things That Can Build Future Business Value

To build business value, many owners start by installing three important Value Drivers.

Building business value is a core reason you wake up and run your business every day. As your business grows in value, it can position you to find new clients; keep current clients happy; support your employees financially and intellectually; and provide a nest egg for yourself, your family, and any charitable organizations you work with.

Many business owners find that thereʼs a certain point at which they donʼt know how to grow the business any larger. Theyʼve done everything they can think of, but the business plateaus. These plateaus can create big challenges for owners who will one day rely on selling or transferring their ownership to fund their post-exit lives. What can you do to help yourself overcome these plateaus?

Hire or Train Next-Level Management

Perhaps the most important driver of business value is the presence of a next-level management team. Next-level managers are managers who know how to grow companies beyond their current levels. Oftentimes, next-level managers come from companies that are larger than yours. Working in those larger environments usually gives those managers the experience necessary to build your companyʼs value. They can also be a catalyst for rapid growth in your company.

Alternatively, you can train your current managers to begin taking more responsibility for some of the important tasks that you do. For example, if your current management team has been growing the company at or beyond the goals youʼve set, you might consider giving that team more responsibilities.

Regardless of which path is right for you, you should seriously consider installing a next-level management team if your goal is to build future business value. With greater value, youʼll have more options available and subsequent goals can be easier to achieve.

Establish and Document Operating Procedures and Systems

Both external and internal buyers benefit from turnkey operations compared to rebuilds. Establishing and documenting your companyʼs procedures and systems that contribute to profitability and cash flow can strengthen performance and highlight areas for potential growth, which can increase your businessʼ overall value.

For example, if your company can install ISO 9001: 2015 standards, you can more adequately demonstrate your companyʼs ability to consistently provide goods and services that meet or exceed the requirements set forth by customers and regulatory bodies.

Likewise, if your company has a unique value proposition, new owners will likely want to sustain it efficiently so that they can continue the growth trend. Muscle and brain memory are less valuable than written and standardized procedures when it comes to building future business value.

Diversify Your Customer Base

Much like next-level management, a diverse customer base provides strength in numbers. If your companyʼs profitability and cash flow are reliant on just a handful of customers, your business is likely at risk. If one or two of those customers were to leave, it would hurt profitability.

Diversifying your customer base is much easier when you have both next-level management and documented processes.

However, finding new markets to which you can introduce your companyʼs value proposition is a key aspect of building business value, and itʼs something to consider right now. Ask the next-level managers you recruit or develop to identify creative and competitive strategies to expand into desirable markets, then document the processes used to achieve those goals. This is how we leverage one value-building technique with another, making the end results greater than what you might achieve if you only focus on one area.

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.

November 2023 Conference Call with Economist Marci Rossell, Ph.D.

Once again, Marci engaged our clients with a lively discussion of the economy. If you were unable to join us, here are a few highlights.

At the beginning of this year, the big question was, “Is there going to be a recession? If so, how bad will it be?” 

What actually happened this year exceeded expectations. GDP grew almost 5% in the third quarter and the elusive soft landing now seems to be the consensus. Year-over-year inflation was almost 9% at its peak. The most recent reading in August was about 3.5%. Marci views the U.S. economy’s fundamentals as incredibly strong, especially in the light of how well it has adjusted to rising interest rates.   

So how did this positive result come about? As Marci pointed out on our previous call, our economy is very different today compared to the 1980s, which was the last time we experienced rapidly rising interest rates.   

There are three key factors at work today: 

•  Energy independence: In the past, rising prices meant a recession for the US economy since we were a net importer of oil at that time. The US is now a net exporter of oil, so rising oil prices are a net benefit to our economy. 

•   Managing expectations: If consumers expect inflation to continue, they will purchase things today in anticipation of higher prices tomorrow. That will cause prices to rise further and become a big problem. The Federal Reserve has been very intentional in its messaging to prevent this upward spiral. 

•  Demographics: Rising interest rates have not hurt the labor market because labor is so scarce. The current generation of young workers is much, much smaller today than it was in the 1980s.  

 Despite the positive economic picture, people still feel mired in an “emotional recession”. Higher prices are still taking a bigger chunk of their paychecks. Consumers are also very sensitive to rising gas prices. Even if they drive an electric car, oil prices still reflect how consumers feel about the economy.  

There are also challenges in the housing market which is “essentially frozen”. Consumers who hold low-interest loans are not selling, so inventory for new buyers remains scarce.  

Marci expects interest rates will come down in the second half of next year. She expects inflation to settle in close to the Federal Reserve target of 2% and mortgage rates will settle in around 5%. She feels that the housing market has borne the brunt of the damage in the current economy.  

 The other big issue discussed was the cost of servicing US government debt. Now that interest rates are no longer “effectively zero” we can’t run deficits like we used to. The political realities will be difficult, but Marci believes “the wealthiest nation in the world with the most innovative economy in the world” can balance their budget. The market pressure to balance the budget will become incredibly strong. She expects to see across the board cuts in discretionary spending and changes “around the edges” of Social Security for future generations. People lack confidence that our current government can compromise, but she remains optimistic that the task is doable because U.S economic fundamentals are strong. 

FOR MARCI’S FULL COMMENTARY AND ANSWERS TO PARTICIPANT QUESTIONS, THE AUDIO RECORDING IS AVAILABLE BELOW:

This event was presented on 4/18/2023. It is for informational purposes only and should not be considered investment advice. Opinions expressed are as of the date of recording. Such opinions are subject to change. The views and opinions of Marci Rossell are not necessarily those of Prosperity Planning. Prosperity Planning is not affiliated with Marci Rossell. All investments are subject to investment risk, including possible loss of principal. Individuals should seriously consider if an investment is suitable for them by referencing their own financial position, investment objectives and risk profile before making any investment decision.  Please consult your advisor for investment advice as it pertains to your specific needs.

Economist Marci Rossell, Ph.D. engages audiences nationwide, communicating complex economic issues in a way that is relevant to people’s lives, families, and careers. Her animated style was honed when she served as the popular, lively Chief Economist for CNBC. Prior to her career in broadcast journalism, Marci served as an economist with the Federal Reserve Bank of Dallas and earned a PhD in economics from Southern Methodist University.

Thinking of Selling Your Business to an Employee?

Whether it’s because you want to keep the business “in the family” or because you suspect you will not be able to find a good buyer for your business, you may be thinking of selling your business to an employee. The first thing to think about is the kind of employee who can and should take over leadership and ownership. You’re entrusting your business and its future to this person or group of people. We suggest that a “key employee” may be a good candidate to purchase the business.

What is a Key Employee?

Key employees are those who have a direct and significant impact on business value, meaningfully participate in the business’ strategic future, and whose combination of skills and experience would be exceedingly difficult to replace.

Why would you sell to you key employees?

One reason you may want to sell to a key employee is that you believe you have already achieved financial security. You may feel that your employees have earned ownership or that you owe them ownership of the company for their many years of loyalty. Another reason is you may not have an alternative option. Maybe you have no other third-party offers and no children to pass along the business to, so you look to your rock star employees to continue building your legacy.

Selling to Employees can be Both Fast and Slow

If you have some time to complete a transfer, a key employee might be a good option. Often, an owner must stay active in (or at least in control of) the company for five or ten years after the sale process begins in order to complete a successful transfer and attain financial security. In these years, owners hire and groom employees who not only want to be owners but also have the ability to assume ownership.

If your business has a business value today that you think is too low, you may also be considering a sale to a key employee. Taking more time to transition ownership to one or more key employees may also give you more time to grow business value and capture profits.

On the other hand, selling your business to key employees might be faster or less risky. Typically, key employees are very involved already in the day-to-day activity of the business. They will know how you want your company to be ran because you have groomed them to run it a certain way. They may share your vision for the future and see opportunities for growth and success that outsiders might miss. As a result, your key employees may be excited to get going on transitioning ownership sooner rather than later.

If you’ve been thinking about selling to employees for many years, or if the thought is just now occurring to you, you’ve reached the starting line for the next phase of your business owning journey.

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.

Preparing for a Successful Third- Party Sale

Many business owners choose to sell their businesses to third parties for several reasons. If you're thinking about pursuing a third-party sale as your business exit strategy, consider these four steps to prepare yourself for a successful third-party sale.

Of course, as with any plan for a successful future, your first step is to determine what it takes to achieve financial independence with help from your Advisor Team.

Install Next-Level Managers

It's difficult to overstate the importance of next-level managers. This is especially true if you're considering a sale to a third party.

A strong next-level management team is the foundation of your company's value to outside buyers. They often drive operations, create new efficiencies, and, most importantly, keep the business thriving after you leave it.

If your company relies on you for its success, buyers may hesitate to consider your business. Generally, buyers are most interested in businesses that run smoothly without the owner at the helm. Next-level management teams position you to leave the business on your terms.

In some cases, business owners who have thriving businesses but no next-level managers must either postpone their retirement or stay with the company after they've sold it. This is often not ideal for many business owners.

Create Business Continuity Plans

Business continuity plans are non-binding guides that help your family and business address an unexpected event, such as death, incapacitation, or something else that prevents you from running the business.

Having this kind of plan can provide clearer guidance about your goals. For many business owners, planning for a successful future doesn't end with achieving financial goals. They may have other aspirational goals they'd like to achieve in tandem.

For example, say you were in the middle of planning a third-party sale and were suddenly incapacitated.

Your family and advisors may know that you wanted a certain dollar amount for the business. What they may not have known is that you also wanted to keep the business in your community. But the only way to achieve your financial goal at the time you were incapacitated would be to sell to someone who wanted to move the business out of the community.

A business continuity plan can help you elucidate your goals in instances where you cannot speak for yourself.

Assemble A Negotiation Team

Third-party buyers almost always assemble top-notch negotiation teams when purchasing a business. Though business owners are good at a lot of things, negotiating a business sale is an entirely new arena for many.

Negotiations are often complex and require more time than a business owner has to fully dedicate themselves. This is especially true if you don't have a next-level management team.

It's no secret that buyers want to maximize their value with any business they purchase. They'll do comprehensive due diligence and use their findings to pursue this goal.

Assembling a strong negotiation team can help you find weaknesses in your business and then strengthen them before a buyer finds them and tries to leverage them against you. They can also represent your goals, both financial and aspirational, at the negotiation table.

Negotiation teams do everything they can to get you the best deal you can get. They also have specialized skills, such as in valuation, tax reduction, and law, that can protect your interests.

Avoid False Starts Whenever Possible

When pursuing a third-party sale, your first chance is often your best chance. This doesn't mean you must accept the first offer proposed. What it does mean is that you don't want to pull your business off the market because you didn't get an offer you liked.

This is called "tainting the marketplace." When a business comes off the market without selling, it tells potential buyers that there may be something wrong with the business. This may make future buyers more hesitant to purchase your business.

Fortunately, by installing a next-level management team, creating business continuity plans, and assembling a negotiation team, you reduce the likelihood of tainting the marketplace.

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.

Getting the Value You Deserve for Your Business

Business owners deserve to get full value for their businesses when they decide to retire. But who determines what "full value" is, and how do you create it? Let's look at three strategies you can implement to pursue and build your business' value.

1. Get a Proper Valuation

For many business owners, the value of their businesses goes well beyond a dollar amount. There's an emotional investment that can sometimes cause business owners to overvalue their businesses.

In many cases, business owners may not realize that they've overvalued their businesses until they're ready to leave them. That gives them little to no time to build the value they need to exit with financial independence.

Obtaining a proper, professional evaluation for your business can help you avoid this common pitfall.

There are several different tiers of business valuations, and you may not need the most expensive one at the outset. The key is to avoid "back of the napkin" guesses at what your business is worth.

A proper, professional valuation can give you a baseline that helps you determine the next best steps for building business value.

2. Begin Installing Next-Level Management

Once you know where you are, it's easier to determine where you need to go. Perhaps the most important aspect of growing business value is installing a next-level management team.

If your business only has value while you are running it, then you can never truly leave it on your terms. Additionally, if potential buyers believe that the business can only succeed while you're in it, they're less likely to pay you what you deserve to leave the business.

Many successful business owners discover that installing next-level managers gives them more freedom to determine what a successful future looks like for them.

Your next-level management team is what stays behind when you decide you're ready to leave your business. They improve processes and allow the business to run successfully without you. Their ability to keep your business thriving without you is often a big determining factor in building your business's value.

3. Diversify Your Customer Base

Buyers are typically more likely to pay full value for a business that has a diversified customer base for several reasons.

A diverse customer base can help insulate your business from unexpected downturns. Additionally, having a diverse customer base usually means that losing one customer won't throw operations and projections into chaos.

Another attractive part of a diverse customer base to buyers is that they don't necessarily need to build a book of business from the ground up. Turnkey operations are generally more valuable to buyers, which can position you to get paid what you deserve for all your hard work.

Fortunately, your next-level management team can help you diversify your customer base if your current customer base is homogeneous. Their skills and networks can open new avenues for your business to serve.

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.

Addressing Disagreements Among Co-Owners

When you co-own a business, you likely don’t go into it thinking, “One day, we may loathe each other.” But over time, goals, ambitions, and the economy itself can change, creating strife among co-owners. And it becomes hard, if not impossible, to solve major disagreements when you’re in the midst of a disagreement with co-owners.

Today, we’ll look at a process that can help you prepare yourself, your co-owners, and your business for potential disagreements.

1. Get Out In Front Of It

The best time to plan for how you’ll approach a major disagreement is before you have the disagreement.

For example, say you equally co-own a business with two other partners. You have the same general goals and ideas for what you want the business to achieve.

This is a good time to begin planning for events that may cause disagreements in the future. When you’re all on the same page, it can be easier to remain clear-headed about disagreements that could crop up.

For instance, you might propose a scenario where a co-owner wants to cash out of the business early to start their own business. You and your Advisor Team can begin to lay ground rules for what that might look like, such as inserting a non-compete provision in your Buy-Sell Agreement.

The goal of staying ahead of a potential dispute is to make such decisions while you’re in a collaborative mind-set. You don’t have to try to solve every single disagreement you may have.

2. Keep Your Buy-Sell Agreement Current

When disagreements arise among co-owners, a common strategy is a buyout. In some cases, your Buy-Sell Agreement may state the conditions of a buyout, such as a Texas Shootout provision.

In a Texas Shootout provision, one co-owner may offer to buy out another co-owner. If the second refuses the buyout, then the second co-owner must offer to buy out the first co-owner at the same price, terms, and conditions of the original offer, with the goal of leaving just one co-owner in charge.

However, an outdated Buy-Sell Agreement can cause all sorts of issues with such a scenario. Inapplicable business valuations, a change in financial security requirements, and countless other calculations could cause issues.

Keeping your Buy-Sell Agreement current could help make implementing a solution for a co-ownership disagreement run more smoothly (e.g., less litigation).

3. If All Else Fails, You May Need To Cut Bait And Start Over

In some cases, when a co-ownership situation is untenable and no one is willing to work toward a solution, business dissolution could be an option.

For many business owners, this solution is unthinkable, especially if the business has grown in value over the years. It can be time consuming, expensive, and make achieving your financial goals much more challenging.

While this option is generally a last resort, it’s not always a necessity. With proper planning, you can better position yourself to avoid reaching this worst-case scenario.

Conclusion

Addressing disagreements among co-owners is generally easier if you plan for them before they reach the boiling point. It may even be possible to position yourself to engage co-owners on disagreements with help from a professional and objective Advisor Team. However, as with implementing solutions to disagreements, it’s generally easier to do so through proactive planning than reactive actions.

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.

4 Reasons Why Planning for a Successful Future Isn’t DIY

At their core, successful business owners like you are builders. Whether you founded your business, or purchased one and took it to new heights, doing it yourself runs through your veins. Why, then, would you need professional help to plan for a successful business future?

We could go on and on about all the reasons why, but let’s focus on four major elements of planning for a successful future that are typically complex and extremely challenging for even the most talented business owners to handle alone.

1. Your individual brilliance may not be scalable

Business owners are a special breed of ambition and brilliance. As you run the business, you may have methods that work well based on your individual talents and idiosyncrasies. However, a key to a successful business future is building a business that doesn’t rely on you. Because if it relies on you, you can never leave it. And even if you never want to leave it during your lifetime, a business that lives by you may also die by you, which can have wide-ranging effects on others.

The true tragedy of individual brilliance is that when it comes naturally, it’s hard to explain to others. A classic example of this is Wayne Gretzky. Gretzky was the greatest hockey player in history, setting unbreakable records with ease. But when he tried his hand at coaching, he was much less successful because he struggled to explain how he did the things that made him so outstanding, which came so naturally to him.

So it goes in running a successful business. Having (a) documented operating systems that increase cash flow sustainability and (b) a way to scale those systems in ways that don’t involve you, are profoundly important for a successful future. A professional advisor can help you distill your individual brilliance into something that doesn’t rely on you for success.

2. What does a successful future mean?

The idea of a successful future might seem easy to understand at first glance. Maybe you want enough money to retire with some left over to begin building generational wealth. Perhaps keeping the business in the family is your idea of success.

Whatever your vision of success is, do you know precisely what it takes to achieve it? And have you begun implementing a plan to pursue it?

Many business owners have two jarring experiences when they start considering the nuts and bolts of a successful future. First is the Misperception Spell. This is when a business owner becomes complacent because they believe they’re farther ahead in their planning than they truly are.

For example, you may think that having $3 million in retirement is enough for you. But how can you know that for sure? What happens if your estimate is wrong? What if you live longer than you expect? Would you be willing to go back to work for someone else if you were wrong about your estimates?

Second, and related to the Misperception Spell, is that many business owners have an Asset Gap. This is the difference between what you actually have and what you’ll actually need to achieve financial independence, whether you leave your business during your lifetime or die at your desk.

Without accurate information, planning for a successful business future is essentially a gamble. Professional advisors can help you obtain accurate information about your wants and needs, and then create plans that help you achieve them.

3. Best friends may not make best managers

A crucial element of planning for a successful business future is Next-Level Management. However, many business owners struggle with this because it could mean that longtime, loyal managers aren’t the best people to help them pursue future business success.

This doesn’t necessarily mean that you need to be starkly Machiavellian with your current managers. However, a professional advisor may be able to examine your talent pool more objectively. Then, they can help create a plan that allows you to maximize your business’ potential through Next-Level Management.

This may include incentivizing current managers to achieve more ambitious goals if they’re capable. It may also mean finding a more appropriate role for your current managers as you bring in next-level managers, if necessary.

4. Honesty is hard when it’s your baby

Finally, planning a successful business future is emotional. It often requires owners to confront the warty parts of their business to take the business to the next level.

For instance, business owners typically place a higher monetary value on their businesses because of how much the business means to them personally. It can be devastating, even financially harmful, to find that an objective valuation doesn’t agree.

Though many business owners believe they can handle the slings and arrows of building a successful business future, it’s much, much harder when their expectations fall short of reality. However, with the help of professional advisors, business owners can obtain accurate information; begin to act in ways that improve business performance; and gain a clearer path toward creating the business future they want, rather than a business future they’re forced into.

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.

Controlling the Uncontrollable Parts of Ownership

A common tragedy for business owners is facing a life-changing event, such as a sudden death or illness that devastates the business, without a plan. While these events may seem uncontrollable in the moment, the good news is that with foresight and planning, you can regain control over what seems uncontrollable.

Let’s look at a short fictional but representative account to see the different consequences between proactive vs. reactive planning.

He Was Gone Before He Was Gone

Geoff Starr and his father, Bud, thought they had planned for everything. They survived lockdowns, supply-chain interruptions, and several weather events that had put their competitors on the brink of failure.

But recently, Geoff noticed that Bud’s decision-making seemed off. Bud was often agitated and mean, which was out of character for him. He had trouble remembering long-time clients and, on several occasions, mixed up major client orders that Geoff only caught at the last minute.

Bud refused to see a doctor and demanded that he remain in charge of his business responsibilities. His newfound meanness had driven important managers to the point of quitting.

After his wife found him shivering on their patio in the dead of winter, he was rushed to the hospital to be treated for hypothermia. Over the next few months, Bud’s doctors confirmed he was suffering from dementia. Geoff realized that he needed to transfer Bud’s ownership in the business so the business could continue to operate and provide Bud and his family the financial support they needed for his care.

Sadly, Bud’s Buy-Sell Agreement indicated that a transfer of ownership could execute only at his death.

Being Ready Before You Need To Be

It’s common for business owners to create Buy-Sell Agreements early in the business and never update them again. This is what happened to the Starrs.

An outdated Buy-Sell Agreement can have unintended consequences. In Geoff’s case, there was nothing he could do with his father’s ownership until his father died, which defeated the purpose.

What could the Starrs have done differently, and what might you do to avoid a fate like this?

1. Create a Business Continuity Plan

A Business Continuity Plan gives your family, your business, and your advisors guidance about what they should do if an unexpected event occurs.

For instance, your Business Continuity Plan can offer strategies for first contacts and actions to take following the owner’s unexpected departure, use of proceeds schedules, and management responsibilities.

Providing guidance when you can’t actually provide it yourself can bring relief to your family and those who rely on you.

2. Retain Key Employees

When something happens to a business owner, it can cause key employees to worry or consider leaving. In Bud’s case, his managers became so fed up with his meanness that they considered quitting. This would have horrible consequences for the Starrs, because without the business running at full steam, Bud’s care would decline.

To stay in control in this regard, you might consider establishing Stay Bonuses in your business planning. Stay Bonuses incentivize key employees (often financially) to stay at the business following unexpected events that affect the business owner.

It’s often true that your company will need to be financially strong to offer Stay Bonuses. By strengthening your company to allow for this scenario before you need to, you may find opportunities that benefit your company even if nothing ever happens to you.

3. Avoid Assuming It Won’t Happen To You

No one wants to think about bad things happening to them. It’s difficult and scary to be sure. While you don’t need to dwell on everything that could go wrong, it’s important to be reasonably prepared for things that may go wrong.

You might even use the idea of an unfortunate event befalling you as motivation to control it as much as possible. Planning to address events that are realistic and potentially harmful to your company can introduce you to the strategies to overcome them, which, in turn, could further strengthen your business.

Conclusion

Controlling the uncontrollable parts of ownership is more attainable with a plan.

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.

Building Value Outside the Business

Many business owners find the bulk of their wealth within their businesses. However, planning for a successful future often means wrangling financials outside the business too. This is especially important when markets may not be as favorable to small and midsized businesses as they have been in the past.

Here are three things to consider to help you build value outside of your business.

1. Know your Business’ Real Value

Before you begin strategizing about the best way to build value outside your business, it’s a good idea to know what your business is actually worth. In many cases, business owners use rules of thumb, comparisons to competitors, or good ol’ fashioned wishful thinking to estimate company value. And it’s not uncommon for business owners to overestimate their company’s value.

However, using inaccurate estimates of business value can make it difficult, if not impossible, to create a strong plan to build value outside the business. After all, if you think you have everything you need based on inaccurate assumptions, it’s far too easy to take your foot off the planning pedal.

By working with a professional who can more accurately estimate your company’s value—such as via a Calculation of Value—you can begin to create a more focused plan to build value, both inside and outside the business.

In other words, when you know what you have now, you can carve a clearer path toward getting what you’ll need for later.

2. Diversify investments

Any good financial advisor will tell you that diversifying your investments is one of the most basic things you can do to build value. With the advent of self-service investment tools and newer asset forms (e.g., cryptocurrency), it seems easier than ever to diversify investments.

Nonetheless, it’s prudent for business owners to be responsible when diversifying their outside investments. Even as technology allows easier access to investing, you should still consider how a diverse portfolio works toward your goals in the long term.

The past few years have shone brightly as a bull run in many markets. It may be tempting to try to catch that lightning again. But history often shows that disciplined investing, especially with professional help, makes longer-term planning more successful and manageable.

3. Minimize taxes

In addition to building value outside your business, it’s just as important to minimize how much value you lose. This often comes in the form of taxes.

For example, if your company is a C corporation, you may face double taxation (once for corporate income, once on your personal income). This could reduce the amount of money available to build wealth outside your business.

Likewise, given the inherent complexity of the US Tax Code, it’s possible that you’re simply paying more than you must by no fault of your own. Legally minimizing your tax burden, often with the help of a professional, could give you more capital to invest outside the business. This, in turn, could help you build more value toward the future you envision on your terms.

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.

How to Clarify Your Brilliant Processes

Many successful business owners are successful because they think about things differently than most people. Others may recognize your personal brilliance and say to themselves, “I wish I could understand how she does it.”

This “secret sauce” can be a great differentiator. However, when it comes to planning for your successful future, it may also be a roadblock.

Today, we’ll examine a few strategies that can help you leverage the methods that contribute to your unique success into a planning process that lets you pursue your goals on your terms.

1. Create A Paper Trail

When it comes to long-term planning for future success, documentation is key. This can be challenging for business owners who tend to work in a more stream-of consciousness style. For these kinds of business owners, documentation can seem constraining.

However, as your business grows—and with it the stakes that determine your success—having a method to guide what makes your business successful becomes more important.

For example, say you’re the creative force behind business-development concepts at your company. You might come up with your best ideas after 3 hours of sleep, 15 cups of coffee, and an intense brainstorming session with trusted partners.

After going through this process, you’ll likely need to guide others toward how to implement the ideas that come from the process. It’s unlikely that the people who will implement the ideas will be able to do the exact same things you do to rouse the muse.

Having a documented method to pursue your great ideas is key to consistent success. It gives others who may not have the same strengths as you a way to make your ideas come to life. It can also insulate your company against risks, such as if you were to fall ill for an extended time and couldn’t be the catalyst.

2. Consider Next-level Managers

Successful business owners often recognize that they can’t do everything themselves. This recognition is an important touchstone for continuing business success. It allows business owners to search for and implement next-level managers to keep moving the business forward.

If you find that your business isn’t quite executing on your ideas—or perhaps you’re having difficulty articulating what you need the business to do—next-level managers could be the solution. Next-level managers have proven track records of solving problems relevant to their field of expertise. Their presence can strengthen a company both because of their inherent expertise and because they may have the skill to clarify and implement your unique strategic style.

3. Ask For Help

Even if your processes make sense to you, it’s a prudent strategy to explain those processes as clearly as possible to others to reduce risks. This can be a challenge if you tend to view and do things differently.

That’s why it’s critical to ask for help when necessary. In certain aspects of planning for a successful future, objectivity is key. For example, reducing your tax burdens is a crucial step toward your goal of financial independence. But these methods can be complex, and without proper guidance, you may position yourself to miss opportunities to reduce your burdens.

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.

April 2023 Conference Call with Economist Marci Rossell, Ph.D.

Once again, Marci engaged our clients with a lively discussion of the economy. If you were unable to join us, here are a few highlights.  

The Federal Reserve is winding up its lightning round of interest rate increases, which raises the question of whether we're going to have a hard landing or recession. Marci said she does not see a true recession on the horizon -- which she defined as a “prolonged period of economic decline across multiple sectors, generally lasting six months or more”. 

 To make her point, she made some comparisons between today and the 1970-80s, when the economy was battling high inflation and rapidly rising interest rates. For example, the oil embargo and withdrawing from the gold standard in the 1970s were unique in their impact on inflation and monetary policy.

 What to look for in the next six months:

• Expectations are for a 0.25% increase in the target Federal Funds rate at the next Federal Reserve meeting, then hold at that rate until year-end.

• Some market watchers believe the Fed will be pressured cut to begin lowering rates if the economy falters or if there's more instability in the banking sector.  Marci predicts they will not lower interest rates until inflation comes down. 

• As rates come down, she expects to see a recovery in interest sensitive sectors such as residential real estate. 

• The stage is set for another debt ceiling showdown in Congress which could trigger volatility in the financial markets up until June. She expects it to go down to the wire and that rational actors will make a deal at the very end.   

For Marci’s full commentary and answers to participant questions, the audio recording is available below:

This event was presented on 4/18/2023. It is for informational purposes only and should not be considered investment advice. Opinions expressed are as of the date of recording. Such opinions are subject to change. The views and opinions of Marci Rossell are not necessarily those of Prosperity Planning. Prosperity Planning is not affiliated with Marci Rossell. All investments are subject to investment risk, including possible loss of principal. Individuals should seriously consider if an investment is suitable for them by referencing their own financial position, investment objectives and risk profile before making any investment decision.  Please consult your advisor for investment advice as it pertains to your specific needs.

Economist Marci Rossell, Ph.D. engages audiences nationwide, communicating complex economic issues in a way that is relevant to people’s lives, families, and careers. Her animated style was honed when she served as the popular, lively Chief Economist for CNBC. Prior to her career in broadcast journalism, Marci served as an economist with the Federal Reserve Bank of Dallas and earned a PhD in economics from Southern Methodist University.

Why You Shouldn’t Do Everything

When you started your business, you might have done a lot of the heavy lifting alone. It’s something to be proud of.

As businesses grow, they tend to become more complex. Many business owners one day realize that, try as they might, they simply cannot do everything all by themselves. Yet, there’s also a fire that might try to tell you, “I’ve done everything before, I can do everything again.”

Today, we’ll present some of the benefits of letting others help you compared to some of the pitfalls of trying to do everything yourself.

1. The Snowball Effect

At the beginning (and perhaps even now), your business revolved around you. When something important needs to happen, people come to you. It’s similar to making a snowball on flat ground by having people gather snow from somewhere else and bring it to a fixed location.

But when the business grows, it climbs the mountain. And as any good mountaineer will tell you, having a team makes it easier to reach the peak. Likewise, once you start climbing the mountain, it’s much easier to grow the snowball by rolling it down the mountain than by having people gather snow and bring it to one specific spot.

Planning for a successful future is similar. As you ascend to the peaks of success, you’ll likely find that it’s a smoother trip with a team of spotters and support. You still lead the charge, but you allow others to help you find the best path forward.

Their expertise then helps you reach your destination more safely, so you can roll the snowball down the mountain for quicker growth.

2. Concrete Consequences

More literally, trying to do everything by yourself can cost you money from unintended consequences. You likely have a favored role or supreme expertise in a specific area of your business. As the business grows, you could find that you spend less time on the things you’re incredibly good at just to keep the business growing.

For instance, say your expertise is in running operations. As the business grows, you need to take on more sales responsibilities. As the sales department grows, you then find you need to consider the tax implications of all this growth. Trying to solve all these issues by yourself can lead not only to mistakes and missed opportunities but also take even more time away from the thing that motivated you to start the business in the first place. Delegating responsibilities to others—both in running the business and planning for a successful future—can help you avoid these issues while expanding your success. Even better, you still get to have the final say.

3. Avoiding Burnout

Over enough time, nearly everyone can experience burnout. This is especially true for business owners like you, who have so many responsibilities to juggle (keeping the business growing, protecting your financial security, looking out for your employees, etc.).

In many respects, burnout is just a new term for a mid-life crisis. But in some ways, it’s on a much bigger scale. Whereas you might buy a Corvette to quench a mid-life crisis, burnout can sap your energy to the point where nothing can motivate you. This, in turn, can have negative effects on business performance.

Two proven methods to avoiding burnout are: 1 – reducing exposure to job stressors, and 2 – completing a periodic assessment and realignment of goals, skills, and work passions. These are aspects that planning for a successful future, with input from your trusted Advisor Team, can help you tackle while still running a successful business.

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.

The Dangers of Transferring to Children Without Planning

After building a successful business, many business owners decide that they want to transfer their ownership to their children. Too often, those owners assume that a transfer to children will go smoothly and simply, requiring little more than informing their kids of the date they’ll be taking the reins. Owners who make this assumption commonly realize that without planning, they can harm their businesses, their business exits, and their long-term relationships with their families.

Without proper Exit Planning, ownership transfers to children can produce negative consequences in three areas of your life.

1. Money

It’s likely that your children don’t have the capital to purchase their shares of ownership outright. This means that when transferring to a child, you’ll likely need to accept a promissory note and rely on your child to maintain or grow the company to receive your business’ full sale value. If something goes wrong, such as your child not having the ability to run the company as successfully as you did, you may receive less than what you expected from the transfer of your ownership interest. Since the goal of an Exit Plan is to position you to exit with financial security, transferring ownership to a child without a thoughtful plan can threaten that goal.

Another common money-related problem concerns how you’ll parse your assets between your businessactive children and non-business-active children. Transferring ownership shares to non-business-active children can lead to two problems.

First, it can create resentment among any business-active children, because those children have worked hard to build the business, only to watch a sibling who did nothing to build the business get a share of their hard work. Second, it can make non-business-active children feel forced to do something they have no interest in doing to receive their share. In both cases, your company’s cash flow can be affected, potentially harming your ability to exit your business with financial security.

2. Time

Ownership transfers to children usually require owners to wait longer before receiving full sale value. This means that your finances may be exposed to general business risk for longer. If the company or economy experiences a downturn, you might need to wait longer than you had anticipated to receive the full sale price, which can affect your post-exit plans.

Another time factor that many owners overlook relates to how much time they’ll need to spend training their children or refereeing squabbles between them. If your children aren’t ready to run the business without your help, you may find yourself doing more work for longer, which can prevent you from doing other things you want or need to do to achieve your exit goals. Additionally, if you need to mediate fights between children—whether it’s related to who should do what within the business, or asset allocation between business-active children and non-business-active children—you may end up spending more time cleaning up messes or, worse, end up having to take the reins back to prevent your children from doing permanent damage.

3. Values

Although many owners assume that their children will run the business similarly to how they ran it, this isn’t always the case. If a child decides to run your business differently than you, it can create discord or amplify existing friction among your family members. This can cascade into problems that affect the money you receive and the time you spend in the business.

Differing values can also create hard feelings among in-laws, who might feel that you aren’t treating their interests fairly. In the worst scenarios, in-laws can use access to grandchildren as bargaining chips to get what they think they deserve out of your ownership transfer.

Business owners often fail to identify the consequences of a poorly coordinated ownership transfer to children until it’s too late. If you’re considering transferring your ownership to your children but aren’t sure whether you’ve addressed these potential problems, 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.

How to Identify Internal Next- Level Managers

Next-level managers are an integral part of planning for a successful future. They can come from inside or outside of the company, and you often have a choice about where you find them.

Many business owners want to install next-level managers from within the business. But how do you know if internal managers are up to the challenge? Here are a few strategies to consider, along with the consequences they can produce.

1. Ask Them If They’re Up For It

An important part of installing next-level management from inside the company is to be sure that they’re up for it. A good way to determine this is to just ask them.

You might have employees who you think would make excellent next-level managers. They perform beyond expectations, they’re reliable, and you just plain like them. However, it’s not uncommon for excellent workers to not want to be managers. Some of your best employees just want to be employees, even if you think they have more potential. Asking them if they can see themselves running a business can help you avoid making assumptions.

Some employees may be eager to take on more responsibilities, which can help you begin the process of training them. Others may not be sure, which can give you a chance to let them test the waters before you throw them in the deep end. Still others will be flattered but have no real interest. The challenge with these employees is that they may feel an obligation to take you up on your offer because you’re the boss. This can be a dangerous path, so it’s crucial that you express that there’s no obligation for them to take a path they’re uninterested in and that you value their work regardless.

2. Give Them Incentive

Next-level managers need proper incentives to perform. Creating an incentive plan and presenting it to a potential next-level manager can help you determine whether an internal employee has the proper expectations and drive to be a next-level manager.

In general, a good incentive plan for a next-level manager includes all of the following:

1. Performance standards that increase company value

2. Specific standards they must meet delivered in writing

3. Substantial motivation, often monetary

4. Strategies that handcuff employees to the business (e.g., vesting)

In other words, to find the people who can take your business to the next level, they need a plan that can help them take their career to the next level. It’s crucial to understand that many incentive plans require advisor guidance to properly motivate potential next-level managers. An Advisor Team can help you determine proper performance standards, design the plans to benefit managers and your company, and install contingencies should a potential next-level manager fail to achieve their goals.

3. Let Them Do It

Once you’ve identified, incentivized, and begun training internal employees up for the challenges of next level management, a next step is to let them do it. It’s important to remember that you may not want to hand over the reins right away. You’ll likely want to give potential next-level managers some guard rails.

One way to let them try without handing over everything is to take a longer vacation. If, while you’re on vacation, you find that you’re still fielding basic questions and making important decisions, it could be a sign that the manager isn’t ready (or qualified) to run the business.

On the other hand, if the business runs like a Swiss watch while you’re gone, it could be a sign that your internal manager does indeed have the skill to one day run the business.

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.

Whether You Sell Your Business or Not, the Planning Is the Same

There are many things for you to consider as you think about the future of your business ownership: When is the right time to move on? How much money will I need? How do I even sell this business? These questions dovetail into an important decision you’ll try to make early in the process of planning your future: Whom you’ll sell or transfer your ownership to.

At the end of the day, business owners can sell to two different types of buyers: insiders or outsiders (also referred to as “third parties”). There are different flavors of insiders (e.g., children, key employees, co-owners, and even ESOPs) and third parties (e.g., competitors, venture capitalists, private equity groups, strategic buyers), and owners sometimes get bogged down in what seems like an endless supply of options and strategies to plan for the future of their businesses. However, whether your goal is to sell to an insider or a third party, it’s important to understand that, no matter what, third parties set the standards by which we judge just about all ownership transfers.

It may sound odd that a third party can set the standards of an ownership transfer even if you wanted to transfer your ownership to, say, a family member. But professional buyers, such as private equity groups, set the terms of ownership transfers based on their experience with buying businesses, their competition with other buyers, and their abilities to find strengths and weaknesses in potential acquisitions. In short, they know what makes successful businesses successful, and they demand that the businesses they buy have the elements of a successful business. Like professional buyers, just about anyone else you’ll look to sell to will want those same things.

So, even if your dream is to transfer your ownership to your children or employees, it’s important for you to prepare your business for a third-party sale. Let’s look at three reasons why.

1.  Professional buyers determine value.

Professional buyers have the experience, resources, and understanding of the market to find what makes a business successful. They know what a strong management team looks like, they know what good operating systems look like, and they often know how to leverage a business’ strengths beyond what the current owner can do. Thus, they are the arbiters of value.

Because professional buyers can determine a company’s value, it’s wise to build your plans around what professional buyers look for in a potential acquisition. If a professional buyer would value your company highly, it’s likely that other third parties and insiders will do the same. Additionally, if a professional buyer values your company highly, it can mean that your business has elements that make it run smoothly whether you’re present or not.

2.  Many buyers want similar elements in their businesses.

Many buyers want strong management teams, a competitive advantage, and a proven growth strategy in place before they buy a business. This is true of professional buyers as well as insiders. Insiders—especially children and co-owners—can develop a blind spot for the company’s weaknesses and take its strengths for granted. This can put you at risk if you’re relying on the company’s performance to provide your income after you exit. On the other hand, if you propose that your top managers take over ownership, they may start to scrutinize flaws in the business, creating skepticism and uncertainty.

You can position yourself to mitigate these risks by planning as though you needed to impress a professional buyer. Again, if a professional buyer sees the value in your business, it’s likely because it has certain elements that allow it to run smoothly, whether you’re in control or not.

3.  Third-party sale planning gives you an out.

 Sometimes, transfers to insiders can fall apart even with the best planning. For instance, a family member or key employee may decide that the pressures of ownership aren’t worth the benefits and pull out at the last moment. Or, a co-owner you hoped to sell your share of ownership to may realize they aren’t cut out to fill your role. By preparing for a third-party sale even when you don’t intend to sell to a third party, you can give yourself an out if the insider you choose can’t or won’t take the reins.

Many of the big picture elements that go into third-party sale planning apply to planning for an insider transfer. If you’d like to evaluate or begin your plans for the future of your ownership, 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.

Protecting What You Care About: Business, Family, & Employees

As a business owner, you’re likely the most important person in your business. You’re probably the breadwinner for your family. Your employees rely on your leadership and success for their livelihood. A lot of people depend on you.

What would happen if, without warning, you were to die or become incapable of running the business?

Many business owners might answer that question by saying, “I have a Buy-Sell Agreement” (a written agreement that controls what happens to your stock following certain events, such as death or incapacitation). If you own a successful business, a Buy-Sell might not be enough. Experience shows that Buy-Sell Agreements only dictate to whom business ownership would transfer. They often don’t provide enough guidance to family members, the new owners, or employees about how to handle all of the responsibilities you once had.

For example, if you were to die, would your family know what to do about any personal guarantees you provided in connection with your business? Would the person who took over your business know how to work with your important clients?

Without preparation, sudden death or incapacitation can wreak havoc on the plans you make for the future of your business, along with the plans your family and employees have. But by planning for an untimely death or incapacitation, you can position your business, family, and employees to thrive without you.

Consider how one owner, Valerie Heidelberg, did just that.

Valerie Heidelberg’s company, Heidelberg Flooring, was in the midst of a business boom. As the face of the company, Valerie was preparing to open Heidelberg Flooring’s eighth location. On the day the new location was to open, Valerie failed to show up for work. A few hours passed before Glen, Heidelberg Flooring’s VP of Sales, received a call from Valerie’s husband, Nick.

Nick told Glen that he was just leaving the hospital. Valerie had suffered a stroke in her sleep and had died just an hour ago. Glen was stunned, both because Valerie seemed to be in such good health and because he had no idea what Heidelberg Flooring would do without her.

“Expect a call from someone named Braelyn,” Nick said to Glen. “That’s one of Valerie’s advisors.” Later that day, Braelyn called Glen to discuss the situation.

“Valerie did a very good job of planning.” Braelyn said. “In fact, she and I worked on a plan to protect against something like this.”

Braelyn explained that Valerie left instructions about who would take over certain responsibilities in the event of her death. Glen would take over as interim president, and Heidelberg Flooring’s Operations Manager, Gary, would take full control over operations leadership. Each received a 25% salary bump to reflect their new responsibilities.

“Valerie also left a list of key clients and prospects, and how she recommends you speak with them about various issues, as well as contact information for key advisors who she thought could help you make any tough decisions” Braelyn said. “We can meet tomorrow and I can go over everything with you.”

Over the next few days, Heidelberg Flooring used the instructions that Valerie provided to Braelyn to announce Valerie’s death to clients, prospects, employees, and vendors. Because Valerie had planned for her unexpected death, the company’s clients and vendors were assured that Glen and Gary would provide the same service and timely payment they’d always expected. Glen proceeded to secure business with three of the biggest prospects Valerie had been working on by using Valerie’s notes and suggestions she’d left behind. Two years after Valerie’s death, the business had grown in value by $1.5 million. The company thrived, even without Valerie, because she left everyone with detailed instructions about what to do if she were to leave the company unexpectedly.

And Valerie’s family also made it through the experience pretty well. With help from her advisors, Valerie had created a salary continuation plan to protect her husband—a freelance film critic—and four college-aged children. When paired with her life insurance money, Valerie’s family didn’t see a change in their lifestyle.

Because she had transferred business responsibilities to two of her key employees, her family had minimal stress about the business. Glen and Gary ended up purchasing Valerie’s ownership interest over the next five years, using the company’s increasing cash flow to fund an incremental buyout over time. The sale proceeds, plus Valerie’s investments, allowed Valerie’s husband to lead the family through what might have otherwise been a very difficult financial situation and her children to finish college debt-free.

In short, Valerie’s business, family, and employees all continued to move forward despite her untimely death, all because she left detailed instructions and plans for how the business would continue without her.

If you’re wondering how your business, family, and employees might be affected by your untimely death or incapacitation; or if you’d like to begin planning for how everyone can respond to such an unexpected event, 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.

Incentivizing Your Best Employees to Stay

When thinking about business planning, one aspect you may be tempted to overlook is the contributions of your key employees. Key employees are the lifeblood of well-run businesses, and they play an important role when owners begin to plan for their businesses’ futures, especially when owners begin to plan for their inevitable business exits. Many owners find that unless they have ways to incentivize key employees to stay with the business—rather than taking their talents elsewhere for more money or recognition—they cannot properly plan for their business’ futures. Consider the story of Jacqui Dickson, a key employee with Balthazar’s Ink Emporium.

Jacqui Dickson was a top performer at Balthazar’s Ink Emporium, a specialty ink supplier for large publishing companies. She always exceeded her sales goals and happily took on other responsibilities outside of her comfort zone. She helped manage marketing designs, public relations inquiries, and occasionally trained new hires. Among all of her responsibilities, Jacqui typically worked 55 hours a week and was responsible for about 35% of the company’s new sales year after year.

But Jacqui was getting restless. She felt as though she had hit a wall in her career development and was frustrated that she hadn’t received a substantial raise in over five years, despite constantly taking on more responsibilities. Ever the diligent worker, she kept her head down and continued to produce, confident that her work wouldn’t go unnoticed.

One day, the owner of the company, Balthazar Ek, requested a meeting with Jacqui. They had spoken a few times casually over the last 10 years, but Balthazar had asked for an hour of her time. For a man so rarely seen sitting still, an hourlong meeting was practically an eternity.

In the meeting, Balthazar revealed that he would be transferring his company to his two sons. He told her that because the company had well-tested and documented processes, they wouldn’t need to do very much to keep the company running. He intended to give each son 45% of the business, and because of all her hard work, he wanted to offer Jacqui the remaining 10% to make sure the business continued to run smoothly.

“This business is worth at least $10 million,” he told her. “That means $1 million for you.”

Jacqui was stunned and terrified. She had no idea how to run a business. More importantly, she had no desire for ownership.

“Sir, that is a generous offer, but I can’t. Owning a business isn’t for me.”

Balthazar was unaccustomed to hearing “No” from anyone. “How can you say no to $1 million?” he asked.

“Believe me, it’s not easy,” she replied. “I’ll gladly take a fraction of that as a pay increase, but I can’t accept ownership. It’s not what I want.”

“You’re a fool!” Balthazar exclaimed. “Sleep on it. I will offer you this opportunity one more time at the end of the month.”

Jacqui left the meeting startled and insulted. As nice as $1 million sounded, she knew that that value wasn’t liquid. She couldn’t buy a new car with it or get a better apartment. She knew she couldn’t sell her share without Balthazar’s sons’ approval. And even if they gave her that approval, she had no desire to work through that process. She’d be at the mercy of decisions made by the two sons, whom she hardly knew.

And there must be other landmines that she didn’t even know about.

She immediately began a job search and quickly found a job that offered to double her salary. She accepted the position and, ever the diligent employee, decided to share her decision with Balthazar face to face.

“I assume you accept my offer?” Balthazar asked when they met.

“No, sir,” Jacqui said. “I’ve decided to resign. I do not want ownership, and I will not tolerate being called a fool for that.”

“I was only teasing!” Balthazar pleaded. “Who says no to $1 million?”

“I’m not saying no to $1 million. I’m saying no to your offer.”

Jacqui left Balthazar’s Ink Emporium and had immediate success at her new position. After she left, Balthazar learned a harsh lesson in how much Jacqui did for his company. Quarterly cash flow plummeted 30%. His sons—each of whom now owned 45% of the business—proved that Balthazar’s processes weren’t as foolproof as he had assumed. They made expensive mistakes.

As cash flow fell, so too did Balthazar’s income. He begged his sons to let him run the business for them, but they had decided to sell it to a third party for $2 million ($1 million for each of them, while they had paid nothing for their ownership when Balthazar gifted ownership to them) instead, after growing weary of hearing their father’s complaints about how they ran the business.

Balthazar incorrectly assumed that Jacqui would immediately agree to the incentive plan he had conceived because to him, it was $1 million. He failed to realize that “incentive” to him was nothing more than a reason to leave for Jacqui. He didn’t properly incentivize Jacqui and thus lost her. Losing her meant losing business value and cash flow, which eventually turned into net losses of $5 million.

If properly incentivizing your key employees is important to you, or if you’d like to discuss how you can blend key-employee planning into your overall planning for your business’ future, 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.

Why Make Your Business More Valuable Without You?

Businesses that rely on their owners as the primary source of success are common. They’re also the most dangerous kind of business to own when you want to plan for the future of your ownership interest. Unless your goal for the future of your ownership is to liquidate the business and shut it down, you’ll likely need to build your business’ transferable value.

One way to define transferable value is that it is what a business is worth to a qualified buyer without the owner present. Essentially, a business that relies on its owner for success is worth less to a buyer than a business that can run smoothly without its owner. For some businesses, overreliance on the owner can make the business not only worth less but also worthless to buyers, despite all other indicators of success.

This might seem at odds with the tenets of entrepreneurship, ownership, and job security in general. Many of us are taught to take on as many responsibilities as we can to make it harder for a company to do without us. Entrepreneurs often take pride in how many different hats they wear as they build their companies. This attitude is admirable but also dangerous for owners who want to plan for the future of their businesses. Consider the story of Henry Rutherford and how his constant drive to do more affected his planning.

Henry Rutherford had built quite an empire. Over 35 years, he turned his three-person propane distribution business, Rutherford Propane, into a six-location regional staple. He employed 45 people and owned a well- maintained fleet of 30 delivery trucks. At 70 years old, Henry still coordinated the routes, worked with the largest customers, and led the company’s marketing efforts. His employees looked up to his work ethic and often wondered how Henry could do so much. Simply, he was a model of hard work.

Privately, Henry was exhausted but hopeful. He wanted to get out of his business within the next year, before he completely burned out. Two of his primary but friendly competitors, Wyatt Durndel and Theresa Seels, had recently sold their businesses. Wyatt said he ended up with “north of $5 million” for his business, and Theresa had managed to make “about $9 million out the door.”

Henry knew that his company did more business than Wyatt’s. He also knew that his company had more large contracts than Theresa’s. When he thought about all the hard work he had put into marketing and building a strong, reliable, and diverse book of business, he figured he could get at least $10 million for the company. He reached out to his most trustworthy advisor, Butch, to seek out a buyer for him.

Over several months, Butch found three buyers interested in Rutherford Propane. Each offered Henry between $8–9 million on the condition that Henry stay with the company for at least five years to help train replacement leadership.

“That doesn’t make sense,” Henry said. “I’ve built this company and created a strong book of business. Why do they need me to stay?”

“They don’t feel that the company is worth much without you,” Butch said. “They think that you do all the heavy lifting, and without you, the company won’t function how they want.”

Frustrated, Henry asked, “What if I refuse to stay? What will they give me then?” “I can ask,” Butch said.

A week later, Butch reported back to Henry.

“Two buyers said they aren’t interested unless you stay,” Butch began. “The last one offered $1.5 million for your delivery truck fleet, book of business, and company name.”

“But that’s barely 10% of what I’m looking for!” Henry said. “And, what, my employees lose their jobs?”

“That’s what they implied,” Butch said. “They worry that your bigger clients like to do business with you personally and that if you leave, most of them won’t renew their contracts. Without you, the only value they have is finishing out your existing delivery contracts and adding your trucks to their fleet.”

“Aren’t they responsible for replacing me with people they’ve trained?” Henry pleaded.

“That $1.5 million offer took that into consideration,” Butch said. “They figure it’ll cost them at least $5 million to train others to do everything you did as you did it, build the market back up, and get new contracts in the door. Even then, they aren’t confident that they can retain all of your business without you there.”

Working hard is admirable and necessary for success. But when it comes to planning for the future of your ownership, it’s wise to make yourself inessential. If the business cannot succeed without you, you’re likely to find yourself with limited options. If you’d like to discuss why and how you should position your business to be more valuable without you, 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.