Exit Planning Tools for Business Owners

Steven Zeller

Preserving Family Wealth is a Generational Effort

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Wealth within a family can be a double-edged sword. It can serve as an incredible resource to benefit its family members, but it can also be destructive and divisive. Destructive in the sense that if not properly tended to and respected, wealth can destroy the purpose and outcomes of individual family members, and divisive in the sense that it can damage the bond between family members and cause a splintering of the family.

Wealth and the handling of wealth is a topic that has been discussed or written about throughout the ages, as it is mentioned in both the Old Testament and the Gospels within in the parables of Jesus. Yet often, families don’t properly plan, develop, and practice the preservation and utilization of their wealth in a way that produces favorable outcomes and continues over the generations. The reality that families face is that just because they have addressed the accumulated tangible assets with a planned strategy and structure to transfer those assets, it does not assure that those assets will last and more importantly, promote the growth and well-being of the individual family members, and promote family unity.

So how does a family address this topic? A good place to start is to change the way wealth is viewed and is approached. First, family wealth is capital, which equals potential (Family Wealth = Capital = Potential). That potential can have a positive effect or have a negative effect. Secondly, family wealth comes in multiple forms – Financial capital, human capital, intellectual capital, and spiritual capital. Wealth in a family means more than just money, assets and material resources, it includes all of the other things such as family heritage, reputation, knowledge, education, passions, purpose, relationships, achievements, personal growth, and values. In fact, the other forms of wealth that I just mentioned are arguably more important to preserve and grow than the tangible form of wealth, because without nurturing and expanding the intangible forms of wealth, the tangible wealth is not likely to survive and breaking family harmony as a consequence. The emotional bonds, unity and harmony of the family members are some of the more powerful components that are critical for preserving family wealth long-term.

Within family unity and harmony lies the development of trust, respect, and communication. These components should be developed and strengthened before financial capital is transferred and deployed. We will discuss that later.

Discussing the Four Forms of Wealth

The forms of family wealth that I mentioned are somewhat subjective but are important to realize and work to develop, grow and protect. Strengthening all 4 forms of family wealth promotes purpose, personal growth, happiness, and well-being. Furthermore, the legacy of this wealth involves every family member and spans over several generations.

Financial Capital – Financial capital consists of the tangibles – Investments, savings, bank accounts, real estate, businesses, precious metals, collectibles etc. – The movable and immovable assets that the family owns. Financial capital can provide a powerful tool with which to promote the growth of the family’s human, intellectual, and spiritual capital.

Human Capital – Human Capital is the most important capital. It is the members of the family and their physical and emotional well-being and self-sufficiency. It’s their ability to pursue happiness, having a higher purpose than themselves, their ability to make a positive impact on their community, and the centeredness of maintaining a strong family. Not only is it vitally important to focus on the strength and growth of this capital long-term, the family needs to work, communicate, and cooperate with each other as a team to help assure that everyone is flourishing to the best of their ability, and work towards common goals.

Intellectual Capital – The strength of a family rests on what it knows. The intellectual capital is the knowledge life experiences and wisdom of each of the family members. gaining knowledge, applying knowledge, and other skill sets to preserve the wealth, and apply it in ways that is conducive for the family and well-being of family members. It is also the competencies of each of the family members. Building a strong foundation of intellectual capital will help drive individual purpose, skills, and the applicable knowledge to preserve and respect the financial capital.

Spiritual Capital – As sad as it is, this subject has become controversial within our society as it becomes more secularized. But the spiritual capital ties in with the happiness, well-being and purpose of each family member, in that if they have a strong spiritual foundation, they have a higher power to live for, go to, and from a meaningful perspective, make a positive difference in the world for the sake and love for mankind through God.

Long Term Success of the Family Wealth

The Importance of Family Harmony

Family unity and harmony are vital for the survival of family wealth. The proactive building of trust and communication needs to begin early on as a family. Why? Because it doesn’t happen overnight and requires working as a team and developing the family bonds that are trusting, compassionate, and cohesive. According to some studies, 70% of estate transitions fail and to which the wealth vanishes. Within the 70% failure rate, 60% of that failure rate was due to a breakdown of trust and communication; 25% was due to the failure to prepare heirs; 10% was due to not having a family mission statement; 5% was deemed to be for other reasons.

Because of the high failure rate, due to the breakdown of trust and communication, stresses the importance of the family focusing on it and making a consistent effort to strengthen it. Hence, proactively preparing family members involves resolving the breakdowns in communication and trust. It also requires them to work together to establish a family vision and mission statement, aligning those statements with the financial capital, identifying family values, develop roles for each family member, developing performance and quality standards, and work towards family governance involving the whole family.

There is a process that a family can go through starting with the wealth accumulators, or the first generation of wealth. This journey consists of several tools including a family retreat that involves the first generation or the parents that accumulated the wealth. Later, the other generations are brought into the fold with the beginning of family meetings. From there, the building of communication, trust, common causes, the establishment of values, the fine-tuning of the vision and mission statement, etc. are pursued. When this is thoroughly completed, the family can then work towards establishing roles for each individual, develop leadership skills, and develop family governance.

Ultimately, this is the creation of a family legacy, and as I mentioned in the title of this article, it is a multi-generational process and effort. It also is likely that the family will need professionals to help them through the process, which our firm can provide.

Steven Zeller is a Certified Business Exit Planner, Certified Financial Planner, Accredited Investment Fiduciary, and Co-Founder and President of Zeller Kern Wealth Advisors. He advises business owners with developing exit plans, increasing business value, employee retention, executive bonus plans, etc. He can be reached at szeller@zellerkern.com or complete an Exit Readiness Assessment for yourself now.

Protect Your Business with A Solid Continuity Plan

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The Need For A Solid Continuity Plan

A great characteristic of successful business owners is that they are optimistic people and will do what it takes to protect their business. They have a can-do attitude, setting their goals high, taking risks, hiring the right people, constantly striving to improve the delivery of their service or product, with a constant drive to build their entity into one of great significance.

As a result, building a successful company may give the owner great pride in their achievements and a strong sense of identity. That is normal human behavior. But because of that, the thought of an event that causes the owner to leave the business due to death or a disability is often never planned for and is overlooked. If such an event were to occur, it would not only jeopardize the value or even the survival of the business itself, especially if the business is heavily reliant on the owner or a key partner, but it also jeopardizes the future career paths of key employees and others, and leave customers scrambling to find somewhere else to go.

What Does It Take To Protect Your Business?

One thing is often on the minds of owners and advisors; how the family is taken care of through an unexpected death or disability. However, business continuity planning goes much further than that. A solid business continuity plan includes agreements, procedures, employee incentives, and safeguards that are put into place to help enable the business entity and all of its successors. This includes all key employees, vendors, operations, procedures, and customers. It helps the business continue on a successful path, with as little interruption as possible, if the owner/s is no longer present.

For instance, who will fill the slot of Chief Executive or Chief Operating Officer? Does the remaining management have a plan? Do they have financial resources available to search and bring in somebody from the outside to fill that position? Should they begin, now, to groom key employees for that role? How will the key vendors, creditors, and customers be handled? Will supplementary training need to take place? What will you tell the customers and the community to maintain confidence in the company during an unexpected death or disability? What plan will you put in place to entice the key employees to stay around and ensure the internal integrity of operations?

The reality within the marketplace is, if the business is left paralyzed and vulnerable, they risk losing key customers, creditors, and key employees who may be quickly recruited by competitors.

The Elements of a Solid Continuity Plan

The good news is that building a solid continuity plan is a required step within the exit planning process. It helps to build the value and marketability of the organization.

There are many areas that a continuity plan addresses and help protect your business. It includes the creation of a Buy-Sell Agreement, or amending or replacing one; the disposition of ownership interest, which is done through estate planning documents; insurance to fund the Buy-Sell Agreement; a management continuity reward program; retaining key employees after death or disability; a stay bonus plan; a process for terminating personal guarantees for business obligations, business continuity instructions; and a Buy-Back agreement for minority owners. There are other potential areas to address, but these are the likely critical areas.

Key Documentation

Buy-Sell Agreement – This document is created to summarize the terms of the written agreement that will govern the ownership transfer and ownership rights aspects of the ownership interest of the primary owner/s and other members of the controlling interest group. This document also covers the issues related to the rights and responsibilities of the parties to the agreement.

Disposition of Ownership Interest Through Estate Planning Documents – Estate Planning documents summarize the intentions and issues that are most important to the owner if he/she dies while holding the ownership interest in the company. This is carried over into the continuity plan and is created within the personal estate planning documents.

Insurance to Fund A Buy-Sell Agreement – The purpose of this exercise is to recommend and select the appropriate type of life and disability insurance related to the purchase/sale of the owner’s interest in the company. Proceeds from these policies are used to purchase the ownership interest.

Management Continuity Reward Program – This is to address the benefits that the owner intends to provide to the individuals who take over the management responsibilities if the owner should die or become disabled, and is unable to perform the regular responsibilities.

Retaining Key Employees After Death or Disability – This is the section of the plan that addresses the steps to retain key employees. This is not intended to include incentive and reward planning for key employees, which is more properly addressed in a separate component of the overall planning. Instead, attention is given to the particular issues relevant to the key employee retention when a majority or controlling owner is unexpectedly absent from the company. This section is intended to assist the successor management staff. It also allows them to concentrate on the continued success of the company and protect your business.

Stay Bonus Plan – Develop a written agreement that would become effective upon the owner’s death or disability. The Stay Bonus Plan acknowledges the indispensable employees remaining with the company should such an event occur. The plan provides confidence and support to specific employees who choose to remain with the company and provides substantial financial reward for them doing so.

Terminating Personal Guarantees for Business Obligations – This is a stipulation of steps to be taken to protect the company if the owner’s personal financial resources are no longer available to support the financial activities of the business. In the event of death or disability, the company relationships may require that the business demonstrate financial stability to continue their relationship.

Business Continuity Instructions – Business continuity instructions are written instructions that are completed, signed, and stored with other important personal documents related to the owner’s death or disability.

Buy-Back Agreement for Minority Owners – The purpose of developing this agreement is to state the situations in which an employee owner’s interest will be purchased by you or the company in specific situations that may arise. It also governs the employee’s ownership interest while he or she is an owner. It addresses certain rights and responsibilities associated with the ownership status and other terms related to ownership.

Work Flow Diagram

Over the years my staff and I have developed a work flow diagram to help the owner understand how we can approach the development of a Business Continuity Plan. Although, every situation is different, it gives you a general idea of how it may come together.

Protect Your Business

The bottom line is, a solid Continuity Plan is critical for you, as a business owner, to develop and maintain, to help ensure that your business, which you and your staff have worked so hard to build, maintains its integrity and success if something should happen to you.

Steven Zeller is a Certified Business Exit Planner, Certified Financial Planner, Accredited Investment Fiduciary, and Co-Founder and President of Zeller Kern Wealth Advisors. He advises business owners and develops exit plans, increases business value, employee retention, executive bonus plans, etc. He can be reached at szeller@zellerkern.com