Exit Planning Tools for Business Owners

Exit Planning

“Work From Anywhere” Comes Full Circle

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Work from anywhere has been a necessity, an epithet, an obstacle, and an opportunity over the last 3 years. To paraphrase Aristotle’s axiom about Nature (“Horror Vacui”), business abhors a vacuum. Where one occurs, it is quickly filled.

Work from anywhere started as a COVID-induced necessity. During the lockdowns of 2020-2021 (and longer in some places) we all had a crash course in video calling, VPNs, and virtual meetings.

Employees quickly expanded the definition of anywhere. They tired of shunting the children off to a bedroom during conference calls, or using office-like backdrops to hide their kitchen cabinets. Soon they began changing their backgrounds to something more aspirational, like a mountain cabin or a scenic lake.

From there it wasn’t much of a leap to make the mental shift from a make-believe environment to a physical one. Pretty soon employees were calling in from real mountain cabins. In many cases, they shifted to someplace where the cost of living was much lower than in their former metropolitan workspace.

Work from Anywhere as an epithet and an obstacle

As employees moved further afield from their office environment, bosses began to sound off. “We aren’t going to pay Los Angeles wages to someone who has a Boise cost of living,” was a commonly heard complaint.  Most put up with it because qualified help was getting harder to find. Hiring remotely was too hard a new skill to master.

The complaints of employers grew louder as they began to ask employees to return to their former location of working activity. They made arguments about deteriorating corporate culture or a lack of mentoring opportunities.

At the same time, stories surfaced about workers who were getting full-time paychecks from multiple employers, or who were “quiet quitting” by doing as little as possible. The “Great Resignation” forced many organizations to put up with it. If you wanted to keep employees, you needed to accommodate their demands.

Then the work-from-anywhere poaching started. If an employee could do the job from a thousand miles away, why not just hire people from a thousand miles away? Now recruiters could dangle Los Angeles wages at candidates from Boise. Many employers saw work from anywhere as a curse costing them their best talent.

Work from Anywhere as an Opportunity

But as I said at the outset, business abhors a vacuum. Every action has a reaction. When the job can be done from anywhere, does that mean anywhere?

work from anywhereIf the higher cost of living centers can fill their needs by hiring people who are accustomed to earning less, why shouldn’t employers look at those candidates before the local talent? The Internet allows almost-instant communication across countries, what about across oceans?

In the last few months, I’ve worked with employers who are hiring accountants in India, staffing recruiters in the Philippines, programmers in Argentina, support techs in Colombia, and screening nurses in Nicaragua.  None of these employers are multinationals. Each one fits the SBA’s definition of a small business.

Their new employees are educated, English speaking, have the same hours as the employer, and are thrilled for the opportunity. Some are hired directly through a local placement agency. Others work for an organization in their home country that makes them exclusive to the client and promises to replace them if needed.

Most of the wages appear to be about 50% more than the same job would pay in the country of residence, and roughly half of what the position in the U.S. would cost.

Business has once again filled a vacuum. I wonder what is next?
 
John F. Dini develops transition and succession strategies that allow business owners to exit their companies on their own schedule, with the proceeds they seek and complete control over the process. He takes a coaching approach to client engagements, focusing on helping owners of companies with $1M to $250M in revenue achieve both their desired lifestyles and legacies.

Family Succession Planning: Who Gets the Office?

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Sometimes the most sensitive question in family succession planning is “Who gets the office?”

Dad’s (or Mom’s) office is usually perceived as the center of authority by the employees and other family members. That is where you got called on the carpet, where you were informed of promotions, or where you took an insolvable problem.

When a parent/CEO is handing off operating responsibility, there is often a lag, sometimes measured in years, between stepping back from the daily decisions and completely separating from the premises. There is great value in having that experience available for coaching, mentoring, or just to lend perspective on new problems, but where should they sit?

Family succession planning

Timing

The question of the appropriate timing for an owner to surrender his or her seat of power can be sensitive. The retiree often worries about becoming irrelevant. The fear of appearing irrelevant is just as strong. The boss’s office is a symbol. Often the owner who is stepping down would rather have no office at all rather than a smaller, less prestigious location.

I’ve seen owners elect to use the conference room as their “temporary” post. That can create other issues of its own. Are scheduled meetings now subject to last-minute relocation if the boss (who will always be the boss, regardless of title transfers) commandeers it for his own use? Equally distracting is when the conference room is scheduled as before. Then the boss arrives planning to do some work and winds up wandering through the offices looking for a place to camp out.

Perception

The situation is exacerbated when multiple children are assuming ownership. Who gets the office? Parents often have a vision of equality among their children. Ricky will handle sales, Peter does the accounting, and Ellie takes care of inventory and purchasing. The three will make business decisions jointly.

Regardless of voting rights, or any amount of explanation to the employees, one of the children will be perceived as functioning at a higher level of authority by assuming possession of the boss’s office. As in George Orwell’s Animal Farm, all are equal, but some are more equal than others.

Family Succession Planning

Settling who gets the boss’s office is an important part of any transfer. Too often it is treated lightly, only to be more seriously addressed after the issues are recognized. The symbolism of moving offices is strong, and sends a message to everyone. In some cases, remodeling to change the whole office configuration may be the best solution. New drywall is a cheaper fix than lingering resentment among shareholders or confusion in the ranks.

It’s often the little things in family succession planning that matter. One owner who was continuing in his office after his son was named President asked what he could do to make their shared space better reflect the change.

“Well Dad, “ the son responded, “maybe you could take down those pictures of our fishing trip when I was 11 years old.”

John F. Dini develops transition and succession strategies that allow business owners to exit their companies on their own schedule, with the proceeds they seek and complete control over the process. He takes a coaching approach to client engagements, focusing on helping owners of companies with $1M to $250M in revenue achieve both their desired lifestyles and legacies.

Prepared for 2023 – Is This the Year to Exit?

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What does being prepared for 2023 mean for business owners who are approaching, at, or already beyond normal retirement age?

It’s become fashionable to pontificate about the “inevitable” recession in the coming year. There is an argument for not talking ourselves into making it happen. Unfortunately, there are indisputable reasons why it is going to occur regardless of whether we discuss it or not.

Inflationary stimulus (including $6 trillion of ”quantitative easing”) in the US, combined with over-dependency on Russian gas supply in Europe and falling industrial production from COVID lockdowns in China have created the proverbial slow-motion car wreck for the world economy. All three will come home to roost for the world’s major markets in 2023.

What will happen?
Just as the result of these failures in leadership is eminently predictable, the impact on businesses in transition is equally plain.

Company valuations will decline. Inflated multiples fueled by low interest rates for leveraged buyouts have already disappeared. If you are planning your retirement around the value of a year or two ago, it is time to reassess.

A corollary to declining multiples will be a lack of financing. Market conditions directly impact the availability of acquisition funding. Already, Wall Street has seen a 90% drop in IPOs.

Running a business will get tougher for some time. The ”Great Resignation” is actually only half driven by increasing worker mobility. The other half is from Boomer retirements. As employees seek a counterbalance to inflation, staffing will be an even bigger issue than sales volume.

Many owners will look back at 2022 as the year they finally decided that enough is enough. Owners overcame the dot-com crash, 9/11, and the Great Recession. Now a combination of resurgent inflation, supply chain headaches and a lack of qualified workers will tip the scales toward developing an exit strategy.

What can an owner do?
Lower valuations call for creativity in structuring transactions. Employee buyouts and ESOPs that maximize the benefits of sustainable cash flow can provide owners with income that wouldn’t be available from a hard-negotiated third-party sale.

Seller financing or installment sales may offer flexibility that brings more qualified buyers to the table. Stretching out proceeds as recurring income can help a seller wind up with more in his or her pocket, albeit over a longer time period.

Retaining your top talent will be more important than ever, especially if wages continue to rise. Structured equity sales can act as both an incentive and “golden handcuffs” to ensure that a company’s best employees, and consequently its enterprise value, remain intact through dips in revenue.

Prepared for 2023
Many owners were lulled into a false sense of security by frequent calls from business brokers and private equity groups. They may have postponed their planning in the belief that a transition could always happen whenever they felt the urge.

When the phone stops ringing, they will need cooler heads to help them understand that there are options besides a fire sale. Equity can be retained, and retirement can be secured. Work with an advisor who understands the alternatives to “List it and they will come.”

Companies will still be sold in the coming year. Prices may be lower, but are only falling from the unrealistic high driven by cheap money. It may feel like you are getting less than market value, but multiples have only receded to their historical mean.

If this is the year for you to begin your “second act,” it’s still the same approach as it was before. Being prepared for 2023 is a matter of researching the market, planning the process, and hiring qualified professionals.

John F. Dini develops transition and succession strategies that allow business owners to exit their companies on their own schedule, with the proceeds they seek and complete control over the process. He takes a coaching approach to client engagements, focusing on helping owners of companies with $1M to $250M in revenue achieve both their desired lifestyles and legacies.

Owner Obstacles to an Exit Plan

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Owner obstacles to the implementation of an exit plan are often unconscious, but they can be dramatic.  Their attachment to the business can be difficult to break. An advisor spends a lot of time and energy developing the vision for life after ownership in the hopes that it is far more attractive to them than their current role in the business.

Yet no matter how well developed that vision is, or how well defined the action steps are, it isn’t unusual to find owners who behave in a way that ultimately sabotages the plan. Sometimes their actions are even intentional, but more often they aren’t. The problems arise in two ways.

 

“Death from Inattention”

We always ask exit planning clients for two target dates. The first is when they want to be relieved of day-to-day operational responsibilities. The second is when they want to be completely free of any connection to the company.

We tell a client that once we have achieved the first objective, the second may become more flexible. Freed on the task-based duties of running the business, an owner often becomes more strategic. He may start planning for new growth and value creation. She might go back to her role when the business first started when she was the best salesperson or the designer of novel product offerings.

Owners returning to their core skill set are usually a benefit to the business. The problem arises when they enjoy the lack of responsibility so much that they just become owners in absentia.

There is no strategy. The company drifts along on the backs of the operations managers, but doesn’t have a direction beyond “more of what we did yesterday.” There are no new initiatives.

Companies are organic. They are either growing or shrinking. The lack of direction may take a while to have an impact, but eventually, performance will suffer. Getting owners to re-engage after time away can be exceedingly difficult, but if they don’t, the transition is unlikely to accomplish their objectives.

“Death from Over-Attention”

The second obstacle to successfully implementing a transition occurs when owners have surrendered their task-based duties. In this case, they are unable to define their contribution in the absence of being “busy.” They begin looking for ways to contribute, often where their contribution isn’t needed.

It’s not uncommon to begin demanding more accountability and greater detail than is necessary. He or she pours over reports looking for errors, anomalies, or declining results to prove added value.

Another technique used to prove contribution is “seagull management”. An owner may look for opportunities to make decisions but does it without consulting the managers who are in charge of the function. Because they have always known best, they still know best. What isn’t as obvious is that they are now working in a vacuum, with little knowledge of what went before. The results are usually not ideal.

A third way owners might evidence over attention is with a “break the rules” mentality. They offer exemptions from policy or circumnavigate systems because they can. Exercising authority shows who is in charge, even if there is little apparent responsibility.

Preventing the Owner Obstacles

We call these “good” obstacles because they typically occur only after some level of initial success in the exit planning process. They are a direct result of relieving owners of the more mundane duties of management, and freeing them up for more effective leadership. Each is preventable with some preparation.

Either issue can be forestalled by including the owner’s next level of responsibility in the planning process. If the owner resists retained responsibilities, then the future becomes plain. Plans can then include the transfer of higher functions to the management team. If the owner insists on maintaining a level of day-to-day control, the coaching process should include defined parameters about what reporting is essential, and how often it will be presented.

owner obstaclesIn either case, owner obstacles occur when the owner is crossing the no man’s land between total focus on the business and the time when it isn’t a recipient of their attention at all. Like any no man’s land, it is unfamiliar territory, and some pathfinding is necessary. That is the exit planning coach’s job.

John F. Dini develops transition and succession strategies that allow business owners to exit their companies on their own schedule, with the proceeds they seek and complete control over the process. He takes a coaching approach to client engagements, focusing on helping owners of companies with $1M to $250M in revenue achieve both their desired lifestyles and legacies.

How to Separate Yourself From Your Business – Why It’s So Important

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When you run your own business, oftentimes one of the most confusing aspects of the job, especially if you are new to the experience, is understanding how to separate yourself from your business. And this issue can show up in so many ways, from achieving a work/life balance and managing your time to how you get paid and even how much taxes you owe.

With this in mind, here we will offer a big-picture overview of this issue, and in future articles, we’ll drill down to some of the finer details of keeping your business and personal assets separate. Although it might not seem overly complicated or important, separating yourself from your business is a serious issue for every business owner.

You & Your Business Are Separate Entities

The first thing to keep in mind is this: you are not your business, you are not your heart project, your are not your work in the world or even the services you offer. Your business, heart project, work, service, and/or product may feel like it’s one and the same as you, or even as if it’s your baby. But one day, just like the little ones you give birth to, you may want your business to grow up and go on to live on its own without you. Or you may not want that—it’s all a matter of preference, and your decision on this point may even evolve over time.

Either way, this is a good thing to start thinking about now. Do you want what you are creating to live beyond you? If so, you’ll need to start thinking about it as an evolutionary entity that can grow separate from you. And whether you want it to live on beyond you or not, you want it to exist separately from you, because as you’ll learn, there are major tax and asset protection benefits for you by doing this properly.

Owning A Business vs. Being An Employee

To add perspective, let’s contrast what it’s like to run your own business with what happens when you are working as an employee.

The Employee Experience:

As an employee, you get paid via a paycheck, with taxes taken out and a W-2 issued to you at the end of the year. In this case, you and your money-earning vehicle are essentially one and the same.

You earn money, and you pay taxes on that money in the form of income taxes and payroll taxes. As an employee, what comes to you every pay period via your paycheck is yours to put into your personal financial accounts, so you can pay your bills, save, or invest. In that context, you are getting taxed on every dollar you earn.

There are some ways that you can save money tax free as an employee, such as by directing some of your pay into a 401(k), an IRA, or even a Health Savings Account, provided your employer offers such benefits. But for the most part, you are paying payroll taxes and income taxes—which are two separate types of taxes—on every dollar you make.

The Business Owner Experience:

In contrast, when you are earning money through a business entity that is under your control, money comes into your business, goes into your business accounts, and is first used to pay business expenses, which are deductible expenses to your business. When you deduct business expenses from the income of your business, you do not pay income taxes on that income. In this way, you can think of business expenses as a government-subsidized expenditure.

Here’s what I mean: if you can purchase a computer through your business and use it for business, you are paying for that computer with pre-tax dollars, which could save you up to 40% (or more depending on your state) on the cost of the computer, versus if you were to purchase that same computer with after-tax dollars. But this only works if you treat your business like a business, and properly separate your personal and business accounts.

To keep your business and personal expenses separate, your business entity needs its own bank account, its own credit cards, and it needs to pay you. You then always pay your personal expenses out of your personal accounts, never your business accounts. Whatever your business pays you will be subject to income tax and possibly payroll tax as well, though there are ways to significantly reduce your payroll tax obligation by choosing the right way to structure your business entity. Be sure to talk with us regarding how to structure your business for maximum tax savings, if you have not already gotten great guidance on that front.

To the extent that your business earns more money than what’s required to cover your basic needs, you may want to consider investing to hire experienced support staff (especially a skilled bookkeeper and administrative support) to free up your time and allow you to focus on generating more revenue, better serving your clients or customers, and growing your operation. Or you may choose to invest that money in additional education or training for yourself, so you can increase the value (and price) of your services. If you have excess cash flow, you’ll also want to know how to structure your profits, so you pay the smallest amount in taxes legally possible.

Don’t Mix Personal & Business Finances

Whatever you do, do not simply have one bank account that you pay both your personal and business expenses from, or you are going to get seriously confused, and you could even end up losing money or getting into legal or tax trouble, depending on your company’s entity structure.

If you have already paid business expenses out of a personal account, or by using personal credit cards, keep careful track and document exactly how much you paid out from those accounts to your business. This payment will either be an investment in your business that you will want to track for the future, or it will be a personal loan to your business that you will want to eventually have paid back.

Talk with your CPA regarding how best to structure investments in or as loans to your business, and then we can help you properly document your decisions. Or if you need strategic support on this issue, contact us, and ask about a LIFT Business Breakthrough Session, and we’ll look at all of your legal, insurance, financial, and tax strategic decisions together.

When you work with us, as your Family Business Lawyer™, we offer a number of systems and processes that make keeping your personal and business finances separate a snap. Not only that, but we offer additional services that make separating yourself from your business as easy and convenient as possible. Reach out to us to learn more.

Get Clear On Your Actual Financial Needs & Goals

One of the best ways to effectively manage your business and personal finances is to first get clear on what you need your business to pay you at a base level, so you can pay all of your bills and other personal expenses as well as meet your personal time and money goals. To get clear on this, we use a process called Money Mapping. If you haven’t worked with us on this yet, now is the time to finally get a solid understanding of how much money you actually need to reach your goals, rather than guessing or worrying about how much you need to earn to stay afloat.

We’ve Got Your Back

When it comes to separating yourself from your business and managing all of the different aspects involved with this process, you can count on us to provide you with the trusted support and guidance. With our help, you’ll learn how to do this in a way that not only ensures you are doing it right, but that actually adds value to your company and generates increased revenue. Sit down with us, your Family Business Lawyer™ to learn about all of the different ways we can support you in this area. Schedule your visit today.

This article is a service of Todd Jarvis, Family Business Lawyer™. We offer a complete spectrum of legal services for businesses and can help you make the wisest choices on how to deal with your business throughout life and in the event of your death. We also offer a LIFT Start-Up Session™ or a LIFT Audit for an ongoing business, which includes a review of all the legal, financial, and tax systems you need for your business.