Exit Planning Tools for Business Owners

Exit Strategies

Will You Be Ready?

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calendar with one pink flag to mark a special dateWill you be ready when it is time to leave your company? A business owner needs to have a basic business strategy to monitor company financials regularly. Several owners consider this a strategy to prepare for exiting their businesses. However, monitoring company financials is like looking in the rearview mirror. What if you could incorporate a business strategy that looks forward and leads to accelerating profitability and increases business value? In addition, this strategy helps lead to less stress, more free time, and ultimately helps take control of a business exit?

The Active Strategy

The Business Strategy is called Exit Planning. John H. Brown, author of How to Run Your Business So You Can Leave it in Style, writes: “Exit Planning is a process that results in the creation and execution of a strategy allowing business owners to exit their businesses on their terms and conditions. It is an established process that creates a written road map, or Exit Plan, often involving efforts of several professionals, facilitated and led by an Exit Planning Advisor who ensures not only the plan creation but its timely execution.”

Unfortunately, most business owners do not employ this strategy. They are personally unprepared, and their business is not ready when it comes time for them to transition. Ultimately, there is less control over the timing of the exit and even less control over the value they receive when they do exit their business entirely.

What can you do?

Consider this when building an exit strategy:

1. Focus – Adhere to the niche the company serves. Buyers place a premium valuation on focused companies that do one thing very well, better than others. Do not stray from the niche because it destroys value.

2. Develop a Management Team & Reduce Owner Dependency – Ensure the management team can carry on without the business owner when the business sells. It is difficult for the business owner to disengage while they still actively manage. But this is precisely when the owner can create more value—because when the business is not exclusively dependent on the owner, it is worth more! Ask yourself, if I leave today for an extended length of time, will the success of my business be impaired? If your answer is yes, you have not created value. You have created a glorified job.

3. Assess Your Business – Prepare an objective assessment of the company’s current position and potential. A simple SWOT analysis is beneficial. Write down the Strengths, Weaknesses, Opportunities & Threats of the company.

4. Ensure the Business Has Adequate Capital – The lending markets are often more willing to lend in good times than in bad times. Are you maxing out your credit lines, or do you have a comfortable margin of credit? Are you happy with your current lending relationship? Evaluate alternatives and review your loan covenants regularly.

5. Clean Up the Balance Sheet – Collect past due accounts or write them off if uncollectable. Review customer credit policies. Clean up inventory and take it off the books if obsolete or unsellable. Diligently track personal expenses run through the business. And lastly, call in loans to shareholders and employees.

6. Obtain Financial Audit of Business – Frequently, the company’s accounting has not grown at the speed of the company’s growth. An audit prepared by an objective third-party accounting firm provides a high level of credibility to the business performance.

7. Protect Key Personnel – Obtain employment and non-compete agreements from key employees. The last thing you want is someone leaving just before you decide to exit. The buyer is looking for continuity of Key Personnel. If you have not already tied your integral people to the business, it may be far more expensive to do so at the time of sale.

8. Identify & Mitigate Legal & Environmental Risks – Working with your liability insurance advisor is essential. Unfortunately, until the buyer brings up the subject, this is often left undone.

9. Review Customer Concentration & Overall Operations – Are your vendor contracts assumable/transferable upon sale? Do you derive more than 20% of your revenue from one customer or client?

10. Build Your Team of Advisors – Establish a strong team of qualified accounting, tax, legal, financial, and investment banking professionals. Invite them together at one meeting to establish your expectations of collaboration around your personal & financial goals. Establish recurring management meetings to monitor progress.

While there are many competing needs for a business owner’s time, working on an exit strategy can result in less stress and more time to do the things you want to do instead of need to do. In addition, an exit planning strategy can also enhance profitability and business value, resulting in a win-win for the owner, the owner’s family, and the employees of the business.

Securities and advisory services offered through Commonwealth Financial Network®, Member FINRA/SIPC, a Registered Investment Adviser. Fixed insurance products and services offered through Legacy Planning Partners, LLC or CES Insurance Agency.

Jan Graybill is a Certified Financial Planner® (CFP), and holds the Certified Exit Planning Advisor® (CEPA), Chartered Financial Consultant® (ChFC) and Chartered Life Underwriter® (CLU) professional designations. He is a Managing Partner and CEO of Legacy Planning Partners. For more information about Jan, click here.

Are Remote Employees Value Killers?

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Remote workers, computers, businessesRemote employees can have a dramatic impact on the value of your business. If your exit strategy is to sell to a third party, take some time to think about the areas where offsite workers could have an impact.

Curb Appeal

One of the first things any good business broker will look at is your curb appeal. Your business needs to look good, just like a house that’s for sale. (OK, maybe right now a house doesn’t even need to look good, but you know what I mean.)

When I brokered Main Street businesses, I was always surprised at how much we had to tell owners. Clean up the piles of files in the office. Clean and sweep the parking area. Remove the pile of broken pallets next to the dumpster.

What message does your office space send?  Is it better to downsize, and just describe the employees who are no longer on the premises? Or would a buyer prefer to see a room full of empty desks, so that he knows he could bring them back if he so desired? (But he would also be calculating the wasted rent in his mental cash flow.)

Equating Dollar Value

What are your productivity measurements or KPIs for remote workers? Can you prove that they are worth what you are paying them? How? What level of confidence can a new owner have that he is acquiring a productive team? A recent survey in the U.K showed that almost 30% of remote employees were working a side gig on company time.

How is their remote presentation? Unless they are in a job that is strictly production-based, most will interact with customers, vendors or other employees. Do you have standards for their workspace and their appearance on video?

Can you give a buyer confidence in their compensation structure? New ownership can be a great time to ask for a raise. What assurances are there that it won’t happen? As I wrote a few weeks ago, how do you integrate them into your culture?

Confidentiality and Human Resources

Confidentiality about the transaction is more difficult. Does the buyer interview remote employees one by one? You can be sure they are talking to each other, whether on Teams or Slack or just texting each others’ cell phones.

On the other hand, a group video call raises new issues. A buyer could come out of it with a poor impression because one individual is obnoxious or inattentive. Someone might press for inappropriate information. (“Will all of us keep our jobs?”)

Remote Employees Increase  Risk

I am not campaigning against remote employees. They are a fact of life, now and likely for the foreseeable future. I’m just pointing out that handling their management, controlling the information flow to them, and anticipating their potential impact have all become part of exit planning.

The best surprise is no surprise. Part of your planning process when listing your company for sale should be how you will handle these questions.

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.

Avoiding Financial Anxiety

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worried man with calculatorSeek help and avoid financial anxiety[/caption] Everyone has financial anxiety to some extent. Whether you have a little money or a lot of money does not make a difference. However, when it comes to asking for help, many people avoid seeking financial advice until necessary.
 
As financial decisions become more complicated, it is far easier to make a mistake. Today more and more people procrastinate on making financial decisions. Procrastination to make financial decisions can ultimately lead to anxiety, delay, or indifference.
 
In this article, I provide three keys to seek out and accept financial advice from a professional advisor. If you recognize the need for help, whether you are a millennial, a baby boomer, or someone in between, you can increase the odds of making beneficial financial decisions. You can avoid making predictable financial mistakes.
 
One may ask, “Why can’t I do all of this on my own?” To which, I would respond, “You don’t know what you don’t know!” An experienced financial planner has many clients that are at different stages of their financial lives. They can use their experience of what has worked and what has not worked to help you arrive at a better outcome. Financial success is not only contributed to by the earnings over a lifetime, but it is also the avoidance of predictable financial mistakes.
 

Who to turn to for Financial Advice?

Let us start with some definitions: A Financial Planner is a professional who helps individuals create a plan to meet long-term and short-term financial goals. A Financial Advisor is a broad term for those who manage money, including investments and insurance products. A Wealth Manager is a financial advisor who utilizes the spectrum of financial disciplines available such as financial and investment advice, legal or estate planning, accounting and tax services, and retirement planning to manage an affluent client’s wealth. Let us place all these labels under the heading of Financial Coaching.
 
You can decide to work with a Financial Coach based on the financial complexity and after an initial meeting without obligation. This initial contact can take place via an introductory phone call or in-person meeting without obligation. At that time, expect to learn about the financial coach’s value proposition. If financial advice is what you seek, a comprehensive planning process should include: assessing your financial needs, educating you on your financial life choices, recommendations, and a timeline for ongoing review of your financial plan.
 

Choosing the right Financial Coach

If comprehensive financial decision-making is what you seek, start by looking for a professional with CFP credentials. The CFP credential stands for “Certified Financial Planner” and is the gold standard for financial professionals engaged in financial planning. In addition, look for senior financial planners who have 10+ years of experience with a support team around them. This team might consist of a client relationship manager and an associate financial advisor who is always available to the client for follow-up and execution of action items. The senior financial planner’s job is to get to know your unique financial needs and manage the overall strategy to achieve your financial goals. This process covers important concepts around economic assessment, risk management, and education related to your unique circumstances.

Accepting Financial Advice

Today, everyone faces increasingly complex financial decision-making. In addition, financial information has become readily available to anyone who searches the internet. However, this information is useless without the wisdom to know how to use it. Is it any wonder we fear making financial decisions? It is often difficult to distinguish good financial choices from bad. As a result, many people make financial decisions without knowing the negative impact they will have on other areas of their financial lives until it is too late to correct them.

Seek out a qualified and experienced financial coach/planner to assist you in making your financial decisions. The results may lead to reducing your anxiety around making financial decisions and ultimately improve your overall fiscal well-being.

Securities and advisory services offered through Commonwealth Financial Network®, Member FINRA/SIPC, a Registered Investment Adviser. Fixed insurance products and services offered through Legacy Planning Partners, LLC or CES Insurance Agency.

Jan Graybill is a Certified Financial Planner® (CFP), and holds the Certified Exit Planning Advisor® (CEPA), Chartered Financial Consultant® (ChFC) and Chartered Life Underwriter® (CLU) professional designations. He is a Managing Partner and CEO of Legacy Planning Partners.

Utilizing a NING Trust as Part of a Business Exit Strategy

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Signing Trust DocumentsThe most commonly stated goals of an exit plan for a business owner are to exit their business on their terms, to receive the highest possible value (or their desired value), and to do so in the most tax efficient manner. It takes time to implement the process to accommodate those objectives. When a business owner rushes to sell their business many things can be overlooked including how to set up the exiting transaction in a way that minimizes taxation.

Particularly in California, state income taxes are excessive in relation to other states, especially compared to states that don’t have any income taxes. For 2020, the top tax bracket for California is 12.3%. Upon the sale of a valuable business, the realized gains can be substantial enough to hit this top tax bracket, especially if the business has a low cost basis. To put it into perspective; if a company is sold, realizing taxable proceeds of $12,000,000.00, the potential taxation in the state of California is approximately $1,476,000.00. That’s a significant amount but, if planned carefully, this potential taxation can be avoided.

Though it is not the only solution for a California business owner, a NING Trust (Nevada Incomplete Gift Non-Grantor Trust) is a tactic that be utilized to avoid California income taxes, if the right conditions are met.

What is a NING Trust?

A Nevada Incomplete Gift Non-Grantor Trust is an irrevocable trust designed to reduce or eliminate the potential State income tax for high income earners or on a significant capital gains on a sale of an asset, and the owner lives in a high income tax state. An irrevocable trust is often a trust to which the assets placed in it are no longer owned by the Grantor (Owner). Therefore, it has a third party trustee, and the trust and the assets in it are considered to be outside of the Grantor’s estate. However, because the NING trust is considered to be trust with an “incomplete” transfer status, it is still in the owner’s estate, but we will get into the benefits of that later. Because it is a Non-Grantor trust, the trust is the entity that pays the income taxes and not the Grantor, or owner of the assets. Because Nevada does not have a state income tax, a resident or a trust in Nevada would not owe income taxes.

A NING Trust is created under Nevada state laws. It is considered to be a “self-settled” trust, which means you are the creator and primary beneficiary of the trust. The NING trust would be utilized if you have a desire to receive distributions from this trust. Furthermore, you could benefit from a “self-settled” asset protection statue of this trust, which the state of Nevada recognizes. Although Nevada isn’t the only state to recognize this statute, Nevada is a very trust friendly state and is convenient for California business owners, which we’ll get into in a moment.

Estate Planning with a NING Trust

For estate planning purposes, it is important to realize that asset transfers into a NING trust is considered to be an “incomplete gift”. Because of this, the assets in a NING trust will be included in the asset owner’s estate and will receive a step up in costs basis at death, if the low cost basis assets are still existing in the trust. But, you will have the benefit of transferring assets into the trust and not be subject to gift taxes. Furthermore, keep in mind, that the NING trust is for income tax strategy purposes and not for estate planning to reduce an estate tax liability.
So here’s the catch. In order to take advantage of a NING trust, the business owner residing in California that is looking to sell their business should first purchase a home in Nevada or another state without income taxes and establish residence there. You will need to definitely work with a business transaction attorney or an estate planning attorney that is well versed in NING trusts.

Later, the shares of the corporation are placed into the NING trust (after it is established), which then the shares of the corporation are then sold to the buyer. The business owner, now a resident of Nevada, can eventually begin to take distributions from the NING trust. You will need to work with a C.P.A. or tax attorney, but some say that after a year or so after the sale, the Grantor can begin to take distributions from the trust.

NING trusts can only own intangible assets, so shares of a corporation or an investment account. But that is okay in this instance, because the shares are sold and then placed into an investment portfolio to continue to grow.

Maintaining Non-Grantor Status

In order for the trust to maintain a Non-Grantor status or not violate the Grantor trust rules (which would make distributions taxable), the Grantor needs to exercise Powers of Appointment or Non-General Powers of Appointment. This means you retain the power to appoint anyone in the world except yourself, your estate, or creditors of your estate. For this discussion, we will refer to the “Inter Vivos Powers of appointment”, or powers during life. In this situation, distributions must be facilitated by a committee of adverse appointees. Second, the distributions need to be made in a non-fiduciary capacity and based on HEMS (Health, Education, Maintenance, and Support). Adverse committee members may include siblings, children, or other relatives that may be beneficiaries. There are many more nuances to these rules, which we won’t get into for sake of time. Besides, an expert attorney will explain all you need to know.

The bottom line is, this trust has a lot of rules and must be carefully written and set up. But it is feasible.

To Summarize, the trust needs to:
1. Be self-settled to give the grantor the ability to receive distributions.
2. Be a non-grantor trust so that the grantor won’t be taxed on the trust income at the rates of their home state.
3. Ensure the grantor be given a non-general power of appointment to direct disposition of the trust.
4. Furthermore, the transfer of the business to the trust would have to be an incomplete gift, includible in the grantor’s estate at their death.
(source: Save State Income Taxes Using a Nevada Incomplete Gift Non-Grantor Trust; Steven J. Oshins, Esq., AEP & Brian J. Simmons, CFP)

There are other solutions other than a NING trust to accommodate a business exit planning strategy. It all depends on the business owner’s situation, and what state they live in or operate the business in.

If you are interested in learning more about these tactics, or would like to see what solution is best for your exit planning needs, feel free to contact me by email: szeller@zellerkern.com.

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

The Coaching Skill in Exit Planning

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The single most important talent in your exit planning team is coaching skill. I’ve written often in this space about the need for multiple talents, from taxation to legal, financial planning, and risk management. None, however, is more important than coaching.

Let me put it this way. Your planning team can be led from any position, as long as the person leading has coaching skill. If he or she doesn’t, all the clever tax advice or ironclad documentation in the world won’t lead to your successful transition. But if the person leading the team is an experienced coach, you’ll probably be okay.

What is Coaching Skill?

Let’s make it simple. Coaching is asking questions. An experienced coach will ask the questions that no one else does, preferably in a way that doesn’t offend.

Do you want to save money on taxes? Of course, and that should be apparent to every professional involved. Do you want to maintain control until you are paid what the company is worth? Sure. Do you want to ensure that your family is taken care of? Naturally.

These aren’t the questions that derail a transition plan. Here are a few that, left unasked, will.

Is there something more important to you than the proceeds from selling? Is there a part of your legacy that must be preserved if at all possible? Are there non-financial or non-equity stakeholders whose welfare must figure into the plan? Is your family on board with this?

These are the questions that an advisor who is focused on the technical complexities of exiting will often omit.

The Most Important Question

What will you do when you no longer own this business?

For many entrepreneurs, that’s the stumper. Unless you can answer it comfortably, your plan is very likely to fail. Most advisors will ask it in a casual way. “So what will you do next?” They may react little or not at all if your response is “I don’t know.”

When I was active as a business broker, I would decline a listing if an owner couldn’t enunciate a plan for life after the business. In my first book, 11 Things You Absolutely Need to Know about Selling Your Business, I describe a case where an owner declined two offers, each for twice his company’s estimated value. He simply didn’t know what he would do next.

“I don’t know” is a signal that the owner can’t envision life without the activity of the business.

Sometimes the answer is too facile. “I’ll play a lot more golf!” Nice try, but I’ve heard many a retiring owner tell me “I never thought I could play too much golf.” Here is an exercise I use with clients to help them visualize the next phase of their lives.

Filling in the Week

Start with the time you currently spend at the business. Include that “quiet time” at the beginning or end of the day when you like to think. Add in answering emails and texts at home or reading reports and articles on the weekend. Let’s say, conservatively, that you are engaged with your business for 50 hours a week.

Now, let’s start retirement with golf every Monday, Wednesday, and Friday. That’s a lot of golf, but we have only consumed about 15 hours of your workweek. What else?

Many folks will say they want to do more community service. Unless you plan to take on the full-time responsibility of running a charitable organization, let’s try simple volunteering to start. Two half-days a week? That’s another ten hours. We are up to twenty-five.

Travel is a big goal. How do four, two-week trips a year sound? That’s an average of another 8 hours a week.

Now you have two months of traveling, 150 golf outings, and 100 days a year working for charity. That only leaves you with about 17 hours a week to fill. Sleep in, exercise more, catch up on your reading?

There are lots of ways to fill the remaining time, but remember we are starting with someone who has a lot of plans. Many business owners have none.

Unhappy Exits

According to a survey by the Exit Planning Institute, up to 75% of former business owners are unhappy with their exits one year after selling.

I don’t know of any of my clients who are unhappy with the results. Perhaps that’s just luck, but I like to think it’s at least partially due to my coaching skill. The technical and financial complexities of a successful transition are nothing to sneeze at, but helping an owner be prepared is so much more than that.
Invest 15 Minutes and take our FREE Exit Readiness Assessment. We do not request any confidential information.

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.