Exit Planning Tools for Business Owners

leadership

The House of Gucci Succession Plan

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By now, you may have seen the movie House of Gucci. Lady Gaga and Al Pacino star in the true depiction of the Gucci family.

The Gucci brand started with two brothers who own the family business equally. Each brother had a son, and each son was to inherit the empire. One of the sons was a ne’er-do-well, who always attracted and found trouble. Despite nobody ever giving him a chance, the viewer could tell his successor ownership was doomed. The other son married the woman who was played by Lady Gaga. The story progresses through time as one of the fathers die and the other goes to jail while the wife rises to power and greed. To complicate the succession plan, lavish lifestyles, poor business decisions, children and divorce ensue.

The Gucci brand has always been iconic, and it remains so today. The movie describes the struggle between the two brothers and their ideas on how to grow the brand. One brother wants to expand into shopping malls across the world, while the other brother believes the idea of having a Gucci store in a mall is despicable. The two brothers who have these opposing views show how difficult it is running a family business with 50-50 ownership.

The two sons are the on-again/off-again heir apparent to the fortune, and eventually they will run or have a hand in running Gucci. The ne’er-do-well son struggles and is really off-base with his ideas, which are very inconsistent with the brand, and he lacks any sense of training or sense of how to run a business. Subplots in the movie describe how the other stakeholders attempt to circumvent his ownership and ultimately the rest of the family.

The other brother is smart, but he has a blind spot in that he has never had to struggle financially. He has never had to know what it was like to lack resources. His approach to management and growth are flawed because of the company culture and his paradigm. The influence of his wife and others around him also taint the management and success of a family run business. He lives lavishly, incurring personal expenses that he funds through the company.

Subterfuge and infighting ultimately become the demise of the family. The business survived but it was sold off for pennies on the dollar and was turned into a publicly traded company and as a result, the family no longer owns the business.

Clearly, the Gucci’s would have benefited from a team of exit planning advisors to help them navigate these waters! Indeed, there was no training of the sons, there was no alignment by the brothers, there was no dealing with the other stakeholders in the family. There was no financial planning, nor personal planning. Other than the brand quality, there was no development of cultural consistency or business attractiveness. There was a lack of management succession, planning and delineation of who does what. Sadly, there are many family run businesses that much less well known, but who lack the kind of exit planning that is needed to successfully pass along the business to the next generation.

House of Gucci illustrates how important it is for families to pay attention to succession and exit planning. I give this movie two thumbs up for the entertainment value of the movie, but two thumbs down on exit planning!

Mark Hegstrom is Certified Exit Planning Advisor and helps business owners to plan for what may be their single largest lifetime transaction: the transfer of their business. Get started by completing an exit readiness Assessment for yourself. Mark is Managing Partner at Business Owner Succession Strategies (BOSS). He currently serves as President of the Exit Planning Institute -Twin Cities Chapter.
 

Do You Suffer From Decision Addiction?

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Do you suffer from decision addiction?

The typical business owner lives on dopamine.  According to WebMD:

Dopamine is a type of neurotransmitter. Your body makes it, and your nervous system uses it to send messages between nerve cells. That’s why it’s sometimes called a chemical messenger. Dopamine plays a role in how we feel pleasure. It’s a big part of our uniquely human ability to think and plan.

Feeling the Rush

That’s what business owners do; think and plan. Their lives are a chain of thought processes that go “What if I do this? How will it affect the business? Then what would I do next? What would be the effect of that?”

An owner’s brain is trained to generate dopamine. That “What if? What if? What if?” chain is pleasurable. It’s the same neurotransmitter that is triggered by nicotine and alcohol, and the craving for that dopamine rush is the driving force of addiction.

That is why so many owners complain that their employees can’t make decisions and can’t think critically. They understand consciously that their businesses would run better if they groomed decision-makers, but unconsciously they are addicted to making decisions.

decision addictionEvery time an employee asks, “What should I do about this, boss?” there is a little rush. It’s like an old cartoon. The good angel is sitting on one shoulder saying “Make them go through the thought process themselves.” The little horned devil is on the other shoulder saying “Go ahead. Tell him just this once. It’s faster, and it feels good.”

Answer given. Another challenge surmounted. Pop! The little rush.

When the Rush Gets in the Way

Advisors are frequently frustrated by a client’s reluctance to implement their advice. They spend time and effort developing a course of action, and more time and effort explaining it to the client. The business owner client listens, agrees, and then does…nothing.

“I’m too busy running the business,” is a frequent excuse. What is really happening is that the owner is too busy feeding his or her dopamine rush. Owners are more likely to take action on their own decisions. Implementing someone else’s idea is antithetical to why they became entrepreneurs in the first place.

It feels good to be needed; to be the one who knows. Unfortunately, the more you run your business based on owner centricity™ the harder it is to sell, and the less it is worth. Like any addiction, it’s a tough habit to break

Breaking Decision Addiction

This is where I should offer a twelve-step program for breaking yourself of decision addiction. That’s pushing the analogy just a bit too far. I can. however, offer one tip that can get you started on the road to a more valuable company and more peace of mind for you.

Offer an enticing incentive for anyone making a decision for you. It should be instant, and worth a little effort. One possibility is to keep a stock of ten or twenty dollar bills in your desk. Anyone who comes to you with an issue and a proposed answer gets a bill.

The answer had to be sensible and practical. You could require it to be SMART (Specific, Measurable, Attainable, Resourced and Timely,) or you could set your standards. You will, of course, have to retain the final say over what qualifies. No one should earn a ten-spot for deciding whether to make the background on a flyer blue or yellow.

An answer doesn’t have to be the answer, but if it is unworkable, at least you have the opportunity to communicate your thought process, and at least the employee tried. He or she should still get the incentive for an honest effort.

Try it. You may be surprised at how much better it feels than that little bit of decision addiction.

This is an excerpt from my upcoming book The Exit Planning Coach’s Handbook, coming this fall. 

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.

Key Employees: Build and Protect Business Value

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Key Employees

You may have people working in key roles who are instrumental in growing and building the value of your business. These key people can be identified as having the following characteristics:

  • Makes a substantial business contribution
  • Possesses critical information or knowledge
  • Maintains and nourishes key contacts and relationships

Sellable Business

In helping clients plan to build a sellable business, and then eventually exit on their terms and conditions, we emphasize that “key people are a key value driver” in realizing success in both of those strategic goals. And, we find it helpful for owners to have two categories in mind when considering key employees:

  • Building business value
  • Protecting business value

Key people help owners build value and exit successfully as their roles serve in removing the owner(s) from the day-to-day management of the business, and by accomplishing objectives and key results for growing the business, that is aligned with the exit goals of the owner(s). An important planning focus for the owner(s) in building value, as it pertains to key employees, would include alignment of the employee’s performance goals with the exit goals of the owner(s), and a well-defined key employee incentive plan that provides impactful awards for goal attainment and retention.

Owners Beware

Owners need to be aware, that there is also inherent risk related to key employees. Risks involving departure and competition, solicitation of customers and/or employees, and disclosure of confidential information. There is also the risk of losing a key employee due to unexpected death or disability. It can be costly to recruit, train, and compensate for a replacement in such a situation, as well as make up for any loss in corporate earnings. Important planning areas in protecting business value, as it pertains to key employees, would include: Well-written and regularly reviewed employee documents (i.e., Employment Agreement; (listen to ExitReadiness® PODCAST Episode 43 w/attorney Marc Engel) and adequate life insurance coverage on the key employee (listen to ExitReadiness® PODCAST 54 w/Bill Betz of Betz Financial Advisory).

Pat Ennis is the President of ENNIS Legacy Partners. The mission of ELP is to help business owners build value and exit on their own terms and conditions.

Non-Qualified Plans

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When I talk to business owners about “non-qualified plans,” their first reaction is often “Hold on there. I don’t want to get in trouble!”

The term “Non-qualified” merely refers to the Employee Retirement Income Security Act of 1974, more commonly known as ERISA. As the title indicates, it is the basic set of regulations for retirement plans. If your company offers a 401K or SEP IRA, it has a Qualified Plan. If you have an Employee Stock Ownership Plan (ESOP), that is also an ERISA plan.

Under the terms of ERISA, a plan must be made available to all employees. In return, the company can deduct contributions as benefit expenses, and the employee can contribute pretax income to the plan.

A non-qualified plan doesn’t comply with ERISA requirements.  It is discriminatory in nature, meaning it is not offered equally to all employees. The employee cannot make contributions, and the employer usually can’t deduct the costs of funding the plan (which is built around future benefits,) as of current expenses.

Most non-qualified plans are designed as Deferred Compensation, thus the common acronym NQDC. The concept is to offer key employees a carrot for long-term retention. It can be enhanced retirement funding, insurance, or one of many forms of synthetic equity in the business.

Non-qualified Plan Types

We can start with the simplest example of NQDC. If an employee remains with the company until retirement, he or she will receive an additional year’s salary upon retiring. This benefit is not sequestered in a secure account anywhere, it’s just a promise by the company. It’s known as an “unfunded” benefit. There is no annual statement, just a guaranty (typically in writing,) by the business.

Non-qualified plansOften, an NQDC is funded by an insurance policy with a death benefit and an increasing cash value. It is owned by the company, which pays the premiums. At retirement, the employee receives the paid-up policy. This approach has the added benefit of lending confidence to the process, as the employee can see the funding and growth of the future benefit.

Synthetic equity may be stock options, phantom stock, or Stock Appreciation Rights (SARs.) In most forms, it is the right to future compensation based on any increased value of the business. For example, if the business is valued at $2,000,000 today, the employee may be given a contractual right to 10% of the difference in value at the time of retirement. If the company is worth $3,000,000 then, the employee would receive $100,000. ($3,000,000 minus $2,000,000 times 10%.)

Valuation, Vesting, and Forfeiture

Non-qualified plans based on equity should have a formula for valuing the benefit. It may be any financial measure such as revenue, pre-tax profit, or EBITDA. The objective is to make it clear to both parties how the benefit will be measured.

Vesting is an opportunity to be creative. The benefit can vest gradually, or all at once at a specific point in the future. An employee may be able to collect once fully vested or, in the case of synthetic equity, may have the right to “let it ride” for future growth if other conditions are met.

Regardless of how attractive a benefit may be, no employment relationship lasts forever. Pay special attention to how you construct acceleration and forfeiture clauses. Of course, no one wants to pay out to an employee who has been terminated for cause, but the employee deserves some protection against being let go just because a promised benefit has gotten too expensive.

Similarly, provisions for accelerated valuation in the case of a change in ownership are common. You also may want to consider rolling the NQDC into a stay bonus agreement if you sell the business. If there are options on actual stock involved, you will need to determine the handling of them if they could pass into the hands of someone other than the employee. That would be triggered by bankruptcy, divorce, or death.

Benefits of Non-Qualified Plans

As I described in my book Hunting in a Farmer’s World, incentives for employees should match their level of responsibility. Production workers have incentives based on their production. Managers have incentives based on their ability to manage.

Your very best people, the ones you want to stay with you through their entire careers, should be able to participate in the long-term results of their efforts for the company. Non-qualified plans are a way to single them out and emphasize your interest in sharing what you are building together.

As always. check with your tax advisor. Setting a plan up incorrectly could result in unwanted or phantom taxation for the company or the employee.

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.

Internal Leaders Affect the Value of Your Business

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Internal leaders may not be obvious. They may not even have a “leadership” title. Make no mistake, however; internal leaders are critical to value and attractiveness when it comes to selling your business.

In Super Bowl 55 we saw the impact of an internal leader. Tom Brady has the highest winning percentage of any single athlete in major professional sports. The Tampa Bay Buccaneers have (or at least did up until this season,) the worst win/loss record over their entire existence of any major professional sports team. Yet one man changed the culture of the organization almost overnight.

Remember, for all the accolades being heaped on Brady, he is an employee. He doesn’t own the Buccaneer enterprise or negotiates any contracts other than his own. He didn’t choose the team’s logo, uniforms, location, or coaches.

Tom Brady is paid to fill only one of 53 player positions in the organization. There are also 31 coaches on the team, whose jobs are to teach and give direction to those 53 players. Although every player will acknowledge that winning is a team effort, none will argue the impact of one strong internal leader on his 83 coworkers.

Internal leaders can be good or bad

When I was a very young business owner, I hired an experienced salesman. He was an alcoholic and began inviting other employees to his house for a cocktail after work. It took me some time (too long) to realize that he was plying his coworkers with free booze while he ranted daily about how poorly the company was being run.

I couldn’t understand why there was so much resentment among my team. They seemed to resist any direction I gave them. Finally, one person was kind enough to explain to me what was happening. Because this salesman was my top producer, I was afraid of the impact on revenues if I fired him.

He didn’t want my job. In fact, he didn’t want any of the responsibility that should go with leading. He had merely discovered one of the biggest truths about leadership. It’s easier to tear something down than build it up. People love to hear that things could be better. It’s making them better that is the tough part.

Tom Brady made the Tampa Bay Buccaneers better. Like any good internal leader, he didn’t limit his contribution to his job description as Quarterback. He helped recruit and train the people around him to build a better team.

Identify your internal leaders

An army dispatches its troops under the leadership of its lieutenants, but it succeeds on the ability of its sergeants. As a business owner, you can inspire with core values and set great goals. Whether you reach them, however, will be determined by your internal leaders.

When it comes time for your transition, they are more important than ever. If you are selling to family or employees, they may not expect to be included in equity, but they will determine the acceptance of those who are.

If you are selling to a third party, his or her achievements following the sale are conditional on the support of your internal leaders. They can prop up an inexperienced owner, or sink him without a trace.

If any part of your proceeds from exiting depend on the continued success of the business, you would be wise to identify your internal leaders and make some provision for their continued loyalty after you are gone. If they don’t buy-in, you could see the value of your enterprise (and your payout) decline substantially.

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.