Exit Planning Tools for Business Owners

selling a business

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.

Exit Planning and Marathon Runners

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marathon race“Eat well and exercise!”

Just about everyone over 30 has heard this advice from someone interested in our health, usually a doctor. We all know that we should begin by doing SOMETHING, yet we wind up not really doing anything. We know deep inside that if we want to live long and prosper, taking a few painful steps will have long-term pay-offs, but all too often those first few steps never happen.

What has this got to do with Exit planning?

Business owners know they should be taking steps to plan for the future, but all too often they don’t seem to get around to it. With each passing year comes the thought, “I’ll get to that.” But, like the good intentions for diet and exercise, the longer one waits, the harder it gets.

Exit Planners Help Businesses Get In Shape

Exit planners are a bit like personal trainers. What personal trainers do for fitness, exit planners do for businesses. They take a look at the shape a business is currently in, and develop plans to improve that business until it is in optimal condition, usually so that the business can be transferred or sold in such a way that the owner remains in control of the sale. A business in less than optimal condition often means that the owner will lose some of control of the sale to the whims of the buyer.

Dream Big

A middle-aged person who develops a dream to run a marathon soon finds that just reading about marathons is not enough to get in the race. Still, if they never dream the marathon dream the race has no chance of being run at all.

Business owners who intend to sell also should not hesitate to dream big, even if they do not plan to sell for five or ten years. Big dreams mean big accomplishments. Every business owner should dream big about two things:

1. The ultimate objectives (financial, personal, family, and/or philanthropic goals) for leaving the business.

2. The “transferable value,” of that business, which should ensure that the owner does not have to go with the business when it is sold.

Set Small, Achievable Goals

Like someday wanting to run a marathon, dreams are easy to write down, but need diligent daily work to achieve. They will not happen on their own. Whether you a baby boomer nearing retirement, in the middle of your career enjoying the excitement, or just at the very start of a venture, taking these simple steps will prepare you for the future:

1. Get help to develop a “workout plan.” Just as it can be helpful to get a personal trainer involved when you begin to exercise, the same is true for business planning. It’s a complex process that requires specific knowledge in certain areas (legal, financial, estate planning, human resources, etc.) to ensure your business gets in optimum shape.

2. Set simple goals – Simple goals when one begins exercising help to prevent accidental injury, and the same is true for exit planning. Three simple, easily achievable goals are:

     a. Determine how much money you need, or want, for retirement

     b. Decide when you want to leave your business

     c. Identify the person, or persons, to whom you want to transfer the business

3. Start slowly – you can’t rush getting into great physical conditioning, and you can’t rush the business planning process. Set realistic goals and act on them one by one.

4. Stay steady and consistent – sticking with the plan and taking small, consistent steps will pay off. Make time in your busy schedule to do the essential steps.

5. Measure progress – in order to ensure you’re making progress toward your goal you’ve got to measure it. Setting 90-day goals allows manageable progress and the ability to celebrate the small wins.

As you work hard in the business day-to-day, take the necessary time to prepare for tomorrow – starting your exit planning program now will maximize your quality of life in the future.

Invest 15 Minutes and take our FREE Exit Readiness Assessment. We do not request any confidential information.

Corby Megorden is a Principal at ENNIS Legacy Partners. The mission of ELP is to help business owners build value and exit on their own terms and conditions.

Thinking About the Future: What’s Your Plan?

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Dial to show planning for the futureWe’ve all heard the saying, “Fail to plan, plan to fail.” This is extremely pertinent if you’re thinking about the future of your business. Many owners focus solely on the exit transaction itself without spending the time to properly prepare for it. Transitioning your business can take many forms, from passing to a family member to selling to a strategic partner. Here are some things to think about before you transition.

Are you ready to leave?

Many business owners fail to consider what they’ll do after a transaction. Do you plan to continue to work in the business? For how long? To whom will you report? If you’re no longer the owner, then you will NOT be in charge. If you’re not present, is existing management prepared to run the business? What will you do?

Have you mapped out your financial plan?

Before any transaction, you should evaluate your finances and create a personal balance sheet with a lifetime spending plan. How much wealth does it take to retire? What kind of lifestyle do you plan to have? Have you considered medical costs? Don’t forget to update your estate plan to take into account personal and charitable bequests.

What’s your business worth?

Sure, you may have an idea of the value of the business. How can you best position the business for maximum value extraction? What’s your best option? What about non-financial considerations?

The decision to turn over your business to someone else is a difficult one. Think about your goals before you proceed, then “Plan your work and work your plan!”

Invest 15 Minutes and take our FREE Exit Readiness Assessment. We do not request any confidential information.

Mary D. Richter is a tax shareholder who has been serving tax clients for more than 25 years. She has worked in both public accounting and private industry. Mary has a diverse tax background with experience in federal, state, and international tax and business issues and has provided dedicated client service to multinational manufacturing and service entities in all phases of the business cycle, from start-up to exit strategy.

Business Succession Planning Is There Life After Death?

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Consider this scenario: You’re part owner of a thriving small- to medium-sized business. You handle certain key responsibilities and rely on your partner to handle others. While your partner is away on business, the phone rings. The shaky voice at the other end of the line informs you that your partner has been fatally injured in a car accident. You’re grief-stricken. At the same time, you realize many people—you, your family, your partner’s family, your employees, customers, and creditors—depend on the uninterrupted continuation of your business. You know you should have planned for this. . .but you just never found the time.

What If I Wait?

<man at cemetery with rosesIs this a situation you secretly dread the possibility of facing because you’ve never “found time” for business succession planning? Once tragedy strikes, it can be the worst time to deal with these issues. Under some circumstances, it may be too late. Consider the following potential risks you could face without a proper business succession plan in place.

An owner’s unexpected death may jeopardize the long-term viability of a company, whether it is a sole proprietorship, partnership, or corporation. For instance, loans may be called, or work in progress may be put on hold until a replacement can be hired. In the meantime, customers may gravitate to your competition, making it difficult to win them back.

Moreover, once a business is in crisis, selling a deceased owner’s interest may result in the surviving spouse or family members settling for a price that is less than fair market value (FMV). Since stock or partnership interests in a closely-held business are not publicly traded, their value is not established without a business succession plan.

Finally, although a deceased owner’s estate plan may have made sense for his or her estate, it could spell disaster for the business. For example, if the company is an S corporation, and the trustees of a family trust become stockholders in the business, an inadvertent termination of the S corporation election may result if the trust does not qualify.

Secure Your Future

A business succession plan helps reassure all parties the business will continue to operate. It establishes a monetary value for each owner’s business interest before the need arises. It also helps prevent problems by coordinating each owner’s estate plan with the business. One of the key components of a business succession plan is a buy-sell agreement.

A buy-sell agreement is a contract that creates a market for a deceased owner’s business interest. It obligates the owner’s estate to sell his or her shares for a predetermined price to partners or shareholders (a cross-purchase agreement); to the business itself (an entity agreement); or to both (a hybrid, or “wait and see” agreement).

Life insurance is commonly used to help fund buy-sell agreements. It provides tax-free money at the owner’s death, and can also help fund a buyout at retirement or in the event of a disability. Points to consider in choosing a policy include the size of the death benefit; the flexibility to change the death benefit as the business’s valuation changes; and the size of the cash value component. Also of importance are the policy’s ownership, beneficiary designations, and endorsements.

Smart Moves Help Beat the Odds

Relatively few closely-held businesses pass to the next generation. A demanding schedule may lead to procrastination. However, with so much riding on a proper business succession plan, investing the time to prepare one now—and to review it periodically—may be one of the smartest business moves you’ll ever make.

Keep in mind you’ll need qualified legal, financial, and insurance assistance in establishing your buy-sell agreement.

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.
 

When Kids Don’t Cut It

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Many owners want to see their children inherit the business, but what happens when the kids don’t cut it?

Some years ago I worked with a business owner whose exit plan was to sell into one of the private equity roll-ups that were active in his industry. His son was finishing college, where he studied for a career in wildlife management. The son’s ambition was to spend his life in the great outdoors.

One day my client was beaming when I walked into his office. “Guess what?” he said. “My son called. He wants to take over my business!” After a few minutes, it was pretty clear that we weren’t going to have a conversation about experience or qualifications. This owner had a whole new exit plan.

Fortunately, that plan worked out. There was strong management in place, and the son paid his dues in sales and management training before the transition. Not all such shifts work out that way.

When kids don’t cut it

when the kids don't cut itThere was another prospect who gave me my “assignment” for proposing. “My son has been in the business for the last ten years. He seldom shows up. He is nominally in charge of a department, but we do little or no business in that area. He’s abusive when he is here, and all the employees hate him.”

“We (his mother and I) want to sell him the business, and we need him to perform well to fund our retirement. How much will you charge to straighten him out and get him to run the business right so he can pay us?”

I wanted to answer “Infinity,” but chose instead to politely decline the engagement.

I’ve written many times about the attachment a founder has for his or her business. Of course, parents (hopefully) have an even stronger bond with their children. Watching the first client’s face light up when he made the announcement was the best illustration of how important legacy preservation can be to an owner.

Yet, keeping the business in the family isn’t always the best idea. It involves a number of stakeholders, including employees and other children.

Key Employee Issues

For brevity, we will start by presuming that you’ve never promised, indicated, discussed, or even hinted to key employees that they were going to own the company. If you have, that’s a whole different can of worms that we’ll deal with another time.

We also aren’t talking about a succession plan where the son or daughter has always been the heir apparent, and has trained for the position.

Commonly, it’s somewhere in between. The child holds a job in the company, but not the second-in-command position. He or she does it well enough, but isn’t a star. They are interested in ownership (another too-often ignored question,) but their ability to act as CEO in the foreseeable future is doubtful.

Even if key managers aren’t resentful, they are not chattels. Giving ownership to a child is a clear message that their career path has reached a stopping point. It may be an eye-opener, and almost certainly disposes them to look at other opportunities, even if they don’t do so actively. Remember, their loyalty is to you. It isn’t automatically transferrable.

One solution that’s often employed is the perpetuation of the founder/owner. He stays on in a consulting role long after normal retirement age. Often it works out, and it can lend tremendous experience to the company.

If you don’t want to stick around in the “answer man” role, however, you need to secure the continued commitment of the key managers. That should be done through conditional compensation, tied to the continued success of the company. If appropriate, it may also require reaching benchmarks for training the offspring to take the reins of the business.

Long-term compensation can be through virtual equity (Phantom Stock or Stock Appreciation Rights,)  direct profit participation, actual minority equity ownership, or supplemental retirement insurance. It needs to be more than just a salary, though. Someone else can always beat a salary.

Keep Thanksgiving Friendly

The other stakeholders who should be considered are the siblings who don’t work in the business. Often the owner wants to leave the business to the child who has worked in it. The owner’s spouse wants to divide it equally among all the children. Both ways are fraught with issues.

Leaving the entire income-producing capability of the family (the company) to one child can obviously create resentment. On the other hand, forcing that child into a lifetime of working for the benefit of his or her siblings is likely to end family Thanksgivings. No one wants to grow a business only to see a third, or half or three-quarters of the benefit go to bystanders.

Some owners choose to balance their estate with other assets outside the business. If that isn’t practical, we frequently recommend dividing the business equally, but with a valuation formula and documented agreement to sell the inherited shares to the active child or children. Everyone benefits from the parent’s work, but going forward the active child keeps any increase in profits (and also bears the risk of any decline.)

Passing the legacy of a successful enterprise to children can be one of the greatest thrills of a parent’s life. When the kids don’t cut it, however, it is wise to face facts and plan accordingly.  Glossing over the issues will inevitably lead to more pain down the road.

John F. Dini, CExP, CEPA is an exit planning coach and the President of MPN Incorporated in San Antonio Texas. He is the author of Your Exit Map: Navigating the Boomer Bust, and two other books on business ownership. If you want to see how prepared you are for transition, take the 15-minute Assessment at MPNInc.com/ExitMap.