Exit Planning Tools for Business Owners

small business advice

Contingency and Continuity Planning

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When business consultants talk about preparing for unforeseen problems, they frequently commingle the terms contingency and continuity. The terms are not synonymous, and there are important differences between them.

Contingency Planning

Contingency planning is generally accepted to mean how a business will respond in the event of a disaster. This could entail a building fire, severe weather, a strike of key service workers, civil unrest, or riots (depending on the audience.) Additionally, in the age of cybersecurity, ransomware or a denial of service attack, identity theft, and electronic fraud are all well qualified to be categorized as disasters.

Generally speaking, these are all insurable events. Contingency planning often recommends insurance as a major component of preparedness along with remote working capabilities or alternative production resources. In privately held businesses, however, contingency planning has one weakness.

It assumes that the owner of the company will be available to oversee the implementation of the plan.

What if the disaster is at the top of the pyramid? Most businesses need a continuity plan that addresses the sudden absence of the owner. We start the conversation with a simple scenario.

“What if you are hit by a bus on the way to work tomorrow? You are rushed to the hospital, and no one knows where you are. When they find out, it appears that you will be unable to respond to questions for weeks, if not months. How will the business operate for that time?

Continuity Planning

Exit Planning is presumably designed around a voluntary departure from the business, but what if it isn’t voluntary? Where contingency planning looks at a variety of financial risks, continuity planning is focused on the operational problems of an owner’s absence.

Continuity planning starts with the most elementary task-based assignments. We ask questions like, who opens the business? Who informs the employees, the customers, the vendors, and the bank? How are they told, (By email, phone call, personal meeting, or teleconference?) Who distributes funds, draws down the credit line, and signs contracts? Are there specific customers or vendors who will require special treatment?

Additionally, if employees are expected to step up to a higher level of responsibility, will they receive contingent compensation attached to their added duties? Many owners rightfully anticipate that employees will shoulder additional duties out of loyalty, but loyalty has a limit. What if they are in this position for months?

Are there limits on the employees’ decision-making authority? Can they decide on new capital investments, or enter into new vendor relationships? If there is a dollar limit, who has the authority to exceed it if necessary? Who are the key advisors they should consult if they have questions? Is there a compensation agreement with those advisors if they need to be closely involved or engaged for an extended time period?

Contingency and Continuity

These are just a few of the operational answers required on Day One. The owner’s extended or permanent absence will also involve decisions about credit facilities, family income, real estate, working capital, buy/sell agreements, licenses, cybersecurity, and the long-term disposition of the business.

We take a practical look at the issues of an owner’s absence from the business, whether it is planned or unplanned. Continuity planning is just one component of modeling “life after the business.” For the great majority of exit planning discussions, it is a useful but not urgent exercise. If a Continuity plan is needed, however, it may be the most important thing we’ve done for that client.

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.

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.

A Hazy Crystal Ball is Better than a Rearview Mirror

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Car side mirror with a rear view of a clear road and a sunset in the mirror.Several years ago, I did a cross-country trip with my family. We laid out a rough plan of what we wanted to see, how long it’d take, and most importantly, what we wanted to eat!

When we hit the road, I did not drive looking primarily in the rearview mirror, with an occasional glance at the gas gauge and the road signs. I looked ahead and tweaked the plan. Yet, that is often how business owners run their businesses. Often, this year’s business planning consists of, “let’s do what we did last year – just more of it.” We look at whether we have cash in the bank, check our financial statements, and compare how we fare against last year. Although this is a common practice we should run our businesses with an eye on the future.

No one has a crystal ball that provides perfect clarity on the future. A million factors and forces affect our business and most of them are not within our control. Forecasting and planning require looking ahead a taking our best (hopefully educated) guess on what the future holds. I want to convince you that a rough, hazy plan is better than no plan at all!

If you do not know where to start, here are some practical pointers.

MAKE THE PLAN

Every forecast needs to answer the following questions:

  1. Where am I? Assess your revenue, profitability, operations, market position and see how you are doing. What is working well and what isn’t?
  2. Where do I want to be in the future? Lookout 3 to 5 years and write down goals. How much revenue growth, how much net income growth, what improvements are necessary for the business?
  3. HOW do I get there? This is most critical. Identify actions/investments you could take/make to attain your goals. These might include:

    4. • Establishing new markets
    • Creating new products
    • Adding key staff
    • Improving processes

  4. What is most important? Prioritize your improvements and plan them over 3 to 5 years. Tackle 2-3 goals per year.
  5. The end result should be:

• How much will my revenue grow in the next few years?
• What improvement do I need to make?
• How much will my bottom line grow in the next few years?
• Who do I need to hire/get on the bus?
• How much will this cost?

WORK THE PLAN

Once the plan is created, establish a consistent review and adjust as needed. This may include:

  1. Review your monthly financial performance against the plan. Include revenue, cost of goods, overhead, net income, and other appropriate key metrics. This implies a monthly budget.
  2. Conduct a monthly review of strategic projects. Routinely assess whether you are making progress on your major goals. Are you ahead? On track? Behind? Dead-in-the-water?
  3. Adjust course. If you are not “on the plan,” why? What are the causes of the variance and what do you need to do to get back on track?
  4. Modify the plan as needed. The “crystal ball” is hazy and there is no perfect plan. As you adjust you will learn your capacity for change and identify ways to improve.

Start Now and Keep It Simple

In planning our road trip, we identified key sights to see along the way and saw most of them. We paced ourselves and enjoyed the trip. You may not know how to forecast, but you DO know your business! Trust your experience and make a “road trip” plan to identify the following, at a minimum:

  • Revenue goals for next 5 years
  • Net Income goals for the next 5 years
  • New Critical Hires & the cost
  • Major projects & the cost

When you shift your gaze out, you are more able to see the business as an asset, rather than a job. The team knows where you are going and will often get on board to help you stay on track. Looking ahead allows you to see the potholes in the road before you hit them and it helps the journey become more predictable. Hopefully, you will start to enjoy the business more. Proven ability to grow is a key value driver when selling a company but, it may also help you build the company you want to KEEP!

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.

Die at Your Desk or Go Golfing?

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Die at Your Desk or Go Golfing?

The truth of the matter is, every small business owner will eventually transition from the business. While most have spent much time working in the business, and at times on the business, they have not given much thought to what to do after the business.

Whether you love your work so much that you would be happy to die at your desk, or you would like to devote much more time to your golf game, every small business owner needs to consider how they plan to exit. And planning has significant benefits.

The Business Enterprise Institute defines three major objectives that a business owner should consider before reaching that point where they must exit the business.

    Timing of your exit – When do you want to leave?
    Financial needs after exit – how will you support the post-exit lifestyle you desire?
    Who’s going to take care of your baby and run the business when you are not there?

When do you want to leave the business?

Unless you want to die at the desk, you will want to consider at what point you desire to make the transition. Pick a time frame and begin considering the implications of that time frame. When do you back out of the day-to-day operations? How long do you take to do this…years or months? Can I effectively transfer the company to whom I wish to transfer it within that period? How long will it take to train my successor or children to be owners? Will I be able to realize my financial goals within that time frame? Will market conditions lend toward a successful sale to a third party? The time frame you decide on is a key driver. And, it is essential to establish at least a target date, or you could end up on the perpetual “I’m going to leave in around five years…” merry-go-round.

What income do you need?

Depending upon the success of the organization, answers to this question vary widely. You may not require any income from the business and would happily pass on the business to family members or key employees without any benefit to yourself. However, The large majority of owners require some type of income either from the business at the sale, or a residual income stream from the ongoing operations of the business. There are a wide variety of approaches to defining how a payout can occur, as well as the timing of it. Engaging tax lawyers and accountants at this point is significant to walk alongside your financial planner to plan out the remaining years so that you can enjoy the standard of living that you desire as well as pass on value to your children, your state, or your favorite charity. As much as we all enjoy supporting our local and federal governments, wise tax planning in this phase is very significant. Making the wrong choice can result in significant tax consequences, hindering your ability to use the value that you have built into the company.

Who’s going to watch over your company?

Hopefully, you have enjoyed working in your business and there is a sense of giving up “your baby” to someone else. Choice of a successor is a significant, and often an emotional decision. There’s the emotional aspect of giving up your hard-won successful business, as well as a desire to take care of those faithful employees who have served over the years in your company. Several options exist, from passing the business on two children, selling it to key employees, selling it to a trusted third party, or even an employee stock ownership program. So significant factors come into play here – the most critical being who has the skills, knowledge, and temperament to own and run the company as well as you have.

Should a business owner have family in the business, the above questions become even more significant. Taking the time to thoroughly discuss your goals and desires with your spouse, children in the business and children not in the business are all very significant. It’s often been said, that on our deathbed we do not desire to have another day in the office, but another day with our family. Planning enables conversations to be had so everyone’s expectations are clearly understood before that day when the transition occurs.

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.

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.