Exit Planning Tools for Business Owners

small business advice

Wealth Management for Business Owners

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Wealth Management Considerations for Business Owners

Small business owners are at times neglected by the wealth management community as the business is commonly (not always) the owner’s largest asset rather than a portfolio of stocks, bonds, and mutual funds. You’d be well-advised as a business owner to engage a Financial Advisor who is proactive and experienced in factoring your future plans for the business, into your overall plan for managing your wealth.

 

Key Elements of Exit Planning

Impactful wealth management for you as a business owner would include at least these elements of exit planning:

  • Clarifying what “exit” means to you. For example, do you want to leave entirely at some point, or gradually over time?
  • Clarifying your financial, values-based, legacy goals, and what role the business needs to play in attaining your goals.
  • A financial needs and gap analysis with an accurate valuation (not back of the envelope – meaningful planning requires accurate data) of the business. How much $$$$ will you need to do everything you want to do after the business? Is there a financial gap? Will that gap need to be closed by increasing the value of the business?
  • Personal risk management including asset protection, insurance planning, tax planning.
  • A current estate plan — a business owner cannot do exit planning without doing estate planning.
  • A plan to preserve the value of the business (typically a small business owner’s largest asset), and a plan for it to survive during unexpected events of your permanent disability or death.
  • An appropriate plan for managing financial assets resulting from the successful sale or transfer of your business.

Exit planning is wealth management for business owners that requires assessing, preserving, and building the value of your largest and most complex asset…your business.

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

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.

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?

What if I wait? Is 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.
 

The Dismal Ds and Exit Planning

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The “Dismal Ds” is an inside joke in exit planning. Every industry and profession has them. In some, it’s “You can have it done well, done fast, or done cheaply. Pick any two.” In planning it’s “Sooner or later, every owner exits his or her business… 100% guaranteed.”

Clearly, that refers to the unplanned but inevitable departure from the biggest D – Death. That isn’t the only D, however. There are others, NONE of which lead to a controlled, lucrative, or enjoyable transition. Most start with dis- defined as “dis– 1. a Latin prefix meaning “apart,” “asunder,” “away,” “utterly,” or having a privative, negative, or reversing force.”

The other Dismal Ds include:

  • Disease – the critical illness of the owner or an irreplaceable employee.
  • Dissension – between partners, shareholders, or family members
  • Disaster – Fire, flood, storm, or accident
  • Disability – An owner’s inability to oversee operations
  • Disinterest – of the founder or next-generation ownership
  • Distraction – When an owner’s focus is elsewhere. (frequently love or bar ownership)
  • Disarray – More simply, bad management
  • Dishonor – financial fraud or other skulduggery
  • Disenchantment – A fancy word for burnout
  • Divorce – a bitter fight over the business asset or its value
  • Debt – Leverage taken on in good times but no longer sustainable
  • Depression – Economic malaise (think hospitality in 2020.)
  • Defection– The poaching or bolting of a key employee, frequently in sales
  • Defenestration – Getting thrown from a window

(Okay, I may have gone too far with that last one, but I couldn’t resist.)

Planning – The Cure for the Dismal Ds

The point is, there are many ways of a forced exit from your business due to circumstances. Some might be beyond your control, but most can be avoided.

  • Disease – Have solid business continuity instructions in place
  • Dissension – Start with a good buy/sell or shareholders’ agreement that makes it plain how disagreements will be handled
  • Disaster – Fire, flood, storm, or accidents can be insured, including for loss of revenue.
  • Disability – Business continuity instructions again
  • Disinterest – Start implementing an exit plan before your business shows the effect. For example, in brokerage, we used to say “Show me an owner who says he is burned out, and I’ll show you financial statements that evidenced the problem three years ago.”
  • Distraction – Don’t buy a bar. Don’t buy another business. Don’t have an affair.
  • Disarray – Get help. Consulting, coaching and peer groups all work.
  • Dishonor – Have an outside party check your systems and security.
  • Disenchantment – See Disinterest
  • Divorce – Settle the value of the business first, preferably before the lawyers do it for you.
  • Debt – Limit your debt to half what your current cash flow can service.
  • Depression – If you have to cut expenses, do so deeply and quickly.
  • Defection– Two words- employment agreements
  • Defenestration – Stay away from the Departed, or Irish, Italian, and Jewish mobsters in general. Alternatively, live where there are only low-rise buildings.

Dismal DsI obviously have my tongue firmly planted in cheek for this column, but my point should be clear. Your business is probably the most valuable asset in your life. Losing it to unplanned events hurts. So even if you are no longer in the picture, you have some responsibility to your family, employees and customers.

A good exit plan, whether it’s for implementation now or years down the road, should take many, if not all of the Dismal Ds into account. All entrepreneurs want control over their future. That is why they are entrepreneurs. Planning isn’t merely an intellectual exercise. It’s all about control.

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. 

 

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. 

 

Succession Planning or Exit Planning? Small Business Owners Need Both!

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One of the questions we often hear from business owners is, “What is the difference between Succession Planning and Exit Planning?  Aren’t they the same thing?”  Surprisingly, they are not.  The next question usually is, “Which one do I need?” The answer is simple.  Whether the business is small or large, family-owned or not, astute business owners always need both.

succession planNearly $10 trillion dollars in business assets will be transferred globally in the next decade, according to Forbes Magazine.  Baby Boomers selling privately owned businesses or transferring them to family members will comprise much of that $10 trillion dollar transfer.  As the market becomes crowded with owners ready to sell, the advantage will go to those owners who have done their due diligence, considered all of their options, and planned for unexpected contingencies.

Succession Planning

Succession Planning focuses solely on transferring leadership inside the business from one generation to the next.  Succession plans identify key individuals within the organization who can be trained and mentored to someday take over as the existing business leaders exit.  Succession Planning is just one necessary aspect of a more comprehensive exit plan.

Exit Planning

Exit Planning incorporates succession planning with strategies for building transferrable value, reducing tax liability, preparing for unexpected contingencies, minimizing family stresses, and increasing the likelihood of a successful business transfer.  Exit plans also incorporate the personal and financial goals of the business owner, their spouse, and their family.  A prudent exit plan starts and ends with the long term business and personal objectives of the owner.

Plan Ahead for A Successful Exit

Succession plans and exit plans so share an important characteristic – neither should wait.  Business owners who eventually want to sell for top dollar with the least amount of trouble must start the planning process early enough to give it the thought and consideration it requires.   With the proper plans in place, you, the business owner, gains the ability to make critical long-term decisions that will significantly increase the likelihood of selling or transferring the business when you want, to whom you want, and for the price you want.

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