Success In Business Is Not Without Challenges!

DEFINITION OF BUSINESS GROWTH AND TRANSITION 

I often refer to my business planning as “Business Growth and Transition,” because I consider the business and the owner, as two separate and distinctive entities.  

For example, when the business is growing, the owner of the business needs to grow with the business and envision needed growth. As a business owner, he/she needs to continue to learn, ask more questions, depend on their instincts, experiment, be willing to fail, along with many other experiences to create the changes neededWithout the business owners’ creativity and involvement, the business will stop growing.  

Likewise, when planning for the business entity, we also plan for the owner personal needs. The business success creates personal challenges for the business owner, such as succession, estate taxes, family distribution, protection of the assets, and a host of financial and personal planning areas.  

STAGES OF A BUSINESS 

The business has two distinct stages it goes through which are critical; I define them as survival period and growth period 

Survival period is just what it means! Staying alive! This is where owner learns how to maneuver through the maze of “business savvy” strategies. “What doesn’t kill you, will make you stronger.” 

The survival period of business consists of: 

  • Excessive amount of time, sweat, and patience, luck, and much more.  
  • Bottom line:   Survive staying in business.  
  • Cash flow, Capital improvements, Inventory, client development create many challenges. 

The Growth Mode: 

 Not to simplify, but this is where the action is. It is up, up, and awayWhat needs to be done during this stage:  

  • Creates the opportunity for the future value of the business.  
  • To expand in all areas of the business. 
  • Inventing yourself and the company if needed, this includes building value drivers and transferable values. 
  • To become creative, reinventing of products, customers, process. 
  • To reinvent your markets and your clients. 
  • To build a customer base with loyalty, creating culture, and next level management. 
  • Much More… 

The expansion in Growth, (NOT ONLY) in markets and products, but also employees and the culture of the business. This is extremely important for the future of the business value, with the focus on growing your business value and to create transferrable value for the future. Owners need to start the process of giving up some of the control to middle management. This also means creating strategies which allow the owners to walk away and allow the business to run effectively and efficiently normally. This is my “Can you Take three months off” question, without an impact on your business profits?   

Disadvantages of Growth/ and letting Go 

You are giving up control to your management team! You are giving up things you controlled from the very infancy of the business. This is good because a future purchaser wants to buy your business as a running entity. They want a business that can run, and without YOU!  

When you start to delegate to others, things can happen. Your key people will learn how to run your business, and start thinking like an employer. They will develop greater relationships with your customers, advisors, and vendors. They will start to create profits for you, ease your time in the business, and allow you to enjoy more free time, however, there could be a price to pay!  

Tough Questions to Ask 

  1. What if your key people got to know your business so well, and they wanted to buy it from you, what would you do 
  1. What if you did not want to sell it to them at the time they want to buy? Will they walkWill they stay? Will the relationship change?  
  1. Will they go to a competitor 
  1. Will they take your customers and employees with them 

If this happened, what are you doing to protect yourself 

Consider this:  I recently had a client who went through this nightmare. The key people (2 key employees), left and started their own business. They also took other employees and customers with them.  

Unfortunately, the protection which we outlined to the owner three years prior was never implemented, and they are paying the price for it now.  

We told them to make sure they had programs in place to protect themselves from the business growth and success. 

Things Such As:   

  • Key person documents:  such as non-compete, non-disclosure and non-solicitation of customer and employee agreements.  
  • Benefits with Vesting:  We also suggested that they put in a vested benefit package for them and stagger the time where they would only have a partial vesting immediately  (we have found this to be a valuable motive to stay).  

Lesson to be learnedIf it happened to them, it could happen to you. Your key people will take over your business, which is good because as it creates transferrable value for the future. However, you must protect yourself from your business success.  

Insight 18 Key Groups Have a Voice In Your Company!

Your Key Group Holds The Key To Your Success! But! You Need To Listen To Them!

This was an interesting case we worked on. There were a few educational moments that I would like to share with you. 

Scenario:  Three brothers owned a successful manufacturing company. The company had several government contracts over the years and built an exceptionally good reputation with the government agency. These contracts were very profitable and kept the company busy. The company took pride in its work, delivery of the projects, and having the staff to accommodate the project, which lead to ongoing contracts. Over time, it became clear that doing work for the government and a few other companies was all the manufacturing company needed to be profitable and grow. 

So, what is the problem? On the outside, nothing, but inside there were some disturbing situations brewing. 

This scenario set up the problem we had to deal with. The key person in the firm developed a strong relationship with the agency head who awarded the contracts. He did an excellent job enhancing the relationship over the years. Through his efforts, the owners were able to be very profitable and to take sizable salaries each year. 

Because the key person ran the business like he was the owner, the three owners were able to take a lot of time off. They usually spend about two days in the business a week and took long vacations. 

The problem started when the owners decided to give the key person a large bonus the past year for doing a fantastic job. However, the key person assumed this would be the norm each year. A good salary and a fabulous bonus, which the key person was looking for each year. So, when a new year rolled around, there was anticipation by the key person to receive the bonus. When he approached the owners about the bonus, there was a clear disconnect between their vision and the employees. 

The owners felt that the bonus was based on performance of a particular year and did not think the key person would be looking for this substantial bonus each year. In a way, the owners felt they were being held hostage by the key person. “Once a luxury, it became the necessity”

However, when we broke it down for them, they realized the key person had the relationship with the government agency, not the owners (they did not even know the contact). The government contract represented about 40-50% of their sales. The keyman also had a great relationship with the private companies. We suggested to the owners that key person was more than a key person, he was their middle management! 

PROBLEM: The key person wants to receive a bonus as if it was part of his salary each year. Owners did   not want to pay it! Also, the company had 40% or more of its revenue in one basket (the government agency). 

Our part:  We communicated to the owners that based on the relationship the key person has with the vendors and customers, there would be a potential disaster if the key person were to leave. A few things which would happen: 

  1. He would take the business to a new employer.
  2. He could take employees with him. 
  3. He could stay but put less of an effort in building the business. 

After looking at all the facts, the owners realized they had a great deal and what they were receiving from the efforts of the key person was certainly more than what the keyperson wanted. 

 Educational moment:  We suggested the following.

  1. Owners communicate to the key person that he is a part of the growth of the company, and not only give him a bonus, but include an incentive of a % of business growth, or some metric that was measurable.
  2. Create a “graded-vested benefit,” which would be hard for the key person to walk away from. 
  3. Execute a non-compete clause and a non-disclosure agreement concurrently with the implementation of a selected benefit for the key person. “This is what we would like to give you, but for this we want you to agree to this.
  4. We discussed the disproportionate revenue from the government and discussed ways to increase their customer base. We suggested that no more than 10-15% of revenue should be coming from one source. 

These were only a few of the steps we suggested. 

It is common for owners to reevaluate their middle management; however, compensation is only part of the equation. Creating a middle management culture takes time, loyalty, along with compensation and benefits. Your key person(s), may be one of the most valuable assets of your company. Certainly, it is one of the value drivers which increase the value of your company. 

Succession Planning: 6 Key Questions You Must Answer!

THANKS TO CZEPIAGA DALY POPE & PERRI, LLC, author of this article. (written, March 22, 2019) 

*I came across this article last year and I thought I would pass it forward.  I thought it was written very well and had a great message to it.  Should you have any questions, give me a call.  Thank you Czepiga, Daly, Pope and Perri.  

Building and growing an independent family business is an accomplishment to be proud of. It takes an enormous amount of passion, ingenuity, and downright grit. Preserving and protecting your business also requires some effort, but it’s a task many business owners overlook or put off. 

Business succession planning, like any kind of estate planning, is something that should be addressed with the help of a professional well in advance of the actual event. Unfortunately, the majority of family business owners are missing that window of opportunity. According to a 2016 survey from Price Waterhouse Coopers, while 69% of family businesses surveyed expected the next generation to take over the business, only 23% had invested in creating a robust and well-documented business succession plan. 

It’s not difficult to understand how business owners find themselves without a succession plan. It’s a complex and time-consuming process that involves addressing hard realities and tough questions. But, it’s also a task that’s well worth the investment of time and money in the long run. 

If you own a family business and have not yet developed a thorough business succession plan, you may want to consider the following list of questions. These cover just some of the issues a good plan would address. It’s really never too early to start thinking about what’s next for your business, and these questions will put you on the right path. 

Who will take over when you’re gone? 

  • Whether you’re taking the precaution of planning in case of unexpected tragedy or simply doing due diligence in advance of a planned retirement, one of the biggest questions you need to answer is who will take the reins when you’re no longer in charge. 
  • If you were to become incapacitated or die unexpectedly, is there someone ready to step in to run the business? 
  • In such a situation, would your family or other business stakeholders have fast access to funds that would allow them to hire any necessary resources to keep the business going? 
  • Is your family protected against financial risk if you should pass unexpectedly? 
  • Do you have a detailed management succession plan that clearly defines who will take over which roles? 
  • If you face a temporary disability, do you have a business Power of Attorney in place to manage financial affairs related to the business? 

How much control would you like to retain?  Continue reading “Succession Planning: 6 Key Questions You Must Answer!”

A Great Benefit Every Business Owner Should Be Aware Of! 

Over the years in the small business arena, when retirement is mentioned, the discussion usually focuses on programs like 401k, Profit sharing, SEP’S, and Simple Plans.   

 They are all very good plans and every business should offer one of them to their employees for the purpose of having a benefit plan where employees can save for their retirements.   

 However, not every employer wants to take on the burden of funding retirement for their employees for many reasons.  The reasons range from a lack of cash flow, employee groups who would rather take the money home.   

 In situations where the employer feels they would like to use their company to create a benefit for themselves, and not the employees, they should look into an executive compensation plan called the CEEP (Corporate Executive Equity Plan).  The CEEP is a hybrid of a few types of benefit plans used for the higher paid group in companies and for the owners.   

 The term “non-qualified “, refers to a plan that normally is not used for the masses, but used for a selected group of people.  As an example:  Employer A can decide that they want to put a plan in for employee B, C but not employees D-Z.  In most cases the plan itself would not be tax-deductible as a “plan”, however, it can be tax deductible under certain conditions. 

How the CEEP works!  

Mr. Jones owner of the Big Dip Donut shop decides that he wants to allocate $25,000 a year into a retirement plan for himself and no other employees of the company.  For the most part, he can’t have a qualified retirement plan without offering it to the employees.  Even a “Simple Plan”, which is the easiest to implement would have drawbacks.    Continue reading “A Great Benefit Every Business Owner Should Be Aware Of! “

Case Study#5 Using Corporate Dollars To Keep Wealth Out Of The Business But In Your Pocket

This is the case of Joey Bag of Donuts and his pursuit of keeping wealth outside of his business.  You see, over the years working with Joey Bag of Donuts we told him that leaving too much of his wealth in the business can be problematic, especially when the time came when he needed to exit his business.  He heard me tell him many times, that someday he will leave his business by either a death, disability, or retirement, and taking the wealth with you when you need it the most, can be a problem, if you don’t have the right exit strategy.

There are many reasons wealth gets lost in a business when it is sold.  It can range from bad planning to bad luck, but Joey Bag of Donuts always remembered to keep as much of his personal wealth outside of the business as possible.  By the way this is why he purchased his company building and put it in a separate LLC.  Joey Bag of Donuts also believes in putting as much of his income to the company pension plan, again, outside of the business.

We also taught him to have his company support whatever it can legally towards his personal lifestyle.  For example, his cars, gas, some entertainment, health insurance, retirement, and other things are paid for through company.

Joey Bag of Donuts wanted to put more money away for himself and his family’s future, but didn’t want to use his own funds, so why not have the company support more retirement contributions?

We already had a profit-sharing plan, and he was sharing company contributions with his employees.

We decided that a non-regulated plan was the best way to go, so we developed a plan for only him.  The plan is a combination of two concepts.  We call this the CEEP PLAN (CORPORATE EXECUTIVE EQUITY PLAN).

The plan is a discriminatory plan, so Joey Bag of Donuts can pick himself or anyone else he wants, unlike a profit sharing or 401k plan, which is a regulated plan.

THE PLAN:  As you can see, the company made all the contributions, and took the deductions for them.  Joey Bag of Donuts was the sole participant of the plan. His cost was “0” out of pocket and he ends up with almost $800,000 of cash at retirement.  He also could turn the cash into a tax-free income stream.  In this case it was $67,500 tax-free income. The stream of income is worth more than $1,215,000.  Along with that he has a death benefit of $2,300,000 payable to his family tax-free.

THE BOTTOM LINE:  Joey Bag of Donuts gets retirement income using corporate funds.  All the contributions can be applied to just his account.  He also has the use of the account before retirement, like a  “family bank”, along with the ability to withdraw funds tax-free.[1]  There would be no 10% penalty if withdrawn before 59 ½.  Continue reading “Case Study#5 Using Corporate Dollars To Keep Wealth Out Of The Business But In Your Pocket”

THE SECRETS OF BUILDING A GREAT ORGANIZATION

I recently read a book called,” The Secrets Of Building A Great Organization”, by Bruce Clinton owner of BusinessWise, L.L.C., a business consulting and coaching firm based in Connecticut.

I found the book to be very interesting because, not only does it provide a road map of management for newer managers, but it re-educates older experienced managers in the most up to date strategies.

Bruce is the first person to mention that there are no magic formulas in being a good manager, however, with the basic strategies that he covers, a good manager, through their own talents, can become a great manager using the strategies Bruce discusses.

Many of the strategies are ones that Bruce uses in his practice as a business coach, and strategies developed while he ran different businesses.

For anyone who is a business owner or running a business, I would suggest this read.  In the book it is mentioned that most business owners don’t consider themselves good managers or they feel they don’t know enough about managing.

Any business owner who does $1-$150 million in annual sales, has 8-200 employees, is family owned and may be facing growth or succession issues, should read this book.

What I really enjoyed about the book is the small details that Bruce covers which are needed to build a successful business.  These are details which are not normally discussed in detail.  The book covers the importance of them.  These are the small details that make all the difference in the world of a business’ success, and Bruce covers them extremely well.  For example:

  • Overcoming communication breakdowns
  • Dealing with levels of incompetence
  • Fitting family members into the business
  • Retaining good employees
  • Building a workable succession plan

Continue reading “THE SECRETS OF BUILDING A GREAT ORGANIZATION”

Why Use Non-Compete Agreements!

Non-compete agreements (NCA) represent a separate agreement. They could be in an employment contract, or as a separate article in a buy and sell agreement. Sometimes they are referred to as Covenants not to complete. “

This is based on the possibility that an employee can do harm to a company upon termination.  They could know sensitive information about the company’s operation, owners and employee’s personal information, special operations, and proprietary information to a competing advantage, along with so much more.

Picture a very long-term employee working side by side with the owners, for many years, and then leaving to work for the owner’s competitor.  Certainly, there can be issues.

No compete agreements (NCA), can be used to retain employees also.   It would be very difficult to change jobs within an industry or profession when the leaving employee is limited to compete in a geographic and specific industry for a period of time.  However, non-compete agreements are hard to enforce, because in many instances the agreement has overreached and is very broad in the definition of industry and geographic coverage.

Continue reading “Why Use Non-Compete Agreements!”

What Status Is The Stock After A Triggering Event?

Chris Mercer author of “Buy-Sell Agreements for Baby Boomers Business Owners” addresses a very good question.  Who owns the stock after the trigger event?  After a trigger event, does the affected shareholders retain the rights, risks and privileges of the ownership, things like, voting, distribution, access to financial information, etc., or are their shares converted to another status, such as (example), the “pending sales of stock” status?

If the shares are converted into the new class or status, do they have the right to receive dividends, or interest while in that pending status, if so, who should be receiving it?

The agreement can also have a clause where the stock that is waiting to be purchased would convert to a “non-voting “status prior to being purchased.

There are many times a stockholder has signed personally for a corporate debt.  The stockholder may desire to have the remaining stockholders make an effort to get the departing stockholder off the note, as they have ceased to be a stockholder.

The questions that Chris puts forth are legitimate issues and should be dealt with when business owners and their council set out to design a buy and sell agreement for the company.

Thank you, Chris Mercer, for bringing these topics to the forefront.

Over the years, many of the buy and sell agreements which I have reviewed over the years, do not address or mention these particular situations, and could create a void should the situation arise.

Check Chris Mercers publications.  He puts out very good information that is useful to practitioners.

Alternatives To Buy And Sell Agreements – Different Documents To Put Buy Sell Agreement Language In!

  1. Governance documents– Articles of incorporation, partnership, organization, bylaws or operating agreements frequently have Buy And Sell Provisions (BSP). Is critical that you change your agreement within these documents should you update to a formal BSA, so the language is consistent.
  2. Compensation based plans: Such as consulting agreements and salary continuation plans.
  3. Entity recapitalization: It is possible to recapitalize the ownership interests of the entity which could create differences and ownership interests.
  4. Gifts of ownership interest: this could change the ownership and voting rights.
  5. Charitable gift of ownership interest. Same as #5.
  6. Private annuities: You could transfer ownership of your interest to someone else in exchange for a promise to make payments for you for the rest of your life
  7. ESOP’s: EMPLOYER STOCK OPTION PLANS.
  8. Non-qualified deferred compensation plans.
  9. Qualifying for section 6166 deferral.
  10. Division of an entity.
  11. Confidentiality and non-competition agreements; In conjunction with a buy and sell buyout , the former owner could be paid to not compete with the entity and to keep secret all confidential trade secrets, customer lists, and other private proprietary information of the entity.
  12. Installment sales: The owner simply wishes to retire and sells the stock in exchange for promissory note that is payable overtime.
  13. Sale to outsiders.
  14. Public offering.
  15. New generation opening a similar type of business: This is where senior generation winds down and a new generation may open a similar business preferable to allow younger generations to open a new look but similar to the identical business of the old. The dying on the vine concept.

*A good read would be “Buy and Sell Agreements (US Legal Series); Paul L. Hood Jr.  Also, I have included a link to article from Ed Partesi, ASA,CM&AA of UHY Advisors “Covering the bases:  “The Need for Effective Buy -Sell Agreements”. Effective Buy and Sell Agreement!

Lastly,  a very good book to read about the future of the selling your business,  “Your Exit Map”   by  John Dini;  This gives you a great insight as to the next generation of buyers and the market place for selling your business.  

 

Be An All-Star Employer and Build Future Value In Your Business!

When you go into your own business, do you have a place to go, a paycheck, and a position?  You basically have a job.   However, when entrepreneurs go into business, they look for the big payday, the selling of their business.    Would it be nice to sell your business for 10 or 20 times your annual salary?

Building a business is not easy.  If you are going to put your efforts into building a business, build a business with a great foundation.  It is easier to build value in a business with a good foundation.  Let’s assume you have systems in place and a business presence.  What is needed for real growth once you get through the systems and organization formats, is to create and develop a business culture!

By having a business culture, marketing and recruiting get easier and less expensive as people are more attracted to your company.  Long –term employees get to know the business, your customers you’re your suppliers.  They become more efficient and become the “team”.   You will attract better quality candidates to hire.  You can become more selective and create the right roles for your employees.

Go to Trader Joe’s and ask the employees how they like working there.  You will soon find out that there is little stress, a lot of fun, and the employees want to be there working side by side with each other.

When employees are happy and like their jobs, they stay, they learn, and they attract investors and future purchasers.  This culture promotes profitability and consistency, which is how you maximize your potential profitability of the company.  Consumers like consistency and the added value of having a company that is easy to work with.  I like to call this the “Amazon Factor”.  Who doesn’t like ordering from Amazon? They make it easy for many reasons.

Having this type of environment doesn’t automatically happen.  You need to invest in it to create it, however, it will pay off in the future.  They key is to start early creating the vision you have for your company long-term. Create the vision of being the “All-Star Employer”, and you will attract the best, like minded employees, and create a great business that people will want to work at.