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. 

Critical Step Needed To Create An Exit Strategy! Part 1 

Some business owners think that selling their business is a matter of getting an appraisal and putting the business on the market hoping for a good offer.

Many business owners that I have worked with initially assumed they knew the value of their business and what they could sell it for.

Through our education process they realized there is much more to selling their business, then just the establishing a value and then going to market.     One of those factors or variables is whether the business owner needs the business value for their future retirement, most do!

Helping the owner figure out what they need for retirement is critical in establishing what they need to sell their business for, and what action is needed to increase the future value of the business (Value Drivers).  In this article I will cover two of the seven steps that  are the most critical when planning a future exit from the business.

Whether the sale is one year or ten years from now, these are the steps needed to sell  a business.

  1. Must identify the Exit Objectives (why, when, and in some cases who) 
  2. Identify Personal and business financial resources; (this is part of the future financial security of the business owner and their family).  
  3. Maximize and Protect Business Value
  4. Ownership Transfer to Third Parties
  5. Ownership Transfers to Insiders
  6. Business Continuity
  7. Personal Wealth and Estate planning

In this post I will cover steps 1-3, and cover steps 4-7 in the June issue.  

In comprehensive Exit planning, (when you break the process down it looks like this):

Your Exit Objectives

  • Building and preserving business value
  • Selling your company to a third party
  • Transferring your ownership to insiders

Your Business and Personal Financial Resources

  • Business Continuity
  • Personal wealth and estate planning

Owner’s goals and aspirations are

  • Financial Need
  • Overall Goals
  • Value based goals
  • Defining the owner’s goals and aspirations shows the client’s wants and needs and identifies what is  important to the business owner. By spending time collecting this information from the business owner we establish a strong relationship, while differentiating you, and allowing you to be the quarterback of the plan.

Accurate information from the owner is critical to planning.      Calculating what the GAP of resources the owner needs to have in order to supply their future retirement income is critical.  It is here where the measurement of their resources helps to decide what they need to sell their business for, to help fund the gap.    Continue reading “Critical Step Needed To Create An Exit Strategy! Part 1 “

A Road Map For A Succession Planning  Essentials For Planning   Creating Your Team Of Advisors 

Who Are They 

Their Role 

Accountant 
  • Develops financial statements 
  • Provides tax advice 
  • Assists in Estate planning 
  • Assists in Business value 
Attorney 
  • Negotiates agreements 
  • Tax Advice 
  • Prepares estate documents 
  • Advises on business structure along with implementation 
Management Team 
  • Manages the ongoing operation  
  • Operational advice and expertise for new owner 
  • Enables business continuity 
Business Appraiser 
  • Estimates fair market value of Business  
  • Provides the credibility of asking price 
  • Advice on how to maximize business value 
Business Broker 
  • Finds buyer and market insight for value 
Financial Advisor 
  • Facilitates and council’s family goals and value 
  • Plans for the future of the estate and distribution 
  • May have the capacity to help fund Buy and Sell Agreements and Deferred Compensation situations 
  • Offers financial advice to all the members 
  • Helps project future financial needs 
Banker-Commercial 
  • Financing options for acquisition 
  • Access to other experts that may be needed 
  • Supports the business transition before and after the acquisition 

Exit Options: 1 

  • Transfer the business to a family member; This represents about 42% 
  • Sell to partners or your employees (directly or through ESOP); This represents about 17% 
  • Sell to a third party; 19% 
  • Partner: 10% 
  • Wind down business -3% 
  •  Don’t know -8% 

Questions To Consider 

  1. Are there one or more family members who want to take over the business?  
  2. Does the family successor have the skills to operate the business and guarantee the return on your investment?  
  3. What are the qualifications and skills someone would need to purchase your business to guarantee the successful transition?  
  4. If you transitioned to your family member, how will your employees, suppliers and customers react?  
  5. What is the most tax-efficient way to pass ownership to family members?   
  6. Will you continue to have a role in the business? 
  7. How will this succession option impact the rest of the family? 

Selling to partners or your employees 

  • Which employees or partners are best suited to purchase your business?  
  • Do they have funds or access to funds?  
  • Will you have to finance part of the sale?  
  • Do they have the management capability to run the business successfully?  
  • Can the business take on debt for this transaction long term?   
  • Where will the purchase price come from?  
  • Do the purchasers have assets as collateral?   

Third party  

  • Who are likely candidates in your industry that would be interested in your business?  
  • Do you want to sell the whole business or only part of it?  
  • Will the potential buyer have the entire financial resources to purchase the business, or would you be prepared to partially fund their acquisition?  
  • What is the most tax-effective way to sell your business?   

 

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”

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.

The Major Reason Why Business Owners Don’t Plan For Maximizing Their Business’ Financial Potential Is Now Eliminated!

Many business owners spend the majority of their time running their businesses and inadvertently end up neglecting some of the more important aspects of their business. This is the time where all the details of the success of your business are planned. We call this “working ON your business”.

Business owners can be vulnerable to financial mistakes because of many factors.

One of the key details of a business owner is what happens to their business in the following scenarios:

  1. What happens if I die?
  2. What happens if I become ill, or have a long-term disability?
  3. What happens if I lost my key person, or my key group of employees?
  4. What happens if I can’t control cash flow, or just don’t want to run the business any longer?

Unfortunately, many business owners don’t spend the time working on their business for many reasons.  Many owners think it’s expensive, complicated and very time consuming.

The truth is that by not working on their business, should any of the above scenarios occur, the consequences would be much more expensive, time consuming and potentially devastating.

In our planning practice, we estimate the average time to create a business and estate financial plans for a business owner, is five to ten hours, not including time with attorneys and accountants who are a part of the team.

How does our process work?

Our system is built around planning with the least amount of time needed for the business owner’s time.  To do this we use technology in communication such as phone conferences, video conferences, and audio and video productions to explain our client’s situation.  This allows the business owner to eliminate using work hours for this project.  We can do this technologically with clarity and brevity.  Our plan is focused on brevity for the business owner.

Our Process: 

  1. Viewpoint Meeting: Define what are some of the areas of concern using our Viewpoint System.  This is a 30 minutes conversation.  Our business owners need about ten minutes to prepare using this aid.
  2. “The Selection Meeting”. Once we define the areas of concern, we dig deeper with a 45-minute Selection Meeting. This is where we discuss all of the possible areas where the client may have problems and concerns.
  3. “The Planning Stage” is the longest meeting. This is about 1½ hours.  Prior to the meeting, we send our client material which they can review and prepare on their own time.  This takes them about 20-30 minutes to complete.
  4. The Discovery Meeting is about one hour where we bring together our findings based on their personal situation and discuss which issues and direction of implementation the client may wish to go. Again, our client receives the information to review prior to our Discovery Meeting[i].
  5. Implementation Session: This is where we start implementation needed to solve the issues.  This is the time when all of the client’s advisors work together to get the planning completed.  For example, our findings are discussed with the professional team and look for their advice and suggestions.    Also, this process brings everyone on the team up to date on the business owners’ situation.  This process breeds new ideas and strategies (earlier in the process, I would have been in touch with these advisors between the Discovery and Implementation Meeting). This may be the first time the client has had all of their advisors working together and sharing knowledge about the business owner! 
  6. Semi-Annual or Annual Review:  This is where we move on to the next area of concern; One concern at a time (in some cases, there may be overlapping of concerns and they can be bundled in the planning).  If there are no additional concerns, we review what has been implemented. This is an automatic process, so we are always adjusting as the business situation changes.

For business owners who realize that they need work  on their business, our process can maximize their business’ potential profit, organize them in a timely fashion, and fine-tune them in the future, so they can maximize their “business potential value” when they exit from their business.

[i] We plan for this time, but do not limit this session to a time schedule.

Good Luck You Are Now In Business! Now What?

Chances are that the moment you started your company you felt the need to be in charge of everything (the control thing).  Tasks such as ordering stationary, trips to Staples, talking to the utility company, dictating messages and a sundry of other things. You did pretty much everything including the bookkeeping, sweeping the floors and taking out the garbage. 

 You were proud of your new business and wanted to make sure it did well from the very start and in in every aspect of your business. Even if it meant you had to work 80 hours a week to keep it going to be successful.   

 Then you started to make more money, enough to hire employees to help you grow the business.  As you moved forward so did your business commitments.    Your mindset however, is control, just like when you started the business.   A natural reaction since you started and created your business, the tendency is to protect it, this is your baby! 

THE NEEDED CHANGE IN MINDSET! 

The problem comes when you have to change your mindset as an entrepreneur. When you started your business, you had a talent and believed that your talent could make you profit and grow your business. However, as your business and commitment to the business grows, there needs to be a new way of thinking on how you should run the business.  

 For example; I have a brother who is a great mechanic.   If he were to open his business, he would be the best mechanic you could find.  His work would be impeccable, and everyone would enjoy working with him.  However, the minute my brother had to start thinking strategically about how to lessen his working hours, grow new markets, start a branding campaign, hire people to do some of his tasks, he would become very stressed and would definitely lose interest in running his business.  He is a great mechanic but didn’t think about the other parts of running a business.  All he ever wanted was a place to go paycheckand a position. Little did he realize that it would take more than being a good mechanic to run a business.   He didn’t realize that some of the things he liked to do would have to take a back seat or be delegated to someone else, so he could focus on the details that will allow him to grow his business.    

Continue reading “Good Luck You Are Now In Business! Now What?”

Shift Corporate Income For Your Personal Retirement! 

 If you own a business, using a split dollar life insurance plan can help you shift business income to you on a tax effective basis, without involving other employees!

 Split dollar life insurance refers to the concept of two or more parties splitting the benefits and costs of a life insurance policy, such as the premium, death benefit and cash value.   

The most common type of split dollar life arrangement involves an employer and the employee or owners, with one part owning the policy, one or both parties’ contribution to the annual premium, but both parties having a vested interest in the policy benefits.   

Split dollar plans are inexpensive and easy to administer as an executive benefit arrangement.   

Here is how it works:  

One party establishes a cash value life insurance contract under the ownership of the key executive.   

The employer receives a “collateral assignment” against the policy, entitling the corporation  to receive the lesser of the policy cash value or the outstanding loan balance.   The loan is based on the premiums contributed by the company.   The same assignment entitles the employer to a portion of the policy death benefit, equal to the outstanding loan balance.   

 The key executive pays the taxes each year on the foregone interest on the loan from the corporation to pay the premium.   

At some point in the future, the split dollar arrangement terminates when the employer’s loan is repaid (typically from the policies cash value), leaving the executive “free and clear” ownership of the accumulated gain in the life insurance policy.   

 The executive can access the accumulated gains in the policy by borrowing against it, which will typically allow for tax-free access to the values.  The policy loan is repaid to the insurance company at the death of the executive, and any residual death benefit is paid to the executives’ named beneficiaries.  

Split dollar is an easier benefit to implement than deferred compensation, and less expensive for the employer.   

 Advantages:   

  • Easy account entries 
  • Recovery of the cost for the employer 
  • Performance objectives to trigger the funding for employer 
  • Very little if any impact on company balance sheet 
  • A “golden handcuffs” for the employer and ability to set restrictions when cash value can be accessed  

 Today’s newer types of life insurance policies enhance the benefits of a split dollar plan  Continue reading “Shift Corporate Income For Your Personal Retirement! “

Building Business Value Techniques!

If you permanently left your company today, would it continue with little effect on cash flow?  If so, would you consider this a transferable value? Transferable value is a driver that is critical for business growth.

A company management team is instrumental in growing cash flow and business value.  When a business has the capabilities of having little disruption with its cash flow when an owner leaves, you have a valuable transferable value.  A key component of building transferable value is Next-Level Managers. Usually they are experienced working for larger companies. They know how to grow companies and know how to attract people with experience and the skill to help run a company.   This level of management will demand more money, perhaps ownership as a condition of employment.

Next level management (NLM) and future changes!

  1. To attract NLM, it involves training and coaching for the existing management. When adding NLM it may involve replacing current managers who underperform.
  2. The decision to replace existing management is difficult and hard for many owners, as current management members have been loyal to the company. However, they may be moved to another position with the same type of responsibility.  They are good employees, but NLM do a much better job in the management position.
  3. Engage management consultants and outside resources to create more growth. NLM work well with these professionals.
  4. Owners provide leadership and motivation for management. Owners should design plans that provide strong incentives to management to remain with the company beyond the owner’s exit.
  5. Motivate employees to perform at higher levels, create a culture.
  6. Financial incentives designed to grow cash flow or business value is more likely to achieve the value or cash flow necessary to support the owners’ exit goals and value growth of the company.
  7. Top management must stay in the business when owners leave, or they don’t have a transferable value and will not achieve the goals when the owner exits. Incentive benefit plans help keep top management employees involved after the exit of the owner.
  8. The use of a “non-qualified deferred compensation plan” or NQDC Plan which involves a benefit formula and vesting schedule, highly motivates management to stay on.
  9. When you cobble the benefit formula to a performance benchmark it is possible to increase cash flow and profitability for the company.
  10. The vesting schedule in the benefit it makes it hard for the top management person to leave. They will leave too much on the table. The vesting schedule give the employer the benefit of keeping a top level management.  The employee benefits as the company can offer a richer benefit knowing the reward the employee receives is tied into the company’s profitability.
  11. The appeal of incentive plans for key employees (management) is understandable: To create transferable value, someone other than the owner must be similarly motivated to grow value and the cash flow necessary to achieve the owner’s exit goals and continue the company beyond the owner’s exit.

Operating Systems That Enhance The Transferable Value Of A Company!

Continue reading “Building Business Value Techniques!”