Articles Tagged ‘Exit planning’

The Road to Irrelevance: Transferring Your Responsibilities to Management

Friday, December 7th, 2012

Presented by T. Ray Phillips

Longtime readers of these articles know that one of our favorite instructions to business owners is: Make Yourself Irrelevant!

Newer readers may find that recommendation off-putting so let us explain. Unless your business can run without you, your business has little value to a prospective buyer.

If making yourself irrelevant is the goal, how do you do that?

In our experience, owner irrelevance doesn’t happen by accident or overnight. It is the result of careful analysis and action.

Analysis

In those rare moments when owners think about their key employees running their companies, they often put on their rose-colored glasses. They expect, that with a few tweaks, their employees can easily run the show.

To those owners, we recommend: Take a trip for a few weeks, preferably to a remote island with no cellphone service. When you return, you will be in a better position to coolly assess your employees’ performance.

Don’t be surprised if you find that:

There is no leader on your management team. There isn’t one person with the charisma or personality to inspire both managers and employees.

There is no decision maker. When disputes arise among managers, there is no one or no mechanism in place to resolve them. In fact, this vacation exercise often illustrates that the members of your management team don’t even respect each other.

You have created a work (or learning) environment very different from the one you experienced as you gained management experience. Most owners acquire their skills through trial and error. When (not if) they made mistakes, they fixed them and moved on. But these same owners unintentionally create a “no error” environment for their key employees. If key employees make a mistake, they are fired. Is it any wonder that management teams are replete with “yes men” rather than creative, entrepreneurial do-ers?

Action

After unpacking and dumping the sand out of their suitcases, how can owners address these issues and work toward owner irrelevance?

First, accept the challenge. It isn’t the management team’s job to fix the problem. It is yours. We encourage you to contact us for help in creating an action plan, but the job of becoming irrelevant is yours alone.

Second, make a list of all the activities that are involved in getting orders in and your product or service out the door. If you need help with that list, we can help as well, but the point is to write the name of the person responsible for managing that task next to each activity. One owner who employed Vice Presidents of Operations, Manufacturing and Sales, found that he was responsible for 94 of 136 tasks. That owner was far from irrelevant.

Third, consider hiring an industrial psychology firm to assess members of your management team to see if they possess the intangible skills necessary to run your company. If you learn that members do not have these skills, you may choose not to devote the time and effort necessary to train them to assume the technical responsibilities of their positions.

Fourth, once you’ve determined which employees have what it takes (or you have hired new people) to run your company, you must create a training plan that includes three important characteristics:
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Has Your Child Earned Ownership Interest in Your Business?

Wednesday, August 8th, 2012

Presented by T. Ray Phillips

Stan Briggs was perplexed when he told his advisor, “My son, Patrick, has worked in the business for the last twelve years. In that time, the business has tripled its revenues and its profits. I’ve started to think about scaling back my activity and I realize how important it is (for my own retirement income) that Patrick be motivated to continue to grow the company profitably. Since I’d like to have him own the business someday, is there a way to start transferring it to him now? It seems unfair to make him pay for all of the business value since he created so much of it and since he is so important to my financial security. My son, of course, agrees wholeheartedly with this analysis but I’m not so sure that his mother and sister are on the same page. What issues do I need to consider?”

Equal vs. Fair

First, Stan must determine if his son is already paying for the business through “sweat equity” (more working hours, greater risk and lower compensation than he could have earned elsewhere). If so, any reduction in the purchase price is not a gift, but rather recognition of Patrick’s contribution.

Second, are Patrick’s efforts adding value to the business? If so, should Patrick have to pay for his efforts by receiving a reduced share of Stan’s ultimate estate?

Third, if Patrick’s involvement in the business is critical to Stan’s retirement, Stan should consider tying his son to the business using “golden handcuffs,” such as awarding ownership if Patrick stays to run the business—and the business stays profitable.

Fourth, in many business-owning families, every child is offered the opportunity for involvement in—and ultimately ownership of—the family business. Many times, however, only one child forgoes the allure of the “outside world” to commit to working in the sometimes uncertain and illiquid world of a closely held business. (Not to mention that having you for a boss should have some payoff!)

Lastly, analyze the transfer issue in light of your own goals. Be certain that any transfer to children will satisfy your exit objectives. Explore with your advisors other issues and concerns that may arise as you begin to transfer ownership to a child. For example, how much money will you need after you leave your business? What, if anything, needs to be done for your key employees or for your other children? Temper and qualify all transfers to children in light of your over-arching exit objectives. In short, make certain the transfer of ownership to a child is also a good business and retirement decision.

Using Advisors

When considering a transfer of your business to a child, don’t underestimate the value of using experienced consultants and advisors. Their counsel, experience and input are perhaps never more important than when dealing with your own family. The need for independent, non-emotionally-charged advice can be critical. Having worked with other family businesses, these consultants along with your other advisors can offer practical advice.

Decision Framework

First determine the level of contribution your business-active child has made to the value of the business.

Second, determine the contribution that child must continue to make to ensure the achievement of your exit objectives. Those determinations can form the basis of what is “fair” with respect to both the business-active child and the other children.

Third, use your advisors to help explain, guide and implement the transfer of the business.

Disclosure:
The information contained in this article is general in nature and is not legal, tax or financial advice. For information regarding your particular situation, contact an attorney or a tax or financial advisor.

The information in this newsletter is provided with the understanding that it does not render legal, accounting, tax or financial advice. In specific cases, clients should consult their legal, accounting, tax or financial advisor. This article is not intended to give advice or to represent our firm as being qualified to give advice in all areas of professional services. Exit Planning is a discipline that typically requires the collaboration of multiple professional advisors. To the extent that our firm does not have the expertise required on a particular matter, we will always work closely with you to help you gain access to the resources and professional advice that you need.

This is an opt-in newsletter published by Business Enterprise Institute, Inc., and presented to you by our firm. We appreciate your interest.

Any examples provided are hypothetical and for illustrative purposes only. Examples include fictitious names and do not represent any particular person or entity.

Securities, investment advisory and financial planning services offered through MML Investors Services, LLC 317-469-9999 Member SIPC Supervisory offices: 900 E. 96th St, Ste 300, Indianapolis, IN 46240. The Family Business Legacy Company, LLC is not an affiliate or subsidiary of MML Investors Services, LLC.

Copyright © 2016 Business Enterprise Institute, Inc., All rights reserved.

T. Ray Phillips, CFBS, AEP, ChFC
trphillips@financialguide.com

The Family Business Legacy Co, LLC
900 E 96th Street
Suite 300
Indianapolis, IN 46240
http://www.familybusinesslegacies.com
317-208-6312

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Characteristics of a Well-Prepared Buyer

Monday, July 23rd, 2012

Presented by T. Ray Phillips

Assuming that all business owners (except for those forced to liquidate) will eventually sell or transfer their companies, we often focus on what it takes to be a well-prepared seller. Setting exit objectives, planning to minimize the income taxes on the ownership transfer, building business value and selecting a skilled Team of Advisors are some of the most important items on the “Savvy Seller Checklist.”

But what about well-prepared buyers? What does one look like and why, as a seller, should you care?

First, once you put your company on the market, you must be able to recognize a “serious” buyer. No one likes to conduct an extensive courtship only to be stood up at the altar. Business owners are no different. They want a serious buyer—one who will be able to close the deal.

Characteristics of Well-Prepared Buyers

They Know What They Want.

First, owners should look for a buyer who has clearly defined objectives. Will your company be a standalone acquisition or part of an industry consolidation? Will the buyer build-and-hold or flip your company? Serious buyers know what they want and aren’t just “looking for a new opportunity.”

They Travel In A Pack.

Second, well-prepared buyers have teams of advisors knowledgeable and experienced in the acquisition process. They are too smart to attempt to fly solo through the sale process. They know that if they try to handle the transaction themselves, the probability of closing greatly diminishes. Ultimately, do-it-yourself buyers can be a waste of your time.

They Know What’s In Their Wallets.

Third, serious buyers know what kind of financing they can secure. They’ve already communicated with their lenders and are poised to move forward.

They Understand Win-Win.

Fourth, well-prepared buyers are not myopic. They know that the only “good deal” is one in which everyone wins.

They Are Grown-Ups.

Serious buyers have been around the block a few times. They know that the road from the initial meeting to the closing table can be full of twists, turns, peaks and valleys. They have stomachs strong enough to endure the ride.

They Run In the Fast Lane.

Once the deal process is underway, an owner can look for several other characteristics. Well-prepared buyers can move quickly to closing. Their preparation, Team of Advisors and understanding of the process eliminate many of the obstacles novice buyers encounter.

They Know Their Place.

Serious buyers understand their role in the deal process. They let their advisors negotiate the nitty-gritty deal points so that they can maintain a relationship with the seller as well as their credibility and professionalism at all times. They are well aware that today’s seller may be tomorrow’s key employee.

Trading Places

Now that you can spot a prepared buyer, don’t be surprised if you have to become one. As you prepare your company for eventual sale, you may need to acquire other businesses as means to achieve “critical mass.” In other words, you may have to buy smaller (or similar-sized) businesses so that your company is large enough to attract qualified cash buyers. Before you become a seller you may have to walk a few miles in a buyer’s shoes.

Disclosure:
The information contained in this article is general in nature and is not legal, tax or financial advice. For information regarding your particular situation, contact an attorney or a tax or financial advisor.

The information in this newsletter is provided with the understanding that it does not render legal, accounting, tax or financial advice. In specific cases, clients should consult their legal, accounting, tax or financial advisor. This article is not intended to give advice or to represent our firm as being qualified to give advice in all areas of professional services. Exit Planning is a discipline that typically requires the collaboration of multiple professional advisors. To the extent that our firm does not have the expertise required on a particular matter, we will always work closely with you to help you gain access to the resources and professional advice that you need.

This is an opt-in newsletter published by Business Enterprise Institute, Inc., and presented to you by our firm. We appreciate your interest.

Any examples provided are hypothetical and for illustrative purposes only. Examples include fictitious names and do not represent any particular person or entity.

Securities, investment advisory and financial planning services offered through MML Investors Services, LLC 317-469-9999 Member SIPC Supervisory offices: 900 E. 96th St, Ste 300, Indianapolis, IN 46240. The Family Business Legacy Company, LLC is not an affiliate or subsidiary of MML Investors Services, LLC.

Copyright © 2016 Business Enterprise Institute, Inc., All rights reserved.

T. Ray Phillips, CFBS, AEP, ChFC
trphillips@financialguide.com

The Family Business Legacy Co, LLC
900 E 96th Street
Suite 300
Indianapolis, IN 46240
http://www.familybusinesslegacies.com
317-208-6312

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Characteristics of Bonus Incentive Plans

Friday, July 6th, 2012

Presented by T. Ray Phillips

Too often, owners only discover that the compensation plans they’ve put in place for key employees are sadly inadequate when those key employees leave their companies for greener pastures. The departure of one or more of these key employees not only complicates your daily business life, but it can slam shut the door on your exit plans. Without experienced management in place, you may find it very difficult (if not impossible) to leave your business in style.

Key employees are aptly named not only because they are key to the efficient and profitable operation of your business; they are also key to your departure. No one will want or be able to run your business without you, unless key management remains after your departure.

How then does an owner manage to keep key employees on board? Rather than tie them to the mast, many owners install Employee Incentive Plans that motivate them to stay. In doing so, owners also work to achieve the goal of ensuring their successful exits.

We have identified four characteristics common to successful bonus plans. They:

Are specific, not arbitrary, and are in writing;
Are tied to performance standards;
Make substantial bonuses; and
Handcuff the key employee to the business.
Let’s look at each briefly.

Clear Communication.

The most basic characteristic of a successful plan is that it is communicated clearly by the employer and understood thoroughly by the employee. Therefore, successful plans are in writing and are based on determinable standards. To be successful, employees know that the plan exists and how it works. Plans are explained to employees in face-to-face meetings, often with the owner’s advisors present to answer any questions.

Performance Standards.

The second characteristic is that the Incentive Plan’s bonus is tied to performance standards. Owners often work closely with their advisors to determine which performance standards should be used—perhaps net revenues or taxable income above a certain threshold—for which employees.

The standards of performance that the owner chooses must be ones that the employee’s activities can influence and that, when attained, increase the value of the company.

Let’s look at how one owner accomplished exactly that.

Duke Manning was struggling to keep his renowned, yet temperamental, chef in line. Henri always wanted more money even though the profits of the restaurant, specifically the kitchen, were uneven. Since Chef Henri controlled both the food costs and the labor costs, Duke and his advisors designed an incentive plan to encourage Henri to keep both items in line, but not too low.

Duke’s incentive plan worked as follows: If quarterly food costs were no greater than 26% and no lower than 22% (a range we once believed necessary to keep food quality high) Henri would receive incentive compensation equal to 1% of the restaurant revenues. Similarly, if quarterly labor costs stayed between 25% and 21%, Henri would receive another 1% or a possible total of 2% of the gross revenues. Duke determined that if the kitchen could not stay within these ranges, profitability or the reputation and quality of the restaurant would suffer. If the restaurant prospered, revenues could be in excess of $3 million and Henri could earn as much as $60,000.

The result? Henri was motivated to increase revenues, because his bonus would increase while keeping costs and quality in line.

Substantial.

Third, the size of the bonus must be substantial enough to motivate employees to reach their performance standards. As a rule of thumb, a plan should create a potential bonus of at least 30 percent of a key employee’s compensation. Anything less may not be sufficiently attractive to motivate employees to modify their behavior to make the company more valuable.

Handcuffs.

Finally, a successful plan handcuffs the key employees to the business. The goal here is to keep the employee with the company the day after, and even years after, the bonus is awarded. Owners typically use several techniques to create “golden handcuffs” for their employees.

Recall Henri’s incentive. Because Duke wanted to keep Henri for the long term, Duke paid half of Henri’s bonus to Henri as he earned it and deferred (and subjected it to a vesting schedule) the other half. Of course, if Henri left the restaurant before he was vested he would forfeit half of his bonuses.

Disclosure:
The information contained in this article is general in nature and is not legal, tax or financial advice. For information regarding your particular situation, contact an attorney or a tax or financial advisor.

The information in this newsletter is provided with the understanding that it does not render legal, accounting, tax or financial advice. In specific cases, clients should consult their legal, accounting, tax or financial advisor. This article is not intended to give advice or to represent our firm as being qualified to give advice in all areas of professional services. Exit Planning is a discipline that typically requires the collaboration of multiple professional advisors. To the extent that our firm does not have the expertise required on a particular matter, we will always work closely with you to help you gain access to the resources and professional advice that you need.

This is an opt-in newsletter published by Business Enterprise Institute, Inc., and presented to you by our firm. We appreciate your interest.

Any examples provided are hypothetical and for illustrative purposes only. Examples include fictitious names and do not represent any particular person or entity.

Securities, investment advisory and financial planning services offered through MML Investors Services, LLC 317-469-9999 Member SIPC Supervisory offices: 900 E. 96th St, Ste 300, Indianapolis, IN 46240. The Family Business Legacy Company, LLC is not an affiliate or subsidiary of MML Investors Services, LLC.

Copyright © 2016 Business Enterprise Institute, Inc., All rights reserved.

T. Ray Phillips, CFBS, AEP, ChFC
trphillips@financialguide.com

The Family Business Legacy Co, LLC
900 E 96th Street
Suite 300
Indianapolis, IN 46240
http://www.familybusinesslegacies.com
317-208-6312

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