Valuable Tips

Chip Mayo 7/28/20 Chip Mayo 7/28/20

Where to Start

When we start any important project, it is common to choose to plan in phases. Sometimes we choose to plan in phases because there is a certain aspect of the project that we consider to be more urgent than others. Maybe it can be overwhelming to try to focus on the big picture. Regardless of the reason, a phased planning approach can be a great strategy to help alleviate the stress of a large project like planning for the future of the ownership of your business.

Even if you know you are interested in a phased approach to planning, you may still not know where to begin the process. Considering every business owner and every business is different, there are many ways to approach planning for your business. To give a sense of the more common starting points, here are some examples.

Prioritize Your Goals & Objectives

Carol owns a structural engineering and design firm with an average of eight million dollars in annual revenue. She owns 100% of the company. Her family has never been involved in the business. She has a few key employees that she trusts, but she is not completely confident that they will be able to manage the business for her once she is ready to step back. A year ago, Carol’s husband passed away unexpectedly in an accident. Her key employees did a great job of keeping the business going while she was grieving and taking care of her husband’s affairs. But now that she is starting to return her attention to the business, she’s realizing that if something unexpected happens to her again, the business may suffer, company debts may not get paid, and employees may be out of work. She is aware that she needs to start developing a plan for the worst-case scenario, but she is not exactly sure where to start.

Carol is a good candidate for phased planning. If one of her main concerns is the success of her business long-term (and possibly without her), the first phase she might focus on is business continuity. Business continuity planning is a means of handling in advance a variety of events and consequences that can impact the business and the remaining (or new) owner when the original owner’s involvement with the company is somehow interrupted.

A sole owner, like Carol, can benefit from business continuity planning because it works to mitigate the impact of a serious disruption in areas like customer or vendor relationships, day-to-day operations, or management of critical business. Carol’s lack of confidence in her management team tells us there is potential for reduced business value and/or challenges in the business carrying on without Carol. Carol may be able to act now to change these outcomes through planning.

Small Wins Lead to Clarity of Next Steps

Abe is 77 years old and a successful entrepreneur in the hospitality industry. He owns a variety of assets, including hotels, restaurants, food distribution facilities, transportation vehicles, and even parking lots, all in separate entities. He also owns a management company with his sister Glenda that provides all types of services connected with many of the assets, including marketing, sales, data analytics, staffing, and accounting. The hospitality industry has recently been hit hard by a world-wide economic crisis. Abe and Glenda have seen the value of their business go down. At age 77, Abe needs to act quickly to protect the business value they have left and rebuild value so that he and his family can live comfortably for generations to come.

Abe is another great candidate for phased planning for his business. His attention is likely being pulled in many directions and his anxiety level may be high. His first priority should be protecting and building (or rebuilding) business value. Abe can first focus on a variety of key business activities, often called value drivers. In Abe’s case, he may need to take a fresh look at all the assets that comprise his business interests, and think creatively about how they might be reorganized or repurposed in light of more traditional value drivers, including:

· Stabilize and increase cash flow.

· Establish a stable, motivated management team.

· Put in place reliable business systems that improve the sustainability of cash flows.

· Develop a solid, diversified customer base.

· Build a business facility with a physical appearance consistent with the asking price.

· Devise a realistic, documented growth strategy.

· Establish effective financial controls.

Once Abe progresses on the value drivers that he deems most useful, he may begin to gradually build the value in his business. He can then move on to other phases of planning, including updating his estate plan and preparing for the sale of the business.

Taking the planning process one step at a time is sometimes the best way to continue making progress. The last thing you want is to lose motivation or momentum because the planning process became too much to handle. It’s easy to become overwhelmed or frustrated over the long laundry list of tasks to complete. Keep the momentum going with little wins that stack up and, eventually, build a more comprehensive planning framework for the future.

Welcome to Cornerstone's Exit Planning newsletter. We'll provide you with practical tips on planning your business exit twice a month. Click here for a complimentary planning assessment. Contact us with any questions or to help get you started with the planning process. Enjoy!

Dallas Romanowski, Chip Mayo, and Mike Leannah

As a member of the Business Enterprise Institute (BEI), Cornerstone Business Advisors is an authorized distributor of BEI’s content and Exit Planning Tools.

The Cornerstone team includes former C-Level executives, successful entrepreneurs and advisers who offer unmatched experience in delivering advanced, custom-tailored, results-oriented solutions for business leaders. As a member of the Business Enterprise Institute (BEI), Cornerstone is an authorized distributor of BEI’s content and Exit Planning Tools. We developed the Performance Culture System™ to help clients implement best practices and drive high performance throughout their organization. For more information, visit www.launchgrowexit.com, call (910) 681-1420 or email Dallas@LaunchGrowExit.com

Chip Mayo 7/8/20 Chip Mayo 7/8/20

Planning When You’re Too Busy to Plan

As an owner of a successful business, it’s likely that you got where you are today through efficient planning. You may have planned out your business model, your competitive advantage, or your target customers and how you’d get them to use your products or services. However, you didn’t get where you are today overnight. It most likely took many hours of hard work and dedication to start and to run your business successfully. It is also likely that you were able to focus on one project at a time, and eventually strengthen the weakest links in your business operations. The dedication that you put into the start and continued success of your business should equal the dedication you bring to the future (and even the final) phases of your business.

You’re probably pretty good at planning by now, or at least understand the process better than some other business owners do. But success can bring complexity, including more managerial, implementation, execution, and relationship development. Success doesn’t always create a lot of space for planning. Our brains may try to tell us that we’ll plan as soon as the more critical matters get taken care of.

Planning under difficult circumstances is possible. There are a few things you can do to keep your planning moving when you’re too busy to plan.

Define Your Goals

Before you can begin thinking about the future of your business, it is essential to understand exactly what your objectives are for yourself and your business before, during, and after any major transitions you’re anticipating in the business. Take the time to prioritize your goals and objectives. Decide what is most important to you and what you need to achieve to ensure your business remains successful.

Understand Where You Stand Today

Many business owners do not have an accurate sense of the current status of their business’s worth and available resources. A business owner must consider their company’s current financial performance and the risk factors associated with any future changes. It is also important to consider what the company is worth without you, the current owner, in place. To ensure that the company can run efficiently without your leadership and vision, you may need to look at the company’s growth rate, profitability, diversity in products sold, and the strength of the management team. How much is your business really worth?

Once you have an idea of the current state of your business, you can get a clearer idea of where you need to go in order to get the results that you want. Being able to identify where you are, where you are trying to go, and the gap between the two is a great starting point in developing your plan for your business.

Set Benchmarks

Having a clear vision of the path you must take for a successful future, make your planning process less intimidating. Create a schedule, a map, or some type of clear plan by breaking down your future goals into some that can be accomplished sooner and others that can wait. These benchmarks can help you stay on track, meet your goals, and build business value along the way. Breaking down the larger plan into a step-by-step process can alleviate some of the dread that might be associated with creating future plans. Smaller planning steps may also fit more easily into your busy schedule. Your future path may take several years, so dividing it into manageable portions is necessary. Taking the process day-by-day, step-by-step, and focusing on your top priorities first, can make the entire process much more appealing.

Comprehensive Planning Can Occur in Phases

For some business owners, it makes sense to address the critical aspects of their plan all at once. We call this “Comprehensive Planning.” But if you look closely at a comprehensive plan, you might find that this planning approach is also broken up into phases, since one thing must happen before another.

Everyone has different motivations and leadership styles. Find the right path and planning approach that is right for you and the team involved.

Dallas Romanowski, Chip Mayo, and Mike Leannah

As a member of the Business Enterprise Institute (BEI), Cornerstone Business Advisors is an authorized distributor of BEI’s content and Exit Planning Tools.

Chip Mayo 6/17/20 Chip Mayo 6/17/20

Where Transferable Value Comes From

One of the most important elements of a successful business transition is transferable value. No matter what an owner sees for the future of the business, transferable value can be the common denominator that makes all goals more achievable.

What is Transferable Value

Transferable value, for a closely-held business, is most simply what a business is worth to someone else without its original owner. Transferable value should not be confused with profit. Just because your company brings in millions of dollars of profit each year, does not necessarily mean it has transferable value. True transferable value in a business is determined not by how well you run the business, but by how well the business runs without you.

What is Transferable Value

Business owners aren’t always aware that transferable value is more than a formula involving multiples of earnings or some calculation of discounted future cash flows. To get a more accurate representation of the current state of your company’s transferable value, you can start by asking yourself a few questions:

· If you permanently leave your business today, would it continue with minimal disruption to its cash flow?

· Who will be responsible for running the business without you—and with minimal disruption to cash flow?

Value Drivers

One way to start to build transferable value is to evaluate your value drivers. Installing and enhancing value drivers can help create a company that can be transferred to someone else (whether that’s the next generation of family members or an outside third-party buyer)—without the owner—with minimal disruption to its cash flow. Some examples of value drivers that you may need to focus on are:

1. Next-Level Management

2. Operating Systems Demonstrated to Increase the Sustainability of Cash Flows

3. Diversified Customer Base

4. Proven Growth Strategy

5. Recurring Revenue That Is Sustainable and Resistant to Commoditization

6. Good and Improving Cash Flow

7. Demonstrated Scalability

8. Competitive Advantage

9. Financial Foresight and Controls

One might measure the effectiveness of value drivers in two ways:

1. Their positive contribution to cash flow.

2. Their ability to continue to contribute to cash flow under new ownership.

A company with strong value drivers might demand (and receive) a higher multiple on the same amount of EBITDA (Earnings Before Interest, Taxes, Depreciation and Amortization) than a company with weak or non-existent value drivers.

Build Transferable Value with Your Management Team

Building a management team that you can confidently leave your company with can be challenging. You may want to create a loyal “next-level” management team that will not only maintain the value of your business but is just as motivated as you are to grow the business to new heights. Understanding where your company may have weaknesses is an important step in knowing the type of person you will need to attract to help fill the gaps. It’s worth it to ask yourself whether you are focusing on attracting people with the skills sets the company needs to accomplish growth independently from the efforts and resources of the current owners. Establishing this highly qualified team long before you are thinking you’ll transfer the can give them the time and space to prove their ability to perform.

Attracting the right team is the first step, retaining the team long after your departure is the real task. To hold onto these vital team members, they may require more money or some percent of ownership as a condition of employment. Creating an effective incentive plan that fits the needs of your team is the best way to ensure your management team stays in place and continues to increase business value after your departure.

Dallas Romanowski, Chip Mayo, and Mike Leannah

As a member of the Business Enterprise Institute (BEI), Cornerstone Business Advisors is an authorized distributor of BEI’s content and Exit Planning Tools.

6/3/20 6/3/20

Identifying “The Gap”

Business owners have a lot of information at their fingertips. There are calculators and assessments available for just about every aspect of your business and personal situation. As a result, many business owners think they have an accurate idea about the value of their business. They may even think they have an idea of where the business value should be at their departure from the business. And retirement needs calculators are abundant, claiming they’ll give business owners a good idea about what they’ll need if or when they step away from their businesses. It can be difficult and somewhat complex to accurately measure the value of a company today, and then what it needs to be worth when the owner is ready to leave. Owners may be surprises to find “the gap” between the current value of their company and where the company value should be when they are ready to move on is much different than what they predict.

Start Your Gap Analysis

A Gap Analysis is the process that you can use to establish a few important benchmarks in your plans for the future, whether you intend to hold your business interest forever, transition ownership over time, or sell out completely in the next few years.

Step One - Quantify the money you will need to reach your personal financial goals.

Step Two - Determine the value your business can contribute toward meeting your financial targets today.

Step Three – Given your expectations for the future of your assets outside the business, try to predict what your business will need to be worth in the future in order for you to reach your financial goals.

Keep in mind that self-assessment and guesswork can only get you so far. You’ll ultimately want to work through this analysis with an experienced professional.

The size of the gap can help you set your priorities and timeline, highlighting your need for building business.

Do You Need to Create a Value Building Plan?

Once you get an understanding of the gap between current business value and where you need to be, you can start developing action steps for the future. Building business value can be an important factor in closing that gap. Many owners know they have to increase business value and want to grow their companies. But owners don’t always know how to do so. You can start by setting the scope of the value-building project.

1. Reorient yourself from working in the business to working on the business. This means as difficult as it might be, set aside your day to day activity and focus on the bigger picture and how you’ll increase value.

2. You will need to determine how much the company needs to grow each year to reach your ultimate goals. Create monthly, quarterly, and annual cash flow projections. Focus your energy on reaching short-term goals that build toward longer-term targets.

3. Repeat your gap analysis. Your gap analysis is the foundation for your value-building decisions: the tools and processes you will use, the support you will need, and the intensity of your efforts. You may need a course correction.

Taking these steps to understand where your company currently stands, where you need to go, and what you need to reach your goals is a great way to effectively include your business in your larger plans for the future. Building business value might be the most important action a business owner can take whether they are ready to leave their business or not.

Dallas Romanowski, Chip Mayo, and Mike Leannah

As a member of the Business Enterprise Institute (BEI), Cornerstone Business Advisors is an authorized distributor of BEI’s content and Exit Planning Tools.

Chip Mayo 5/20/20 Chip Mayo 5/20/20

Realistic Timelines

Global economic disruption uniquely affects each business. Whether you are being hit with a hammer or expect to suffer a slow burn, your reaction to changes and proactive planning will play a major role in how your future unfolds. Signals indicate that once we start to get COVID-19 under control, the world economy will begin to recover, business will rebuild, and business owners will need to ask themselves if they want to go through another major disruption, or transition out of their business while they can. This is the most crucial time to plan so that your business has the best chance of supporting your personal and financial goals, even if those goals are changing. It’s likely that your timeline is changing too

To get a better idea of the urgency of planning, here is a breakdown of tasks that may be involved in planning for the future of your business and the time each might take to complete.

Setting (or Resetting) Your Goals

To get a better idea of the urgency of planning, here is a breakdown of tasks that may be involved in planning for the future of your business and the time each might take to complete.

Setting (or Resetting) Your Goals

No matter what, it’s a good idea to revisit your goals periodically. During times of change, this review is even more important. It’s a good time to look at what your goals have been, especially concerning how much longer you want to stay involved in your business, how much you’ll rely on your business for financial security, and to whom you want to transfer ownership in the future. Have any of your previous goals changed? Are there partners, advisors, or family members with whom you want to discuss possible changes to your goals? This activity is important, so it’s a good idea to give it the time and space it deserves. This may take 30 to 60 days.

Plan Design

Start with your preliminary plan. What aspects of your previous planning still make sense and which of your plans will need to change given new circumstances? Your task here is to get ideas and strategies on the table and start to weigh your options and investigate alternatives. This may require assembling some new data and conferring with specialists. It’s likely that some options previously available to you no longer make sense; it’s just as likely that new alternatives are now worth considering. Depending on how much planning you’ve done in the past, plan on this phase taking anywhere from 90 days to 9 months.

Implementation

Next you’ll start implementing the strategies you’ve identified that you believe will take you where you want to go and put you in a position to transition your business when and to whom you want. Preparing yourself, your business, your management team, and your personal situation brings your greatest chance of long-term success. Many business owners have a sizable gap between the resources they have and the resources they need to achieve their goals. Your gap may be changing. This is where the really important work gets done. It can take six months (if you’re trying to get out of your business soon) or five years (if you need to build value and prepare team members).

The Ownership Transfer

There are many ways to transition out of ownership when you are ready. Your options tend to fall into one of two primary categories: you can sell to a third party, like a strategic buyer or investor, or transfer to an insider, such as a child or your employees. If you and your business are prepared for the transfer, and you commit to pursuing a third-party sale, you can sell your business and be completely out within a year or so. On the other hand, it’s common for transfers to insiders to take longer, usually because new owners don’t have an immediate ability to cash you out. It may still be possible for you to get the value you want and need for your ownership interest, but it can take time. A well-prepared business can transition to insiders and deliver a fair value to a departing owner in three to five years.

The Full Timeline

Planning for the future of your business, and taking the steps necessary to get there, will have a timeline that is unique to you and your company. It’s common for the process to take anywhere from one to ten years. That’s a pretty big range, but you are probably already applying the process to your situation and getting a sense of your personal timeline.

Now is a great time to take a second look at planning you’ve done in the past. Look at how flexible and dynamic your planning has been. Take this opportunity to build a new path toward your future. When everything is changing, it’s important to change too so that you can react to your situation instead of being a victim of your circumstances.

We strive to help business owners identify and prioritize their objectives for their business, their employees, and their family. If you are ready to talk about your goals for the future and get insights into how you might achieve those goals, we’d be happy to sit down and talk with you. Please feel free to contact us at your convenience.

Dallas Romanowski, Chip Mayo, and Mike Leannah

As a member of the Business Enterprise Institute (BEI), Cornerstone Business Advisors is an authorized distributor of BEI’s content and Exit Planning Tools.

Chip Mayo 5/6/20 Chip Mayo 5/6/20

Growing Business Value When Times Are Tough

In times of great uncertainty or disruption, some business owners will panic and bury their heads in the sand. Some will sit tight and wait for things to settle down. But others will try to create opportunity and future growth. Which will you be? We’re here to help you be the latter.

Minimize Tax Exposure

In your annual tax review with your internal and external teams, try taking a new perspective on tax planning. Ask for help in investigating:

· Federal and state tax relief programs and government stimulus or support measures.

· Strategically using losses in a single tax year.

· Leveraging tax reduction devices, such as qualified retirement plans, healthcare plans for all employees, or programs that encourage investment in disadvantaged areas.

Minimize Tax Exposure

In your annual tax review with your internal and external teams, try taking a new perspective on tax planning. Ask for help in investigating:

· Federal and state tax relief programs and government stimulus or support measures.

· Strategically using losses in a single tax year.

· Leveraging tax reduction devices, such as qualified retirement plans, healthcare plans for all employees, or programs that encourage investment in disadvantaged areas.

Tighten the Belt

Your peers and competitors are making difficult decisions right now about where to cut expenses or streamline operations. Sometimes it takes a big event to help business owners see their business models in a new light. You’ve no doubt already made some changes, and your future business value may benefit from making more of these tough decisions now, such as:

· Combining roles and responsibilities to more efficiently deliver your products or services.

· Canceling or delaying planned expansions or equipment purchases.

· Eliminating customers or lines of services that require a high level of human capital or a high degree of customization, which can eat into profits.

Be cautious to not let these decisions affect the remaining employees’ morale. Whatever decisions you make, be sure to keep communication open and frequent to eliminate any fears and concerns within the company.

Consider Growing Rather Than Shrinking

Now may be the time to acquire smaller, less adaptable companies who are struggling to continue. You may have strategic business plans that are more achievable with the help of another company’s assets. Keep in mind that you may not need to acquire an entire business if that approach does not work for you. Consider these options:

· Purchase the customer list of a competitor who is not going to continue their business.

· Look at acquiring inventory, equipment, or staff from smaller competitors; these may be options for growing your business that weren’t available just a few months ago.

· Suggest seller financing and more flexible payment terms; sellers are willing to consider alternate sale structures when bank financing and cash are less likely to be available.

Personal Planning Considerations

Be sure to revisit your personal planning in light of any recent changes in your business value, investments outside of your business, or other areas of personal financial stability. Think through issues such as:

· Business Continuity – how will your business continue if something happens to you?

· Exit Timeline – how has your personal plan to continue working or owning your business changed recently, and what adjustments are necessary to get you back on track or support your new timeline?

· Family Support – Do you have family members who need additional support, financial or otherwise? If so, are there creative ways you can help them?

We strive to help business owners identify and prioritize their objectives with respect to their business, their employees, and their family. If you are ready to talk about your goals for the future and get insights into how you might achieve those goals, we’d be happy to sit down and talk with you. Please feel free to contact us at your convenience.

Dallas Romanowski, Chip Mayo, and Mike Leannah

© Copyright 2020 Business Enterprise Institute, Inc. All Rights Reserved. As a member of the Business Enterprise Institute (BEI), Cornerstone Business Advisors is an authorized distributor of BEI’s content and Exit Planning Tools. The Cornerstone team includes former C-Level executives, successful entrepreneurs and advisers who offer unmatched experience in delivering advanced, custom-tailored, results- oriented solutions for business leaders. As a member of the Business Enterprise Institute (BEI), Cornerstone is an authorized distributor of BEI’s content and Exit Planning Tools. We developed the Performance Culture System™ to help clients implement best practices and drive high performance throughout their organization. For more information, visit www.launchgrowexit.com, call (910) 681-1420 or email Dallas@LaunchGrowExit.com

Chip Mayo 4/22/20 Chip Mayo 4/22/20

Does Your Spouse Feel Left Out of Key Business Decisions?

Sometimes when planning the next chapter in your life, the most important people somehow feel left out. Deciding to transition out of ownership of your business is one of the most important decisions a business owner can make, so it only makes sense to include your loved ones in that planning.

How Will Your Spouse be Affected?

Be sure to include your spouse in the planning process from the beginning, or at least keep them in the loop. In most cases, a spouse should not only be informed about the plan you are putting in place for your business, but they should also be involved in the planning process from start to finish. Be sure you know what their goals and dreams for the future are and why they may want you to make certain choices rather than others. What are their frustrations, desires, fears, and hopes about the future? Your spouse is likely to be affected by your transition out of the business in ways you cannot anticipate. Getting them involved now is a good way to avoid surprises later.

Reasons Why Your Spouse Cares About Your Plans

Your spouse has a unique perspective and may be able to provide valuable insights. They understand your family’s dependence on the business to maintain their lifestyle. They may be thinking of current or future issues that will be affected by your departure from the business. Another concern your spouse may have is that if you leave your business, you’ll become bored and frustrated without a productive outlet for your energy. Your spouse may have a more realistic view of how you’ll handle post-ownership life.

Your spouse may also feel personally invested in the business after years of direct and indirect involvement, so they may want to participate in critical decisions like how much longer you’ll run the business.

Choosing the Right Successor

Your spouse may have an emotional connection to the business. So, it may be important that they trust the successor you choose to run your business after you leave. Even though the next owner may seem respectable and knowledgeable to you, your spouse may take the side of employees or key customers in being skeptical. Listen to these concerns and take steps to address them – they may uncover issues that you did not see coming.

Don’t Forget Your Contingency Planning

The ultimate planning scenario in which you should involve your spouse is your contingency plan, especially as it relates to the possibility of your death or permanent disability. Sharing basic information about business operations and the details of your contingency plan, should something happen to you, can go a long way toward alleviating stress and anxiety for your spouse. Talk through what you think should happen if you were suddenly gone and share your written continuity plan when it’s ready.

Dallas Romanowski, Chip Mayo, and Mike Leannah

As a member of the Business Enterprise Institute (BEI), Cornerstone Business Advisors is an authorized distributor of BEI’s content and Exit Planning Tools.

4/8/20 4/8/20

Smoothing Out Friction Between Business Owners

All business partnerships eventually come to an end when one or more partners leave the business, whether by choice or otherwise. Being prepared for the end of the partnership decreases the possibility of unwanted challenges between co-owners down the road.

Common Reasons Why Partnerships End

Co-owners share a unique relationship. They have built a company together, sometimes out of nothing. They have been through the good times and the bad, working diligently to keep their company thriving.

Partnerships between co-owners, like any relationship, change over time. Partners can grow apart; goals and visions can change. Co-owners may have different financial situations or targets. The ways in which they intend to take care of their families in the future may differ. Partners may be on different timelines due to age, health concerns, or personal interests. And of course, one owner may become disabled or die unexpectedly. The reasons for a partnership to end vary widely. Being prepared for any of these scenarios is crucial.

Common Reasons Why Partnerships End

Ways to Limit Co-Owner Friction

Being prepared for the worst can significantly ease tensions between all parties involved, both today and at the end of the partnership. There are several things to keep in mind when attempting to limit friction between co-owners.

Retirement Needs Analysis

Consider how much each co-owner will want (or need) on the day he/she leaves the business. Each owner should understand what the value of the company is today, where the company will need to be when each owner decides to leave, and how much an owner will need or want to sustain their life after their departure. This is a combination of each owner separately reviewing their personal financial situation, as well as a cooperative effort to understand the current and expected future value of the business. Once these are known, owners can work together to plan now for the various possible ways each may leave the business in the future.

Risk/Liability Assessment

Each co-owner cares about the potential risk or liability associated with the business after a co-owner departs. The departure could impact the company. There may be a risk that employees loyal to that owner may also leave. Customers may feel anxious when an important partner departs. Sales may lag. The risks following the departure of an owner are different for every business. Identifying them now and putting measures in place to minimize these risks can make all the difference.

Ownership Agreements

Owners are sometimes caught off guard by an unexpected need to buy out a co-owner. Whether that co-owner has decided to retire or has recently passed away, conflict may arise about who will buy the ownership interest, how it will be valued, and what rights it includes. If the business is likely to experience a disruption at or after the departure, concerns may be magnified. Insurance to buy out a co-owner may not be available, or if it’s available it may not be enough. Disagreements and financial challenges can distract owners and cause the business to suffer. A carefully constructed and regularly reviewed ownership agreement (also called a buy-sell agreement) can address most of these issues in advance in a way that all owners (those who later leave and those who stay behind) believe is fair.

Dallas Romanowski, Chip Mayo, and Mike Leannah

As a member of the Business Enterprise Institute (BEI), Cornerstone Business Advisors is an authorized distributor of BEI’s content and Exit Planning Tools.

3/18/20 3/18/20

How to Be Sure You Are Leaving Your Business in Good Hands

Most business owners are considering several options for the future of the ownership of their businesses. If you’re keeping your options open, that is typical. But business owners who end up selling their businesses to an outside, unrelated buyer often report that they wish they had known more about what the sale process would be like, and that they wish they had spent more time (years) preparing. So, whether you are actively looking for a buyer right now, or if a sale is only one possibility you’re considering for the future, it’s important to take steps today that could be helpful in a future sale. If you put the company on the market, there will be a lot to think about, and anything you can do today to make that process easier is well worth the effort.

Benefits of Planning Ahead

Selling your business can be overwhelming. You probably want to be sure that your company will be in good hands after you leave.

Benefits of Planning Ahead

Selling your business can be overwhelming. You probably want to be sure that your company will be in good hands after you leave. Don’t wait until after you’ve made the decision about who your buyer will be to make sure that your most important employees remain loyal to you and the business. By then it might be too late. To improve the chances that your employees stick around and continue to support the business plan that enabled you to attract a good buyer, consider taking the follow precautions.

Tips to Keep Your Key Employees Around

1. Although this may seem obvious, you may want to have your high-level employees sign a covenant not to compete well before you put the company on the market (and ideally, at the time they are hired). This can be tricky because you could easily offend your most valuable employees with this request, and they could do exactly what you didn’t want them to do in the first place – leave and work for a competitor. Of course, you always need independent legal analysis to determine the conditions under which, if any, covenants not to compete are enforceable. In most, but not all, states, covenants not to compete are generally unenforceable except or unless they meet certain rather narrow exclusions—exclusions which often apply to key employees and management. If you are not a candidate for the non-compete, you may be able to implement other types of restrictions that suit your needs and are enforceable.

2. Create an effective incentive plan for your employees. In your incentive plan, be sure to “handcuff them to the business” (so to speak). This means create an incentive plan that encourages key employees to stay with your company for many years after your departure. You can do this in several ways. It’s best to work with your full advisor team to think through incentive compensation options, vesting schedules, funding devices, forfeiture provisions, and payment schedules.

Time is on your side when you start planning early. It can mean the difference between options being available to you or being off the table. Planning ahead to keep key people around can also have additional benefits, even if you decide you’re never leaving your company.

Dallas Romanowski, Chip Mayo, and Mike Leannah

As a member of the Business Enterprise Institute (BEI), Cornerstone Business Advisors is an authorized distributor of BEI’s content and Exit Planning Tools.

3/4/20 3/4/20

Thinking of Selling Your Business to an Employee?

Whether it’s because you want to keep the business “in the family” or because you suspect you will not be able to find a good buyer for your business, you may be thinking of selling your business to an employee. The first thing to think about is the kind of employee who can and should take over leadership and ownership. You’re entrusting your business and its future to this person or group of people. We suggest that a “key employee” may be a good candidate to purchase the business.

What is a Key Employee?

Whether it’s because you want to keep the business “in the family” or because you suspect you will not be able to find a good buyer for your business, you may be thinking of selling your business to an employee. The first thing to think about is the kind of employee who can and should take over leadership and ownership. You’re entrusting your business and its future to this person or group of people. We suggest that a “key employee” may be a good candidate to purchase the business. 

What is a Key Employee? 

Key employees are those who have a direct and significant impact on business value, meaningfully participate in the business’ strategic future, and whose combination of skills and experience would be exceedingly difficult to replace. 

Why would you sell to you key employees? 

One reason you may want to sell to a key employee is that you believe you have already achieved financial security. You may feel that your employees have earned ownership or that you owe them ownership of the company for their many years of loyalty.  

Another reason is you may not have an alternative option. Maybe you have no other third-party offers and no children to pass along the business to, so you look to your rock star employees to continue building your legacy.  

Selling to Employees can be Both Fast and Slow 

If you have some time to complete a transfer, a key employee might be a good option. Often, an owner must stay active in (or at least in control of) the company for five or ten years after the sale process begins in order to complete a successful transfer and attain financial security. In these years, owners hire and groom employees who not only want to be owners but also have the ability to assume ownership.  

If your business has a business value today that you think is too low, you may also be considering a sale to a key employee. Taking more time to transition ownership to one or more key employees may also give you more time to grow business value and capture profits. 

On the other hand, selling your business to key employees might be faster or less risky. Typically, key employees are very involved already in the day-to-day activity of the business. They will know how you want your company to be ran because you have groomed them to run it a certain way. They may share your vision for the future and see opportunities for growth and success that outsiders might miss. As a result, your key employees may be excited to get going on transitioning ownership sooner rather than later. 

If you’ve been thinking about selling to employees for many years, or if the thought is just now occurring to you, you’ve reached the starting line for the next phase of your business owning journey. 

We can help business owners identify and prioritize their objectives with respect to their business, their employees, and their family. If you are ready to talk about your goals for the future and get insights into how you might achieve those goals, we’d be happy to sit down and talk with you. Please feel free to contact us at your convenience.  

Dallas Romanowski, Chip Mayo, and Mike Leannah

As a member of the Business Enterprise Institute (BEI), Cornerstone Business Advisors is an authorized distributor of BEI’s content and Exit Planning Tools.

2/19/20 2/19/20

Which Planning Process Is the Best Fit for You?

Planning for a successful future isn’t homogenous. It simply can’t be. The needs that you and your business have are likely to be different from every other owner and business out there. So, the question you might ask about planning for future success isn’t, “How should I do this?” Instead, it should be, “Which process is the best for me?” Today, we’ll look at three different ways you can begin the process of planning for future success.

Urgency Planning

Many owners like to approach their planning through the lens of urgency. Urgency planning means identifying goals or problems that are of the highest risk, ranking them by risk, and then tackling each element in order. This may seem straightforward, but there are some considerations.

Urgency Planning

1. How do you define risk?

2. Why do you think a certain aspect about your business is subject to risk?

3. Why do you think you must address this risk before or after others?

Determining why things are urgent guides the planning process. If tackling projects based on their criticality is what’s most comfortable for you, it’s important for you to know why those things are critical and how they affect the other critical things down the list. Pausing to understand your reasoning may also give you some insight into your more fundamental priorities.

From-the-Ground-Up Planning

When business owners first start thinking about planning for a successful future, from-the-ground-up planning is what they initially envision. (This might be a reason why owners sometimes find the concept overwhelming.) The process for from-the-ground-up planning often looks like this:

1. Getting internal affairs in order. This could be hiring the right and appropriate number of people, conducting quality control, or creating yearly goals for each team.

2. Develop management. Once the house is in order, the next step is to find or train managers who can run the company themselves. Developing a strong management team is critical to the success of from-the-ground-up planning because it’s the managers—rather than you—who will keep internal affairs in order and exceed expectations. This will give you time to move to the next step.

3. Designing your ownership transfer. Whether you stay in your business forever, transfer to insiders, or cashing out with an outside third party buyer, you’ll need to determine the appropriate amount of money you must have to achieve financial independence and how the business can support that need. Planning your future may include anything from installing programs to incentivize, retain, and/or reward key employees to creating a set of business continuity instructions in case you die or become incapacitated.

Hybrid Planning

Hybrid planning takes the two planning methods from above and mixes them together. Doing so lets you maintain a balanced momentum toward the things you’re excited about pursuing while still addressing the most daunting aspects of your planning process.

For example, you might be excited about building your company’s value but dread the idea of finding a next-level management team because you’ve never had one before. A hybrid method lets you combine your urgency planning (building value) with your from-the-ground-up method (installing next-level management) so that you aren’t disregarding the things you’d rather not do. Similarly, you might combine your urgent desire to install your kids as the next generation of owners and leaders, but you’ll also need to support the company documenting its internal systems and processes (a fundamental factor for business stability), which can help your children be more successful.

Dallas Romanowski, Chip Mayo, and Mike Leannah

As a member of the Business Enterprise Institute (BEI), Cornerstone Business Advisors is an authorized distributor of BEI’s content and Exit Planning Tools.

2/7/20 2/7/20

Strategies for Reducing Risk and Improving Outcomes

As a business owner, you make decisions constantly that you believe will reduce your risk and/or improve your business outcomes. There are countless ways to do this. In this article, we’ll present ways to leverage your internal strengths to reduce risk and improve business outcomes. We’ll also show you how these strategies can affect your longer-term, post-business planning.

An effective strategy for reducing risk and improving outcomes is having a management team that can run the business in your stead. There are numerous benefits of having such a management team. First, it reduces your company’s reliance on you. This can give you more time to focus on the biggest goals you have for yourself, your family, and your business.

Second, it can act as a source of new ideas to improve the business in general. This is especially true if your management team has a diversity of experience. Different experiences can lead to different, sometimes unconsidered, strategies to improve business outcomes.

Third, it often increases the value of your business. Whether you hope to sell to a third party or an insider, or even work until you die, having people other than yourself who can keep the business humming makes it more attractive to potential buyers.

Having a strong management team also ties into your long-term, post-business planning. If you hope to eventually sell your business to insiders, the management team may end up being a qualified buyer, or they may be critical to supporting your children as they take over leadership. This can give you a head-start on bolstering future performance for a strong and healthy company, leading to a more successful transfer.

For example, incentive plans for your management team give them more responsibility, which lets you determine whether they’re fitting successors or high-level executives. Incentive plans also motivate the team to continuously improve the business because any rewards are contingent on achieving goals that contribute to your future success. This can allow you to wind down your responsibilities without giving up control while increasing your income, reducing your risk, and improving your outcomes.

To take it one step further, a common misinterpretation is that owners must transfer all of their ownership to insiders at once. This isn’t necessarily true. There are many ways to transfer portions of ownership over time, which are often tied to good incentive planning. This can keep you in control while you delegate more responsibilities to other people. It also gives you an out if your management team proves incapable of meeting or exceeding expectations, which protects you against risk.

If you intend to sell to a third party or work until you die, you can set up different kinds of incentive plans to make your desired path and tenure easier. You might consider a “Stay Bonus” structure in your incentive plan. It rewards managers who stay with the business through and after you transition out of it. This reduces the risk that important players will abandon ship and negatively affect your company’s value.

How can you know whether you have a management team that can reduce risks and improve outcomes? A good indicator is how the business operates in your absence. If you’ve ever taken extended time off only to find yourself addressing business issues on your time off, it’s likely you don’t have a strong management team (the same applies if you feel like you can’t ever take extended time off). If you aren’t confident that your management team can run the business well without you, you may want to consider finding managers that can.

To reduce risk and improve outcomes, you’ll likely need to look outside of yourself. But this can be extremely beneficial to yourself, your family, and your business. However, leveraging your internal strengths (or finding strong external managers to join your company) can take time. This means that it’s likely in your best interest to start this planning now, before you absolutely need it, rather than when you need it.

If you’d like help in working through the ways you might reduce risk and improve outcomes in your business, please contact us today.

As a member of the Business Enterprise Institute (BEI), Cornerstone Business Advisors is an authorized distributor of BEI’s content and Exit Planning Tools.

2/7/20 2/7/20

The 7 C's of Planning Success

Success can be a nebulous concept. What one business owner considers success might only be a step on the path to success for you. What are some of the guidelines that you can use to foster the kinds of planning that achieve the success you want?

Tom Morris—a pioneer of business thinking—proposed the 7 Cs of Success. These seven Cs speak to how successful people achieve excellence, regardless of field or industry. Let’s look at these seven Cs and you can apply them when planning for your successful future.

A clear CONCEPTION of what you want, a goal clearly imagined

The very first C speaks to having defined goals. Goals are the foundation of all future success. You may have goals for your future success, and you should make those goals SMART (Specific, Measurable, Actionable, Realistic, and Time-bound). Once you’ve done that, you can adequately act.

An emotional COMMITMENT to the importance of what you’re doing

An emotional commitment to your cause is a major aspect of successful planning. Like most people, you likely make decisions and act based on your emotions and gut reactions, in tandem with logic and analytics. This can be a good thing. If you can harness the emotional side of planning, it can encourage you to move the planning process quickly and efficiently.

A strong CONFIDENCE that you can attain your goals

Laying out all the wants and needs you have might cause you to ask, “How can I possibly do all of this?” One way to accomplish even the most ambitious goals is to have a written road map of what to do, by when, and by whom. Writing goals down can make them more manageable and give you the confidence to formulate strategies to tackle them.

A focused CONCENTRATION on what it takes to reach those goals

Planning for future success is more of a marathon than a sprint. It’s normal if you’ve ever found yourself focused on fending off each day’s problems and postponing the future. This is where it can be prudent to call on expert advisors who can focus on bigger picture planning items to keep you concentrated on both your present operations and your future goals.

A stubborn CONSISTENCY in pursuing your vision

Having a consistent planning process can increase the likelihood of successfully pursing your vision of a successful future. When unexpected hurdles arise, having a consistent planning process can give you the means to keep planning moving toward achieving your vision for yourself and your company.

A good CHARACTER to guide and keep yourself on a proper course

Planning for future success hinges on trust. From the key employees in your company to any outside advisors you work with, you should be able to trust the people who play a role in achieving your goals. Ask yourself, “Are the people working for me doing everything they can to keep me on track?

A CAPACITY TO ENJOY the process along the way

Planning for future success can be challenging. It’s possible that you’ve never engaged in this type of planning before, which can make you reluctant to move forward. To make planning enjoyable, you should set realistic, achievable, and actionable goals. Usually, these goals involve growing the business and its cash flow. You can then establish the means of achieving growth in value and cash flow. Enjoyment and satisfaction occur as you see your planning and implementation efforts bear fruit.

Conclusion

The seven Cs of success all share a common theme. They give you control: control over your present successes and control over how you pursue future success. If you’d like to discuss how you can maintain the most control over your future and implement these seven Cs in your planning, please contact us today.

Reference

“The Stoic Art of Living: An Interview With Philosopher and Pioneering Business Thinker Tom Morris.” Daily Stoic, November 3, 2019. https://dailystoic.com/tom-morris-interview/.

Welcome to Cornerstone's Exit Planning newsletter. We'll provide you with practical tips on planning your business exit twice a month. Contact us with any questions or to help get you started with the planning process. Enjoy! Dallas Romanowski & Chip Mayo

As a member of the Business Enterprise Institute (BEI), Cornerstone Business Advisors is an authorized distributor of BEI’s content and Exit Planning Tools.

1/8/20 1/8/20

3 Ways to Position Yourself and Your Family for Future Success

Many business owners support their families through their businesses. If something were to happen to you, such as a sudden death or permanent incapacitation, it may affect both your business and the lifestyles of the people who rely on you. Here are three things you should consider when planning for the future success of your business and your family.

Keep ownership agreements up to date

Many owners create ownership agreements early in the business’ life. As your business has evolved, those agreements may have fallen out of date.

Keep ownership agreements up to date

Many owners create ownership agreements early in the business’ life. As your business has evolved, those agreements may have fallen out of date. The most common type of ownership agreement that doesn’t evolve with the business is a Buy-Sell Agreement. Having an outdated Buy-Sell Agreement can be worse than having no agreement at all. Consider two examples about how outdated ownership agreements can harm a business and an owner’s family.

Maurice Belcher was the sole owner of a successful construction company. Each year, he brought in a salary of $275,000 for his family, on top of health benefits and other perks. One day, Maurice had a heart attack and died.

Maurice had created a plan for his business 25 years ago through his estate plan, which named his wife, Dina, as the owner should something happen to him. Maurice was not a good candidate for a Buy-Sell Agreement because he did not have anyone (at that time) who would be able to buy him out if something happened to him. So, this was his best option. Dina had no experience running a business and immediately called Maurice’s advisors, asking them to help her sell it for as much as they could.

When the company’s key employees found out she was selling the business, they began looking for new jobs and left. Revenue crashed, and Maurice’s bank began to call in the company’s debts. Dina couldn’t find a buyer for the business, so she liquidated it for $375,000. After repaying the company’s bank debts, Dina was left with just $100,000, no health coverage, and no income.

In this example, a sole owner put his wife in an impossible situation. By failing to update his plans as the company grew, he left her stranded without direction.

Now, consider a co-owned business with outdated ownership agreements.

Janelle Black and Sierra White were co-owners of Black & White Distribution. Their business was appraised at $5 million. Each brought home $375,000 in salary. According to their Buy-Sell Agreement, which they created just five years earlier, if one of them were to die, the surviving owner would purchase the remainder of ownership.

While driving home from work one night, Sierra was killed in a car crash. As 50/50 owners, Janelle and Sierra had each taken out a life insurance policy on each other. After Sierra’s untimely death, Janelle used the insurance funds to pay for Sierra’s half of the business. The $2.5 million lump sum wasn’t enough for Sierra’s family to continue living their current lifestyle. Rather than the $375,000 annual salary, Sierra’s family income fell to just $100,000 a year, based on their decision to follow the rule of thumb that one would withdraw just 4% of a critical asset’s value each year.

In this case, the Buy-Sell Agreement worked as planned, yet Sierra’s family still suffered. If your family relies on the business to maintain a lifestyle, you should consider the consequences of your untimely departure from the business and keep any ownership agreements up to date with the goal of protecting yourself against the unexpected.

Separate fairness and equality

If you have children, planning for future success becomes more complex. Consider a business owner, Joe.

Joe has three children: Doug, Glen, and Jania. Jania has worked in the business for 20 years, growing it from a $1 million enterprise to $15 million. As Joe approached retirement, he planned to transfer ownership to Jania and leave $1 million apiece to Doug and Glen after he died. When the brothers learned how much the business was worth, they demanded an equal amount in cash from their father. They didn’t think it was fair for Jania to receive what they considered to be more money, even though the company’s value was largely illiquid and they had nothing to do with its success.

To mitigate situations like this, you should have a plan to communicate your goals to your children. Consider how you’ll determine what’s fair in terms of how each child contributed to the business’ success and how any ownership or monetary transfers can reflect those contributions. Equality and fairness aren’t the same, and only you can determine what’s fair.

Have a backup plan.

It’s important to have a backup plan when planning for a successful future. The surest way to do so is to install Value Drivers in your business. Regardless of whom you want your successor to be, all potential buyers/recipients of ownership will want Value Drivers to be present in the business.

Another way is to determine whether your chosen successor can continue to grow the business. Implementing strong incentive plans is a way for you to determine this and reward high-performing potential successors.

If you’d like help thinking through the ways in which you might be able to plan for a more successful future for your family, please contact us today.

© Copyright 2020 Business Enterprise Institute, Inc. All Rights Reserved As a member of the Business Enterprise Institute (BEI), Cornerstone Business Advisors is an authorized distributor of BEI’s content and Exit Planning Tools. The Cornerstone team includes former C-Level executives, successful entrepreneurs and advisers who offer unmatched experience in delivering advanced, custom-tailored, results-oriented solutions for business leaders. As a member of the Business Enterprise Institute (BEI), Cornerstone is an authorized distributor of BEI’s content and Exit Planning Tools. We developed the Performance Culture System™ to help clients implement best practices and drive high performance throughout their organization. For more information visit www.launchgrowexit.com, call (910) 681-1420 or email Dallas@LaunchGrowExit.com

7/20/18 7/20/18

3 Benefits of Written Exit Plans

Planning a business exit can seem like a lot of work at first. From building business value to developing capable successors to figuring out exactly what you want to do with your life after you leave, Exit Planning might look like too much work for one person to do. In our experience, Exit Planning isn’t something that business owners can tackle alone if they want to exit on their terms. But with so much to do, where can you start?

One way to begin the Exit Planning Process is by writing your Exit Plan down. Writing your Exit Plan down can provide three potential benefits when done properly.

Increasing Clarity, Accountability, and Chances for Success

Written communication is often clearer and more specific than verbal communication. Typically, the act of writing causes business owners to think carefully, which decreases chances for misinterpretation. Minimizing misinterpretations—about goals, resources, and desires, specifically—often leads to clarity and consistency, which can cut down the amount of time it takes to implement the Plan by months or even years.

Additionally, written Exit Plans encourage accountability. In a written Exit Plan, all participating advisors have responsibilities and deadlines. This makes the Exit Plan an executable document. It also helps you avoid procrastination. Having a document that tracks deadlines and responsibilities can keep you accountable and help you avoid falling prey to the “rolling five-year plan,” wherein you’re always looking to exit five years from now.

Finally, simply writing your goals down increases the likelihood that you’ll achieve them. According to a 267-participant study on goal setting, written goals are much likelier to be executed. Dr. Gail Matthews, a psychology professor at Dominican University in California, found that individuals are 42% more likely to achieve their goals just by writing them down.

Maintaining Control

A common Exit Planning paradox is that most business owners don’t want to give up control of their companies before they’re ready, but they also don’t want to spend too much time on Exit Planning. Having a written Exit Plan gives owners a chance to maintain control of the Process while also controlling when and how they transition out of ownership.

Owners who write their Plans down—with the help of an Exit Planning Advisor and Advisor Team—can hand their Plans over to their Exit Planning Advisors, who will then take the lead on the Process and execute the Plan. This means that once you’ve confirmed your goals and written them down, your Exit Planning Advisor works to address your goals based on what you’ve requested. With a written Plan, you can keep control of your business until you’re ready to give it up, and you don’t have to make Exit Planning your primary focus. This can increase your planning efficiency and give you the time to continue to build your company’s value.

Minimizing Cost and Time

In general, creating an Exit Plan can take several months, while executing the Plan can take several years. Creating and executing an Exit Plan usually requires input from owners and several advisors, and can also involve an owner’s family or management team. With so many moving parts, it’s easy for owners to take more time and pay more money to exit than necessary. A written Exit Plan helps mitigate costs in terms of time and money.

Written Exit Plans can make the Exit Planning Process more time and cost effective because they allow you to see where everyone is within the Process. Rather than wasting hours of time calling each advisor to ask what they’re doing—time that you could be spending working to generate revenue for your company—a written Exit Plan allows you to track everyone’s progress throughout the Process. Your Exit Planning Advisor is responsible for keeping the written document current and making sure that it reflects your resources, goals, and assets relevant to your business exit. When your advisors are all on the same page, knowing what they must do and by when, it usually minimizes the time and money you’ll need to spend on the Process itself.

Written Exit Plans can benefit you as you begin to plan your business exit, and it’s important to remember that “written down” does not mean “chiseled in stone.” Written Exit Plans can, and often do, change. As your business and goals evolve, a written Exit Plan gives your planning strategies a chance to evolve in lockstep.

If you’d like to determine whether a written Exit Plan can focus your efforts at exiting your business; or if you’d like to begin the process of creating a written document to help guide your business, your family, and yourself through your business exit, please contact us today.

As a member of the Business Enterprise Institute (BEI), Cornerstone Business Advisors is an authorized distributor of BEI’s content and Exit Planning Tools.

7/5/18 7/5/18

What’s So Important About Planning?

When business owners start their businesses, they often create a written business plan to guide them toward success. However, many successful owners don’t mimic that process when they begin to approach the end of their business ownership.

There are three areas in which forgoing planning for the future can create unintended consequences for business owners: money, time, and successors. Consider how a thoughtful planning process (or lack of one) can affect each area.

Planning Affects More Than Just Personal Finances

Regardless of the reasons why they choose not to create an Exit Plan, business owners who don’t create Exit Plans tend to open themselves up to more risk than owners who take the time to think through and document their plans for the future. Some of this risk correlates with age, because as you age, you can become less physically and mentally able to adjust to events that can negatively affect your business, such as economic downturns or rapid changes in the competitive environment. This inability to adjust can affect cash flow, which in turn can affect how much money your business is worth and how much money you receive for your ownership.

But an absent Exit Plan can also affect you beyond your personal finances. For instance, without an Exit Plan, your family might find itself in a financial bind if you were to die suddenly. If you were to die and did not have a plan for how the business should be run in your absence, operations may become interrupted or key employees might abandon ship. If your family members rely on your business ownership to fund their lifestyles, it can become difficult, if not impossible, for those family members to fill that hole without a plan.

Planning Can Adjust to Changes of Heart

Experience has shown us that business owners can have changes of heart as they approach their business exits, and even throughout the process of exiting. Owners who at one point said they’d never want to exit may change their minds due to family considerations, an unexpected illness, or burnout. Likewise, owners who first thought they’d like to keep the business in the family may find that their children are incapable of running the business successfully.

In cases like these, you might find yourself with too little time to adjust to a change of heart. This lost time can force you to stay in the business for longer than you wanted, which can cause burnout and affect your performance. This can be especially challenging to your exit if you are at the center of most of your business’ success: If cash flows primarily because of you, hitches in your performance can negatively affect your business’ bottom line. This can have a ripple effect on your personal finances, your family’s financial security, and your business’ value.

Properly crafted Exit Plans help address the issue of lost time by digging deeply into your Exit Planning goals. Then, advisors devise strategies that position you to pursue those goals while remaining nimble enough to adjust to changes of heart you might experience throughout the process.

Planning Can Encourage Stability

Many owners want their business legacies to reflect their values positively, even after they’ve died or exited voluntarily. This kind of stability can be threatened if you can’t clearly articulate your expectations of your business exit. While “producing a good product or service” is a nearly universal value among successful business owners, the nuances of your values can get lost unless they’re clearly stated.

Exit Plans consider your personal values and which aspects of the business are important for your successor to continue or maintain. Using your goals and financial situation as bedrocks, a solid planning process guides advisors toward strategies that respect your values-based goals and find (and if necessary, train) successors that are willing to commit to the values most important to you. This type of stability can too easily fall to the wayside without a plan.

If you don’t yet have an Exit Plan but you’d like to see how Exit Planning can address potential issues concerning your money, time, and successors, contact us today. We have tools and strategies that can help us determine whether the risk of unintended consequences may affect your business exit.

As a member of the Business Enterprise Institute (BEI), Cornerstone Business Advisors is an authorized distributor of BEI’s content and Exit Planning Tools.

6/20/18 6/20/18

Balancing Your Goals With Your Family’s Goals in Family Transfers

If you’re considering transferring your business ownership to family, you might be tempted to put your family’s wants over your own goals. While this altruism may be admirable, it can also cause more problems than it solves. Consider the case of Darnell Orie.

Darnell Orie was unsure how to approach his business exit. His son, Hannibal, was the main reason why his company had tripled its revenues and profits over the last 15 years. And even though he wanted to begin winding down his own involvement in the business, he knew that he had to keep Hannibal motivated to grow the company: His retirement depended on Hannibal’s continued success growing the company.

Darnell had always wanted to transfer ownership to Hannibal, but he knew Hannibal didn’t have the money to pay him full value. He wanted to begin transferring ownership now, but he also felt it would be unfair to expect Hannibal to pay full value, because Hannibal was primarily responsible for the business’ success through his work.

While Hannibal agreed that his sweat equity should lower what he would pay for ownership, Darnell knew that Hannibal’s stepmother and half-sister would probably disagree, even though they were not involved in the business. Darnell is agonizing over three goals: his own financial security, making sure Hannibal’s sweat equity is rewarded, and treating his wife and daughter fairly.

Like many owners, Darnell was equally concerned about his goals, and his family’s wants and expectations. He simply didn’t know how to make them whole.

However, there are three tools he used to help prevent his ownership transfer to family from becoming a zero-sum game.

1. An Exit Planning Process Focused on Financial Security

When he initially approached his exit, Darnell only had one set goal: transfer the business to his son. He didn’t know how much money he wanted and needed to live a post-exit life on his terms, and he wasn’t even exactly sure when he wanted to exit.

In our experience, the most important goal to set when exiting is determining how much money you’ll need to be financially independent after you exit. All other goals should be considered within the context of your financial security. Establishing this foremost goal typically makes your other goals—determining your exit date and successor—clearer, because setting your financial goal first usually lets you consider your exit date and family considerations more accurately.

2. An Incentive Plan for Key Employees

In Darnell’s case, Hannibal was a key employee, someone whose absence from the company would cause its value to drop and operations to suffer. Darnell had to make the offer of ownership appealing to Hannibal while acknowledging Hannibal’s sweat equity and still assuring his own post-exit financial security.

A common tool to address these issues is to implement an incentive plan that hinges on a key employee’s performance. If you’re considering transferring ownership to a business-active child, you might offer your child shares of ownership for meeting certain performance goals. Those performance goals would in turn allow you to exit when you wanted and for the money you needed, while recognizing your child’s contributions.

3. An Equitable Estate Plan

Even though Darnell’s wife and daughter had no interest in ownership, he still wanted to be fair to them when transferring his ownership in his company. Because he couldn’t offer them ownership, he needed a solution outside of the business that wouldn’t require Hannibal to work for them, something Darnell knew his son would refuse to do. He found that solution in estate planning.

Estate planning is an important part of the Exit Planning process, and it can give you flexibility in how you approach family considerations throughout your business exit. By adjusting your will and trusts appropriately, and keeping your Buy-Sell Agreements current, you can more easily do what you consider is right by your non-business-active family members without short changing family members who take on the risk of running an otherwise illiquid business.

You can expose your post-exit financial security and family relationships to unnecessary risk without the tools necessary for proper planning. If you’d like to discuss the tools and strategies you can use to help you transfer ownership to your family members as smoothly and equitably as possible, please contact us today.

As a member of the Business Enterprise Institute (BEI), Cornerstone Business Advisors is an authorized distributor of BEI’s content and Exit Planning Tools.

6/6/18 6/6/18

The Dangers of Transferring to Children Without Planning

After building a successful business, many business owners decide that they want to transfer their ownership to their children. Too often, those owners assume that a transfer to children will go smoothly and simply, requiring little more than informing their kids of the date they’ll be taking the reins. Owners who make this assumption commonly realize that without planning, they can harm their businesses, their business exits, and their long-term relationships with their families.

Without proper Exit Planning, ownership transfers to children can produce negative consequences in three areas of your life.

1. Money

It’s likely that your children don’t have the capital to purchase their shares of ownership outright. This means that when transferring to a child, you’ll likely need to accept a promissory note and rely on your child to maintain or grow the company to receive your business’ full sale value. If something goes wrong, such as your child not having the ability to run the company as successfully as you did, you may receive less than what you expected from the transfer of your ownership interest. Since the goal of an Exit Plan is to position you to exit with financial security, transferring ownership to a child without a thoughtful plan can threaten that goal.

Another common money-related problem concerns how you’ll parse your assets between your business-active children and non-business-active children. Transferring ownership shares to non-business-active children can lead to two problems.

First, it can create resentment among any business-active children, because those children have worked hard to build the business, only to watch a sibling who did nothing to build the business get a share of their hard work. Second, it can make non-business-active children feel forced to do something they have no interest in doing to receive their share. In both cases, your company’s cash flow can be affected, potentially harming your ability to exit your business with financial security.

2. Time

Ownership transfers to children usually require owners to wait longer before receiving full sale value. This means that your finances may be exposed to general business risk for longer. If the company or economy experiences a downturn, you might need to wait longer than you had anticipated to receive the full sale price, which can affect your post-exit plans.

Another time factor that many owners overlook relates to how much time they’ll need to spend training their children or refereeing squabbles between them. If your children aren’t ready to run the business without your help, you may find yourself doing more work for longer, which can prevent you from doing other things you want or need to do to achieve your exit goals. Additionally, if you need to mediate fights between children—whether it’s related to who should do what within the business, or asset allocation between business-active children and non-business-active children—you may end up spending more time cleaning up messes or, worse, end up having to take the reins back to prevent your children from doing permanent damage.

3. Values

Although many owners assume that their children will run the business similarly to how they ran it, this isn’t always the case. If a child decides to run your business differently than you, it can create discord or amplify existing friction among your family members. This can cascade into problems that affect the money you receive and the time you spend in the business.

Differing values can also create hard feelings among in-laws, who might feel that you aren’t treating their interests fairly. In the worst scenarios, in-laws can use access to grandchildren as bargaining chips to get what they think they deserve out of your ownership transfer.

Business owners often fail to identify the consequences of a poorly coordinated ownership transfer to children until it’s too late. If you’re considering transferring your ownership to your children but aren’t sure whether you’ve addressed these potential problems, contact us today.

As a member of the Business Enterprise Institute (BEI), Cornerstone Business Advisors is an authorized distributor of BEI’s content and Exit Planning Tools.

5/16/18 5/16/18

Unforeseen Challenges to Third-Party Sales

For many business owners, a sale to a third party is their assumed Exit Path. Some business owners even start their businesses with the goal of finding a larger, more deeply pocketed buyer; selling the business; and retiring early. The potential to sell the business for cash draws business owners to third-party sales. If you are considering a third-party sale, do you know the full scale of the planning you’ll need to do to get ready? Those who make plans improve their chances for a successful sale.

While it’s true that many business owners initially intend to pursue a third-party sale as their Exit Path, it’s also true that many of those same owners choose a different Path in the end. There are four challenges that you may face in pursuing a third-party sale that may cause to you change your mind, and some of them are unexpected.

Challenge 1: Threats to Financial Security

Third-party sales are a two-sided coin. While they may attract the highest sale price, they also can require you to give up control. If you do not receive the entire purchase price in cash at closing, you risk relying on the company’s new owners to perform well enough to support the earn-out or pay off a promissory note. If the company struggles after the sale, and you are reliant on the continued performance of the business you no longer own for post-exit security, you may find that you have to go back to work.

Challenge 2: Seller’s Remorse

Seller’s remorse occurs when business owners sell their businesses and find that they don’t have anything that they like to do outside of running the business. You may assume that you will figure out what to do after you exit, only to panic as the sale date approaches. Pulling out of a sale can have a ripple effect, since qualified buyers might shy away from businesses that go on the market then come off the market without selling. Additionally, owners who don’t know what to do with their lives without the business can have an unfulfilling post-exit life if they sell the business without a post-exit plan.

Challenge 3: Tax Consequences

Will you be one of the unfortunate owners who finds yourself owing a significant percentage of your sale price to the government in taxes? Without a pre-sale analysis of the business and personal tax consequences of a sale, you may go too far down the path with an attractive buyer before you realize you can’t afford to sell the business for the price they offer.

Challenge 4: Culture Shock

Buyers commonly want to make changes to their acquisition post-closing. After all, buyers rarely buy businesses unless they think they can make changes to improve them. You may regret selling to a buyer who radically changes your company, which can dampen your post-exit satisfaction. Perhaps more harmful are owners who decide that they cannot stomach a radical change to their businesses’ culture and take them off the market, thereby causing the value of their businesses to drop dramatically (i.e., tainting the marketplace).

There are many assumptions for business owners to make if they decide to pursue a third-party sale. Those assumptions can have negative effects for owners and their businesses if not properly addressed. If you’d like to discuss the plausibility and challenges of a third-party sale for your business, please contact us today.

As a member of the Business Enterprise Institute (BEI), Cornerstone Business Advisors is an authorized distributor of BEI’s content and Exit Planning Tools.

5/2/18 5/2/18

Building Business Value Through Exit Planning

Business owners seldom seek to exit their businesses without attaining financial security. They understand that one requirement of financial security is to grow business value, but many struggle to achieve this goal. Fortunately for these owners, Exit Planning can directly address their need to build business value and serve as an unexpected solution for owners who want to increase their businesses’ value, but don’t know how.

One of the pillars of Exit Planning is a timeline that plots the value-building actions that owners should consider in order to position themselves to exit their businesses on their chosen exit date. This timeline incorporates how much the business needs to grow in value to meet the owner’s financial target by the owner’s departure or exit date. The timeline is created after the business owner’s professional advisors assess the owner’s current resources (especially business value and cash flow) relative to the owner’s financial needs post-departure.

For example, a business owner may want to exit in five years with $250,000 of post-exit annual income. Her Advisor Team may determine that the value of her business must grow from $3 million to $4.5 million for her combined ownership and other assets to provide what she needs to achieve her goals. They may also determine that growing cash flow (or EBITDA) by $100,000 per year would likely create that value. Action items and anticipated benchmarks are added to the overall Exit Planning timeline to keep everyone focused on what needs to be achieved and when.

Following the creation of the timeline, the next Exit Planning step is to assess the strength of the company’s Value Drivers. Value Drivers are activities that create value in a company. Third-party buyers, private-equity firms, and even key employees often require businesses to have strong Value Drivers before they consider purchasing the business. That’s because Value Drivers often create sustainable, recurring, scalable, and ever-increasing cash flow.

Some of the Value Drivers that you may install in your business include:

1. A stable, motivated management team that stays after you leave the business.

2. Operating systems that improve the sustainability of cash flows.

3. A solid, diversified customer base.

4. Recurring and sustainable revenue resistant to commoditization.

5. Good and improving cash flow.

Because installing strong Value Drivers is a foundational element of proper Exit Planning, and strong Value Drivers typically increase a company’s value and curb appeal to buyers, using Exit Planning to build company value can help business owners begin to solve the value-building question while positioning themselves for their future business exits.

A common mistake that business owners make when thinking about Exit Planning is that they focus more on the term “Exit” than “Planning.” They worry that if they commit to Exit Planning, then they will have to aim all of their energy at leaving their businesses, whether they want to or not. However, Exit Planning goes far beyond the concept of leaving the business in that the Exit Planning process addresses various issues that can positively affect the business’ value, cash flow, and overall operational performance.

If you’d like to learn more about installing Value Drivers in your company or simply want to talk about whether using Exit Planning to build business value is a viable option for you, contact us today.

As a member of the Business Enterprise Institute (BEI), Cornerstone Business Advisors is an authorized distributor of BEI’s content and Exit Planning Tools.