Today, most of our successful business owner clients are now facing the second economic crisis of their careers. Strike 1, of course, was the Great Recession of 2008 to 2012. That recession, struck without warning, or should I say without awareness because there was plenty of warning? After it ended, many companies took years to recover and resume business as usual.

The novel COVID-19 pandemic truly struck the world without notice, and once again owners unwillingly and without any fault of their own, were confronted by a second great crisis (Strike 2). This crisis has hit the economy faster and harder than the events that triggered the Great Recession from 12 years ago. We still can only guess how long this crisis will last and how long it will take businesses to recover.

There are some things, however, we know for certain.

1. Many owners who have endured two great recessions will likely be unwilling to face a third (Strike 3).
2. A majority of owners (70%) are unsure or pessimistic about the U.S. economy and concerned about business sustainability since the onset of the COVID pandemic.
3. Owners who are working to stem their losses have not yet created or finalized their recovery plans. They need a path to move forward.
4. Advisors skilled in Exit Planning can and should help, probably in ways owners do not expect.

The Exit Planning Advisor’s Role in a COVID-19 Economy

You are in a position to help your clients deal with their business challenges—even as you manage your own. Perhaps many of your clients will assume that business planning, especially Exit Planning, is not worth their time until they figure out how to move forward as the economy recovers. We submit that they are mistaken.

Owners have to act immediately to battle the effects of the COVID crisis. Yet it is also true that most of our time, effort and recommendations as Exit Planning advisors are directed to growing businesses so that their owners can exit on their terms. That goal is perfectly suited to owners in crisis or in times of crisis and prosperity.

Getting Owners to Act

We suggest that you organize and schedule a planning meeting with your clients and their chief advisors to discuss strategies to restart their businesses and regain lost value. If a client already has a written business plan, use this meeting to review it and realign it to the new economic environment. If a client does not, this is an ideal time to create one because they are focused on the future.

Whether a client has a business plan or not, your meeting should include the following agenda items (adapted from BEI’s year-end planning meeting agenda).

• Owner Objectives
  • What are the owner’s goals for the business?
  • Have goals changed since this crisis hit?
  • What are the owner’s goals once the crisis passes?
• Preserving Value
  • Has the owner applied for all available government programs?
  • If the business continues to be profitable, discuss and recommend appropriate tax minimization tools and approaches.
• Protecting Value
  • What steps can be taken to protect the owner from business creditors?
  • Is there a risk a key employee could leave and take key accounts, customers, or vendors?

• Promoting Value
  • What actions will increase or restore company cash flow and value?
  • Has the owner engaged with the management team so that all of its members are aware of the owner's commitment to sustaining and growing the business long term?
  • Discuss possible methods (or modifications to existing incentive plans) to reward the management team and other important employees for improving company performance. Set performance standards that restore business cash flow and value. Tie these standards to also achieving the owner’s financial security exit goals.
• Other Value Drivers
  • Operating Systems: Are they effective, efficient, and up to date?
  • Diverse Customer Base:  Is the company’s customer base sufficiently diversified?  If not, the loss of a few key customers may spell disaster for the company and its owner.
  • If the business is stronger than its competitors, discuss the possibility of growing the business through acquiring weaker competitors.
• Business Continuity Wealth Preservation and Estate Planning
  • What must be done to make sure that, if the owner dies or become disabled, the business will continue with minimal disruption to its cash flow? An owner’s unexpected and unplanned death when the business and economy are weakened would be the worst result imaginable for the business and the owner's family. What protections should be considered or strengthened to prevent adding this additional disaster to the COVID Crisis?
  • What will the consequences be to the business if the owner were no longer there? If a company relies on its owner's abilities or financial statement, the loss of that owner could also mean the loss of the business. Life insurance is an obvious solution.
  • If an owner has a larger estate, discuss gifting business interests while the business value is temporarily depressed.

This meeting agenda is the starting point for issues that you know to be relevant to each client. Because the topics are relevant, wide-ranging and owner-centric, discussing them can bring owners a sense of order in an uncertain time.

Note to BEI Members: Use the EPIC planning software to produce dozens of appropriate recommendations for each of the items listed on the agenda.

With your guidance, the COVID Crisis has the potential to motivate owners to take the actions necessary to create businesses that permit them to exit on their terms —before they face Strike 3.

Takeaways

• Owners may be struggling with how to deal with the COVID Crisis. Schedule meetings with your owner-clients and offer assistance in overcoming the economic effects of the COVID Crisis.
• Owners need to act swiftly. Using the organized approach we’ve described will provide them the road map to do so.
• Your clients will appreciate your advice and help to restore value as a first step to exiting their companies on their terms. They want, more than ever, to exit the batter’s box before the pitcher throws another strike ball. Use the agenda in this post to help make that happen. 

Planning for a successful business future is an exercise in foresight and commitment. Without foresight, owners won’t have any idea what success means to them. Without commitment, even the best-laid plans will fall by the wayside. For everyone involved in the process of planning for a successful future, defining goal is the foundation.

When talking about goals, most business owners share some commonalities. Most owners want to be in control of their destinies. Most want their businesses to reach certain cash flow or revenue benchmarks. But unless owners clearly articulate what their goals are, they can stumble into some unexpected and unwanted scenarios. Consider the story of two partners who fell into this trap.

What happens when goals get misaligned

Bruce and Jeff Skaggs spent 20 years turning a passion project into generational wealth. Their high-end clothing line had grown from a two-person outfit headquartered in Jeff’s basement to a $50 million brand. With Bruce in charge of design and Jeff as the company’s rainmaker, Skaggs Couture afforded Bruce and Jeff a life of comfort for themselves and the people they cared about, including their workers.

Bruce and Jeff took pride in giving each employee a yearly $9,000 stipend to use as each employee saw fit, on top of the above-average salaries they offered each employee. Bruce and Jeff also provided employees with pieces of their newest designs, which used only the highest-end fabrics and leathers. Their generosity helped attract the best employees.

As Bruce and Jeff grew older, they decided that they wanted to sell the company to an outside party. They had no shortage of suitors and chose to negotiate with the one that offered them the most money, well over the $50 million it was worth. As they and their advisors negotiated with the buyer, Bruce and Jeff became more horrified by what the buyer intended to do.

The buyer said that they intended to eliminate the employee stipend entirely. They wanted to move production overseas and introduce a lower-quality, lower-priced line of clothing to attract a wider swath of consumers. They also proposed enacting what they called “hiring efficiencies” that would maximize shareholder value and increase Skaggs Couture’s bottom line.

Bruce and Jeff discovered how important the culture they’d built had become to them. They didn’t want to sell the business for top dollar if it meant harming the employees who had gotten them there. So, they took the business off the market, determined to restart from square one.

Though this scenario is fairly common, it’s also eminently avoidable. The root of the problem was that Bruce and Jeff’s advisors failed to ask the right questions about what they wanted from the sale beside the money. While money is important, it’s rarely the only important thing to business owners. Exit Planning addresses this common error because the first step in Exit Planning is when advisors ask probing questions about what owners want from their eventual business exits. This saves owners time and money by letting them accurately pursue what they truly want from the outset.

How advisors help owners in defining goals

The most important tools advisors have to help owners define their goals are the right questions. When owners begin planning for their business futures and eventual exits from their businesses, there’s a lot for them to consider. How much money do they want and need? When do they want to exit, and can they realistically exit by that date? Defining their goals has big consequences. When those goals are poorly defined, it can lead to poor outcomes.

Advisors help owners define their goals by guiding owners to talk about what matters most to them. By asking probing questions, advisors put owners on the path to establishing foresight. For example, if an owner says they want to maximize company value, an advisor might probe into some of the consequences of pursuing that goal. In the process, that owner might realize that if maximizing value can damage the company culture, there might be other goals that matter just as much as maximizing value. Advisors can then help that owner thread the needle of increasing value and protecting employees.

Once advisors help owners establish foresight in defining their goals, they act to keep owners committed to the process. Planning for a successful business future and eventual business exit takes time. It’s full of obstacles and unexpected forks. It can wear business owners down if they try to take it on alone. Advisors work to take responsibilities off an owner’s plate. They provide recommendations based on the owner’s goals to get what the owner wants and needs. They keep everyone on track toward a common goal: letting an owner leave the business when they want, for the money they need, to whomever they choose, and in ways that let owners abide by what’s most important to them.

Takeaways

• Defining goals is important for a successful business future and business exit, and it requires foresight and commitment.
• It’s common for business owners to gloss over goals that are truly important to them. Advisors must understand owners’ goals—and help owners uncover their goals—before committing to any Exit Path.
• By asking the right questions and presenting a proven process, advisors help owners accurately define their goals and work toward achieving them.

There are many businesses that are successful right now whose owners don’t feel any urgency to begin Exit Planning. This might partially explain why only 17% of owners have a written Exit Plan. When owners are comfortable where they’re at, despite not having a formal Exit Plan, they may struggle to plan with a longer view of their business futures. They may ask, “Why change what works?”

According to Chuck Hollander of Red Flag Advantage Business Consulting, strong businesses are a marriage between performance and health. During the BEI 2017 National Conference, he described the difference between business performance and business health as follows:

• Business performance is the business’ ability to win today.
• Business health is the business’ ability to win tomorrow.

Many successful businesses have indisputably strong business performances. Fewer of them have similarly strong business health. For example, many successful businesses meet or exceed various expectations based mostly on the owner’s presence. If that owner were to leave unexpectedly (via death, injury, or otherwise), the business would most likely suffer, if not fail altogether. In this example, the business may have a strong performance. But its health—its ability to win tomorrow—is in jeopardy because if anything were to go wrong with the owner, it’s likely that things will go wrong with the business.

Compounding that challenge is the fact that most owners are incredibly optimistic about themselves and their businesses. They may say, “We can worry about that when it’s time.” But the time to worry about the business’ health is now, especially if owners, their families, and others rely on the business to support their lifestyles.

Let’s look at three ways that advisors help owners marry business performance to business health and reframe the conversation.

Pinpoint problems without interrogating

Business owners typically don’t answer to anyone. They’re the boss, the decision maker, the interrogator. Owners whose businesses have consistently strong performances may question why they need an Exit Plan at all. Exit Planning Advisors approach this mind-set by pinpointing problems without interrogating the owner.

This doesn’t mean that they don’t ask questions at all. On the contrary, they ask probing questions that speak to the owner’s needs. Exit Planning Advisors motivate owners by guiding them toward identifying their problems themselves. They may ask an owner, “What is your biggest challenge?” or “What does independence mean to you?” These kinds of questions put the focus on what the owner thinks, rather than on what the Exit Planning Advisor does. More importantly, they tend to reframe the conversation with a focus on business health (i.e., planning for the future of the business, which includes the owner’s inevitable exit).

Calculate consequences

Once the owner has self-identified what they think are their challenges, based on the Exit Planning Advisor’s probing questions, the Exit Planning Advisor has a base to work with. At this point, Exit Planning Advisors can begin to calculate the consequences of owners’ inaction.

For example, an owner may say that for 30 years, their business has provided their family with a lifestyle they could have only dreamed of when they founded the business and that changing what they do wouldn’t make much sense. Rather than debating the owner, an Exit Planning Advisor might respond, “You’ve spent 30 years building this successful business. Is it protected?”

Even without going into vivid detail, the advisor has begun to help the owner calculate the consequences of not having an Exit Plan. The owner may begin to think about threats or risks they’ve ignored for years, because those threats and risks haven’t yet affected the business or simply because they don’t have a solution to address them. 

By calculating consequences, Exit Planning Advisors shift the owner’s focus to the business’ long-term health and how its health can affect the people and things the owner cares about most.

Contrast current solutions with recommended solutions

Once the Exit Planning Advisor has pinpointed the owner’s problems and calculated the consequences of not addressing them, they can provide recommendations. Exit Planning Advisors determine what the owner’s current plan is before they offer up a different plan. The owner’s current plan may help the business win now, but without a formal Exit Plan, it’s more challenging for the business to win tomorrow, especially if the business relies on the owner (as many of them do).

When contrasting, successful Exit Planning Advisors refrain from injecting their opinions. Rather than saying, “We’re going to do X,” they ask owners, “Based on what you’ve told me, what do you think about doing X?” Asking owners their thoughts about their plans for their futures gives them the agency to marry the success they’re having now to the success they want to have in the future.

Takeaways

• Successful business owners may not feel an urgency to change what works. Exit Planning Advisors work to reframe that objection by focusing on the business’ long-term health and how that health affects owners and the things they care about.
• Advisors can’t solve problems that owners don’t think they have, even if those problems are obvious to the advisor.
• Successful advisors pinpoint problems, calculate consequences, and contrast the owner’s current solutions with the advisor’s recommended solutions to demonstrate value.

The goal of Exit Planning is to let business owners leave their businesses when they want, for the money they need, and to whomever they choose. The actions owners and advisors take to achieve that goal are based on an Exit Planning road map, or what we call an Exit Plan. What does that road map generally look like?

Each individual road map is unique because each business is unique. (If you don’t believe this, try telling a business owner “Your business is like a lot of other businesses” and coming out unscathed.) However, every road map has a common thread that runs through it: making the owner inessential to the business. Owners understand that if the business requires their involvement to maintain its cash flow, few buyers will be interested in the company. To make buyers interested, advisors must help owners understand and install Value Drivers.

What Are Value Drivers?

Value Drivers are aspects of a business that give the business value to a potential buyer whether the owner is present or not. Though there are many different Value Drivers, we’re going to talk about three that are a part of all successful Exit Plans to give you an idea for what an Exit Planning road map looks like.

Next-Level Management

If a business lacks sufficient value to allow the owner to exit on their terms, Exit Planning Advisors look to the management team to spur growth. If current management doesn’t have that ambition or capability, they need to be replaced. Exit Planning Advisors usually have a recruiter or search firm on their Advisor Team whom they can retain to find outside talent as necessary. That management talent possesses “next-level” experience and proven performance. It can grow the company to the level needed to allow the owner to exit successfully.

A critical aspect of recruiting, motivating, and retaining next-level management is designing an appropriate incentive plan. This is the task of the Advisor Team. It uses the owner’s goals to establish performance standards for next-level management. These performance standards align with the business owner’s specific Exit Goals. If next-level management achieves the set performance standards, then by design, the business will achieve growth at a rate that allows the business owner to leave their business at their chosen time, for the money they want and need, and to whomever they choose. These performance standards become a part of the road map.

If management achieves the performance standards, it usually receives a generous cash (or stock) bonus and a deferred bonus, which vests over a time period that extends a bit beyond the owner’s desired exit date.

Helping owners find, motivate, and keep next-level management is often the most impactful single consequence of Exit Planning.

Operating Systems That Increase Cash Flow Sustainability

A second critical Value Driver professional buyers demand is documented, state-of-the-art, proven operating systems in the business.  Next-level management teams typically know what this means. If not, Exit Planning Advisors often have a systems consultant on their Advisor Team to help businesses.

Diverse Customer Base

Diversity within the customer base insulates businesses from the risk of a major customer or two leaving and causing a large dip in revenue. Some of the most successful small and mid-sized businesses thrive because of the relationships their owners build with their clients. Unfortunately, most buyers will look at relationships based on the owner personally as a risk they aren’t willing to confront. They ask, “Will these clients stay if we buy the business?” If the customer base isn’t diverse (i.e., if any one customer accounts for more than 5–10% of total sales), that risk multiplies.

Once again, next-level management often mitigates this issue. They know how to find and enter new markets. Combined with documented operating processes, they know how to highlight competitive advantages to draw more diverse customers.

Takeaways

• Exit Planning road maps are unique among business owners, but a common thread among them is installing Value Drivers.
• Finding and retaining next-level management is the most important Value Driver. This management develops and enhances all other Value Drivers.
• One result of developing strong Value Drivers is providing owners with the freedom to choose how they wish to contribute to the business.

Exit Plans are rarely set in stone. There are simply too many factors that can change on a dime. Recall that over the last few articles, we’ve looked at how a successful business owner named Linda wanted to transfer her business to her two sons and exit in five years with financial security. As she and her Exit Planning Advisor discovered, Linda’s original plan wouldn’t allow her to exit with financial independence. As they proceeded with planning, they also learned that only one son, Jimmy, was interested in ownership. Her other son, Gene, was not interested in ownership, and his continued employment was adversely affecting company performance.

Emmy and her Advisor Team needed to help Linda recalibrate her Exit Goals. First, Linda decided that she wanted her other son, Jimmy, to eventually take full ownership. However, she also had to address the fact that her sister Gail was interested in ownership. Linda didn’t want to give Gail actual ownership. Emmy and her Advisor Team decided that the best way for Linda to achieve financial independence and still transfer the business to her son required Gail to remain with the company through Linda’s exit. It also required Jimmy to step up to the ownership plate.

So, they created an incentive plan for Gail designed to reward her with a current and deferred bonus (subject to vesting) if cash flow met annual benchmarks. Attaining those benchmarks meant Linda could exit on her birthday in five years, just like she wanted, while rewarding Gail for her hard work and perseverance in the company.

At the same time, Emmy and the company’s CPA designed a plan to bonus ownership to Jimmy while also allowing him to buy 5% of the stock each year at a minority discount if the company achieved the same cash flow benchmarks set for Gail’s incentive plan. This addressed Linda’s desire to keep the business in the family. It also set boundaries for Jimmy—which was something he needed—to eventually own the business.        

With ownership transfers and incentive plans properly designed and aligned with Linda’s goals, the company met its cash flow benchmarks in the first four years. In the fifth year, Jimmy cashed Linda out using a bank loan to acquire her remaining ownership interest. On her 70^th birthday, Linda retired, just like she had planned.

Reaping the Benefits of Proper Exit Planning Preparation

Linda’s success may have seemed easy, but she faced several obstacles that could have derailed her plans. First, Linda was dead-set on transferring the business to both sons.

Second, Gene could have inadvertently destroyed Linda’s plans to exit with financial security. Gene was both uninterested and unqualified for ownership, but Linda didn’t know any of that until her Exit Planning Advisor and business consultant met with him. By finding and addressing this issue early, Linda gave herself and her advisors time to plan around it and still treat her now-non-business-active son fairly.

Finally, addressing Gail’s desire for ownership by creating an incentive plan for her kept her onboard and motivated to achieve the growth Linda needed to exit on her terms.

Through proper planning, Linda avoided late-stage surprises that constantly pop up during Exit Planning. She treated everyone equitably. And most importantly to her, Linda kept the business in the family. She positioned herself to succeed by retaining Exit Planning savvy advisors.

Takeaways

• Exit Plans typically need to be adjusted because of changed circumstances. Advisors must make owners aware of this likelihood early in the planning process.
• Owners who start the Exit Planning Process early tend to have more successful exits because their advisors can properly plan for the unexpected.
• With enough time, owners and advisors can adjust Exit Plans to achieve most—if not all—of an owner’s Exit Goals.

In last week’s article, we mentioned that an important aspect of planning for a third-party sale was incentivizing key employees to stay with the business. Today, we will expound on that idea, because it’s a crucial function of maintaining a successful business. No matter when, how, or to whom business owners leave their businesses—and even if owners intend to die at their desks—they must assure that they are giving their best employees incentive to stay with the business throughout.

Why Business Owners Need Incentive Plans

Recently, businesses have begun to refer to employees—whether they are key employees or not—as “their most important assets.” They talk about employees in terms of “human capital,” which implies that they are something to be exploited. This cynical view of employees as chattel can lead to one of the most terrifying aspects of business ownership for owners: constant turnover.

Employees, regardless of whether they are high ranking or rank and file, understand when plaudits are empty. Without tangible, and often spendable, proof that the company recognizes their contributions to the company’s success, most employees will eventually leave. Typically, the first ones to leave are the ones that matter most. While no companies can ever claim a 100% employee retention rate over the years, many small businesses struggle to maintain even an average 90% employee retention rate.

This inability or disinterest in motivating employees to stay—despite the constant refrain that “our employees are our greatest assets”—equates to outright business sabotage, ironically approved by the very last person who wants to sabotage the business: the owner. Key employees are crucial to business success—now, in the future, and especially when the owner prepares to exit the business—and owners simply cannot afford to lose them. This is why formal incentive plans are so important for owners to have.

But how do owners implement a successful incentive plan? What does a strong incentive plan look like?

How Business Owners Can Implement Incentive Plans

Business owners have many inborn talents, but typically, creating and implementing a strong incentive plan isn’t one of them. Incentive planning is usually too complex and broad to tackle alone. Thus, owners leverage the combined expertise of an Advisor Team to help them fill in the gaps in their own expertise.

In implementing a proven incentive plan, advisors and owners must work together to determine what will best incentivize their best employees to stay with the company. This is especially important when owners are considering their business exits because it’s their best employees who will likely run the business as and after they exit, which inherently affects the business’ value. While there are numerous types of plans owners and advisors can use (Phantom Stock Plans, Stock Appreciation Rights Plans, Cash Bonus Plans, or Profit Sharing Plans, just to name a few), all incentive plans must do four things.

1. Be tied to performance standards.
2. Be clear, consistent, specific, and in writing.
3. Create substantial bonuses.
4. Handcuff the employee to the business.

Why Tied to Performance Standards?

Much like a business has yearly goals and an owner has specific exit goals, employees need goals to aim for to invest themselves in an incentive plan. Without basing incentive plans on performance standards, owners can back themselves in a corner for two reasons. First, without a performance standard, everyone is left to guess at what they’re supposed to be doing. An employee’s view of a good performance might not match with an owner’s, and what an employee considers an important performance might not be of value to an owner at all (or vice versa). Second, without a performance standard, any awards given can be misconstrued as favoritism, because again, there’s nothing that determines who gets an award or how. Both can lead to bitterness and cratering morale.

Specific performance standards vary by business and industry, and advisors must use their skills and planning tools to determine standards that are both realistic and based on historical performance. They shouldn’t be so easy to achieve so as to cost the company net money but also shouldn’t be so difficult as to make them impossible to achieve at all.

Why Clear, Consistent, Specific, and in Writing?

Unless employees know what they must do to receive their incentive, there’s no way for them to pursue it. Likewise, incentive plans cannot exist solely in the owner’s brain, because if something were to happen to the owner (death at worst, a bad day at best), the incentive plan is meaningless. Putting the plan in writing and assuring that it’s clear, consistent, and specific makes it more likely that employees will successfully achieve their goals, which will positively affect the business’ growth. Advisors can help owners write clear and concise incentive plans, and explain them to employees in face-to-face meetings to assure that everyone understands what’s expected.

Why Create Substantial Bonuses?

For owners, the goal of an incentive plan is to motivate employees to achieve goals that will grow the business to new heights. This implies that employees will need to vastly exceed what they’ve been doing historically, which further implies more work. For employees, if they are asked to do more work, they will expect ample compensation. An owner who offers a 5–10% bonus for 100% more work should not be surprised when their targeted employee declines the opportunity or leaves the company altogether. Generally, a “substantial” bonus is defined as no less than 30% of the employee’s base compensation. With the right tools and ideas, advisors can determine a bonus that is substantial enough to motivate employees to achieve their set performance standards.

Why Handcuff?

The entire point of an incentive plan is to keep the employee invested with the company over a set range of time. In offering an incentive plan to an employee, owners are saying that the company will be better off with the employee than without the employee. To keep that employee around for the long haul, advisors can recommend that the incentive plan be vested over time, which gives employees a piece of the pie now on the condition that they stay with the company and continue to achieve performance standards for the remainder of the pie later.

If owners are the heart of the business, key employees are the circulatory system that keeps the business running smoothly. To neglect them by not providing incentive for them to stay is a huge risk owners take with the success of their businesses—both now and later—and the success of their eventual business exits.