Allan Vander Hamm is a principal and the Director of Business Valuation and Transition Services at Berntson Porter and Company in Bellevue, Washington.   Allan’s practice focuses on designing and implementing comprehensive owner succession and transition projects; completing successful Merger & Acquisition transactions; and providing business valuations for transition, transactions, buy-sell agreements, divorce and estate and gift tax purposes.   He will be a panelist at our Equinox Focus program on Succession Planning on August 25.

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How can exit planning help a business owner make a smooth transition from ownership into an exciting and financially secure phase of life?  How can it put more money into the owners pocket both during ownership and when the business interest is sold?  When and how should an owner start the complex and multidisciplinary process?  Let’s touch on each of these questions.

An exit plan is an integrated process controlled by the business owner and facilitated by an expert in exit planning.  The plan documents a multidisciplinary strategy to transition out of business ownership into a new financially abundant and joyful lifestyle.  It addresses all business, personal, family, financial, legal, tax and operational issues necessary to achieve the owner’s goals.  It increases the probability that the owner will achieve success according to his or her definition, not as circumstances dictate.  A well executed plan takes time to implement.  Most fall within a range of three years to ten years to be most effective.

An integrated exit plan helps facilitate a smooth transition in a number of ways.  The first step is to ask basic questions followed by a more in-depth assessment of personal, family and business arenas.  Initially, as a business owner, do you know:

-  Your lifestyle goals during the transition and after exiting your business?

-  How much cash you will need to live on after exiting your business?

-  How much is your business worth today and an estimate of worth when you plan to exit?

-  How to increase cash flow while you continue to own the business and reduce risk?

-  How to sell your business to a third party while paying minimum taxes?

-  How to transfer your business to family members, co-owners, or employees for maximum after-tax value?

-  How to implement a continuity plan for your business if the unexpected happens to you?

-  How to ensure financial security for your family if the unexpected happens to you?

After answering these and other more detailed questions we identify options that fit best with the owner’s unique situation.  At this point we form a team made up of the owner and other professionals with specific expertise to identify options and develop specific plans in each specialty area that best suit the owner’s personal needs. 

Most plans include the following specialty expertise. 

-  A business valuation identifies business worth, value drivers, cash flow, trends and operating areas to improve.  

-  Estate planning protects assets, documents directives, minimizes taxes and brings security to the family. 

-  Financial planning ensures that cash flow needs are met with minimal risk. 

-  Legal assistance protects the business and helps ready it for sale.  

-  Insurance protects the owner, key employees and family members, facilitates sales to insiders and helps fund estate planning goals.  

-  Tax planning minimizes personal, business and estate taxes. 

-  Depending on the situation merger & acquisition experts, sales generation advisors, capital structuring and banking professionals, family counselors and others may become part of the team. 

The team collaborates to create a detailed plan document.  The document guides implementation by the owner, management and the professional team.  Exit planning results have shown time and time again that the owner has more control, takes away more cash, pays less in taxes, reduces risk, and engages in a smoother transition than if fate runs the show.

A well executed exit plan often generates significant financial and operational benefits to the owner.  For example, a quality business valuation will identify strengths and weaknesses in business value drivers.  Perhaps a broader and deeper management team will allow the owner to reduce time in the business while increasing value to a buyer on sale.  Perhaps the company is dependent on a few major customers.  If management addresses expanding the customer base and increasing revenues, cash flow to the owner could well improve during ownership.  Higher cash flows and lower risk when the business is sold can generate hundreds of thousands to millions in additional total cash to the owner.  There are numerous examples showing how each professional on the team adds unique value.

A savvy business owner can start a formal exit planning process at any time.  Starting earlier increases the likelihood of optimal outcomes.  I recommend starting a minimum of three years before exit to prepare a business for sale to insiders or outsiders.  Seven to ten years out is even better, especially if the most likely buyer is an insider group.  A number of techniques exist to transfer ownership to insiders that result in maximum value to the owner at low risk, but they take time to implement.

I’ve just scratched the surface in this post.  Exit planning is the one of the most exciting and high return processes that a business owner can undertake.  Please call Allan Vander Hamm to discuss the process in more detail, at no charge, for more complete education on exit planning for business owners.

Our guest blog this week comes from Bob Gruber, President of  The Rainier Group, a professional firm with  concentrated experience in the issues that affect successful private business owners and other successful individuals including business transition services, wealth advisory services and institutional consulting.  Bob will be participating in our Succession Planning panel discussion on August 25.

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Let me begin by defining a ‘family business’ as a private business in which there are at least two active generations. It is the transfer of ownership between the generations that is the most common type of ownership (and management) succession for established private companies in the United States.

 It is not difficult to understand the motivation behind the desire for this type of ownership transition. Predictably the older generation (G1) has spent years building and shepherding the enterprise. G1 usually sees the business as an extension of themselves- their identity and the identity of their business is comingled. There is thus a natural desire to create a legacy and give the adult children (G2) the opportunity to benefit from their succeeding ownership. G2 has grown up with the business and participated in its success through their active role as adults within the enterprise. They also see the opportunity for themselves as represented by the success of their parents. Given these motivations, an intra family ownership transition becomes an obvious objective, and it is at this point that a critical consideration is overlooked.

Regardless of the emotions involved, is the succession of G2 to the ownership of the company a good practical solution?  Objectively, does the business have the capability to support the goals of both generations and remain healthy and competitive?

Typical objectives of the older generation include the following:

-  Financial security. Subsequent to the transaction are there sufficient resources to effectively guarantee the desired life style.

-  An effective governance structure during and after the transition period. Frequently this includes powers retained by G1 at various points in the process.

-  A desire to withdraw from or significantly reduce involvement in the day to day grind of business- a loss of experience and talent.

-  Tax relief either by actions that shift the burden or a desire to be made whole by additional payments.

Objectives of the younger generation share some commonality with the older generation and also contain considerations that are different.

-  Personal cash flow needs.

-  The defined roles of family members.

-  Governance- how decisions are made and who has what powers.

-  Within the second generation who will acquire ownership and in what percentage.

-  If inactive siblings, how are the interests of active and inactive family members to be addressed.

-  Developing a strategic direction and tactical guide points that are understood and supported by all family members.

-  Agreement on an acceptable level of risk.

Any one of the above factors can create an impasse that makes an intra family ownership transition suspect and potentially impractical. Families are complex; families involved in business even more so. So it is not simply the financial issues that need to be tested before attempting a family succession effort.

Let’s assume that we have tested the waters and that no deal- breaker has surfaced. We have one more critical consideration before hitting the go button. We need to assess the future of the industry to which the business belongs and the competitive landscape. A business that has been successful can face an uncertain future due to changes in technology (video rental stores) or by increasing competition from industry consolidations. If the industry is declining or competition is becoming fiercer, an exit strategy other than retained family ownership may be a better alternative for all stakeholders.

As I type this, it occurs to me that the reader could conclude I am not a proponent of maintaining family ownership in the family business. In fact, if maintaining family ownership is a good practical solution as well as a feel good emotional decision, I prefer it believing that the family business creates a significant benefit to the community in which it is located.  The purpose of the above content is to simply state it is a good idea to look before we leap, that assumptions can be  dangerous,  and that good decisions are made when both the emotional and practical are taken into our considerations.

As Chris Corrigan so aptly stated, “You can never over-prepare in business!”   Yet, we know, from strategic plans to budget plans and marketing plans to staffing plans, business owners find it difficult to fit it all in.  Now I raise the issue of succession plans… another one of those plans that doesn’t seem critical today; but, in the grand scheme of things, it is a critical factor in business continuity and longevity.  The topic is most commonly raised in connection with an owner’s retirement; but it also applies in situations of death, disability, and other withdrawals of owners or executives from the company.   

With closely held businesses, the succession issues that affect ownership also affect management because the same people typically hold both positions.  The close-knit group find it difficult to distinguish between their ownership in the company and their roles as employees of the business.  For this reason, a critical protection for the company is often missed:   You cannot fire an owner but you can fire an employee.  If an owner fails to perform his or her duties, the owner can be fired as an employee but remains an owner with a right to participate in the profits and losses of the business.  For many businesses, this just doesn’t seem “fair.”   If properly addressed up front, though, ”fairness” can be built into the formal relationships among the parties.

In most closely held and family owned businesses, the “formal relationship among the parties”  I refer to above is an agreement between owners (usually an “Operating Agreement” for LLCs and a “Shareholders’ Agreement” for corporations).  This agreement should spell out under what circumstances an ownership buyout may be triggered.  These circumstances include both involuntary and voluntary withdrawals of owners from the business.   The termination of employment would be a typical trigger of a mandatory or optional buyout by the company or the other owners.   This buyout gives the company power to determine whether the terminated person remains an owner despite his or her employment termination.  Other involuntary departures that may trigger buyout provisions are death, disability, and bankruptcy.  Voluntary departures must also be considered in these agreements.  Often an owner elects or is forced to cease participation in the business activities due to retirement or other reasons.  The agreements should address whether the company or other owners have the right to purchase the interest of the departing owner in a voluntary departure situation.  In all cases, the agreement should specify the buyout terms.    

The process of thinking through these scenarios and terms offer the business owners an opportunity to consider the critical people in the business and the confidence that the business is in good hands in the event of a planned or sudden departure of one or more owners.

Catherine Dovey is the founder of Compensation Works LLC and offers this guest blog with insights as to how and when to communicate with employees about compensation.

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Several surveys show that up to 70% of employees are planning to look for new opportunities after the economy recovers.  Most of us assume that we need to increase pay to increase employee retention.  However, employee satisfaction with pay is directly related to the amount of communication employees receive about their pay.  Research shows no correlation between levels of pay and pay satisfaction.  Theoretically, you can pay on the low end of the market and still have employees who are as happy with their pay as if you increased pay 5 or 10% across the board.

This means you can get more bang for your buck simply by communicating clearly and consistently about pay.  In order to do that effectively, you need to have a clear system in place that is consistently administered and that you can easily communicate to staff.  Employees like receiving information about the organization; it helps them feel they can trust management to keep them up to date on issues which affect them.

Reaffirm your overall compensation strategy and communicate to employees.  Share both good news and bad news.  Even when you are freezing salaries or not increasing pay structures, it’s important to communicate with staff.  Without information, we human beings tend to assume the worst.  In this critical time, don’t make the mistake of reducing your communication to employees about pay. 

Let them know throughout the year that you are paying attention and will make adjustments when needed.  You’ll spend a lot less time dealing with employee-generated internet survey data.  You’ll also create trust and commitment that will help with employee retention in the future.

Scott Verrette of Resourceful HR offers us our guest blog post this month on how to create value in employment relationships.  Scott will be one of our guest speakers at the Equinox Focus Event:  Creating Value Through Employer-Employee Relationships on July 28.  Resourceful HR  helps companies grow through increased employee efficiency.  You can also sign up for Resourceful HR’s newsletter here.

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One of the most critical responsibilities of a leader is to cultivate a work environment that promotes a high level of employee morale, mutual trust and active engagement. These qualities set the stage for high productivity, employee retention and customer satisfaction.

Unfortunately, despite your best intentions and active efforts, occasionally you are faced with a situation where you have a disgruntled employee and you find yourself presented with a conflict that requires you to ask, do I address the situation head on or do I wait and hope that it will resolve itself over time?

Just as you must invest time and energy into building and sustaining a healthy relationship with your family and close friends, so too must you be willing to nurture and grow a productive relationship with your employees, especially those that are struggling.

 Causes of Employee Dissatisfaction

There are many possible causes for employee dissatisfaction. The critical task for you as a leader is to quickly spot a potential problem and to accurately diagnose the situation and get to the root underlying cause(s), which may include:

-  Personal issues – In some circumstances the employee’s poor attitude has little to do with the workplace and, instead, the employee is distracted by financial worries, health concerns or possibly personal issues such as depression or anxiety.

-  Family problems – Other times the cause can be related to problems at home, e.g. relationship issues, disagreements with parents, siblings, relatives, or problems with children.

-  Stressed interpersonal relationships in the workplace – Unfortunately, a vast majority of the time the cause is due to personal conflicts between an employee and their boss or fellow co-workers.

 Symptoms and Potential Ramifications of Not Taking Action

To be successful in managing these types of conflicts, you must be vigilant about noticing the early warning signs of employee discontent and investigate the situation promptly. Failure to intervene can quickly lead to the following negative ramifications:

-  Poor attendance and timeliness – Discontented employees often become unreliable in their job performance, which can damage trust with co-workers and customers.

-  Low level of personal engagement – Both your immediate department and the company at large are unable to fully capitalize on the skills, talents and ideas of a discontented employee.

-  Abrasive interactions with others – Angry, short-tempered, uncooperative interactions quickly shut down lines of communication that are critical to the effective functioning of the department and the overall organization.

-  Increased employee turnover – There is abundant research verifying that the single most prevalent reason for employee turnover is poor interpersonal relationships in the workplace, especially with management.

The Payoff for Maintaining Healthy Employee Relationships

There are many benefits, both tangible and intangible, to be realized by maintaining healthy employer-employee relationship including:

-  Positive attitudes are contagious – When you are able to build and sustain an open, engaged relationship with employees the benefits are exponential since the positive, enthusiastic attitudes of even one employee can influence others in a positive manner.

-  Enhanced capacity to weather difficult times and stress – Employees who feel secure and invested in their work and the organization are much more resilient and able to ride the occasional waves of uncertainty and change that buffet all companies.

-  Increased bench strength – Building a cadre of employees who have positive interactions with management helps to build a healthy pool of potential new leaders who possess the types of aptitudes needed to maintain an engaged workforce.

-  Happier internal and external customers – Most employees are neither interested nor skilled at hiding their emotions when interacting with others in the course of performing their job. By maintaining a positive, engaged workforce you enhance the positive perception of both your department and your company as entities with which it is pleasant to do business.

-  Enhanced goodwill and a forgiving attitude when mistakes are made – When you cultivate a work environment that exhibits a caring attitude, that values the unique contributions of each employee and that looks for solutions rather than someone to blame when problems occur you help to create a generosity of spirit that extends to interactions with others when difficult issues arise.

Underlying all of the positive attributes and benefits of creating and maintaining good employer-employee relations is the promise of increased productivity and profitability. With very little monetary expense and a moderate investment of your time and energy you can realize positive returns that will continue to pay dividends well into the future.

Many studies show employers the value of “happy employees” to a business’ productivity and success.  An obvious question arising from these studies is:  “What makes for a “happy employee?”   The studies address this to varying degrees; but to me, a particular employee’s happiness in his or her work depends on many factors such as age, financial needs, passion for the business and its customers, and role within the organization.  The many contributing factors make it difficult to create a workplace that satisfies all the varying needs of the workforce.  In small companies, the “employer” is often also the owner and works closely with all the employees making it very easy to engage the team in the vision and passion he or she feels for the company.   As an organization grows, though, this becomes more difficult.  The vision and passion are still felt among certain ranks, but these important messages are heard second-hand by most employees through their manager or human resources contact.   The receipt of such information second-hand makes it difficult in many companies for all employees to adopt the vision and passion of the employer.

In my experience, one essential element can be linked to employers’ success in hiring: expectation setting.   Where an employer has a formal procedure for hiring that outlines job responsibilities and expectations, the employer creates an environment for success.  

As an employer, the first step in setting expectations for an employee is knowing what business needs are being filled by the new employee.  Employers should spend a great deal of time understanding what the job duties are and what skills are necessary to do the job.  Furthermore, the employer must be sure the interview process targets these skills to determine if a candidate can fill the gaps required by the business.   Some companies even include personality testing as part of the interview process to ensure there is a fit between employer and employee in certain essential areas.

Next, when the new employee comes on board, the employer must have a formal new-hire process.  The new hire process should set the tone and example to the employee of the quality expected by the company.  Documents sent to the employee for signature should be accurate and delivered timely with clear expectations to the new hire of next steps required by him or her. 

One important document is the employee manual or handbook.  The employee manual sets forth the policies and procedures of the company and is often the most efficient way to set expectations and tone for the workplace.  The employee manual not only includes policies of the company in areas such as dress, attendance, technology, social media,  violence and sexual harassment; but the manual also allows the company to communicate the mission, vision and core values to the employee at a time when they typically are interested in engaging with the company.  

An area that is becoming more and more important to companies is the protection of intellectual property.  The employee manual is frequently the place to include “restrictive covenants” such as non-solicitation, confidentiality, assignment of intellectual property and non-interference provisions.  Where a company is not large enough to want a full-employment manual, these “restrictive covenants” remain critical to the business and should be included as part of the new hire process.   The laws around which provisions are enforceable and under what circumstances differ from state to state; so a company must be aware of these differences, especially when operating in multiple jurisdictions.

An employer should also set an expectation of regular communication with employees.  This communication may differ across companies but to define it upfront allows the employee to prepare for and use the opportunity to express needs.  Employees will be less defensive and the employer may learn how to help them be more productive and “happy” in the workplace. 

Setting expectations with employees reduces this reduces the risk of miscommunication and missed expectations and also sets a standard for dealing with issues as they arise.  Clear communication of expectations to the employee in the specific context of his or her employment will drive confidence on both sides and result in “happier” (read “more productive”) employees.