Myth One:  There’s Plenty of Time

In business succession planning, time is either your ally or your enemy. You can spend time planning for succession during your active business lifetime, or postpone planning and wait until the more chaotic, uncertain and expensive succession planning occurs post-mortem, when the choice is no longer yours.

Reluctance to accept the realities of time can have disastrous consequences, especially since timing issues are often beyond an owner’s control.   Just as the aging CEOs of major corporations are pressed by shareholders who demand a succession plan to protect their investments, so too a small business owner should implement a succession plan to protect the interests of all stakeholders.

The lesson? Start early. Select your successor(s), and work with a financial professional to develop a succession plan before it’s an issue.

Myth Two:  It’s Easier to Just Sell It

Really? To whom? When? For how much? Finding a willing buyer for any business is rarely just a matter of hanging up a “for sale” sign.  Buyers are not necessarily prepared to wait until the time is right in a business’s life cycle before making an offer.

The same issues of timing influence the way businesses will be valued. Most business owners have an idea of the worth of their business based on revenues, fixed assets, profitability and a variety of balance sheet items.

What the business owners want is fair value paid by the buyer, as if that was a constant or objective number.

The United States Board of Tax Appeals defines fair market value as, “The price at which property would change hands between a willing buyer and a willing seller, neither being under any compulsion to buy or sell, and both having reasonable knowledge of the relevant facts.”

The truth is that valuing a business is difficult and can’t be done just once, whether it’s the intent to sell the business or pass it on to family members who truly want to be in the business. A good advisor will recommend an independent valuation of the business, documentation of the business valuation data and methodology and periodic review of the valuation.

Succession planning can be an uncomfortable topic—I understand that. But the truth is that every business must eventually transition to new ownership, and the only real question is how successful the transition will be. Unfortunately, too many business owners put off succession planning and end up watching their business close or go bankrupt soon after they leave.

You’ve invested years of your life into building your business—and succession planning ensures that your hard work hasn’t been wasted. Don’t buy in to the myths—and please contact us today if you would like to learn more!

Unfortunately, for many business owners this process does not unfold the way that they had hoped. This happens for a variety of reasons—often it doesn’t sell for as much money as they hoped, the terms aren’t what was expected, and so forth. Today, we’re going to focus on another issue which is surprisingly common. Namely, what to do after the business sells.

As with most things in life, the key to a successful transition into life after your business is planning and prioritizing. A helpful article published on Divestopedia.com offers four valuable tips:

1. Get in touch with what’s most important in your life. Start with what you’re most grateful for. Perhaps it’s the people in your life; your family, your close friends, your colleagues at work who’ve helped you build your success. Having an appreciative, grateful attitude opens up the path to true wealth.

2. Rediscover what you truly enjoy doing. Whether it’s hobbies, volunteer work helping others, or even the work that you currently do, where there’s a passion, there’s a future. Find the time to explore that passion.

3. Find time for contribution. Shift your thinking from achieving more money, recognition, and authority to what you can do with these assets that could help others. Certainly seeking pleasure is worthwhile. However, we’ve found that those who contribute to the well-being and advancement of others have a greater sense of satisfaction and fulfillment than those who focus solely on pleasure and personal consumption. The focus doesn’t have to be on charity or philanthropy; it could be on supporting younger family members or close business contacts in their work. The point is to stay engaged in contributing.

4. Start putting together your team for the future. Even if you trust them and respect them, the advisors that got you to this point may not be the right ones to sustain you through the next phase of your life. They may even be thinking of cashing out themselves and may not be available to assist. To use a team analogy, build some bench strength, especially if something unexpected were to happen to you or to them.

One of the most common reactions that many business owners have after they finally sell their business is an overwhelming feeling of… “now what?”

They literally don’t know what to do with themselves—and considering that many of them have spent decades working on the business, this is an understandable reaction. The key, as the article referenced above points out, is identifying your priorities. What is important to you? How do you want to spend your time? Answering these questions will help you determine “what’s next” for you… and the best time to start asking and answering these questions is well before you actually begin selling your business!

If you’d like more information on this subject, or if you’d like to discuss succession planning in general, please feel free to contact us today!

Today I’d like to highlight a helpful piece that was published in the Idaho Business Review. While the author is focusing on succession planning specifically from the point of view of a Board of Directors, the points he makes are relevant to every business:

Over the last five years, average tenure of a CEO (based on a survey of public and private companies) shrank from 7.3 years to 4.4 years. Focus on CEO succession is becoming more important to boards. Half the members of boards surveyed believed that their succession planning was inadequate; only 33 percent had a well-documented succession planning process.

It is not clear why boards, at least of larger and public companies, don’t do a better job with CEO succession.

First, it is clearly the task of the board, identified as such in all the popular “Board of Directors” literature.

Second, logic should tell directors that there is nothing more important than having the right CEO.

Finally, it should not be a secret that CEOs impact enterprise value. Because of reputational risk, and the speed and completeness with which media (including social media) spread bad news, boards are quick these days to remove CEOs who present potential public relations taint.

When you add today’s quick firing trigger to the usual reasons for CEO turnover, including poor performance, retirement, moving to a better job, illness, death or merger, the lack of board focus on CEO succession is incomprehensible.

What are the elements of a robust succession plan? The starting point should be an evaluation of the company. How does the board define its strategic future? What substantive qualities and personal characteristics are most likely to be needed over the next five years in a CEO who can effect that strategy? […]

Further, a CEO succession plan should not be viewed in a vacuum. Senior management form part of the executive team, and management should be looked at as a whole. Who are the key managers? Do any of them rise to the level of candidate for CEO? Alternately, is the political environment in a company sufficiently established so as to accept a CEO sourced from the outside?

As a business owner, you typically serve as the CEO and the Board of Directors. Therefore, your job is not just to run your business—it’s also to prepare your business for a future without you. And while this may not seem like a pressing task today, if you hope to either sell your business when you’re done running it, or pass it on smoothly to a successor, you have to have a plan.

So stop putting it off. If you would like to learn more, or if you need some help getting started with this process, please get in touch with us today!

1. You play favorites. Succession planning isn’t a popularity contest. The process should start with an identification of the roles in an organization that require successors, according to Ferro. For a large corporate IT function, those positions may include the CIO, his or her lieutenants, and their direct reports.

The second step is to pinpoint the skills and capabilities required to create value in those positions and for the enterprise. Once you’ve identified roles and their requisite competencies, you can begin identifying individuals in your organization who possess the potential to move into those roles. Just make sure your process for identifying people is defensible, otherwise you might make the next mistake.

2. You arbitrarily or anecdotally choose potential successors. Without a formal, justifiable process for spotting rising talent, you risk picking people who may not be ready to move on to their next role; overlooking qualified candidates; establishing development plans for people that aren’t properly aligned with their strengths and weaknesses; and, of course, angering your employees.

Jay Ferro[CIO of the American Cancer Society with succession planning experience] incorporates a range of data into the process he uses to highlight potential successors, including leadership, management, and competency assessments, 360 reviews, and personality profiles. He and his senior leadership team also make note of their direct reports’ career goals, professional backgrounds, and personal interests.

3. You keep the succession planning process a secret. Your IT organization needs to understand how you and your direct reports pinpoint and rank potential successors. Transparency into succession planning activities helps to build employees’ trust in the process, says Morrison.

“Everyone needs to understand why certain people are on the list and others are not,” he says.

Honest, transparent succession planning can make the disappointments that may occur as a result of the process easier for people to swallow.

Succession planning can be a “messy” process. The stakes are high, and depending on the size of your business, you may have a large number of employees who stand to be dramatically impacted by the process. For that reason, it’s vital that you take the time to create and implement a plan. This ensures that, even if your employees don’t necessarily agree with every decision, they can at least respect and “buy in” to the process. And that “buy in” is essential as your business goes through a period of transition.

If you’d like to learn more about succession planning, or if you’re ready to begin created a plan for the future of your business, please get in touch with us today!

An audit notification from the IRS is something no business owner looks forward to. And while it is impossible to completely avoid the risk of an audit, there are red flags that significantly increase your likelihood of being audited. Fox Business recently published an article identifying seven of these common mistakes. Here are three of them that will get you into trouble every time:

1. Making errors. When the IRS starts investigating, “oopsy” isn’t going to cut it. Don’t make mistakes. This applies to anyone and everyone who needs to file taxes. Don’t accidentally write a 3 instead of an 8. Don’t get distracted and forget to include that final zero. Mistakes happen, but make sure you double- and triple-check your numbers if you’re doing your own taxes. You’ll be hit with fines regardless of whether your mistake was intentional. If you’re math is a little shaky, using an automated program or tax professional can help you avoid unfortunate errors. Remember, the IRS has an eye for funny business. Supply the correct information, and you should have no complications.

2. Failing to include a 1099 or additional income. Easy way to score an audit? Don’t report part of your income. The IRS will be on you like buzzards on a gut wagon. Always include your 1099. Let’s say, for example, you’re employed part time herding cattle for Farmer Jeppe and pick up a little extra cash writing articles for a sheep-shearing publication on a freelance basis. You may be tempted to only submit the W-2 from your cattle work and keep the freelance writing wages on your 1099 under wraps. Well, guess what? The IRS already knows about wages listed on your 1099. It’s only a matter of time before they discover your omission. Report all of your income, including money from bonds, stocks, interest-yielding accounts and the like.

3. Claiming too many charitable donations. If you made significant contributions to charity in 2012, you’re eligible for some well-deserved deductions. Most taxpayers who itemize deductions claim charitable deductions at an average of 3% of their income. This bit of advice is common sense: don’t report false donations. If you don’t have the proper documentation to prove the validity of your contribution, don’t claim it. Pretty simple. Claiming $10,000 in charitable deductions on your $40,000 salary is likely to raise some eyebrows.

No taxpayer wants to be audited, and I’m sure you’re no exception. Avoiding these common mistakes is a big step in the right direction, so be careful. Red flags in your tax return dramatically increase your chances of being audited.

But if it’s too late and you’re already facing an IRS audit, don’t worry! We can help you through this stressful time. Contact us today to learn more!

Unfortunately, these plans don’t always work out. As the New York Times reports, the process of passing a business to the next generation can be very complex:

Samuel P. Phelan and his two brothers […] had taken over Taconic Farms, a breeder of genetically modified rats and mice for laboratory testing, from their mother, who had run the company since their father died in 1955. The company, based in Hudson, N.Y., has 800 employees in three countries and $125 million in annual sales. The United States government and major pharmaceutical companies are clients. Still, no successor among their seven children had emerged.

Over the last decade, the brothers, who are all in their 60s and 70s, had been thinking about how to keep the company in their family.

“There were members of the family involved in the business, but it became pretty evident that they weren’t going to become the C.E.O. of the company,” said Mr. Phelan, who is the executive board chairman. “The other children were either too young and didn’t know their careers or had started other careers.”

The Phelan brothers faced a situation common to anyone who has built a business with family involvement. If they sell outright, they risk that the proceeds could have unforeseen effects on their children and grandchildren. If they try to keep the company in the family, they run the risk of the company failing, or worse, tearing the family apart.

Does this situation sound familiar? In the many years I have spent working with business owners, I’ve heard plenty of similar stories and faced similar challenges. Those experiences taught me a number of valuable lessons, but none more important than this: If you want your family to benefit from your business after you’re gone, you absolutely, unequivocally, need to create a succession plan. Even if it’s difficult, awkward, or unpleasant.

Clear communication and a detailed plan is the only way to ensure that your family can benefit from your hard work for generation to come. Many business owners avoid this process because it can force them to address difficult realities—but all this does is move the problems down the road to a later date, when they will be even more difficult to resolve.

Succession planning isn’t always easy, but it is too important to avoid. Stop putting it off – give us a call today if you’d like to learn more!

You’d likely call the police, try to get the explosive out of your office, try to track down the culprit—but there’s one thing I can promise you: You won’t simply ignore it.

Yet, many business owners do choose to ignore a “ticking time bomb” of their own. The reality is that every company, at some point, is going to go through a period of succession. It may be because the owner gets sick or dies. It may be because he or she decides to take an early retirement. It may be because the current owner is no longer capable of effective leadership. Whatever the cause, it will happen – that’s a guarantee.

Yet, most business owners fail to address this reality. New Zealand’s Business Day examines this trend, referring specifically to businesses in New Zealand. But I can assure you, business owners here in the US have the same attitude:

Kiwi companies are poor at succession planning, says a new survey that showed more than half of company executives were ill-prepared for the business to operate without them.

A survey by Board Dynamics found that almost 20 per cent of New Zealand businesses would be forced to shut down immediately if the head was struck down by illness or death. About 30 per cent could function for a few months before having to close.

Ernst & Young tax partner Jo Doolan said succession planning was absolutely critical.

“Some business owners just don’t actually think it through enough and they also expect that the heir-elect will have the necessary skills . . . People don’t want to look at their own vulnerability, the fact they might die.

“They really should sit down with family and have an open discussion that can be facilitated by an external party on what their expectations are.”

Board Dynamics chief executive Henri Eliot said there was a “she’ll be right” mentality. “But this laissez faire approach is leaving staff, business partners, investors and family financially vulnerable in the event of a crisis.”

Succession planning may not be fun. It can often be intimidating. But if you want your business to survive—and if you want to sell it for maximum value—succession planning is essential. You wouldn’t ignore a stick of dynamite in your office… and you shouldn’t ignore succession planning! Please get in touch with us today if you’d like to learn more, or if you need some help as you begin the process.

And unfortunately, the stress and emotional turmoil experienced during the selling process can lead business owners to make costly mistakes that either de-rail the transaction or cause the sales price to be decreased.

The New York Times recently published an article which identifies common mistakes and points out ways to avoid them:

Hire an experienced team of advisers. You have spent years building your business, and you usually get only one shot at selling it. Having a team of advisers — an accountant, a business intermediary or broker, an attorney, a financial adviser and a business generalist — who have been down this road many times is crucial.

Use an intermediary to sell your business. Going through the sale of your business can be very difficult. You need an experienced intermediary or broker who will speak with the other party and represent you and only you in the sales process. Sellers who represent themselves almost always make mistakes that cost them time and money. This is not a time to cut corners in professional fees.

Accept that the person who buys your business will change it. Most buyers have their own ideas about how things should be done. If your sale involves an earnout or seller financing, you want to make sure the seller’s actions won’t limit your ability to get paid any deferred money that is owed you.

Make sure you tie your most important employees to the business. Have them sign employee agreements that can be transferred to the new owner. The new owners may want you to stick around for a transition period, but they will want your main people to stay longer. Making sure they stay and don’t disrupt the company while it’s in transition is crucial to a successful sale.

Be prepared for due diligence. It can feel like a colonoscopy and its real purpose may be to help buyers reduce the price they have to pay, but there is no getting around it. When businesses are getting ready to sell, I recommend  that they go through a mock due diligence process. This can help you figure out where your company’s weak points are and allow you to prepare responses for a potential buyer.

Selling your business is difficult. It’s a long, complex process. And it can be emotionally challenging as well. If you’d like to learn more about this process, or if you would like some help along the way, please don’t hesitate to get in touch with us today!

And while ringing in the New Year is always fun, this year felt different to many of us. Why? Dick Clark, host of the legendary “Dick Clark’s New Year’s Rockin’ Eve”, is no longer with us. But his show lives on, which is a testament to his talent, his leadership ability… and yes, his attention to succession planning. GovExec.com highlights several valuable lessons all of us could learn from Mr. Clark:

Dick Clark built a team of professionals who worked with him for years and this New Year’s Eve was their first without their long time leader. One of the newer members of the team was Ryan Seacrest who Clark recruited in 2006 to co-host the show after he had a stroke that kept him off the air in 2005.

In the years that followed, Clark and Seacrest co-hosted the show with Seacrest handling most of the on-air segments and Clark counting down the last few seconds until the new year. This year, with plenty of tributes to Dick Clark along the way, Seacrest hosted solo.

While the New Year’s Eve show situation is unique, there are a number of lessons that leaders can learn from what Dick Clark left in place and how he did it.

First, no leader is indispensible – not even Dick Clark on New Year’s eve. Clark understood that and as Seacrest said on-air just before midnight on New Year’s Eve, Clark regularly said to him, “Seacrest, the show must go on.” Clark recognized that he wasn’t going to be around forever and made sure that his ring in the new year production was poised to go on without him.

Second, build a great team. Clark assembled a team of the best people in the business to produce and improve the show year after year. A leader is only as good as his or her team. The mark of a great leader is that the team can keep going when the leader leaves the scene.

Third, hire and position great talent. There aren’t many people around who are as skilled at live television hosting as Ryan Seacrest. With all of his years in the business, Dick Clark understood that better than anyone. Hiring Seacrest for the co-hosting role was a fairly obvious move. What Clark did masterfully, though, was passing the mantle of his duties onto Seacrest in the most public of ways over a five year period. When the inevitable finally occurred and Clark passed away, the transition to Seacrest felt perfectly appropriate and natural.

Succession planning is a subject that many business owners avoid. Unfortunately, failing to create a plan for the future ultimately leads to disaster. I can’t tell you how many times I’ve heard a client say “I just wish we had addressed this sooner.”

So while it may not seem like a top priority today, please don’t put off succession planning any longer. Contact us today if you’d like to learn more!

The OCRegister.com reports:

Jim Webb was a typical small-business owner: visionary, demanding and totally in charge of his “baby,” Webb Design, a Tustin company that designs kitchens and dining areas for large facilities.

Five years ago he joined Vistage, a nationwide network of peer advisory groups, where fellow business owners impressed upon him the need to delegate in the company he started in 1989. That would lead Webb to develop a plan for the company to continue after he departed.

Such planning is difficult for founders who build companies that reflect their values and personalities. Many entrepreneurs never face the task, which is a major reason why three-fourths of even longtime, successful ventures don’t survive into the second generation. In Webb’s case, his family didn’t want to take over the company, so he either had to plan to sell it or groom his successors. He chose the latter.

Webb’s leadership in that grooming became more important after he was diagnosed with bile duct cancer shortly before Christmas in 2010. He put the final touches on the succession plan shortly before his death Oct. 24 at age 58.

Company leadership has now passed to managing principal Gina Brinegar and design principal Costel Coca. Their challenge is to build on Webb’s vision that earned the firm local and national awards, including the 2012 Facility Design Project of the Year from Foodservice Equipment & Supplies magazine for designing and implementing plans for the Metropolitan State Hospital central kitchen in Norwalk.

“Jim was a leader, a typical entrepreneur,” Brinegar said. “He looked at the company at the 30,000-foot level, seeing ways to grow the business but protect his empire and his employees.”

As part of the succession plan, the company formed a board of directors that included business experts and representatives for Webb’s family. Board Chairman Ted Dobson is a business owner and Vistage group chairman who knew Webb for 20 years.

Succession planning “is extremely important but often overlooked,” Dobson said. “Every business operates differently. … Part of the transition strategy is to make sure the business has all the resources it needs.”

The fact the Vistage had a solid succession plan in place may well be responsible for the health of the business today. Unfortunately, many business owners don’t take this proactive approach, and end up regretting it.

The good news is that succession planning isn’t difficult! It’s just something that must be done. If you’d like to learn more, or if you need help to get started, please get in touch with us today!