Finch Exit Strategies

Helping Business Owners Leave with More Money

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Way #36: Disability

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Statistically you are much more likely to become disabled than to die
prematurely. Despite this fact most people fail to plan for this “what
if ” scenario. Most people also don’t own their own business, so you
are not “most people”. You need to plan for this to take care of your
legacy, your employees and your loved ones, but mostly yourself.

Preparing for the unexpected: Disability
This is the most dangerous way to leave your business if not planned
properly. While life insurance provides an income to your family if
you die, disability insurance provides an income if you become sick
or injured and can’t work. Even if you are an employee with a regular
job, living on disability is very hard on the family, because (a)
they are living on a reduced percentage of the previous paycheck
and (b) there are usually increased medical costs for the disabled
person. Becoming disabled as a business owner creates an even greater
burden, so the need for disability insurance goes from imperative to
you’re-crazy-if-you-don’t-have-it.

My Story: Disability
Imagine you feel fine on Friday afternoon, but during the weekend
you start to feel weak and tired. By Monday morning, you just can’t
seem to get out of bed. It’s not the flu because you have no fever
or sniffles, but every time you eat something you get terrible pain.
You go to the E.R. and they say you seem fine but maybe you have
an ulcer and refer you to a gastroenterologist. Meanwhile you keep
getting more and more fatigued but no amount of sleep cures the
feeling of tiredness. You need to call the gastroenterologist but you
are just too tired, plus your thinking gets progressively foggy. Now
it’s Monday afternoon and you know you should go to work but you
just can’t get out of bed and you can’t really process the emails in your
inbox. A week goes by and all you do is sleep. Two weeks and you
have lost 10 pounds because you can’t eat or even shop.

This was my life in 2017. I am normally a high-energy driver-driver
person who does 100 things a day. But, for 6 weeks I simply could
not get up and did not have the brainpower or energy to find doctors
to figure out what was wrong with me. Thank God for my sister
Debbie and one very good friend who finally got me to enough doctors
to learn I had an incredibly rare disease that most doctors do not
run tests to diagnose. By the time they figured it out, I was in week
34 of a 36 week disease that basically cures itself. Thankfully, just in
time for tax season.

But what if it hadn’t resolved itself? I had always believed if I got sick,
it would be something like cancer, back surgery, or a heart attack, so I
dutifully bought great short-term disability insurance, assuming anything
I got would either be ok within 90 days or I would be relying
on life insurance instead. This situation scared the hell out of me, and
birthed my passion to help every business owner develop a comprehensive
Exit Strategy.

If I DIE Become Disabled BOOK

This is where the IF I DIE notebook comes in handy, because it can
also be used for IF I BECOME DISABLED. In order for your family
or your disabled self to be able to enjoy the value of the company you
have spent years building, certain steps will need to be taken:

1. Keeping your illness a secret from the customers for as long
as possible, until a sale for good value can occur.

2. Quick sale. If you’re like me and you have to sign most
everything that goes out of the office, the business will need
to be put up for sale quickly and quietly. Include instructions
for which broker to use, or which other relationship
you have formed with a potential buyer. See Buy-Sell
Agreements – even if you have no co-owners at Way #3.

3. Letter to clients/customers. This is the typical “if you are
reading this, I have become disabled and can no longer run
the company in the manner in which my clients have been
accustomed.” This letter will be used to promote the transfer
to the new owner(s).

4. Long-term care and long-term disability insurance to
ensure your needs are met.

5. Plans for dissolution of assets other than your business,
such as your home, if your disability prevents you from
keeping it. This is where a Revocable Living Trust is a good
idea, and you can read more about those at texasprobate.net
or a similar site for your state of domicile.

6. Medical Directive and Living Will to indicate your wishes
in the event of incapacity.

Heavy stuff, I know. But it will be even heavier if your care is left
to chance.

Excerpt from “50 Ways To Leave Your Business (There Must Be) by Sandra Finch.  Now available on Amazon.

Way#35: Death

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If you are still involved in your business, chances are you aren’t expecting
your imminent demise. Hopefully, you have a will so your loved
ones understand your wishes after your passing. Your will is limited
to addressing who should receive the assets you own, but will not
address the details of converting your business into cash your heirs
can use. A Buy-Sell Agreement will handle what a will cannot. Think
of a Buy-Sell agreement addressing the “what if ” of an unexpected
death to be a sort of extension of your will.

Preparing for the unexpected: Death

I could tell you many horrible stories about business owners dying
unexpectedly and leaving their largest asset (the business) to be hurriedly
sorted, marketed, and sold in a fire sale for much less than its
value. In some cases, employees banded together and moved down
the road, taking loyal customers with them in the absence of noncompete
agreements, and the surviving spouse was left with nothing.
You built this company and you deserve to leave some sort of legacy,
where your customers and employees are cared for and your heirs
receive the full value of the company you worked so hard to build.
If something happens to you before this essential planning is done it
will leave your legacy in jeopardy, your employees in limbo and your
loved ones picking up the pieces. You can, and you should do this, but
it takes planning called “de-risking the business.” Your Buy-Sell agreement
will address the ultimate disposition of your company, but this
plan is a sort of bridge to keep everything going until that happens.

Example of the unexpected death – the sad widow story

As I prepared the room for one of our 2 day retreats, I happened to
meet a woman named Sally who was helping us set up. Upon learning
the content of our retreat, she confided she wished she had known
such information existed. It turns out she had operated a business
jointly for 20 years with her husband. It seemed to her at the time,
she knew everything there was to know and would be able to run
the business without him. When he died, she realized there were
many duties he solely performed that she had not done first-hand in
years. She suffered “grief brain” and couldn’t remember what she had
known and had less stamina and drive to get things done. She realized
they had done little to no planning in the case of the death of either
of them. The oddest thing was a ring with 12 keys on it that were on
his desk when he died. Four years after his death, she still has no idea
what any of the keys unlock.

This doesn’t have to be your story. In our Exit Strategy seminars
and retreats, we teach people how to make an “If I die” box or binder.
In this binder, you should put the following:

EMERGENCY BUSINESS CONTINUATION CHECKLIST
(“IF I DIE” BOOK SUGGESTED CONTENTS)
Is your Will updated and included in the IF I DIE Book? ______________________
Who is first to implement the IF I DIE section of that book? ______________________
If that person also dies, who is second? ______________________
Is there more than one signer on the bank account? Who? ______________________
What happens if the second signer also dies? ______________________
Is there more than one director in the case of a corporation? Name them: _______________________
Is there more than one member in the case of an LLC? Name them: ____________________________
If the business requires a licensed person to perform work or sign off on work, is there someone
besides the owner who has that license? Who? ______________________
Has that person agreed to (signed off on) that responsibility in the event of death / disability? Yes No
Review notes payable to ensure that any notes cannot be accelerated upon death of the owner/
guarantor. ______________________
Will key employees stay in the event of death of the owner(s)? Yes No – consider “Stay”bonus
Do key employees have Non-Compete contracts? Yes No (If yes, put in binder)
Is there a broker to contact immediately upon death of the owner? ______________________
Where are the passwords kept? ___________________(include owner’s phone code to open it)

Whoever controls cash flow needs to explain, in writing, how they do so, including:
1. Where is a schedule of typical accounts payable (regular bills), which are paid and which
are due?
2. When are pay days?
3. What is payroll process and how does it initiate/ where Is it processed?
4. Where is a list of accounts receivable? (assume Quickbooks, but not always)?
5. Is there a line of credit and how does it get drawn on?

It will be a good idea to give a copy of your instruction list to someone
else, like your trusted accountant or attorney, who can review it
with you while you are still alive and then assist the person carrying
out your wishes with a better idea of your vision.
Since passwords get changed a lot, keep them all in a Password vault
app such as Keeper or LastPass, and just put the password to the vault
in the If I Die box.
The main goal of the If I Die box is to leave simple, clear instructions
for the (likely) grieving people who will execute them in your absence.
Make it easy on them by making it as straightforward as possible.

 

Excerpt from “50 Ways To Leave Your Business (There Must Be) by Sandra Finch.  Now available on Amazon.

Way #16: Get A Partner And Create A Buysell Agreement

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What happens if the company needs to be quickly sold because
of death or disability and it doesn’t make sense to transition your
company to any heir? If this applies to you, your family and your
employees and your customers are counting on you to have an answer.

Buy/sell Agreement if you Have No Co-Owners

Can you have a buy/sell agreement with someone who is not your
partner? You can, and it can be a good idea.

For many years, I had an agreement with another CPA who is in his
own private practice. He agreed to buy my practice if I died, and I
agreed to buy his if he died. We agreed that the purchase would be
one times the amount of revenue collected in the first year of practice,
and that amount would be paid to the deceased’s heirs 25% per year
for 4 years, plus the prime interest rate.

Under this arrangement my employees and customers would be in
good hands and my heirs wouldn’t have the burden of trying to sell
the company themselves and instead have the cash.

We did not “fund” the agreement with life insurance because we
really didn’t need to. We expected the earnings from the acquired
business to cover the payments as agreed. In some cases it may make
sense to include life or disability insurance policies in the buy-sell
agreement in the typical manner, so that those policies could be used
to fund the purchase/sale in case of a qualifying event.

Excerpt from “50 Ways To Leave Your Business (There Must Be) by Sandra Finch.  Now available on Amazon.

 

Best Practices For All Businesses

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Here are the best practices for all businesses:

1. De-Risk Your Business. Do not assume that the value you
have built will remain level or even grow.

2. Have a buy-sell agreement if you have any co-owners (and
possibly even if you do not, which is discussed in Way
#16). Buy-sell agreements are discussed throughout this
book, but most comprehensively in the Unintentional
Exits section.

3. De-Risk through Insurance – including life, key-man, disability,
business interruption, liability, malpractice, and
worker’s compensation.

4. Have written contingency plans and processes – such as the
If I Die Notebook described at Way #35 and 36.

5. Work on Business Readiness by knowing the market value
of your company and what factors are used for multiples in
your industry.

6. Work on Business Attractiveness if you intend to Sell to
Others. This includes concentration on the business value
growth, branding, and culture.

7. Work on Personal Readiness by knowing your next act
(see Why Business Owners Are Afraid to Exit chapter for
more information).

8. De-Risk your Sale. This is the biggest sale you will ever
make. Do NOT finance more than 20% of the cash flow –
let a bank be the bank.

9. Take at least a portion of the sale and put it away (see Ways
#19 and 22).

10. Perform an entity-type analysis on the business at inception
and at least every 4 years. Read Entity Type is Everything

Please check back in the upcoming week for daily posts on the chapters referenced above.  Have a Happy Thanksgiving and enjoy some down time with family and friends!

Excerpt from “50 Ways To Leave Your Business (There Must Be) by Sandra Finch.  Now available on Amazon.

Way #49: Selling For The Wrong Value

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You want to be a generous person. You put others ahead of yourself.
You have created this business on your efforts which benefited
employees, customers and vendors as a result. You are the one that
took the risk, that had the sleepless nights, that figured out how to get
things done. You probably had a good team along the way, but it was
your money at risk every day. Getting paid fairly for what you have
built is not greedy or selfish, it is responsible. It is also what puts you
in the best place to take care of those you care about.

Selling for the wrong value
When you sell, try and sell for the highest price. Educate yourself
about how to calculate this price. Surround yourself with accountants,
brokers, and/or attorneys who will help you negotiate and
actually receive the value of the business you spent so long building.
This is not the time for sentimentality which often is the situation
when selling to employees or family members.

Example of selling for the wrong value
The most painful thing I see in exits is selling the business for less
than its value.

About a year ago I got a call from an electrical services company. It
was a Mom and Pop company and the call came from Mom. Pop was
a master electrician and had suffered a massive heart attack within
the last few years and was ready to sell to Fred, a long-time employee.

The company had net income of about $250,000 per year, of which
$175,000 went to Mom and Pop and the other $75,000 was paid to
Fred in payroll. According to Mom, Fred was going to buy the company
for $250,000, paid out $50,000 per year over 5 years. Fred was
not a master electrician but was going to use Pop’s license number
(this is allowed, but it supposed include supervision).

Whoa! I explained to Mom that the company was likely worth at least
3 times what Fred was going to pay, but Mom said they knew some
of the customers would leave, that Fred wasn’t that good with money,
and that he had poor credit so he couldn’t get a loan at the bank.

I practically begged Mom to bring Pop to my office for a meeting, or
at least list the business with a broker or contact a competitor electrician.
Perhaps another company could pay full value for the company
and give Fred a job too? All my requests were answered with a firm
“No” because her husband had promised Fred years ago he would sell
it to him when the time came.

All Mom wanted to know from me was how much the taxes would
be on the $50,000 per year they would receive from Fred. I told her
the answer but was pretty worried about Mom and Pop and how they
would get through their retirement years. I also wondered how much
of the $250,000 they would ever see from Fred.

If Mom and Pop had sold their business for the 3X what Fred was
going to pay, they could have gifted Fred $250K dollars to start his
own place and still walked out with double what Fred was going to
pay. Know your end game and a team of professionals are more likely
to get you there…and take care of those you care about along the way.

Excerpt from “50 Ways To Leave Your Business (There Must Be)”  by Sandra Finch now available on Amazon

Way #5 Transferring your Business to Family

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I have saved the most common transition for businesses is to sell or transfer to family. The State of Owner Readiness Survey conducted by the Exit Planning Institute in 2013 indicated a whopping 32% of private businesses intended to transition the business to family members.

Did you know only 30% of family businesses make it to the second generation, and only 12% make it to the third generation?

What is good about a family transition?
Business legacy preservation – what was built can continue to be a livelihood for the next generation.

Planned – Conversations can, and should begin, long before it is time
to transition so the finances and leadership changes can be controlled and expected by customers, management, and employees.

Lower transaction costs – In theory, the “deal” can be made and then
committed to paper by an attorney, and the tax planning done by a CPA. This cuts out the need for brokers or investment bankers, which can usurp up to 15% of the sale price.

More control of sale and price – The agreement will be decided based on many factors, and not as likely to be based on a true valuation
of the business. While you may be able to save the significant cost of hiring a professional to formally value the business, you need
to be aware of special IRS considerations around a sale to family. Your CPA and attorney should be able to help you navigate these considerations
to ensure you are in compliance. Remember: the terms of the deal are even more important than the sale price because earn-outs and financing take valuable time.

Less disruption to the business – Typically, the style of the business continues so the transition is not a culture shock to customers and employees.

Higher buyer/seller motivation – It is not likely either side is walking away from this deal, nor are they shopping around for any other alternatives.

Negative factors to consider when selling to family:
Family dynamics – There are entire books about this subject, as well as an entire profession of “family advisers” who help smooth the
emotional and political side of negotiating business within a family setting. It is quite typical to be dealing with deep-seeded and ancient
histories of a myriad of issues:
• children deemed or actual favorites
• attempts to balance wealth distribution to children not
involved in the business
• sibling rivalry and bullying,
• birth order issues
• gender biases, and
• strong differences of opinion regarding business potential
and direction.
• addiction or mental health issues
• conflicts around spouses or significant others

I have seen many tears over Mom’s opinion versus Dad’s regarding which child should have majority ownership or a superior position, how to compensate the one child not involved in the business, how the children’s skill and effort compares to their compensation, and real doubts about the children’s preparedness to run a business of this caliber
should something happen to the parents overnight. This is a situation most likely to create issues and the more children, the more issues.

Lack of funds/illiquid buyers – This is the situation I run into most often. The next generation has no funds to buy the business, and they
do not wish to incur debt nor take a lifestyle decrease through payroll in order to buy out their parents so they rely on future, uncertain, profits to repay the debt. Many families fail to consider what may happen if the business does not do well and the impact that may have on parents reliant on that cash flow or children trapped by debt.

Complications around being indebted to family – The lender/borrower dynamic influences those in that relationship even when everything has gone according to plan. However, even after a deal is arranged, many second generation buyers fall short on the payments. If there was a plan made to pay out the parents through salaries and
benefits (see Way #26), it doesn’t take long for the buyer-children to start complaining that the parents “aren’t really doing much” and
wondering when they can take them off the payroll, or treating scheduled debt payments as “optional” and abuse the family relationship

Next generation not prepared for ownership responsibility – In most cases I see, the children feel entitled to the business because they
helped to build it. There appears to be a lack of appreciation for what sacrifices the older generation made in order to build the business to the comfortable and secure state it has attained. The grit and keen sense of entrepreneurship that has developed the strong infrastructure and processes into a well-oiled machine could be skills the next generation
has unfortunately not had a chance to develop. Much like a baby bird that has been helped out of its own shell, being spared the
struggle can sometimes fail to equip the children with the necessary skills to be successful. I am describing many, but not all situations
where the parents know the true sacrifice to build the business that cannot be conveyed to the next generation.

Lower sale price – If you are selling to your family, you are not likely to negotiate for the highest sale price because of emotional ties to the buyers.

Key employee flight risk – why would employees stick around if family members are the only senior executives or potential owners?

Tradition may outstrip good strategy – Sometimes new buyers bring new blood and new ideas, and there’s not always such a change when the business goes to the next generation.

Path of least resistance – but not always a path to growth or success. In many family businesses, the entire family has gotten used to working
together and avoided learning from the outside world in terms of personal interaction, management styles, working under a schedule
or other restraints, and living on a salary without the benefit of draw or additional bonuses.

Uncertainty around financing
As Thomas William Deans describes in the book Every Family’s Business, the best thing you can do if there’s any question at all about
financing is to sell the family business to someone else, give the children a nice bonus, and everyone move on with the fruits of your labor to
retire or start the next chapter. I know, this sounds harsh because so many parents want to continue the family legacy, but it can cause much
more dissension than good if (a) Mom and Dad cannot retire with any dignity because of lack of funds, (b) the payments aren’t being made
as agreed, or (c) the company is suffering because of making the payments. This doesn’t make for a fun Thanksgiving dinner table.

Consider that selling the family business4 can be the greatest success, rather than the failure it is usually considered to be. Imagine pooling
the generational effort to build the business to its greatest value, sell it at a premium, and have everyone ride off into the sunset with a great deal of cash in their pockets to begin their next adventures. How could that be considered failure? At the very least, have some critically honest conversations on a regular basis.  I suggest you read “Every Family’s Business” by Thomas William Deans for greater insight into this topic.

{Excerpted from 50 Ways to Leave Your Business by Sandra Finch, on Amazon soon in print and e-book format}