Protection and Planning Key to Prosperity

The business has grown and prospered. We just bought a building and are setting it up. Getting around to rethinking a will, insurance and succession plans; never really worked on how to protect my family and my assets before — it’s scary!

Thoughts of the Day: Most business owners don’t spend enough time thinking through how to protect their family or business. A clear succession or transition plan provides a roadmap if something were to happen to the owner. As the business grows both assets and liabilities rise, making it an ever-growing challenge to ensure the family and the business are safe. Getting things straight before something happens is essential.

The major assets of most businesses are illiquid, of uncertain value, which is continually changing. Business owners are focused on the growth and development of their businesses. Thinking about mortality can be intimidating. There’s always tomorrow — or is there?

A well-protected business always has a succession operating plan: Who takes over if someone can’t come to work? From entry level to the top of the organization, it’s wise to have more than one person trained to perform every function.

Challenges arise in succession planning because most owners are entwined in every aspect of the business, managing information that no one else knows about. Additionally, owners guarantee loans, sign letters of credit and are involved in negotiations with key vendors and customers.

Making sure that other people are aware of all that the owner does and can and will step up and perform at the top of their game during an emergency is essential. Written instructions and rehearsing what to do if the owner of the business is lost can help secure the future health and well being of both business and family.

Unwinding the assets of a privately held business is challenging, especially after the owner is gone. Time and money are wasted and an unfair burden gets placed on the survivors. Dealing with the personal implications of loss makes things even more complicated. And yet, it’s estimated that more than 80 percent of entrepreneurs have no written asset management plan.

Consider what you, family members and employees want. Who should receive which benefits? Who deals with which challenges? What belongs to the business? As an employee, waking up one morning to find that you now report to the owner’s spouse or children may not be ideal. As a family member, finding out that you’re on the hook for all of the business debts can be devastating. As the owner, it’s your responsibility to figure out the details now.

At different stages of the business’ growth and development, assets may or may not exceed liabilities. Knowing what debts to pay, and who owes what, can be especially challenging because personal and business finances are often intertwined. As early as possible in the business it’s important to separate the company’s finances from personal.

One logical goal is to transfer the owner’s equity to active people in the business. Use a will to dictate who gets the shares. Use insurance to protect the business and individuals from loss of income and taxes. Keep in mind that in many states spouses cannot be disinherited. This means that spouses must be adequately compensated for inherited ownership of company shares if the goal is to get those shares into the hands of people actively running the business.

When acquiring a new asset, such as a building or company, it’s important to think about who will get that asset later on. Work with an accountant and an attorney to get advice on how to set up purchase and ownership of major assets to insure they end up in the right hands in the future. Secure assets as you pay off any debts by using life insurance policies.

Make sure that you understand how the insurance payout works depending on who pays the policy premiums. If the company owns the policy and pays the premiums, then the company benefits, not the family. The company uses the benefits to fix company problems: debt repayment, purchase of stock, hiring a replacement to handle the owner’s job, purchasing shares, etc. If the goal is to protect the owner’s family, use a personal insurance policy, separate from the business.

Complicated? You bet! Put a team together now and figure it out before you run out of time. Make it part of annual planning with the advisors to review the need for changes.

Looking for a good book? Try “Walk Away Wealthy: The Entrepreneur’s Exit-Planning Playbook” by Mark Tepper.


Get Your Succession Plan in Order Now

We have always tried to recruit good people, promoting from within if possible. We think we have people in place who could play a significant role in the company’s next generation. We need to understand their capabilities and commitments on a whole different level. And we need to be clear about our expectations of them. Is there a match? If we mess up, this company’s future could be in doomed, or we could be back in the driver’s seat exactly when we’re ready to retire.

Thoughts of the Day: Planning out the next generation can be a challenge. “Now” is almost always the right answer when considering if it’s time to get moving on figuring out the future. Looking for talent inside the company is smart. Knowing when talent has to come in from outside is crucial. Figuring out any gaps well ahead of time gives you options.

Looking to the future can be intimidating. Thinking who might run the company when you’re no longer around shows that you’re mortal and replaceable. Who wants to admit to either of those? Most owners underestimate the time and effort needed to form a succession solution. Or, they get busy running the company and don’t make time to work through the detail. Or, they follow the model they have followed — one person in charge — without realizing that a management team might do a better job.

Lack of clarity about succession leaves employees farther down the line in the dark as to what might unfold if something were to happen to the current owner(s). If something unexpected happens, you want people who are prepared to step up. You want everyone in the organization to actively support those who do step forward. It’s easier to follow a plan already in place that everyone agreed to when there was the benefit of time to work through details.

It is preferable to be prepared with a solution than to be caught short. That means taking time to brainstorm and plan, even if those plans eventually get scrapped in favor of new plans. Having options is always better than being faced with a critical decision and no preparation.

Start by assessing the talent pool inside the company. Ask people what they’re good at, what they want to learn about and where they see themselves in the future. Expose employees to leadership and opportunities beyond their current roles.

Make it part of everyone’s job to participate in some form of outside education every year. Try job sharing with a peer company to expose your employees to another way of doing things and to bring in people who might look differently at how business gets done. Find out who wants to step up and who is more comfortable taking a backseat role.

Make sure to profile the jobs at the top. What are the jobs today? What skills and talents will be required five to 10 years from now as the company continues to grow and the marketplace changes?

It’s worth noting that any organization knows what it knows — and that’s not everything. There are ideas, solutions, suggestions and options that others have thought about that could be useful to consider. Some of those outside ideas might get rejected and some might be a fit. Ignoring the possibilities that others can bring to the table is just plain dumb.

Constantly challenge your team to get smarter, faster and better at what they do by exposing them to things outside the company. Ask employees to take courses, go on sabbatical, spend time working for another company. Try anything that helps to expand their horizons with information that they could bring back to help your company.

If there are gaps in what the company needs to know — at present or in the future — you have a couple options. Hire the talent. Hire teachers to train your employees. Get people to practice through simulations — for example take time off and let your employees deal with what comes up.

Right now, unless you’re in crisis, your company has time to work through its succession planning needs. Working on successions planning is job number one for every business owner. Ensure that the company is prepared for change and smooth transitions, ready to step into its future when the old guard steps down.

Looking for a good book? Try “Leaders at All Levels: Deepening Your Talent Pool to Solve the Succession Crisis” by Ram Charan.


Building a Business After Entrepreneurship

If I am going to build my company into what it truly can be, I need to work on structure, managing, taking on more difficult tasks: creating reports, thinking instead of reacting, being more proactive than reactive. That seems a lot different from what my current day-to-day is like. How do I make the transition?

Thoughts of the Day: Business building is a 180 degree switch from entrepreneurship. You’ll need to learn and practice a new set of skills, very different from the muscles you’ve built up to now. Along the way, difficulties will pop up that will pull you back to the old skill set – you’ll have to resist the temptation. Knowing where you plan to take the company will help you to maintain focus.

Entrepreneurs who successfully get their businesses off the ground have some basic, innate skills. They are doers. Ready to step in at any time to handle any challenge. A broad set of shoulders on which to carry the full weight of the business. Risk takers. Opportunists. Multitaskers. Without these basic traits, business owners fail before the business is even off the ground.

Once the business is up and running, the skills of the owner that got the business started become the business’ greatest limiters. Rushing in to take over when things go wrong can cause employees to sit back and wait. Seizing opportunities only the owner can see means the people inside the business have difficulty following the owner’s lead. Serious risks don’t pan out and the business ends up in jeopardy, time after time. Belief in self-worth and ability to rescue any situation turns into a business fraught with cycles of ups and downs, making less progress than possible at a higher cost than necessary.

Many people wonder if a person can learn a new set of skills. Can a leopard change its spots? The answer is a qualified, “yes”. It takes significant commitment and drive to build a new skill set.

Business builders, also known as Stage Two business owners, have learned how to temper their ambition. They know how to control their risk taking. They can hold back when they’re itching to get into the middle of things. They value the contributions of others. And they know how to encourage, educate, acknowledge, reward and hold people accountable.

It takes teams of people, all ready, willing and able to step up, to build a thriving business. The owner’s job shifts from solving problems to teaching others how to do that. Teams build confidence and competence when the owner learns to step back, let others take risks, clean up their messes and celebrate their wins.

When things go wrong, be aware that instinct will cause you to revert to old, tried and true methods of coping. Unfortunately, working to build a team, and then turning into a dictator when problems crop up doesn’t encourage people around you to be problem solvers.

If you feel frustrated, take a walk around the block, go work out, punch a punching bag, before you step in and do something unproductive like yelling at your people or telling them what to do. Get rid of the fight or flight instinct.

If people create problems, whatever you do, don’t rescue them. Hold them accountable by making them clean up their own messes. If you’re not sure they can do that, teach them how, and ask them to explain their next steps.

Don’t get shy away at the word “plan”. Plans come in all kinds of forms: goals, objectives, KPI’s, job descriptions, writing vision and mission statements. What tools do you use to define where your company is going, and to help others join along? Build a written set of tools that you and your employees can refer to, to know where the company is going and whether or not it has arrived.

Many owners hesitate to share the numbers, fearing that employees will want in on the rewards when things turn up, or get scared off when things turn down. Teaching employees how to read and react to the numbers can make all the difference when you’re trying to build and align teams. Make sure your employees understand all the demands on profits: paying taxes, investing in infrastructure, building up cash reserves, recognizing extra ordinary performance, paying out bonuses and benefits, and yes, rewarding shareholders for the risks they take. Help people to understand that as the company produces more wealth, everyone wins.

Looking for a good book? Delegating for Results; Manager’s Toolkit Book 2, by Kenneth Wason.


Cleaning Up Your Credit Line

Our Credit Line has an annual requirement to get out of the line for 30 days, and that timeframe is nearing. We’re doing a lot better this year than last year; it’s mostly a timing issue. I’m not confident we can clean up the credit line within the 12 months, as our bank requires. What should I do?

Our Credit Line has an annual requirement to get out of the line for 30 days, and that time-frame is nearing. We’re doing a lot better this year than last year; it’s mostly a timing issue. I’m not confident we can clean up the credit line within the 12 months, as our bank requires. What should I do?

 Thoughts of the Day: Credit Lines are meant to be used periodically, not constantly. Consider a term loan. Plan out your financial needs for the coming year; as the business ramps up, cash flow is likely to dry up. Plan for it.

 Credit lines are designed to help a business manage through ups and downs, to back stop cash flow cycles. Appropriate uses of the credit line might include getting over a short term up-tick in account receivables and acquiring inventory or services in advance of billing it out on a new contract.

 As with all credit instruments lines should be used in anticipation of greater profits down stream. In other words, use the credit line to boost invoicing opportunity and to manage expenses and cash flow until that money comes in.

 Using a credit line to manage losses is a bad idea. Keeping a line drawn down without understanding why you can’t seem to pay it off is also a bad idea. Borrowing to smooth over losses only leads to more problems later on. Now you owe both principal and interest, losses mean you don’t have the funds to pay off your obligations.

 One option for dealing with the clean up period is to ask the bank to term out the line. This means you won’t have to come up with all of the funds to get out of the credit line right away. Before you ask for help from the bank, take a look at this past year’s performance. Has the business been profitable overall? Is it likely to be profitable in the coming year? If so, ask the bank to work with you.

 Discuss converting the credit line to a 2, 3, or 4 year term loan. That way you can make regular payments every month while increasing the amount of time you have to pay down the principal. The advantage of a term loan is that you can work your way out of the principal your company owes, over time.

 You will have to go through another application process to get a term loan though. Be prepared to present personal and business financials, and tax returns. Stop struggling to manage a credit line that is no longer being used for short term borrowing needs. Instead, show the bank you are pro-actively managing the company’s financial responsibilities by making arrangements to pay down the principal owed.

 The bank wants you to be predictable, and responsible. Be ready to show them your growth plan, forecast of prospects in the cue, as well as your budget, and forecasted revenue for the upcoming year. Show them how your company plans to pay off the loan by increasing revenue, and managing its loan obligations over time.

 Keep in mind that as any business ramps up sales, cash flow can dry up. Advance payments for additional staff, inventory, services, equipment, etc. all tie up funds. Clients are waiting for you to finish work before they will accept and authorize payment on final invoices. Once invoices are authorized, some buyers may stretch out payment for another 30 to 60 days or more. Meanwhile the bills continue. However, one the work is completed there should be more than enough profits to pay off all obligations and to put aside reserves for the future. Make sure this is the scenario you’re dealing with. If you’re not sure, get someone to help you figure it out, fast!


 Looking for a good book? The Rational Guide to Building Small Business Credit, by Barbara Weltman.


PDF Version: Ask Andi – 3.18.13 – Cleaning Up Your Credit Line