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Employee Ownership in the Eyes of Exit Planning mernzen Fri, 10/21/2022 – 08:00 October is Employee Ownership Month and according to the National Center of Employee Ownership (NCEO), this month is dedicated to the celebration of the “undeniable benefits that employee ownership provides to employees, companies, local communities, and the nation.”  As leaders in the Exit Planning space, we felt a responsibility to touch on this subject as employee ownership is a piece in the larger picture that is Exit Planning. Employee ownership has piqued the interest of many business owners, and it is worth exploring and gaining a clear understanding of how it serves as one exit path that an owner could choose.  As is true with any exit path that is chosen, calling upon experts is crucial in implementing a successful business transfer. There are a variety of unique benefits and challenges that come with an employee ownership transition. Partnering with employee ownership experts can help you best identify candidates, determine the feasibility for your business owner clients, and monitor the changing market.        The Employee Ownership Market As the modern-day business landscape is ever-changing, many are unaware of what piece employee ownership has in the pie when it comes to types of business models in the U.S.  As detailed by NCEO in an article based on 2019 data, there are over 14 million U.S.participants on ESOPs, with just over 10 million that are actively employed and covered by ESOPs. A majority of privately-held ESOPs are S corporations, represented largely by service and manufacturing organizations.  Another statistic that shows market growth for employee ownership is that according to the NCEO, an average of 250 new ESOPs have been created each year since 2014. However, the total number of active ESOPs has been on a slight decline in recent years.  Lastly, in a recent BEI webinar presentation, representatives from Project Equity reported on a dramatic shift in the business landscape and exit ath preferences due to generational changes of baby boomer business owners nearing retirement.     Check out the statistics Project Equity shared, plus their take on employee ownership by watching the webinar recording!   

Is Exit Planning Only for Aging Owners? mernzen Fri, 10/14/2022 – 08:00 When an advisor is approached with the concept of Exit Planning, it is common to be met with aversion or disinterest in adding those services to their practice. Perhaps they feel the planning work they do is the same thing as Exit Planning, or maybe they feel their business owner clientele are not in need of those services due to their age or place in the ownership cycle.   However, as data has been collected on the state of the economy and the interests of the modern-day business owner, insights suggest that the market for Exit Planning is larger and more vast than ever before.  Every few years, BEI produces a Business Owner Survey. While the 2022 report is in its final stages of preparation, there is one insight we couldn’t wait to share:  Business owners are thinking about Exit Planning at an earlier age than ever before.  While this might not come as a huge shock, this insight suggests that Exit Planning Advisors will not only be working with business owners who are younger in age, but that they may face new obstacles and a different outlook than in years past.   Business Owner’s Outlook   While the above insight might suggest that younger business owners are in a rush to retire, that may not be the case. In a 2021 study by Wilmington Trust, it was reported that confidence in the future of the US economy has declined, as well as confidence in the ability to gain new prospects for their products and services.  With an emphasis on adopting digital tools and a rapidly changing business landscape, insecurities over technology have accelerated the owner’s interest in Exit Planning and they feel that getting out of their business may be a better solution in the long-term. Business owners are weighing the pros and cons of these factors to determine when the right time is for them to exit, leading them to consider their Exit Plans earlier than ever before.  How Exit Planning Advisors Can Help  Ease Anxiety  The above outlook and insecurities of a business owner are only heightened by the headlines. While you may not be able to fully settle anxieties or quiet the whispers of a possible recession, inflation hikes, wars, labor shortages, the list goes on; the reality is that the economy has both tailwinds and headwinds.  A 2022 mid-year market review by Edelman Financial suggested that these negative headlines don’t often tell the full economic story. For example, it was reported that in the first half of 2022: “Beneath the GDP contraction, consumer spending remained strong and nonfarm payroll gains averaged more than 480,000 per month, remaining the tightest job market in decades, driving massive wage gains.”  Headlines don’t always focus on the good news. As an Exit Planning Advisor, having a firm grasp on data, both current and historical, can help put the state of the economy into perspective for your clients. Encourage them to follow the data, not their emotions. Help Diversify  Exit Planning Advisors can help their clients earn greater value from all of their collective assets. It would be ill-advised to let younger business owners assume that even by contributing the maximum amount to a 401(k) plan each year, for example, would give them enough to be financially independent at age 50.  Encourage owners to diversify their assets and find additional passive income streams to more rapidly generate wealth that will sustain long-term. An advantage of working with an Exit Planning Advisor for a business owner is that they will build a team of advisors who can recommend different diversification approaches. These could include tax strategies, different kinds of insurance plans, or even establishing an estate plan, all to protect their wealth and their family in the future, even when the market rises and falls.  Determine Lifestyle Plans As is true with any business owner in any stage of their ownership cycle, if a younger owner desires to sell their business and retire, it is still crucial to determine what they want their post-exit life to look like.  The New York Times recently reported that millennials specifically dream of stopping work, or doing only fulfilling work, 15 years before their parents did.  However, these aspirations are colliding with the reality that they will likely not be able to accumulate enough savings to do so. Despite the struggle and the means to save more, the 2022 Retirement Insights Survey from TIAA revealed that millennial workers, ages 25 – 39 have nearly 40% confidence in their ability to plan for retirement. This indicates that business owners in this age group will need to be approached about Exit Planning at an earlier stage.  No matter the confidence level, the key for an Exit Planning Advisor is to really nail down what their plans for retirement actually are. Whether it’s the time to travel and spend with their family, the ability to volunteer more, or something else, knowing the dreams and lifestyle needs of a business owner aspiring to exit makes the difference in mapping out strategies to get them there.  Start Now  Having the knowledge that more and more business owners may want to exit sooner, or at the very least have it on their minds earlier, broadens the number of prospects you have for Exit Planning. Targeting business owners closer to the start of their business will only reap more positive benefits by lengthening the time you’ll spend with them doing Exit Planning work.  While every Exit Planning engagement is different and has timelines driven by each owner’s exit goals, time binds all decisions. It is advisable to start planning for an exit at least five years in advance, but 10+ years is even better. Knowing that, as well as the fact that younger business owners want to retire, may broaden your opportunities as an advisor and help you shift focus.    Conclusion:  As mentioned, the Exit Planning Market has expanded (beyond Boomers)

Cash Flow is complex, and it’s vital for business owners to understand it.  The complexity comes from the fact that it is fluid, flows in different directions, speeds, and can go off-course relatively easily.  Misunderstanding cash flow often leads to a reactionary relationship with it. To complicate matters, business owners face cash flow on two fronts: in their business and in their family. Being aware of the interdependency between the two is vital for reaching one’s financial security and goals.  When a business owner can see how changes in their business’s cash flow directly impact their family’s lifestyle, it can be the awakening needed to make the necessary changes for an effective succession. BEI defines a successful transition as one in which a business owner leaves their business on a desired date, for the amount they need, and to the successor of choice.  This success is achieved by addressing five critical elements: Target Departure Date Preliminary Financial Needs Analysis Target Successor Preliminary Business Valuation Future Cash Flow Estimate It is obvious that cash flow is a factor for the last element. However, understanding your business and personal cash flow is critical for all five elements. Target Departure Date  Starting with setting the target date, we know that this is likely to change and is heavily dependent on cash flow.  The owner could be ready to start the transition right away, while the cash flow of the business and family tells a different story. It’s not until they have truly defined their cash flow needs that a date can become solidified. Preliminary Financial Needs Analysis  In doing the preliminary financial analysis, we discover the real need of the business owner during retirement.  When you start developing goals, you uncover unrealized cash flow needs.  While some desires, such as volunteering, are charitable in nature, often the cost of big-ticket items like travel aren’t considered and can’t be overlooked when determining need. Frequently, the perks of being a business owner hides their family’s true burn rate, meaning the business owner and their family do not know what the owner’s real paycheck is.  Often the owner’s draw or reported salary is not one that fits with their current lifestyle. Whether big things like healthcare or a car, or little items such as cell phones, expenses can really add up quickly. In the end, the business owner may find that their lifestyle is thousands of dollars more a month than their initial estimate. It’s this interdependence between business and personal cash flow that often is overlooked and causes a misdiagnosis of “The Asset Gap” or the amount the business owner needs to make in the sale of the business. This misstep can really derail the whole Exit Plan.  Providing a business owner with a realistic lifestyle number can give them the confidence and clarity they need to move forward with the plan. Identifying a Target Successor           When identifying a successor, it’s important to realize that the two parties in the transaction both need to understand their cash flow, especially if it is an internal sale. When passing the torch to a family member or key employee, the current owner is hoping to leave a legacy and have the company carry on for generations to come. To best make this goal a reality, one needs to study how cash flow will change for the business under new ownership, and how owning the business will impact the successor’s personal cash flow. We know the business cash flow is going to change starting with the elimination of the current owner’s income.  Now this may just be redirected, perhaps to the premium on the loan that funded the sale.  We need to understand if the business can take on this debt. Purchasing the company also impacts the successor.  If they have the advantage of using the business to cover personal costs now, how does that impact personal cash flow and lifestyle? On other hand, if the purchase decreases income even for a short period, is that offset by the potential future gains? If the successor has a firm grasp of their own cash flow, these questions can easily be answered and any concerns they may have are easily overcome. Preliminary Business Valuation  In calculating a preliminary valuation, it could be discovered that the profit from sale of the company will not fill the gap that exists for the owner.  It is at this point that business decisions must be made.  Will the owner work longer, change their lifestyle to save more, or try to build the company to increase its valuation?   If working longer is not an option, then you need to look at potential cash flow changes at the business or personal level. Being able to look at what they can change such as adjusting the cost of goods sold, or determining how they can reinvest to grow the business, or even how a revised owner’s paycheck will impact both the business and their lifestyle, is essential to helping the owners make the decisions necessary to have a successful transition. Future Cash Flow Estimate Going hand in hand with the business valuation, estimating the future cash flow needs are also important. A professionally prepared cash flow forecast estimate helps advisors and business owners assess the likelihood of success of various exit paths. In any transition, the cash flow is used as a measure of the value of the purchase and establishes financial credibility for the Exit Plan. It’s the forward-looking planning in the Exit Planning Process that will give your client the confidence in their Exit Plan and empower them to make the best decision for their financial future. Conclusion Coming full circle, we see how ensuring a proper understanding of both business and personal cash flow for the current owner and potential successor during the entire succession process provides confidence and clarity to the Exit Plan. Working to improve cash flow and staying on top of cash flow management while working on the Exit Plan

Fri, 09/30/2022 – 08:00 Each of us has likely had that client who is hesitant to talk about their Exit Plan. Whether it be a fear of uncertainty, distrust of others to run their business, or just that their identity is tied up in their work, it can be a challenge to get business owners with this mindset to realize the importance of planning. Regardless of how business owners decide to spend their time, a successful post-exit lifestyle requires ample planning before the transition event. On a workable level, this means that business owners must understand the extent to which the wealth attained through the sale can fund their desired post-exit lifestyle. Additionally, business owners must consider what kind of activities and endeavors will keep them fulfilled post-exit, and how they must divide their time and money between them. What’s Next?  Many times, making those decisions is enough to overwhelm business owners to the point where they’ll continue to feed you with “I don’t know.” Regardless of the exit path an owner takes – willingly or unwillingly – it is crucial that they are able to connect with other aspects of their life outside of the vision. The last thing you want for your business owner clients post-exit is to wonder: what’s next? As an Exit Planning Advisor, ask them: “If money wasn’t an issue, what would you be doing?” Try to get them to open up about their goals and desires that exist outside of their company. This question spurs self-reflection and is crucial to getting owners to envision a “personal vision.” While they may not feel this personal vision is attainable, there are strategies you can implement to get owners thinking about the actions they can take to get closer to their personal vision. You can also show them how they can use the success of their business to fund their personal vision. Reframing Post-Exit Expectations  Before talking with business owners about the details of their personal vision, it is wise to check in on post-exit expectations. An element to post-exit life that tends to overwhelm owners and delay planning is the high expectations they have about what this life will bring them. According to a Coatts study on these expectations, the vast majority of owners expect a lifestyle which is at least as fulfilling as the one they had running their own business. With the proper planning in place, post-exit life can deliver on that expectation. However, owners often underestimate how hard it can be to get to that point. It’s usually much harder for business owners to walk away entirely from the business, they’ll likely be more apprehensive to risk, and it might take longer to create a satisfying lifestyle than they believe. Your role in promoting this aspect of the Exit Plan is to encourage business owners to envision a portfolio of activities that have the possibility of bringing satisfaction. Regardless of exit path, the owner having an aversion to exiting at all, or an uncertainty of a personal vision, having in-depth conversations with owners about what could bring them enjoyment outside of their business is an element of planning that is often overlooked. In order to neutralize expectations, remind business owners to: Focus and clarify their understanding of their skills Consider their network as a source of new opportunity Value their time just as they would their wealth and business success Prioritize their values as it relates to their life after exit, such as family time or travel Defining the Personal Vision When it comes to formulating the personal vision, remind business owners that there are a variety of ways to channel their skills and desires into outlets that will bring them joy. Just like they’ve built their business, there is a process to re-building their identity after the sale or transition of their business. Their personal vision could include: Mentoring & Advising  Business owners who have been in business for a long time or have worked with specific groups have the option of sharing their expertise and experience to help others reach their goals. Whether this wisdom is passed on as a consultant or through the act of sitting on an advisory board, there are lots of mentorship opportunities available. Serial Entrepreneurship   Some business owners aren’t quite ready to give up working after exiting a business. Perhaps after a sale, a business owner may want another challenge and is ready for another risk. They may even reinvest the profits of the sale towards a new endeavor. This type of serial entrepreneurship is becoming more popular as owners seek to diversify their income streams and test the waters of new markets. Investing  Maybe an owner isn’t interested in investing the sale proceeds into another business, however, there are many opportunities for owners to apply their insights to discover and back new ventures and opportunities. This could be seeding start ups, taking equity stakes in growing companies, or simply building out their personal investment portfolio. Giving Back  Just like a monetary investment, if owners want to put their time, talent or money into a non-profit or social cause, it pays to think through how their philanthropic contributions could do the most good. Enjoying Family & Hobbies  Remind owners that there is also the option for a simpler, quieter, less busy life after exit. Perhaps a business owner has missed out on watching their children achieve milestones, traveling with their spouse, or taking on new home projects or hobbies. There could be great satisfaction that comes with newfound free time. Using the Personal Vision to Reinvent Identity  As mentioned and repeated in this article, the transition into new levels of wealth and freedom is the stage of Exit Planning that arguably receives the least attention. The ensure that your business owner clients make the most out of their post-exit lives and fulfill their personal vision, share with them the following tips: Be open to new opportunities. Whether it’s starting a new business venture or the