Protecting Yourself Against Employee Risk
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As your successful business grows larger and matures, you should always be on the lookout for forces that can diminish its value. New companies and competitors constantly aim at the top dog by identifying and exploiting weaknesses. To mitigate this constant threat, you should do two things.
Today, we’ll look at two processes you can use to identify and protect your business’s most valuable assets.
It’s impossible to protect the things that make your company valuable if you don’t know what they are. When we talk about valuable assets in the context of planning for the future, we’re talking about things outside of your presence as the business owner.
The first step in identifying your company’s valuable assets is focusing on things outside of your presence that help the company run well. Remember: If your company’s success relies primarily on you, then it likely has lower transferable value. And transferable value is a key ingredient that can be leveraged to help you meet your business and personal goals.
What are some potential assets that give your company its value? While your company is unique, there are some general features and components that tend to contribute to a company’s value.
You may have knowledge of what some of your company’s valuable assets are. But it can sometimes be challenging to identify which are the most important and which you need to improve. Working with objective, outside advisors can help provide a clearer assessment of which assets are most valuable to your company, and thus worthy of your investment in protecting them.
After you’ve identified your company’s valuable assets, it’s crucial for you to protect them. For example, you may consider drafting legal documents that describe the proper use and dissemination of trade secrets or intellectual property. This is a common strategy that successful businesses use, many times through the implementation of a company handbook that employees must acknowledge and abide by, coupled with regular internal training programs to emphasize the importance of intellectual property and trade secrets, and how they support company performance and growth.
Perhaps most important is protecting your key employees. Recall that key employees are those who tangibly affect company performance above and beyond expectations. Often, they have influence on other employees. In many cases, key employees are a company’s most valuable asset, which makes protecting them vital to future success.
To position your company to protect key employees, you may consider using two different tactics.
Incentivizing performance and retention includes coming up with ways to keep key employees on board and engaged in the company, now and in the future. For instance, you may offer incentive plans that provide more money or ownership if the key employee exceeds certain goals. You may even apply a “vesting schedule” to those rewards, which can encourage this employee to stay with the company over a longer period to receive the full benefits of the incentive plan.
Discouraging post-employment harm to the company is the flip side of the coin. If a key employee decides to leave your company, it’s important to minimize any harm they can do to your company once they leave. Some examples include non-compete agreements and non-poaching agreements (i.e., a former employee may not recruit other workers away from your business). It’s important to keep in mind that these kinds of restrictions must be custom-tailored to your business/employees and state laws, and that there may be other requirements that go along with these types of protections. You’ll need individual legal guidance in order to avoid potential landmines.
This is why identifying your most valuable assets early is so important. If you know what it is that makes your company valuable, you can then work to protect those things, either before it’s too late or before those valuable assets have outsized leverage over your company’s success.
Protecting your trade secrets and intellectual property, designing custom incentive plans, and discouraging former employees from harming your business can be challenging work. Indeed, it’s often too much for one business owner to tackle alone. Fortunately, you don’t need to do it alone. Working with the right experts can give you the comfort and confidence you need to continue growing your business and developing your most valuable assets.
We strive to help business owners identify and prioritize their objectives with respect to their business, their employees, and their family. If you are ready to talk about your goals for the future and get insights into how you might achieve those goals, we’d be happy to sit down and talk with you. Please feel free to contact us at your convenience.
The information contained in this article is general in nature and is not legal, tax or financial advice. For information regarding your particular situation, contact an attorney or a tax or financial professional. The information in this newsletter is provided with the understanding that it does not render legal, accounting, tax or financial advice. In specific cases, clients should consult their legal, accounting, tax or financial professional. This article is not intended to give advice or to represent our firm as being qualified to give advice in all areas of professional services. Exit Planning is a discipline that typically requires the collaboration of multiple professional advisors. To the extent that our firm does not have the expertise required on a particular matter, we will always work closely with you to help you gain access to the resources and professional advice that you need.
This is an opt-in newsletter published by Business Enterprise Institute, Inc., and presented to you by our firm. We appreciate your interest.
Any examples provided are hypothetical and for illustrative purposes only. Examples include fictitious names and do not represent any particular person or entity.
For professional use only. All information can be subject to change without notification.
KAFL Insurance Resources
800 Linden Ave
Rochester, NY 14625
www.kafl.com
585-271-6400
Copyright © 2021 Business Enterprise Institute, Inc. All rights reserved.
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When you set your business up for future success, you can set yourself, your family, and your personal interests up for similar success. But a common problem owners overlook is how to address Deal Killers, which can prevent you and your company from achieving the success you want. Today, we’ll examine eight common Deal Killers and show you a five-step process that can help you address them.
Step 1: Address the Big Three Financial Deal KillersThe first three Deal Killers you may encounter concern your financial needs. 1. Assuming that you can sell your business today and achieve financial independence. 2. Assuming the market values your company as highly as you do. 3. Focusing solely on getting the most money possible for your business. Some business owners mistakenly believe that they can live on less money after they sell, which is rarely the case. And because your business is likely a part of your identity, you may end up overvaluing it, which can create impossible expectations and stunt proper planning. Finally, focusing only on getting the absolute most money for your business can clash with values-based goals, which can cause unbearable frustration. Fortunately, you can address these financial Deal Killers through pre-sale planning. This includes some of the following action items: 1. Objectively determining how much money you need to achieve financial independence. 2. Getting an objective estimate of your company’s value from an investment banker or business broker. 3. Assembling a deal team before you’re ready to sell, which can prevent you from taking your company to market before you and your company are ready. With pre-sale planning, you can strengthen your company and bolster its value, which is good whether you decide to sell or not. Step 2: Keep Key Employees On Board and EngagedYour key employees (i.e., management teams) are likely the backbone of your company’s future success. Without a strong management team, buyers may question whether your company has value outside of your presence. If it doesn’t, and you’re unwilling to work for someone else as a condition of sale, it may become exceedingly difficult to plan for a successful future on your terms. Fortunately, you can keep key employees on board and engaged by “handcuffing” them using quality incentive plans with the help of professional planners. Non-qualified deferred compensation plans, stay-bonus plans, and stock bonus plans are just a few examples of how to keep key employees on board and engaged. Step 3: Be Willing to CollaborateTwo common Deal Killers owners often face are trying to negotiate a deal by themselves and failing to hire a deal team. Serious buyers will come to the table with teams that will help them pay the least and get the most from your company. They know what to look for and will likely give no leeway, which can easily overwhelm you if you go it alone (especially if you’re still ingrained in running the business). Instead of going it alone, hire and collaborate with a strong deal team. A deal team can help you find and fix flaws in your business before buyers see them. That can lead to a sale on your terms while preventing buyers from retrading (i.e., using flaws they find to lower their offer). Step 4: Commit to Pre-Sale Due DiligencePre-sale due diligence can be costly, both financially and emotionally. However, you must identify your company’s weaknesses before a buyer, lest you want to negotiate from a position of weakness. Further, it’s crucial that your pre-sale due diligence is objective and clear-eyed. If you’re a major part of the business, it’s easy to deny or ignore critical business flaws. Fortunately, you can tap your deal team to help you follow through on due diligence. It’s their job to strengthen your company so you can plan for a successful future on your terms. Step 5: Plan for a Future Without Your BusinessYou can do everything right in your planning and still regret everything. This is especially true as you approach your sale date: After all, once you sell your company—something you’ve built, nurtured, and guided for years—it’s no longer yours. Seller’s remorse is fairly common, but it’s also something you can address. An effective way to plan for a successful future without your business is to talk to your advisors, family, and other owners. Share your ideas about what success looks like, and ask for their thoughts. They may be able to help you find your purpose outside of owning a business. Preparing yourself for a future without your company is just as important as preparing your company for a future without you. We strive to help business owners identify and prioritize their objectives with respect to their business, their employees, and their family. If you are ready to talk about your goals for the future and get insights into how you might achieve those goals, we’d be happy to sit down and talk with you. Please feel free to contact us at your convenience.
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