If You Don’t Uncover the Skeletons in Your Closet, Your Buyer Will
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It can be difficult to consider what will happen to your business and your family if you die unexpectedly. Without proper planning, you could be leaving your family and/or key stakeholders in a huge mess. Proper planning allows you to keep your business on the right path even after an unexpected tragedy leaves you unable to continue running your business.
Estate plans focus on transferring assets upon an owner’s death. A successful estate plan achieves three important personal goals:
Estate planning can also be a tender topic for business owners because they will occasionally need to decide which family member is the most appropriate candidate to continue running the business after their death. Families have been torn apart over poorly executed estate plans. Consider the hypothetical example below.
Jonah Kaczmin sat nervously in his office. Until the day before, he had been president of Kaczmin’s Electronics, one of the region’s largest electronic component distributors. Now he was on his way out of a job and felt he was a victim. Naturally, his first thought was to sue those responsible for his misfortune. The targets of his wrath were his younger sister and his mother. They had forced him out of the business, out of a job, and felt he was a victim.
After his father’s death, Jonah had received 49 percent of the stock in the family business. Another 49 percent share went to his sister. The remaining two percent—the swing vote—was held by their mother.
Jonah’s father had brought him into the business early and taught him well. After the founder’s death, Jonah assumed all responsibilities for sales and became the key man in the business. His sister, Stella, handled the bookkeeping and other administrative matters. Her husband managed the customer service department.
Despite the economic slump that hit the region, the business persevered under Jonah’s stewardship. It had a long-standing tradition of service and good name identity because the elder Kaczmin had pioneered new packaging and distribution methods.
Because of his dedication to the business, Jonah had not spent much time nurturing family relationships. He was less a devoted son to his mother than was his sister a devoted daughter. As their mother aged, she became increasingly susceptible to the influences of her daughter. Family friction continued. A confrontation was inevitable.
Jonah had always assumed that his superior abilities and position as president and board chairman would enable him to win any family showdown. He was wrong. At a special meeting of the board of directors, Jonah was removed from his posts, fired as an employee, and given three months of severance pay—after 25 years in the business.
Johah naturally felt victimized…but not so much by his sister and mother as by his deceased father. By failing in the most important remaining task in his life—to plan his estate and the future of the business—the elder Kaczmin made his son an unintended victim.
Jonah’s unfavorable business transition experiences may have been avoided had Jonah’s father asked and answered six critical questions.
An owner’s thoughtful answers to these questions, followed by appropriate implementation of a plan, may well prevent a similar experience in your family and support a smoother business transition for all parties involved.
Keep in mind that a well-crafted estate plan is only one key element of a successful plan for you, your family, and your business. Don’t let an unattended estate plan be the weak link in your overall plan.
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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Dear Pennsylvania Insurance Department Licensee,
You are receiving this notice because your Pennsylvania Insurance license is scheduled to expire within the next 60 days. Please refer to your license for your specific expiration date. In response to the COVID-19 spread in the Commonwealth and pursuant to 40 P.S. 310.8(e), the Pennsylvania Insurance Department is extending the licensing renewal deadline until further notice.
We encourage you to take advantage of our online resources to renew your license. You can renew your license electronically at www.sircon.com/pennsylvania or www.nipr.com.
Please note: If you are unable to renew your license by the license expiration date, any and all renewal requirements, including CE, are still applicable and the Department will work with licensees once COVID-19 has been contained to meet these requirements.
While the Department strongly encourages licensees to take advantage of online continuing education (CE) courses, we understand that at this time, the circumstances related to COVID-19 may prevent some licensees from being able to complete CE requirements in time for their license renewal. Therefore, until further notice, the Commissioner of the Commonwealth, pursuant to 40 P.S. 310.8(e), will temporarily waive CE requirements for licensees who cannot meet requirements due to extenuating circumstances related to COVID-19. For licenses requiring CE, visit www.sircon.com/pennsylvania for information about approved online CE courses.
If you have already submitted a renewal application, please visit www.insurance.pa.gov/licensees/onlineservices to use our online licensee search to verify that your license has been renewed or print a copy of your license. Please allow up to 24 hours for the website to update after renewing your license online. The Department no longer mails licenses.
This email serves as your official license renewal notice, and you will not receive a paper invoice. The Department encourages all licensees to update your contact information including email addresses through Sircon or NIPR to ensure that you continue to receive future correspondence from the Department.
For additional updates and information visit the Pennsylvania Insurance Department’s website at www.insurance.pa.gov.
Office of Market Regulation | Bureau of Licensing & Enforcement | Licensing Services Division
1209 Strawberry Square | Harrisburg, Pennsylvania 17120
Phone: 717.787.3840 | Fax: 717.787.8553 | www.insurance.pa.gov
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Questions?
Reach out to our Employee Benefits Team at KAFL or visit https://www.kafl.com/individual-vision/ to see how to register.
Succession planning, Exit Planning, and business planning may seem interchangeable in most people’s eyes. However, each type of planning plays a very different role in the process of designing, and then implementing, a strategy for leaving your business and planning for the future. You can’t use one strategy without the others when it comes to running, growing, operating, and eventually leaving a business.
These planning approaches go hand in hand. Although they have their similarities and overlap in some ways, there are some major differences you may want to think about in order to plan effectively for your future and the future of your business.
Succession planning has become a common term to most business owners. This type of planning strategy is primarily focused on the transfer of leadership, management, and/or ownership of a business from one person to another. This strategy usually encompasses the identification of potential successors and the training of the chosen successor to build the skills and expertise to successfully run the business once the original owner decides to back away or move on.
Succession planning also emphasizes the timeline for when an owner is planning to part with their business. The succession planning process could take years, depending on the availability of successor candidates, business valuation, profitability, current management team in place, incentive plans, etc.
The main difference between succession planning and Exit Planning is succession planning primarily focuses on the smooth transition (succession) of the operation of the business. A primary goal of succession planning is to find the right person to take over your business and make sure the process of leadership transfer go smoothly. Succession planning may primarily focus on the goals and objectives of the business and may not be as focused on the owner’s personal goals for the future.
Exit Planning can be considered a broader approach to planning for the future. Although one of the main goals of Exit Planning is to ensure a seamless transition from one leader to the next in the business, this approach also considers the future plans of the owners for themselves and their families. Exit Planning considers a business’s financial status, the valuation of the business, the position in the market, employee benefits, and the owner’s family as well as the community in which the business is operated. It tries to identify the gap between what a business owner has today, and what they want for the future. It really is a full picture of all factors that affect a future change in your relationship to your business. This process encourages planning for everything so that when you are ready to leave your business, you’ve worked through as many factors as possible.
Although each owner’s exit strategy is going to be unique, typically each plan consists of some or all of the following 7 steps.
Business planning can refer to the overall plan of how you run and operate your business. This is commonly a strategy most business owners use throughout the lifecycle of their business, from the very start to the day they consider selling the company. Your business plan is a living and growing document. It is often going to be focused on how your business will approach and succeed in its chosen market. It probably looks at how you’ll be profitable in your chosen lines of products and services. It may be reviewed regularly to be sure you are meeting your company goals. Having a solid business plan can play a role in your succession and your exit. The more detailed the business plan you have in place, the easier it may be to advance a succession and exit.
A well-run company always has a plan in place. The planning processes never ends. Your business plan can help ensure the success of the business in its entirety and can eventually provide support for your future plans, including succession and Exit Plans.
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. |
When imagining the future of their businesses, and possibly a future that involves different ownership at some point, owners may wonder if it’s really possible to consider “insiders” (employees, children, or co-owner) as viable successor owners. Insiders are often a great match for company culture, leadership style, and vision. But they may lack one very important element – money to buy the business. Is this a fatal flaw in planning for the transition of future ownership? Maybe, but maybe not.
Before we dig deep into an insider’s ability to pay for ownership, it may be a good idea to take a step back and see whether that line of investigation is even worth pursuing. Start by laying out your goals and objectives for the future of the business in writing. You should be able to clearly define:
Once you know the answers to these questions, you can start to evaluate possible outcomes for the future of your ownership interest by holding each scenario up against your goals to see how well they fit together.
It is often the case that an insider, who would otherwise be an excellent successor owner, does not have enough money (or access to money) to support a purchase of the business. But this does not mean that a transfer of ownership to them should be off the table. The secret to success for an insider who is otherwise a strong owner candidate is cash flow. Cash flow can bring everything together.
What is “cash flow?” You’ve probably heard others say that your sale price might be a “multiple of cash flow”. Well, that all depends on the definition of “cash flow.” There are several definitions or measures of cash flow, each with a potentially significant and substantive difference. Typical measures of cash flow include:
Each of these measures of cash flow can produce a different cash flow amount. Which one makes sense for you may depend on the unique nature of your business.
Shaila Drexl, owner and manager of three commercial buildings, desired to sell each of her three property management operations to each of the three on-site building managers. She thought she’d retain ownership of the buildings themselves and separated her building ownership from the management businesses. She had heard that “six times cash flow” was a fair way to value her type of business and this method matched nicely with her idea of what she needed to meet her financial objectives.
Let’s assume that Shaila’s employees want to buy her business. Let’s also assume that these employees share a trait common to many employees: They don’t have any money. Since Shaila’s employees don’t have money of their own, and they have limited borrowing potential, the payments they make must come from business operations. Every dollar of cash flow that is created through operations will be taxed at ordinary income tax rates, because it will either get reported as company income or it will be paid or passed through to the employee, who will then report it as income. Each employee will only have an after-tax amount left to pay Shaila, who will then most likely owe capital gains tax because she is being paid for her ownership interest. That’s two bites at the apple for the IRS before each dollar makes its way to Shaila’s savings account. So, it may take some time for Shaila to reach her after-tax financial goals if her only plan is to sell ownership to employees, because company cash flow is eroding on its way to Shaila’s pocket. Is there a faster way to help Shaila reach her financial targets?
Shaila did the math and decided that it would take too long for each employee to pay for their part of the business if they just used cash flow to pay for Shaila’s ownership using a generous multiple of cash flow as the company value. She called a meeting of her most trusted advisors and began to look at planning strategies that might work better. Her advisors were able to identify a variety of potential improvements to her plan, including revisiting company value, adding different types of payments to Shaila, and transitioning ownership over time rather than all at once. Through analysis and creative thinking, they were able to come up with several ways to use company cash flow more efficiently, all the while keeping an eye on Shaila’s stated goals. In the end, Shaila was pleased with her more comprehensive plan.
A sale of ownership to insiders can be fraught with danger if the overall picture, from company performance to individual tax consequences, is not taken into account. Comprehensive planning can take time or may require several perspectives, but the benefits can outweigh the costs for many owners.
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. |
While there are many uncertainties when planning for the future, one factor that is almost always essential to the success of your future plans is cash flow. Measuring your company’s cash flow and knowing what aspects of your business can be affected by the health of your cash flow are even more crucial in today’s economy. Having an accurate representation of your cash flow can also make or break your plans for the future, including any ideas you might have about backing away, transitioning ownership, delegating management responsibility, or an outright sale of your business. Since you can’t escape the impact of cash flow, you might as well take it head on, right?
While there are many ways to think about cash flow, the concept that might work for business planning purposes is free cash flow. Free cash flow is the portion of the annual net cash flow from operating activities that remains available for discretionary purposes after the business has met its basic financial obligations. In this discussion, the “discretionary purpose” could be any anticipated use of cash flow to support the business or personal goals and objectives of the owners of a closely-held business. So, free cash flow might be supporting new initiatives, return on investment for current or new owners, cash-based incentive compensation plans, or the buy-out of one or more owners. In other words, cash flow can be described as the engine that powers your plans for the future.
Cash flow is so essential because it impacts just about every aspect of your current and future business operations and planning. Cash flow can affect the value of your business, the magnitude of risk associated with the business, and the business’ ability to manage debt or fund growth.
As much as we don’t want to admit it, cash flow is the lifeblood of a company. Owners must understand —and be able to measure —where cash comes from and where it goes. It is an accurate indicator of the financial health of your business. Unlike more subjective measures, it makes no assumptions and entertains no preconceptions.
You may be putting out fires and managing unexpected crises more frequently now than in the past. But you also know how important it is to look to the future and make decisions that you believe will help achieve your long-term goals. It’s possible to do both.
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. |