Who are your Business’ Key People? Think Outside the Box!

Who are your Business’ Key People? Think Outside the Box!

Every business has at least one Key Person, of course (hint:  if it’s your business, that person is you!), but as you continue to grow, expand your reach, expand your revenues, and expand your workforce – be careful not to lose sight of who your key people are!

What is a Key Person?  According to the Business Directory, a Key Person is “an Individual whose knowledge, creativity, inspiration, reputation, and/or skills are critical to the viability or growth of an organization, and whose loss may cripple it.”  But does this fully cover the realm of who should be considered a key person?

Most companies identify key personnel as being purely those in management  and/or ownership positions.   This is often correct, but can miss many of the valuable people that may not be in these positions.

For example, there’s a sales-based company I know of that had 3 different departments and department heads who reported to the Owner/CEO.  There were multiple other salespeople working within the departments, and over the years the sales force would turn over periodically, with people moving onto other careers, and new people coming in.   The company properly identified the department heads as being key personnel and properly planned for the possibility of their departure.

However, one of their “rank and file” salespeople happened to be with the company for nearly 20 years, and while she never had aspirations for management, nor did she typically post the highest sales totals in the company in any given year, she accumulated a client-base in the hundreds, and due to being somewhat “old fashioned” was much stronger in her customer service and client relationships than she was in her record-keeping. Clients were happy, performance and sales numbers were great, and so on they went.

You can imagine how this story ends – one weekend day a phone call came to the owner of the company who found out that their longtime employee had suddenly and unexpectedly passed away.    An emergency meeting was called and the beginning of the corporate nightmare began – unravelling 20 years worth of handwritten/paper files, determining which clients were active, prioritizing active open clients who needed immediate service or were in the middle of the sales process.   Two full years later, after hundreds and hundreds of man-hours spent by other salespeople (taking time away from their own sales) , untold numbers of lost clients who slipped through the cracks or found other vendors due to lack of followup, the cost to the company was unimaginable.

Did this person fit the classical definition of a “key person?”  Not in the classical sense.  She was a “rank and file” salesperson, not in management, not even one of the “star” salespeople of the company.  Her loss did not “cripple” the company.  However, what made her so key to the company was the accumulation of clients over a long period of time, as well as the lack of transparency in the record-keeping on these clients that made it ever so much harder for any replacement or colleague to pick up where she left off.   And the business suffered hundreds of thousands of dollars of losses in revenue, additional personnel costs, and opportunity cost of what their other salespeople could have been doing instead of unraveling a tangled web of clients and products left behind by their tragically lost colleague.

It is essential to look at your entire employee base and take the difficult step of considering business life without that person.   Can you hire a replacement of equal or near-equal experience easily and at a similar cost to what you were paying the current employee?   Or Is their position requiring of a unique level of experience, education, personal connections or rare personality traits?   These issues, among other, can help to determine whether some level of “key” exists for that employee.

Why is it important to identify the key employees in your organization?  We’ll cover this in next month’s blog entry, Key Person Insurance Planning.


Michael S. Feinberg, ChFC has been working in the insurance advisory and brokerage industry since 1995. His clients include both individuals/families, and small to mid-size businesses both locally and nationwide. Michael joined forces with McLean Insurance in 2013 and through this affiliation adds value to both individual and commercial clients by offering them not only his income replacement and business planning expertise but also valuable consultation on personal and commercial insurance protection through his experienced agency colleagues.

Top 10 Mistakes in Business Succession Planning – Part 2

 

This is Part 2 of a blog about the top 10 mistakes in Business Succession Planning.   Last month’s blog looked at “process” mistakes related to the agreement itself, whether inadequately written, not updated, or overlooking certain triggers to a buy/sell event.   This month the mistakes are in more of a “funding” capacity in order to execute the desired outcome of a buy/sell event.

All business owners have a business succession plan – whether they know it or not.   However, the ability for the business to survive and continue to thrive in the face of adversity depends on that plan being clear, well thought out, comprehensive (covering as many possible scenarios as possible), fair to all parties, and up to date.   Without this, the health of a business and the wealth of its owner(s) can be devastated by adverse tax implications, loss of value, and worst of all arguments, hurt feelings and even litigation between owners that can damage or even destroy even the strongest of businesses.

Here are 5 more “mistakes” that I see most frequently in Business Succession Planning.  All of these mistakes are easily avoidable with the proper foresight and care:

Unfunded plan

A well-written buy-sell agreement will ensure that there is a well-defined prescription for how the equity in the business is to be handled in the wake of a range of specific triggers (such as death, disability, divorce, termination, etc).  This minimizes the conflicts and differing viewpoints on valuation and process that so often occur in the absence of a proper agreement.  However, the agreement is worthless if the means to carry out the agreement are not there.   It is not always possible, or desirable to come up with the amount of liquid cash needed to buy out a partner’s share in the business at an unexpected time.  Without proper funding, often times selling assets, borrowing money, or leveraging the income/assets of the company itself are the only ways to comply with the pathway of the agreement.  With proper foresight, well-structured insurance programs can provide all the liquidity that is needed instead of a sudden and unexpected lump-sum obligation.

Funded plan with mismatched titling or improper use of Corporate-Owned Insurance

It’s great if your business has had the foresight to take out insurance to fund a buy-sell agreement, but if your insurance advisor isn’t experienced in the unique aspects of business succession planning (or if they haven’t communicated with your attorney/CPA) the policies can be structured in ways that can cost hundreds of thousands of dollars in taxes (capital gains, income tax) that could have been avoided.  Ensuring proper tax treatment of insurance premiums, making sure individuals are not the beneficiary of corporate-owned life insurance, analyzing whether individuals or the business should be the owner/payor of the insurance policies, and ensuring proper compliance with IRS regulation 101(c) on corporate-owned life insurance are just a few of the potential landmines here.

Funded plan with inadequate type/amount of funding

How much insurance should be included in the buy-sell planning?   Far too often an arbitrary amount of insurance is implemented without being linked to an informal valuation of the company.   Having an amount of insurance that is too much or too little to accomplish the ultimate goal of the insurance is better than nothing, but can also have the negative impact of leaving possible points of contention between surviving parties.   Often policies are structured to last for a period of time that is far too short to ensure that it is still viable for the duration of the owner’s involvement with the company.

Lack of appropriate valuation method or process

Speaking of valuation (which is ultimately the cornerstone of business succession planning) – how do you know what your company is worth? Many companies “guess-timate” on the valuation of their company, but once a triggering event occurs, it instantly creates opposing parties who will have naturally different views on how to value the equity.  Having a stated valuation (updated regularly) or a method through which valuation is determined ahead of time ensures that there is minimal room for dispute at the most crucial time.

Failing to provide liquidity to company to survive

Buy-sell agreements are ideal for ensuring  a peaceful and amicable transfer of ownership and control between departing owners heirs and surviving owners.  However, it’s important not to overlook the impact of an owner’s absence on the business itself.  Is the departed owner someone whose ideas, leadership, and input into the business can be replaced or will there be a drop in revenues, an increase in expenses, or lost clients/contracts that will ravage the value of the business itself?  This too can and should be mitigated with insurance!

Business Succession Planning is a multi-faceted process requiring a thorough review of current ownership, valuation, and the desires of ownership along with careful construction of a broad plan to guide all parties to a desired solution.   But beware of the pitfalls that can occur if you do not have the proper care, expert attention and communication from an experienced group of advisors.  For more information and guidance through this process, feel free to reach me at [email protected] , schedule a phone appointment with me at http://bit.ly/2fLLzM9  or call me at 703-637-4339!


Michael S. Feinberg, ChFC has been working in the insurance advisory and brokerage industry since 1995. His clients include both individuals/families, and small to mid-size businesses both locally and nationwide. Michael joined forces with McLean Insurance in 2013 and through this affiliation adds value to both individual and commercial clients by offering them not only his income replacement and business planning expertise but also valuable consultation on personal and commercial insurance protection through his experienced agency colleagues.

Top 10 Mistakes in Business Succession Planning – Part 1

Top 10 Mistakes in Business Succession Planning – Part 1

Good news!  You’ve started a business, gotten through the startup phase and are seeing some success!  You’ve taken your business from an idea to a meaningful company providing products or services to customers and have built a revenue-generating, valuable, and growing business with a bright future. Perhaps you’ve done it all on your own, or maybe you have partner(s) who have joined you in this endeavor and share in this experience with you.  Much in the same way as you raise a child, now your focus should be as much as possible on growing and nurturing your “baby” to continued good health and prosperity, but it is also essential to ensure that the product of all of your hard work and planning is protected against the many risks that it faces on an ongoing basis.

All business owners have a business succession plan – whether they know it or not. However, the ability for the business to survive and continue to thrive in the face of adversity depends on that plan being clear, well thought out, comprehensive (covering as many possible scenarios as possible), fair to all parties, and up to date.   Without this, the health of a business and the wealth of its owner(s) can be devastated by adverse tax implications, loss of value, and worst of all arguments, hurt feelings and even litigation between owners that can damage or even destroy even the strongest of businesses.

Here are the first 5 of 10 “mistakes” that I see most frequently in Business Succession Planning. These mistakes fall into the category of “Process Mistakes.”  All of these mistakes are easily avoidable with the proper foresight and care:

No Executed Succession Plan to Begin With

In the rush to get up and running, and in the excitement and stress of becoming busy and thriving as a business, often every ounce of spare time and focus is spent on growing the business and the necessity of having a written succession plan (shareholders agreement, partnership agreement, operating agreement) in place and executed by all owners is often overlooked.  In the absence of a written business succession plan, when/if an owner is no longer able to work for the company (due to any number of reasons) there can be significant conflict between the remaining parties about how decisions are made and how the equity in the company is distributed. It is absolutely essential to have an operating agreement in place (including thorough buy-sell provisions) created preferably by an attorney who understands your specific business (generic templates found online often cause more problems than solutions).

Lack of Communication Between Advisors

Far too often there is little to no communication between the 3-4 advisors involved in almost every successful business succession plan (attorney, accountant, insurance advisor, banker). Would you cook a meal using 3-4 people to prepare it who never see or speak to each other during the process? A plan works much, much better when those who help to create it, fund it, and ensure its tax treatment is maximized are all on the same page. The likelihood of mistakes in the area of tax or legal ramifications decreases exponentially with proper communication between all parties.

Overlooking Disability

A common unexpected “trigger” for a buy-sell situation is the death of a business owner, but what happens if a long-term or permanent disability claims the effective usefulness of that business owner in the same way as a death? In this case, life insurance proceeds will not be available, but the need for funding to execute a buy-out persists. Many buy-sell agreements have very little to no language in them regarding what happens if an owner is permanently disabled. At what point is a buyout necessary? Is it optional or mandatory? These are important issues that must be addressed.

Overlooking Divorce

Extremely common to be overlooked in a buy-sell agreement is the impact of divorce on the ownership of a company. As with most assets, ownership of a company is often an asset that is split between divorcing couples. The impact of ownership passing to a divorced spouse who does not maintain an active role in the company can drastically impact the succession planning and should always be addressed in a buy-sell agreement.

Outdated Plan

If you’ve taken out insurance to fund a business succession plan, how recently have you reviewed this plan? Often, insurance plans become obsolete or insufficient as the company grows, the duration of expected ownership lengthens, and ownership evolves amongst new parties in a growing business. Having an obsolete setup on insurance can cost you sharply down the road.  In the opinion of business succession planning experts at McLean Insurance, a plan should be re-evaluated every 2-3 years. Far too many businesses fail to review or update their agreement or their funding and fall woefully short of what they need to accomplish their goals.

Next month we’ll discuss the other 5 most common mistakes, which are considered “funding mistakes.”

Business Succession Planning is a multi-faceted process requiring a thorough review of current ownership, valuation, and the desires of ownership along with careful construction of a broad plan to guide all parties to a desired solution. But beware of the pitfalls that can occur if you do not have the proper care, expert attention and communication from an experienced group of advisors. For more information and guidance through this process, feel free to reach me at [email protected] , schedule a phone appointment with me at http://bit.ly/2fLLzM9  or call me at 703-637-4339!


Michael S. Feinberg, ChFC has been working in the insurance advisory and brokerage industry since 1995. His clients include both individuals/families, and small to mid-size businesses both locally and nationwide. Michael joined forces with McLean Insurance in 2013 and through this affiliation adds value to both individual and commercial clients by offering them not only his income replacement and business planning expertise but also valuable consultation on personal and commercial insurance protection through his experienced agency colleagues.

Our Employee Benefits are Great!  Wait, Are They?

Our Employee Benefits are Great! Wait, Are They?

So you’re a small business that has implemented a benefits package for your employees.  Congratulations, that’s a big step – one that sets you up for competitive growth and attracting top talent!   More than likely, your open enrollment period is coming up shortly.  Or perhaps you’re not currently offering employer-sponsored benefits to your employees but want to ensure they are taking proper steps to protect themselves and their families.

That’s all there is to it, right?   Not so fast.   Even with a suitable employee benefit package on offer, the likelihood that there are significant unmet needs and risks for your employees is high.  What does that mean?    There are many risks your employees (and most adults) face that benefits often do not or cannot fully cover on their own.

  • Risk of Healthcare Expenses:  Medical Insurance can cover the vast majority of out-of-pocket expenses for medical bills and prescriptions, but increasingly the benefits offerings from employers are building in higher deductibles and copays to mitigate the ever-increasing premiums.  Can employees handle the higher out-of-pocket expenses (often upwards of $4-6,000/yr per family member) if they have unexpected needs?  Often the answer is “not without struggle.”   However, there are voluntary products available to employees that can help to address these unintended expenses without breaking the bank.
  • Risk of lost income from missing work due to disability: Many employee benefits plans include medical insurance, often dental and vision care, but do not provide for the risk of lost income and the impact of a lengthy disability.  Many benefits plans do provide this valuable benefit, but often with limits that cap their benefits well below their actual earnings, do not provide protection to replace important bonus/commission income, have very stringent and “hard-to-satisfy” definitions for when you’re considered eligible for benefits, and do not go with them if they move on to another employer.   If you’re not a high-income earner, and you become totally and completely disabled/bedridden, then you’re probably okay but what if your income is higher and/or your disability isn’t total?  According to the US Social Security Administration, there’s over a 25% chance that a 20 year old will become disabled at some point during their working career.  It’s vital for employees to have personal protection against this risk, and easy for employees to consider supplemental disability coverage if they are already covered.
  • Risk of lost income to the family due to death:  Everyone is familiar with what kind of financial impact a death can have on a family, especially to a primary breadwinner or full-time parent of a dependent child.  Most employee benefits programs include a very token amount of “free” life insurance ($50-100,000), if anything at all.  This is barely enough to pay for final expenses in most cases.  Other benefits plans offer the ability for employees to purchase additional life insurance (in multiples of their income) at prices that are adjusted annually and increase sharply as you get older to the point where they become unaffordable right when you need it the most. In virtually all cases the life insurance disappears completely if they leave the employer.   It is recommended for most breadwinners to have anywhere from 8-12 times your annual after-tax income in life insurance, though that number can certainly be lower or higher depending on your circumstances (# and age of children, outstanding debt, other assets, etc), and to have a plan that covers them, not “them only so long as they’re employed with the same company”.

There are other areas (such as long-term-care, dependent benefits, etc) that are also often not addressed by employer group benefits. So… while you’ve given your employees a great start and a foundation to begin to protect themselves and their families, there’s one more very important benefit that you can provide to them – and the great news is that it’s 100% free to you and will make you look good.

Gather your employees together for a lunch, sponsored by an insurance representative (which can be your existing benefits advisor or another representative specializing in working with employers and their employee’s individual needs), which is purely informational and highlights the specific areas in which their benefits program covers them full, and the areas in which it falls upon them to make sure they and their families are secure if the unexpected happens.   Your employees will appreciate it, their families will appreciate it, and you’ll be providing them the most important benefit of all – a trusted advisor that help them to gain the ultimate peace of mind.     And there’s no better time to do it than in the context of their annual benefits elections most often occurring in the fall.

 


Michael S. Feinberg, ChFC is an experienced, hardworking, and trustworthy advisor to small businesses and their ownership.   Michael’s experience and thorough process provides significant value to his clients while ensuring the long-term success and survival of his clients’ businesses. Please call me at 703-637-4339 or connect by email at [email protected] with any questions or to schedule a consultation or employee meeting.  I look forward to hearing from you.