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.

9 Leadership Behaviors That Lose Employee Trust and Respect

Leadership is hard, and all leaders screw up. I know, it sounds crazy, but it’s true. Even Steve Jobs made some colossal mistakes. Occasionally, we all show that we’re human, that we are sometimes winging it, and that we don’t have all the answers.

One of my favorite leadership experts, Seth Godin, explains that for leaders, it’s uncomfortable to say, “I want to go over there, and I’m going to be responsible for getting us over there, and no one has ever been over there, and I’m not sure how to get over there, but let’s go.” To make our visions a reality, we have to gain the trust of our followers.

Since we’re so dependent on others to move forward, it’s important to recognize the behaviors that will disengage and alienate your supporters. Here are the 9 most polarizing, destructive behaviors leaders can exhibit.

  1. Inauthenticity.

Authentic leaders stay true to what they believe. According to  Harvard Business School professor and authentic leadership expert Bill George, authentic leaders remain true to their values and mission even in the face of difficulty.

They don’t waiver simply because it would be easy to do so. They can be entrusted to show up in the same way, every time, because they operate from a place of total honesty. Employees know when leaders are faking it.

  1. False promises.

Leaders must be careful about the carrots they dangle to motivate their employees. If a leader makes a promise, his or her employees have every right to expect follow-through.

So often, leaders share ideas in the heat of a conversation, not realizing that employees are taking every word to heart. Marshall Goldsmith’s What Got You Here Won’t Get You There explains that when leaders offer suggestions or ideas, employees hear them as commands or promises.

Failing to deliver on a promise — no matter how large or small — will violate the trust of employees.

  1. Ambiguity.

Employees require specificity when it comes to communicating direction. Ambiguity signals two things: 1) lack of clarity regarding direction, and 2) secrecy.

Both of these impressions drive mistrust and skepticism. The clearer you can be regarding your vision and direction, the quicker you will engage others.

  1. One-way communication.

In traditional, hierarchical organizations, information flowed from the top down, through a tightly controlled funnel. Employees simply did their jobs, and received the precise information that leadership wanted them to have.

Today, employees have a powerful voice. In healthy cultures, they are empowered to contribute ideas and observations. Employees have valuable feedback and want to be heard.

There are many ways to create a culture of two-way communication, including routinely soliciting anonymous feedback, and addressing it in Town Hall meetings. Your employees are your single most valuable resource for insight into what is happening in your organization.

  1. Personal agendas/ego-driven leadership.

Leaders require thick skins to power through setbacks and negativity. They also require strong self-confidence because of the non-believers who question their abilities, and would find pleasure in seeing them fail.

However, leaders have to check their egos at the door, and ensure they subjugate their own personal agendas to the greater good of the organization. This may be one of the most difficult behaviors to eliminate because it requires a lot of self-awareness and honesty about personal motivation.

  1. Anger.

There is no place in leadership for uncontrolled anger. It conveys fear, disrespect, lack of control, and lack of concern for those who are on the receiving end.

It is true that the stresses that accompany the leadership journey are intensive and potentially debilitating. However, it isn’t our employees’ responsibility to be our emotional sources of support, which is why it’s essential to seek out healthy options and communities of support to release or share our frustrations.

  1. Refusing to delegate/empower.

Leadership is a team effort. When employees join your organization and support your vision, they bring experience and skills that can move your strategy forward. It can be difficult to release control, knowing that others may not do things exactly as you would.

However, one person — or even a team of leaders in a growing organization — can’t complete all tasks.  Effective delegation enables you to stay focused on what you do best, and what you love most.

Delegation not only expands your ability to get things done, and creates redundancies within your firm; it also tells your employees that you trust them. Employees want to know they are making impacts and contributions. They want to feel needed and empowered.

  1. An attitude of superiority/lack of appreciation.

Employees see their bosses and the C-level community very differently from they way they see themselves. In companies, there is a line of demarcation between leadership and the rest of the company, even if they leaders don’t intend to create such a division.

As our organizations grow, it’s easy for us to get disconnected from our employees. We have to be intentional about  creating appreciation strategies. It takes the entire system to make the company function well, and we must constantly be re-recruiting our talent internally to keep everyone engaged through gratitude and appreciation.

  1. Playing favorites.

One of the most demoralizing leadership behaviors is favoritism. While every organization has “linchpins” who are essential in holding the company together, ideally organizations should aim to be “process-centric” rather than “hero-centric.”

When companies revolve around a handful of heroes, the remaining employees can begin to feel that they are disposable. To minimize dependency on heroes, companies must invest in the creation of processes so that if key people leave, there is minimal disruption on operations.

In summary…

Every leader, in the course of their leadership, will invariably display one or more of these behaviors at some point. After all, we are all human, and leadership is hard.

The most important aspect of continuous improvement as a leader is self-awareness. The more self-aware we are, the more successful we will be at recognizing these destructive behaviors and correcting them, so that we may build our best organizations, and live our best lives.

3 Foolproof Methods for Making Every Meeting Successful

A recent survey about the inefficiencies of meetings revealed that 50 percent of employees would rather watch paint dry or go to the Department of Motor Vehicles (DMV) than go to a project status meeting. You feel their pain, don’t you? We’ve all suffered through unproductive, useless meetings that leave attendees crying “WHY???”

Meetings are indeed an important part of business life. In fact, a recent Gallup poll discovered that employees whose managers hold regular meetings with them are almost three times as likely to be engaged as employees whose managers do not hold regular meetings with them. So how you can go from Zero to Hero as a meeting facilitator?

Whether your meeting is 10 minutes or an hour, and whether it’s with your customers or employees, use this 3-point checklist to ensure a positive, productive outcome for everyone.

1: Clearly define to yourself why you are holding this meeting.

Answer these questions:

  • Why do you need to hold this meeting NOW?
  • What’s at stake if you do not hold this meeting?
  • What are you expecting from people at the end of this meeting?
  • Are you prepared to hold them accountable?

2: Get the right people in the room.

You’re holding a meeting, not throwing a party. The smaller number of attendees the better. Identify who is absolutely essential to your objectives, and only include them. You can always brief a larger team later.

3: Set expectations.

Prior to your meeting:

1: Outline your expectations for the meeting. What do you want to discuss? What do you want to share? What are you expecting from the other people?

2: Share your expectations/agenda with the participants, and ask them the same questions.

3: Create a formal agenda (on paper) that combines all expectations and share with the participants.

At the beginning of the meeting:

1: Review the agenda one more time.

2: Ask if anyone has any modifications and revise accordingly.

Immediately following the meeting:

1: Follow up with a recap to include what was discussed, what issues were parked for a later time, and assigned action items.

2: Assign dates to any expected outcomes.

3: Ask participants if you missed anything in your recap.

This process works great for any kind of meeting, whether it’s a new employee check-in, a team meeting, a strategy meeting, a customer meeting, or any other meeting in which people may be showing up with misaligned expectations and objectives (which is potentially every meeting!). Setting clear expectations is one of Mark Zuckerberg’s meeting strategies as well.

Never assume:

1: That you know what others want and expect

2: That others want and expect the same outcomes as you do

3: That people will speak up when they are not encouraged to do so

And then there’s technology.

Finally, one administrative item. If people are attending remotely via video or phone, schedule in lead-time for you or your admin assistant prior to the meeting to ensure everything is up and running, and set a firm deadline for when people can log on.

Nothing disengages attendees faster than malfunctioning technology, and nothing disrupts the flow of a meeting faster than the constant beeping of people coming on the line. Courtesy & respect for other people’s time should always be non-negotiable in any meeting.

Good luck!

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.