April 2016 eNewsletter

Rhinegeist Event Showcases Top Tri-State Intrapreneurs

By Jacob Fortner, Marketing Coordinator, The Goering Center
April 2016

Intrapreneurs are self-motivated, creative thinkers who pursue innovation, and Cincinnati is home to many of them.

On March 16, 2016 the Goering Center hosted “Intrapreneurs: Empowered to Innovate” - a discussion panel of startup CEOs who brought innovation to their family businesses. The late afternoon event was held at Rhinegeist, a brewery located in historic Over the Rhine, and was presented by corporate sponsors Graydon Head, KeyBank and Mellot & Mellot.

Dominic Franchini, Vice President for HORAN, led the conversation between Andy Nielsen of Everything But The House (EBTH), Jake Rouse of Braxton Brewing Company and Will Housh of HVAC.com. The private events brewery room was the perfect backdrop as panelists shared stories just like friends chatting over drinks. Topics included growing up around the business, how they launched their start-ups and current goals.

The young panelists were transparent. Rouse stressed the importance of knowing the full operation of a business. Just before coming to the event, he changed his typical routine to experience a day-before-St. Patrick’s Day shift on the brewery floor – which started at 4 a.m. The story got Rouse a fist bump from Andy Nielsen, and a chuckle from the audience.

When Housh was asked to share words of wisdom in closing, his response captured the purpose of the event: he was happy to soak in what the other two intrapreneurs were sharing.

After the panel, the room was lively and loud as business leaders caught up with friends and made new ones while enjoying food and drinks.

“Great ideas and products are a direct result from letting your leaders think and experiment,” said Julie Highley, Horan Vice President and chair of the Goering Center’s Membership Committee. “Every firm needs to focus on innovation as part of their long-term strategic plan.  All three of these firms validated that and were most impressive as they also had to maneuver within a family owned business.”  

Four Tips From the Surviving Spouse of a Business Owner

Laura Schmidt, Taft Stettinius & Hollister LLP

Jane and her husband, Bill, started a little company the first year of their marriage. The company grew right alongside their four children and was a multi-million dollar company when Bill died at age 62. Bill was always too busy or felt that they were too young to be bothered to do any estate planning. Bill died after having a stroke that left him physically and mentally incapacitated for a year. Two of their children worked in the business. An old college buddy of Bill’s had started out in the business with Bill and owned an interest in the company. College Buddy left the company years ago, but Bill never got around to buying his interest. 

Bill did not have a will or trust. There was an old buy-sell agreement between Bill and College Buddy. The company owned plenty of key man life insurance on Bill’s life. Now Jane is left with a multi-million dollar company, and College Buddy wants Jane or the company to buy his interest. The children working in the business are fighting over who will run the company, and key customers and employees are leaving. In the midst of her grief, Jane is angry and resentful that Bill left her with such a mess. 

The following simple actions would have helped to avoid many of these problems:

1. Have an Estate Plan. Since Bill did not have any estate planning documents in place, his estate, including the company, must now go through probate. That means that the company must be appraised and the valuation listed on the estate’s inventory of assets. Most probate courts (including Hamilton County, Ohio) are online. People used to go to the courthouse and physically look through files to learn the value of estate assets (such as a company’s), but not today. With the convenience of technology and the Internet, probate information is available with a few clicks in many states and counties. 
2. Coordinate and Update Buy-Sell Agreements. Bill and College Buddy had a buy-sell agreement that required College Buddy to purchase Bill’s interest upon his death. College Buddy is not interested in, nor could he afford to buy out, Bill’s interest. College Buddy now wants the company or Jane to buy his interest. College Buddy has not been involved in the business for over 20 years, but Bill continued to send him a yearly dividend. College Buddy was happy to get the dividends but now knows the value of the company because he looked it up on the probate court’s website, and he wants his “fair” share.
3. Plan for Incapacity. After his stroke, Bill was not mentally capable of making decisions or running the company. He did not have a power of attorney, which could have given the power to someone to vote Bill’s interest. Decisions that required a vote of the shareholders could not be acted upon. Many issues and opportunities were missed by the company until Jane had to be appointed Bill’s legal guardian by the probate court. Jane had the power to vote Bill’s shares but found herself being unfairly persuaded by her two children who worked in the business to vote Bill’s interests as they wanted.
4. Make Sure Advisors Talk. Bill bought the life insurance from one of his golf buddies decades ago, and the company paid the premiums for years, but no one ever discussed who should be the owner or beneficiary of the policy or what it was really intended to do. The insurance was set up so that the proceeds would go to the company. However, the ownership and beneficiary were not coordinated. Jane does not have access to the death benefit because it pays directly to the company. But the company does not need the death benefit. The premiums were paid for years on something that is not benefitting those who need it.

If Bill and Jane had taken these basic steps, Bill’s family and company could have avoided significant stress and discord.

Ten Actions You Can Take to Strengthen Your Business

Tony Schweier, Clark Shaefer Hackett Company

Run through this checklist to position yourself and your company for success.

Every business owner should complete these items today, and repeat them annually.

1. Create a budgeted income statement, balance sheet and cash flow statement. Craft them to be month-by-month or quarter-to-quarter for better results than annual versions.
2. Evaluate your business balance sheet. Do you have sufficient working capital? Have you appropriately matched short and long term assets with short and long term debt?
3. Assess your current business lines objectively. Decide what should stay and what should go.
4. Identify three people in your business to mentor and develop this year, and then do it.
5. Prepare yourself with a list of the “next five in” and the “next five out.” If your business grows beyond your expectations this year, what are the five skills, positions, or people you would add to continue the momentum? Likewise, if your business falters, what skills, positions, or people can you eliminate to keep the business in good standing?
6. Revisit your succession plan and disaster recovery plan. Be sure the right people and systems are in place in the event the unexpected happens.
7. Scrutinize how well you have protected your own future, and that of the company. Are your investments, insurance coverage levels, estate planning documents and the like up-to-date and in good order?
8. Examine your personal financial position. Look at your level of debt compared to your income and asset base. Is it appropriate? Do you have a personal budget and are you willing to live within it?
9. Consider one thing you would change about yourself, and write out your plan to accomplish that change. You are the greatest influence on your business, and when you improve so does the company.
10. Draft a strategic plan, either very basic or quite detailed. Simply answer, “what is going to be different about my business at the end of this year? Set your goals, identify your path, and boldly take the journey.

Maximizing Business Value Through Key Employee Incentive Plans

Crystal Faulkner & Tom Cooney, Partners, MCM CPAs & Advisors

For most business owners, their company is their most valuable asset.  Therefore, understanding the current value of a business is one of the first steps we take when we work with our clients in developing a business exit or transition plan. We then help business owners develop strategies to maximize the value of their organizations to achieve their financial objectives.

A well-designed incentive plan for key employees can be a powerful and effective strategy to motivate employees to meet specific goals. As a result, the company is made more valuable and potentially more marketable in order to achieve business transition/exit planning objectives. Key employee incentive planning can be a win-win for business owners and their top employees.

Who are key employees?

The first undertaking is to identify exactly who are key employees. Most employees work for, and are motivated by, typical benefits which might include: a positive work environment, a stimulating job, good wages and benefits, and job security. Key employees, on the other hand, fit into a different category altogether – they act and think more like business owners. They thrive on challenges and opportunities and want to grow and prosper as the company does. The difficult task is to determine whether or not the people who are in key positions are actually key employees. Take the time to review the key positions on the organizational chart and then make sure the individuals who fill those slots are critical to the business and its success.

Performance goals and incentive plans.

Key employee incentive plans should include specific and measurable performance standards and goals. Those goals must result in a quantifiable increase in the value of the company in order to be effective. For example, if the goal is to increase revenue or diversify customer base, outline the specifics of the goals using numbers, percentages and deadlines. Once the goals are achieved, employees will receive their incentive bonus. Tying compensation to increasing the value of the business allows rewards for employees and achieves stated objectives.

Keep in mind that the financial incentives awarded to employees must be substantial in order for them to be motivated enough to improve or change current work habits. Generally, monetary awards range from 10 to 30 percent of annual compensation. In addition to substantial awards, successful incentive plans often incorporate a deferred component to create a “golden handcuffs” feature through vesting. In other words, instead of paying employees the entire bonus in cash, a portion of the performance award could be deferred and be subject to vesting requirements. By structuring incentive plans this way, key employees would be subject to forfeiting a portion of their bonus if specific agreements were violated. For example, if a key employee quits early, violates a valid non-compete agreement or takes trade secrets, they would forfeit any unpaid deferred compensation balances. Having forfeitures like this in place will help protect the company’s assets. Be sure the incentive plan is communicated in writing and is carefully explained so that all employees understand all of the plan aspects.

Non-Qualified Deferred Compensation.

A non-qualified deferred compensation plan (NQDC) is another effective incentive plan. It is basically an agreement to pay benefits on a future date based on current or past performance, as long as certain requirements are met.

Two examples of NQDC are Phantom (Virtual) Stock Plans and Stock Appreciation Right (SAR) Plans.  In a Phantom Stock Plan, owners give employees “virtual” stock that can grow in value and be turned into cash—it acts just like stock, but is not “real” stock.  Typically, phantom shares corresponding to shares of stock (but not actual equity) are allocated to the participating employees’ accounts. As the value of true stock increases, so does the value of the phantom shares.

An SAR plan is similar to the Phantom Stock plan in that the value of the benefits in the SAR plan is tied to the value of the company’s equity. Unlike phantom stock however, the employee under an SAR plan is only entitled to receive appreciation on a certain percentage of SAR units valued against the corporation’s stock, not the entire principal value. 

Incentive planning has many complex implications, so financial and legal professionals should be engaged to assist in evaluating which incentive plans will be the most effective for the business. Once the plan is implemented, take the time to review, evaluate and adjust as needed.

Tom Cooney and Crystal Faulkner are partners with MCM CPAs & Advisors, a CPA and advisory firm offering expert guidance and beyond the bottom line thinking for today’s public and private businesses large and small, not-for-profits, governmental entities and individuals. For additional information, call 513-768-6796 or visit us online at www.mcmcpa.com.