February 2016 eNewsletter

Ethical Wills - A New Idea

Larry Grypp, President of the Goering Center

There is a reoccurring dynamic of priorities in family businesses: what comes first, the family or the business?

At the Goering Center we suggest that business decisions be made in the best interest of the business as it is the golden goose that must be nurtured so that it can provide treasure and opportunities for the family.

In a successful business many critical elements are documented including a vision, a business plan, a marketing plan, financial results, and a succession plan. These plans and processes create focus and understanding.

Yet, as much as we accept those disciplines as foundational to the family business, we often can overlook other key elements that are proven time and again to be equally influential to the success of the business family –values and ethics. Maybe it’s because we feel those things should be taken for granted, or are infused so deeply into the family culture they need not be written down. Still, there is something about going through the process to clearly articulate our values and ethics — in writing — that sharpens them in our own mind, if not also in the hearts and minds of others.

The process to do so is called an “ethical will,” and ensures that the qualities that underpin a company’s founder(s) are not lost on subsequent generations. It documents those select values, beliefs and ethics that are steadfast and, hopefully, enduring for business family generations. 

It is not always an easy process because it requires a sorting out of the many qualities that more easily come to mind -- integrity, trust, honesty, hard work -- and instead rummage around more for those simple statements that truly capture the cultural pulse of the family. By the way, a qualified facilitator can be helpful in this endeavor.

So, is the value having that framed statement on the wall or on a pocket card or desk plaque? Just like any exercise of this sort -- it is the open discussion, the unveiling of deeper sentiments and aspirations that best fortify the footings for what supports the most successful business families -- the strength of the family itself.

If you are interested in learning more about ethical wills, contact the Goering Center for an article on one founder’s process and actual ethical will.

5 Tips to Grow On

Blake Roe, CPA, Partner, Plante Moran
February 2016

If we’ve heard it once, we’ve heard it 1,000 times: if you’re not growing, you’re dying.  Going all the way back to one of our founding partners, Frank Moran, we’ve believed that a Company shouldn’t grow just for the sake of growth.  Growth is something that an organization should pursue primarily so that the organization can provide a better and a broader range of service to its clients, and allow it to do a better job of taking care of its staff and providing them greater opportunity.  Frank was fond of saying, when done right, “the benefits of growth go on”.

But growth comes with its share of challenges. Here are the top 5 tips both our firm and our clients consider when planning for growth:

  1. Process Improvement: Just because you’ve always approached a process a particular way doesn’t mean it’s the best way. Ask yourself, why does this process exist? Who are its recipients? How can you make it better? And how will you know whether it’s effective?  If your customers, products or business have changed - have your processes kept pace?
  2. Strategy: You’ve heard the phrase, “Culture eats strategy for lunch,” but don’t let that diminish the importance of a strategic plan! Well-thought-out organic and inorganic growth initiatives provide the strategic roadmap for achieving your organization’s overall objectives.  Your strategy should then leverage your culture if you want to give your strategy the best chance for success.  If your employees can not clearly articulate the Company’s strategy and direction then you can’t expect them to help you execute on the strategy.
  3. Talent: When considering talent acquisition and development, we often refer to an individual’s skills. However, it’s important to account for the abilities, personality, and interests of the overall team. Creating proper alignment will enhance the hiring and onboarding experience and, eventually, success rates.
  4. Managing Risk: Whether into new markets or new products, expansion creates exposure to risks, including reputation, fraud, culture, and financial reporting. Making risk management part of the growth process helps to ensure the safety of assets and cash and the accuracy and reliability of records. 
  5. Technology: It’s critical that your technology supports your business strategy. Start by assessing your current technology, people, and processes to identify gaps between where you are and where you want to be. Then develop a prioritized action plan and exercise vigilance to ensure you get the expected return on your IT investments.

From the Ordinary to the Extraordinary

Mackey McNeill, Mackey Advisors

In his classic book, The 7 Habits of Highly Effective People, Stephen Covey introduces habit three, Put First Things First.  He presents the Four Quadrants tool as a guide for effective and purposeful time management.  His four quadrants are built upon the intersection or Urgent and Not Urgent and Important and Not Important.

Here is how they come together:

  1. Quadrant 1: urgent and important matters that require your immediate attention, putting out fires and crisis management
  2. Quadrant 2: non-urgent and important matters that do not require your immediate attention, but are the keys to improvement, like planning, and values clarification
  3. Quadrant 3: not important and urgent are those areas where time is spent impulsively and are for the most part, time wasters, like email and interruptions
  4. Quadrant 4: not important and not urgent matters are mindless activities that burn our days, like trivial tasks and unplanned meetings without clear agendas

Covey points out that in order to make dramatic improvement in your life; you must spend time in Quadrant 2, where planning, values clarification, goal and systems planning activities reside.  To spend more time on Quadrant 2 you must reduce the time spent in Quadrants 3 and 4.

This same framework can be applied to financial management of your business.  The same principles apply.  The more time spent in Quadrant 2, financial management, planning, budgeting and building better systems and processes, lessens the time you spend in crisis matters in Quadrant 1.

My experience is that those companies that invest in Quadrant 2 thinking and systems dramatically out perform their peers, with less owner stress!  They move from ordinary to extraordinary.

To make 2016 all it can be, ask yourself these questions:

  • Are you stuck in Quadrant 1, putting out financial fires and managing crisis?
  • How strong is your attention and focus to Quadrant 2, planning, educating your team and building better financial systems and process?
  • How much of your time and that of your team is being wasted in Quadrants 3 and 4 with ineffective financial reporting, antiquated systems, and unproductive meetings and reports?

Choosing a "Relactional" Model of Delivering Professional Services over the Prevailing "One Off" Transactional Model

Todd Wilkowski, Frost Brown Todd

In the words of the late great Yogi Berra, “It’s like déjà vu all over again.” Decades ago, most companies in the private sector relied on an outside lawyer as a trusted business advisor to advise and guide them on myriad legal and non-legal matters involving their business strategy and risk management issues as well as personal family matters. These trusted business advisors had deep and well-established relationships with the company’s decision-makers at all levels and spent a great deal of time developing a deep and profound knowledge of the company’s business operations and its industry challenges and opportunities. While these individuals were adept at assisting their clients in the daily “firefighting” inherent in the company’s ongoing operations, they remained focused on encouraging and equipping the company’s leaders to not lose focus on long-term growth strategy and opportunities. Over time, for one reason or another, many of these relationships transformed into “one off”, sporadic transactions with hired gun specialists who largely operated in a reactionary mode to a company’s problems or who were just called in to “paper the deal.” Frankly, this largely describes the current delivery model of services within many professional service industries, from legal to accounting to banking.

However, many companies that are growing and focusing on how to structure and scale to best ensure long-term sustainability and address strategic risk issues and opportunities are again seeking trusted business advisors with practical experience and knowledge to provide them with proactive problem resolution and “get to yes” advice. They want advisors that will equip and empower them to make good business decisions that facilitate new opportunities, not impede them. Many of them want their advisors to invest in deeper relationships with them and develop a more profound understanding of their business to better ensure that any advice is customized and tailored to their particular issues and opportunities and their risk appetite (both from a defensive and offensive posture). Most entrepreneurs eat “risk for breakfast” and most companies understand that risk is necessary and correlative to better return and margin. They know they can’t “wrap themselves in bubble wrap” and insulate themselves from and avoid all risk; rather, they need to leverage risk for greater opportunity and growth.

These trusted business advisors invest significant time upfront in the relationship so they can intimately know the companies’ challenges, risks and opportunities. Despite the nuances in different industries, these private, closely held and/or family-owned companies face many of the same issues: (1) developing and implementing a business succession/exit strategy; (2) winning the “war for talent” by attracting and retaining the best talent (by providing incentives to share in the company’s growth besides an equity grant; (3) deepening the company’s leadership bench; (4) growing profitably, i.e. organically or by acquisition or merger; (5) better identifying and refining their “Blue Ocean”, decommoditizing value proposition and services niche; and (6) proactively addressing a host of other strategic issues that continue to keep their leaders “up at night”.

Fortunately, what’s old is new again. Companies still need outside business advisors in all disciplines who truly how the company makes money and have built trust with key decision makers. Based on my experience as general counsel of a large private business, I observed a growing trend that many larger companies increased in-house legal counsel hiring to directly address a lack of comprehensive, integrated support from outside lawyers. However, many private, closely-held companies are neither culturally nor financially ready to hire someone to provide these services in-house, especially as they attempt to remain “lean and mean” and control overhead.

Successful and sustainable companies understand that profitable business is based on relationships, not just a series of “one off transactions”. In fact, the strength of the relationship typically is the best “decommoditizing” factor since trusted relationships cannot be simply replaced overnight, largely based on the time that have been invested, the struggles and challenges that have been shared, and the advisors’ intimate knowledge of the company and deep relationships with its leaders at all levels.

So, this begs the question, why shouldn’t companies insist upon these types of trusted relationships with all of their outside business advisors? Answer: they should! After all, this is where outside advisors can best ensure they are best providing value and “thinking ahead” for their clients, not getting stuck in reactionary mode. Companies should move towards “relactional” relationships with these advisors, i.e. a deep relationship, from which transactions naturally emanate versus settling for a series of “one off” transactions with no underlying relational foundation. After all, this is not what these companies desire in their client relationships so it shouldn’t be acceptable in relationships with their outside service providers.

Hard to believe that we’re over a month into 2016. Most New Years’ resolutions are long-forgotten but it’s not too late to make a new one: transition from pure transactional dealings to “relactional” relationships with your outside business advisors. If they are unwilling or unable to make the transition, it may be time to look for new ones. Implementing this one initiative will better ensure greater value add for your outside spend and significant corresponding positive impact to your bottom line.

The Top Five Mistakes Frequently Made By Business Owners

John D. Dovich, President of John D. Dovich & Associates, LLC

The start of a new year is typically a period that calls for reflection. The hectic holiday period is over and the employees are back to work on a regular schedule. It’s a time when business owners can take a few moments to think about their personal financial goals and determine any outages they may have in their current business practices.

One of the things I’ve realized is, business owners tend to make the same mistakes. I’ve had my own firm for almost thirty years and have advised hundreds of business owners how their businesses inter-relate to their personal financial goals. I want to share what I’ve learned over the years, in terms of the five biggest mistakes business owners make, with a few ideas on how to fix them. They are:

  1. Not maximizing retirement plans
    Retirement plans have many benefits, but it’s surprising just how many business owners don’t take full advantage of this benefit. For one thing, retirement plans are easy to create and the federal government allows both high contribution limits for both the owner and employees to save large amounts for their retirement years. The so-called “catch-up” rules also allow those over age 50 to save even more money for retirement. Even further, profit sharing and defined benefit plans may provide significant additional savings. There’s a myriad more info to share regarding how to maximize retirement plans including the appropriate use of Roth vs. pre-tax contributions. Appropriately structured retirement plans can also be a great recruiting tool for growing and retaining your employees so be sure you are doing all that you can to create, and maximize your retirement plan offerings within your company.
  2. Over-estimating the value of their business
    This is an easy mistake that business owners often make and can be a costly one. Be very careful when you are figuring out the value of your company – especially when you are counting heavily on the proceeds of the sale of your business to help fund your retirement years. A key element of this is a solid estimate of how much tax you’ll owe on the sale of your business. This is truly a case of “don’t put all your eggs in one basket.” Diversify your retirement assets and do not solely count on your business value providing the vast majority of your needed retirement cash flow.
  3. Failure of developing an exit strategy plan for their business
    We’ve all heard the adage of “failing to plan is the same as planning to fail.” This is definitely one area where not having a plan on how to transition your business in the event of a sale, catastrophic accident, illness or death, will guarantee rough seas ahead for your business. An exit plan is a plan for the single most critically important financial event of your life – the transition out of your business on your terms. If you don’t have an exit plan, please stop reading right now and shoot your financial advisor an immediate email to set up an appointment to chat. Seriously.
  4. Not having a Buy-Sell Agreement in place
    Integral for an appropriate exit strategy is a buy-sell agreement that will outline what happens when uncontrollable events occur like death, disability, or an involuntary transfer of ownership by one of your partners. Additionally, having the right valuation formula or approach is an element of a good buy-sell agreement.
  5. Failure to “incentivize” key leaders in the business
    While you may have been able to get your business off and running, having the right leaders and employees is critical to the lasting success of your business and to ultimately maximize its value. Incentives are an important part of your business. Whether you have incentives for your customers and clients, or your key management and employees, they are a valuable tool in growing relationships and results. They are a powerful motivator to increase performance in both your workforce and your clientele. Everyone likes to receive incentives, and your senior leadership team is no exception. Whether it’s developing an annual incentive or a deferred compensation package, don’t forget to give this line item some thought. You don’t want a large number of goals. In fact, you want to keep the number minimal to ensure the appropriate focus on what the strategic objectives are for your business. Aligning goals and incentives/compensation can be very difficult given the emotional nature of an individual’s compensation. Give this some serious thought – you’ll be glad you did.

These items can be daunting to think about as you try to focus on growing your business, serving your clients or customers, and developing great leaders in your organization, but this is a case where you can lean on your business advisors to help you sort through all of these details. Hopefully you have a team of professionals to help you prioritize the above items based on what’s right for your business, now and in the future. And, of course, The Goering Center always stands ready to help, wherever and however they can. Here’s to a prosperous 2016 and beyond!

Investment advisory services offered by John D. Dovich and Associates, LLC, an SEC Registered Investment Adviser. All opinions included in this article constitute the firm’s judgment as of the date of this article and are subject to change without notice. This article is not intended as an offer or solicitation with respect to the purchase or sale of any security. © Copyright February 2016, John D. Dovich and Associates, LLC. All rights reserved.