February 2017 eNewsletter

7 Steps to Post-Exit Financial Security

Nick Pharo, CPA, VonLehman CPA & Advisory Firm

If you were forced to exit your business tomorrow, do you know how much money you would need? Some owners seem to have a handle on what they want, but fewer know how much they need. Both are important to understand. The post-exit lifestyle you want is critical in determining what value you will need from your business. As an exit planning advisor, my task is to identify any potential asset gap between owners’ needs and available assets, and then develop a strategy on how to close that gap. In this article, I will walk you through seven steps designed to ensure post-exit financial security which allows for peace of mind.

1. Understand your Finances: In order to determine where you want to be, you must first understand where you are. Much like owners do within their businesses, this means getting a handle on your personal income and expenses. Pull your bank statements and start documenting your revenue and expenses on an annual basis.

2. Determine your Post-Exit Lifestyle: In this step the focus is more on expenses than income. What do you want post-exit and how much will that cost on an annual basis? Will you do more traveling? Do you have charitable giving plans? Do you want to fund education expenses? Do you want to begin a new business venture? Detailing your post-exit desires will help you determine the cost associated with those activities. Also, it is important to identify your “hidden expenses”. What expenses are currently running through your business that will have to be personally funded post-exit (e.g. country club dues, car payments, gas and travel)?

3. Generate your “Number”: Building on steps one and two, determine how much money you will actually need. You don’t want to “pick a number, any number.”  At this point, owners should build their advisor team, including a financial advisor who can model the information compiled for steps one and two to determine a realistic “number.” Given all the data, they can determine how much money you will need to live your desired lifestyle so that you don’t run out of money.

4. Personal Balance Sheet: Step 4 begins the process of compiling your personal net worth. Identify all current personal assets including: savings accounts; checking accounts; retirement accounts (401k/pension/IRAs); real estate; life insurance policies; and all other assets. For each account, pull your most recent statement to ensure accurate balances and summarize this information into a personal financial statement.

5. Business Valuation: For many, the value of your business will be the largest asset that will fund your “number.” In order to plan properly, business valuation experts work with clients to help owners understand that the value of the business may differ based on their desired exit scenario. The sales price associated with the sale to a third party may differ from the sale to insiders (management team or family).

6. Sales Price vs. Cash Flow: When discussing a potential transaction, it’s easy for owners to get focused on the sales price. However, funding your succession plan is going to be more focused on cash flow from the sale. As part of your advisor team, tax advisors work to determine the “net after tax proceeds” of any transaction scenario so owners can make an informed decision. As an exit advisor, my responsibility is to structure deals to ensure tax efficiency. Furthermore, when selling to a third party, I help owners understand potential post-closing adjustments that could affect cash flow.

7. Identify your Asset Gap: As you’ve worked through the previous steps, you determined: 1) what you need for your post-exit lifestyle; 2) personal asset summary and value; 3) business value and potential cash flow. Using this information, you can now determine whether or not your personal and business assets combined meet or exceed your “number.” If they don’t...you have identified your “asset gap” which leaves you with two choices: 1) increase the value of your business; or 2) adjust your post-exit lifestyle. Exit advisors understand the value drivers of your business and can assist owners in crafting and executing a plan to increase the value of their business.

In closing, all business owners should complete the seven steps above prior to jumping into other parts of the succession planning process. Understanding the goal of each owner is critical to crafting a successful exit plan.

Protecting Your Company before a Cyber Breach

Moira Gettens, Oswald Companies

Anthem, Home Depot, Target and many other large companies across the world have had one issue recently in common. They have fallen as victims to cyber breaches. We now see the topic daily in the news. Cyber Liability arises from the loss of or unauthorized access to private and/or confidential information in care, custody and control of you and your business.

Today you can protect your business by purchasing Cyber Liability insurance coverage. Cyber Liability insurance coverage applies to damage caused due to the loss of personal identification information, confidential business information as well as protected healthcare information. This insurance coverage responds to exposures and costs that include cyber risk management and post incident response. The most common data and server breaches occur when an unauthorized person gains access or hacks into a computer system. Not only can 'hackers' cause harm, but employees with information access could also send stolen data to an unauthorized location. Also, third party service providers can be connected to your Cyber Liability coverage.

When selecting Cyber Liability insurance coverage, there are options for first party coverage and third party coverage. First party coverage encompasses losses and expenses incurred during an attack which include event management expenses, notification costs, credit monitoring and restoration services, legal assistance, forensic investigation costs and the ability to hire a public relations firm to minimize future damage. The costs incurred to investigate and terminate an extortion threat are typically included in this coverage as well as lost income from business interruption. On the other hand, third party coverage provides for damages suffered by others. This includes network security liability coverage for damages and defense costs resulting from a breach in network security. Privacy coverage is also incorporated for failure to protect or wrongful disclosure of personal information as well as costs resulting from civil, administrative or regulatory proceeding alleging violation of privacy laws. Injuries such as libel, slander, defamation and copyright are usually also insured with this coverage.

Cyber Liability coverage provides more than insurance. Once a breach has been reported, your Cyber Liability insurance carrier provides a post incident path. A PR firm should be hired to assist with reputational consequences including, internal and external reputation risk and contract and business earning outcomes. Proper notification and call centers for those affected could be necessary along with administering credit monitoring services, paying fines and penalties and reconstruction of data.

Peerspective (Goering Center Roundtables)

Goering Center

“You need to do that!” Cincinnati businesswoman Elizabeth Barber was stopped mid-sentence with this advice, when she introduced the idea of bake-at-home dog treats to her Roundtable. One year later she has launched her business, Whisk & Wag, and is now running an online store. “The Roundtable has really become like a support system, think-tank, and like a little incubator,” says Elizabeth.

The first Goering Center Roundtable started in 2008. Today, there are 15. The program has grown quickly because Roundtables provide what other networking or affinity groups can’t – balance. Goering Center Roundtables provide a confidential setting to discuss personal and professional matters with others who are at similar stages of their lives, and in similar circumstances.

Most Goering Center Roundtable participants come from a family business background, and appreciate having an empathetic forum to discuss volatile issues such as succession and family relationships. Roundtable conversations aim to achieve better balance for the participants, between the professional, personal and family dynamics of life.

Goering Center Roundtables are a two-for-one deal: join and you become a member of both a Roundtable and the Goering Center. Roundtables meet monthly in settings convenient to the group and are coordinated by a professional moderator who will often bring in guest speakers to address identified topics of interest. A discretionary fund is provided for each group to spend as they choose – on enrichment experiences, or fun…like dinner out.

Most importantly, Goering Center Roundtables are a “safe haven,” free from solicitation and always confidential.

“My Roundtable has really challenged me to be more professional,” Elizabeth says.
“One of the women in my roundtable has raised her four kids, and to have the perspective of what it looks like to have a family and a career has been valuable for me to see that and see the long-term of where I’m headed.”

Participating in a Goering Center Roundtable is a special experience, providing better balance, opening more doors for growth and potentially impacting business strategy.

To get involved with a Goering Center Roundtable or to learn more, contact Membership Director Steve Hater at 513-556-7896 or steven.hater@uc.edu.

EPL Coverage Is a Business Necessity but Be Educated About Purchase

Kelly Holden, Dressman Benzinger LaVelle psc

As the amount of employment-related litigation continues to increase, companies are looking for ways to protect their business and assets.  One option for protection is the purchase of Employment Practices Liability (“EPL”) insurance.  Some organizations elect to purchase a separate EPL policy, while in other cases EPL coverage may be a rider to a general liability policy.  Generally, the purchase of the insurance is a good plan for employers and a wise investment.

In some cases, organizations agree to purchase the insurance and are not advised of how the policy will be utilized when a claim is filed.  When making the decision to invest in EPL coverage, businesses are advised to question the types of employment claims that are covered by the policy.  Typically covered are claims filed with the Equal Employment Opportunity Commission, state civil rights agencies, and lawsuits for discrimination filed in state or federal court.  Not covered are claims for breach of contract, breach of non-compete agreements, and wage and hour claims.

Organizations also should know the policy’s deductible or retention.  These can range from $2,500 to $250,000.  The amount of the retention or deductible may make the policy virtually worthless depending on the size of the employer and the number of claims the employer typically sees during the coverage period.

The choice of defense counsel is also a concern on such policies.  Unless it is specifically negotiated at the purchase of the policy, the insurance company may mandate use of a lawyer or law firm hired by or on retainer with the insurance company.  The insurer may refuse to allow the insured’s counsel to handle defense of the case.  In this scenario, the organization is required to pay a law firm hired by the insurance company up to the amount of its deductible before the insurance company will pay any legal fees or other expenses to that firm.  If an organization has corporate and employment counsel that it prefers to use for defense of its claims, this must be negotiated with the insurance agent prior to purchase of the policy.  Quite often, the insurance company will hire out of town counsel and require organizations to pay travel expenses in addition to other legal fees.

Lastly, companies should inquire as to their right to settle claims.  Some policies give the exclusive right to settle claims to the insurance company and may attempt to exclude the insured company from settlement discussions or even mediation.

Although EPL insurance coverage can make good business sense, organizations are advised to inquire with their insurance company about the detailed provisions of such policies and retain some control over their own affairs.  Being well-informed is a key to the right insurance coverage.