March 2017 eNewsletter

Evaluating Your End Game

Larry Grypp, President of The Goering Center

“What is your exit strategy?” That is an expected question for any company seeking seed money, venture capital or private equity. Not only does it clarify when and under what conditions the investment may be monetized but it also signals a discipline, and focus, about the end-game.

Ask that same question of some family businesses, and you may get a blank look.

Exit? No, I plan on running this for a long time, or pass it on to my family. The notion that they might exit the business is new. Family businesses, by their nature, lean toward retaining ownership in the family instead of being sold to strategic or private equity buyers. Some of that is rooted in the sense of family legacy and wealth built up across many years; some of it, honestly, is emotional and sentimental.

Therein lies the rub. To not have exit strategies is actually to put wealth, legacy and family harmony in peril. And note that strategies is plural.

If you were focused on a sale to a strategic buyer, your concentration would likely be to develop capabilities that would be attractive to a major player in your space.

Similarly, if you were leaning toward a sale to private equity, you would need to focus on the success measures for those investors -- perhaps increasing recurring revenue, market share, cost management and capital planning.

If you were determined to pass the business along to the next generation, you might focus a great deal on developing the management skills of your family, or building up the market value of a family-based business brand.

None of those areas of focus is mutually exclusive. Most embrace good business practices. But clearly, you do lean one way or another if you want to realize the greatest value from whatever your exit event turns out to be.

And turn out to be is often what is missed.

If you were focused on developing the leadership skills of your next family generation but, for whatever reason, you needed to pursue a strategic sale, it is unlikely the new buyer would keep that family management team around. Lost value. As well, the investments and effort to drive valuation alone in hopes of an outside sale can be ill-advised if the business stays in family hands with a long-term focus.

So, there are two mistakes one can make when posed with the question of “What is your exit strategy?” The first is to not have an answer at all. The “exit” need not be an end to the business, but there is a clarity of purpose that comes with a definitive transition in mind.

The second mistake is to commit too early to one course. As Scottish poet Robert Burns wrote “The best laid schemes o' mice an' men often go awry...” Family members may decide to stake their claim elsewhere; major players can come into a market and diminish your differentiator; private equity might ask too much of you or threaten your legacy and management team.

Transition planning -- perhaps a more accommodating term than exit planning -- is an options play. It is a matter of staying open long enough to measure the success factors that apply to each business purpose, whether it be retained family control, private equity infusion or an outright sale.

While the Goering Center certainly is dedicated to helping family and private businesses carry on through generations, we are equally committed to helping them weigh the optimum exit strategies at the right time. You need not commit early to a particular exit path, but it’s crucial to understand the considerations and consequences of each -- and stay open to them as long as possible.

Over the last few years we have been asked to develop an educational program to provide insights on the various transition options available to private and family businesses. We are answering that request with a new multi-day institute starting this April. “Evaluating Transition Options" will take place over three half days on April 27, May 4 and May 10, 2017.

Enrollment will be limited to 20 businesses. To learn more, contact Lisa Jonas, Director of Operations & Programming, at 513-556-7403.

Old Phone System vs. Supreme Business Tool

David Goodwin, Managing Partner & Co-Founder, Advanced Technology Consulting, Inc. dba ATC

First, let’s lay a little groundwork. On a business level, three important benefits of the cloud stand out to support a move to unified communications as a service (UCaas):

The software as a service (SaaS) model is proven: Most businesses are already using cloud-based software applications more than they think, with common examples being Salesforce for customer relationship management (CRM) or hosted email. The scale, reliability and performance of the SaaS model have reached the point where communications platforms can effectively be hosted, even for real-time modes such as voice. This trend will continue as costs keep declining and as private cloud adoption increases.
Improved agility: Full-scale unified communications (UC) is far more complex than voice over internet protocol (VoIP), and the do-more-with-less mantra that most IT departments face is only going to continue. Not only does IT have to juggle shifting priorities, but securing new budgets is getting harder, especially for capital expenditure initiatives. Despite all this, agility has become a corporate mantra, as businesses must be more responsive, not just for customer satisfaction, but also for adapting to changing requirements. For employees to make the business more agile, business processes must flow smoothly and communication needs to be seamless. Both of these requirements are well-served by UC, but its complex nature poses a challenge to IT departments and has been a barrier to adoption.
Employee productivity: The third key benefit that cloud-based unified communications provides is speed and ease of deployment. Not only does UCaaS make life easier for IT, but the business becomes more agile as employees now have the tools to work more productively.

By nature, UCaaS providers are focused on keeping their offerings current, something an IT department would be hard-pressed to do if going with premises-based UC. On a business level, the cloud provides ongoing value by enabling productivity with the latest applications at all times.

Moving On

Today’s mobile workforce expects easy access from varied devices for communication, collaboration and productivity tools. Fortunately, today’s Unified Communications as a Service (UCaaS) providers offer up an integrated solution for this on one telephony platform. Voice, video and Web conferencing, presence, instant messaging, CRM integration, desktop sharing, one-to-one video from handset to handset, email integration, emergency response notifications, text, fax and sometimes more… all bundled into one service and hosted in the cloud.

Can you believe that what was once viewed as a necessary evil and an overhead expense — the business phone system — has now evolved into an irreplaceable productivity and collaboration tool? With the advent of VoIP, and now UCaaS, your phone system can integrate way more, but may not even include any new on-premise equipment.

Often, I see business leaders and IT executives enter the buyer journey for a new phone system with little-to-no interest in how it might help their business. Remember… necessary evil. Then, to top it all off, they want to go lean on their bandwidth too. Why any business leader would go skimpy on communications and Internet in today’s connectivity and cloud-dependent business environment is difficult to understand.

There are many steps that lead to successful deployment. And, by deployment, I don’t simply mean, “it works.” I mean it works as the business-enabling tool it was intended to be, and it is fully utilized by your workforce.

Here are 3 key considerations to make that happen:

Assessment: Understand your core needs. Learn about the technology possibilities that exist with UCaaS and cloud communications. Talk to each department within the organization and challenge them to break the mold and think about what could be, not the way it’s always been.
Network, Network, Network: Understand your network. Inventory your systems and their inherent demands on the network. Plan for plenty of computing capacity. Data consumption is exploding and will only continue to rise for the foreseeable future. Understand your perimeter and the new access points created. Build in network security and redundancy.
Train: Plain and simple…make training on your new system mandatory. No excuses. Too often, I see “skipped” training sessions and a lack of engagement. This “mandatory” must come from the top down to promote widespread buy-in and engagement in the process. The “skippers” (not defined as the leaders in this case) invariably contend the new system doesn’t work. Oh, it works (provided it was implemented correctly) … they just don’t know how to use it.

Regardless of your workforces’ demographic makeup, but especially with the younger generations, make them mobile. Make it easy. Make it collaborative. And, of course, for your protection, make it secure. They will all be happy when they are enabled, connected, collaborative and productive.

This falls directly in line with the Goering Center’s Core Member Breakfast topic: “Going Mobile: Build a 21st Century Workforce that Really Works.”

Buy-Sell Agreements: One Way to Ensure the Successful Transition of Your Business

Blake Roe, CPA, Partner, Plante Moran

As a business owner, you spend a tremendous amount of time and energy building and growing your business. Strategy is a crucial area of focus, but one area that’s often overlooked is planning for an unforeseen event. For example, what would happen to your business — and your family — in the event of your premature death or disability? How can you ensure a successful ownership transition and protect your family in the event of such an occurrence? One way is to have a buy-sell agreement in place.

What is a buy-sell agreement?

A buy-sell agreement is a contract that formally documents the terms related to the transfer of ownership interests for a business. The document acts as a guide to answer the “who, what, where, when, and why” questions of transitioning ownership. Without it, the transfer may be based on more arbitrary terms and not reflective of your wishes, possibly leading to confusion for both the business and your family within the company.

When does it go into effect?

A buy-sell agreement becomes applicable upon certain “triggering events.” While every agreement varies, these events include death, disability, divorce, separation of employment, retirement, and exiting a business. A buy-sell agreement can also address transfers related to a third-party sale; however, it typically only lays the groundwork for the sale transaction.

Once a triggering event occurs, the buy-sell agreement defines the terms for the transfer of ownership interests, such as who is eligible to be an owner, what purchase price is used, and what is the timeline and method of payment.

Why are buy-sells important?

Without a buy-sell agreement, the transition of your business may not reflect your goals. A properly structured agreement will not only address your concerns, but will also allow time for planning and necessary adjustments, ensuring:

The value of the business interest being transferred is accurately determined (a process or formula is often included in the agreement).
The business is transitioned to the right people.
Terms of the ownership transfer allow for the financial success of the company and do not cause cash flow or debt constraints.
The business is able to continue operating and successfully transition, with minimal impact to employees or customers.

The buy-sell agreement not only affects the success of your business; it can also play a major role to your personal financial success. Businesses are often a major asset on an owner’s personal balance sheet, generating income and providing financial support. When a triggering event occurs, ownership can be transferred away from you, resulting in a substantial financial impact. If the event is sudden, such as an unforeseen death, income may no longer be available, greatly impacting the lifestyle and assets available to your family. Without proper planning, the results can be devastating.

Can you give an example of a buy-sell agreement in action?

Let’s say Lisa holds a 50 percent interest in a company. She passes away, and no buy-sell agreement exists. According to the terms of her estate documents, her spouse, Bob, steps in to act in the same capacity. Bob has never had any involvement in the business, but now, he has a controlling stake in the company. This concerns the remaining owner, Sarah, who wants to buy Bob’s interest. However, Lisa’s estate cannot come to an agreement with Sarah on the price and terms for a buyout. Bob feels the value is too low and needs more than the offer to maintain his current lifestyle. As a result of the discord, employees are concerned for their own positions and begin to leave for other employment. Performance of the business begins to decrease, and profitability of the company declines.

Now consider this example: Lisa passes away, but a buy-sell agreement does exist. According to the terms, Sarah purchases the ownership interest at a value that was agreed upon by all parties and determined prior to Lisa’s death. As a result of the agreement, Lisa was aware of the value and able to properly plan for her surviving family. The company was also able to plan properly for the payout of the purchase price and plan to pre-fund the payout amount. After the purchase is complete, Sarah continues to make decisions for the company, and there’s little to no interruption in its performance.

Three common mistakes made with buy-sell agreements:

Owners allow the agreements to become stale
The agreement does not include real estate
The buy-sell is unfunded, or the funding isn’t structured properly

Overall, a buy-sell agreement is essential to a properly structured business succession plan. It provides a roadmap to guide not only your business, but also you and your family. When structured and executed properly, it can help to ensure your lasting legacy.