The sales organization that Craig had built had recently suffered a serious setback when he came to us to talk about transition growth planning. He had helped develop three key employees who he felt were primed and ready to eventually take over and purchase the business. Unfortunately, he had not yet communicated his vision for these employees to the employees themselves. Shortly before he met with us, these three key employees decided that their best future would be to develop a new business on their own. So they left Craig and took their book of business with them. Much of this business had been initially developed by Craig, who had been transitioning his contacts over to these three individuals.
We have identified the top 12 principal reasons we’ve seen where business owners have failed to plan, which has caused their transitions and value acceleration to be unsuccessful. Each of these reasons impacts the company’s ongoing annual profitability as well as an owner’s transition and future exit results.
A transition growth and value acceleration review should help you uncover those areas of your business in which you have not adequately protected your intangible assets.
This article addresses the fourth of these 12 reasons:
Reason #4. Insufficient Company Structure and Key Asset Protection
Your company is not properly structured to protect assets or deal with contingencies, and you have failed to identify your key intangible assets or adopt the legal safeguards to protect your key intangible assets (such as your key employees and intellectual property rights).
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You cannot successfully transition from your business under the financial terms you might wish if you have not sufficiently protected your business along the way. Too many businesses—both large and small—fail to survive due to reasons that are often self-inflicted and avoidable. In order to protect your business, it’s critical that you take the following six actions.
- Structure Business Entities for Asset Protection. One of the first keys to protecting your business is to operate under the best corporate structure. There are a number of reasons for operating the business within a legal entity, rather than simply in the name of the business owner as a sole proprietor. These include the ability to limit an owner’s personal liability from the debts or liabilities of the business and to provide an entity that is the legal owner of the basket of assets and revenues of the business operation as well as continuity of the venture upon the death or disability of the owner. When business owners start to contemplate their exit (which ought to occur from day one of the business operation, but often does not), they need to consider whether their corporate structure (entity, asset, and debt structure) is in line with their exit objectives.
- Plan for Pre-Exit Potential Dispute Avoidance. What do you expect will happen to your company if you are no longer around to act as the “traffic cop” to avoid collisions or as the “mediator” to resolve disputes? What already existing disputes will boil over? What latent potential disputes will surface? It’s important to think through ahead of time how to avoid potential disputes and to understand the means for resolving them. This question is important to a potential buyer, who doesn’t want to walk into a minefield. It’s also important to your key employees and family so they don’t inherit the minefield upon your death or disability or other exit. The transition growth plan process can identify where the “landmines” are located and help you address the right measures to “diffuse” them before they are stepped on by you or your successors.
- Protect Transferable Intangible Assets. What is it that adds value to your company—not merely while you own it, but also from the perspective of a potential buyer who is evaluating the price to pay for your company? In its simplest terms, the value of your business to a potential buyer can be measured based on the expected future cash flow that your business will produce, either by itself or as part of a larger organization. A transition growth and value acceleration review should help you uncover those areas of your business in which you have not adequately protected your intangible assets. Some of the tools in this area include trademark/service mark and trade name registrations, patents for unique products and processes, trade secret confidentiality agreements, defensible covenant not-to-compete agreements, non-solicitation agreements, and employment agreements.
- Develop Contingency Instructions. Upon your death or disability, the continuing financial success of your company may also be dependent on having left your management and family with clear instructions. You should consider creating a transition growth plan letter for your family, shareholder and board resolutions, board instructions, and contingency reorganization or sale plan instructions, in case you can suddenly no longer run your business.
- Pre-Fund Financial Gaps Due to Loss of Key Person. Regardless of the best-laid plans, the loss of a key owner or key employee from your business can still cause financial harm to the company. The potential for financial loss due to the death or disability of a key employee (both owner and non-owner key employees) can to a significant extent be lessened with the advance investment in key person life insurance and key person disability insurance. In order to fully protect your company, a number of potential financial gaps due to the loss of a key person must be addressed. The transition growth and exit planning process provides ways to address your company’s ability to cover these financial gap contingencies (based on your estimated needs and on expected cash and insurance funds you estimate you would have available).
- Utilize a Stay Bonus Plan. If you are viewed by your company personnel as the one person whose presence is necessary in order to keep the company afloat, how many of your key personnel would jump ship promptly upon your death or disability? What if you had a system in place for financially encouraging your key personnel to stay on board until the rough waters have smoothed out? This would provide your family and your advisors with the opportunity to hire a capable successor who could either keep the ship moving forward indefinitely or who could at least step in to oversee a carefully managed completion of pending projects and an orderly liquidation (rather than a fire sale at fire sale prices). One of the best tools for accomplishing this is to establish a stay bonus plan. Under this type of plan, you put into place an arrangement to promptly inform key personnel that they will receive a compensation bonus for staying on board during the rough waters.
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Our Next Step Transition Growth and Value Acceleration Process has been specifically designed by us to address and overcome each of the 12 principal reasons for failure. This program consists of 12 critical building blocks. We are using this program around the country to help business owners design and implement their transition growth plans for accomplishing their transitions and value acceleration successfully.