Tuesday, July 30, 2013

The Family Business Advisor – A Key Member of the Exit Planning Team

Will the next generation want to carry on the business after you are gone?  If so, are they capable?  How many family members are dependent on or involved in the family business?  Will the business survive a transition to the second generation?  How about the third?  Is a third party sale to a financial or strategic buyer an option? 

If these questions have crossed your mind, you may benefit from having a discussion with a family business advisor experienced with best practices that can make a significant difference to both your business and family in the exit planning process.
I recently spoke with Shayne Stephens, a Certified Family Business Advisor and President at Landmark Advantage, a Multi Family Office located in Markham, Ontario (www.lmadv.ca).  Shayne and her co-founder, Jamie MacBride work with business owner families to help construct, oversee and manage the exit planning process.  Being a Certified Financial Planner (CFP) and a Trust and Estate Practitioner (TEP), Jamie is the perfect complement to Shayne’s background in behavioral sciences, organizational development and communication specifically in investment and wealth management.  Landmark Advantage specializes in working with family businesses with revenues in the range of $2M to $10M and a family net worth up to $30M.
According to Shayne, "While the primary role of the family business advisor is to focus on the overall process and work to integrate the interactions of all the moving parts within the family, ownership and the management groups, they also support the business owners to facilitate and manage issues and concerns of the individuals that may be impacted within each of these groups throughout the process."
I asked Shayne to share how a family business advisor helps the family through the exit planning process.  Shayne enthusiastically responded with these 5 essential elements:
  1. Start with a High Level but Comprehensive Assessment - unique individual and family values, needs and goals are identified up front and a comprehensive assessment of the technical documents and current situation is undertaken to determine areas which require deeper analysis, detail and consideration; 
  3. Educate and Communicate – exit planning is a process and one that many family businesses generally will only go through once so it is imperative to get it right!  Areas of discussion include: life after exiting; pros and cons of each exit option, strategies for enhancing business value and minimizing taxes, wealth management plans, impact on the family, etc.;  
  5. Oversight and Managing the Implementation – a poorly executed plan will lead to missing goals, diminished value of the business or possibly not having a salable business, paying too much tax and not being prepared for unforeseen circumstances such as death, disability, dispute or divorce.  Family business advisors understand that both good planning and proper implementation of a comprehensive exit plan ensures that the business owners are better prepared to leave their company on their terms and on their schedules with their families intact;

  6. Keeping the Process Moving - many issues (family, business, personal) will surface creating obstacles that could potentially sabotage the exit planning process.  The family business advisor is there to keep the lines of communication open and to speak frankly about difficult issues including resolving conflict in order to keep the process moving; and 
  8. Involve Other Experts When Required – Shayne recognizes the importance of working collaboratively with other professional advisors as part of the exit planning process.  According to Shayne, "Exit planning is a multidisciplinary endeavor; no single professional advisor has all the expertise required for effective exit planning.  The family’s current advisors offer a very important sense of history and insight into the family and their business that is important to retain and build on.  Our approach is to draw on these existing resources and work with everyone involved to ensure we are all operating from the same premise toward the same goals.  That being said, there generally is a need to bring in experts from other fields to support the clients in making informed decisions relating to issues that arise during this important transition."

Shayne and Jamie represent one component of an experienced and professional team of practitioners in the accounting, tax and estate planning, valuation, legal, M&A, insurance, investment management and management science areas which are necessary to implement a family business owner’s exit plan effectively. 

If you think you may be exiting a family business over the coming decade, contact Shayne at www.lmadv.ca to find out how a family business advisor can help.  For an independent valuation of your business or to learn more about our VSP Exit Starter Program, contact us at www.vspltd.ca.


Wednesday, July 24, 2013

Exit Planning Without a Financial Planner – How Dare You!

A financial planner is an integral part of the exit planning process and should be consulted at the very early stages of the process.

Beginning with the end in mind is Habit #2 of Stephen Covey’s "7 Habits of Highly Effective People" and effective business owners know that exit planning must begin with the end in mind.  This means envisioning life after you leave your business and determining what you will need to accomplish your goals.  Identifying what you will need financially and developing a plan for achieving that financial need is precisely how a financial planner helps in the exit planning process.
I recently spoke with Scott Plaskett, CFP, Senior Financial Planner and CEO with IRONSHIELD Financial Planning Inc. in Etobicoke, Ontario (www.ironshield.ca).  Scott and his team at IRONSHIELD work with business owner clients to develop a comprehensive financial plan as part of the overall exit planning process.  According to Scott, exit planning is one of the main initial topics of conversation he has with business owners.  It is critical for Scott (and for the business owner) to understand when the business owner would ideally like to exit the business and what he/she plans to do after the transition.

A business owner should involve a financial planner in the exit planning process because, based on assumed cash flow needs after exiting the business (and other key input assumptions), Scott can "reverse engineer" the business owner’s liquidity needs, including the net proceeds required from the business to meet the business owner’s goals.  This helps identify any gaps between what is needed and the current situation.  It also provides valuable information which can assist the business owner in negotiating the sale of the business.

From an exit planning standpoint I was interested in Scott’s perspective regarding what a business owner must be aware of when turning to a financial planner.  In this regard, Scott offered the following 4 key thoughts:
  1. A common misconception – many people look to their financial planner to create wealth.  Business owners however build their wealth through growing their business.  The role of the financial planner is to preserve the wealth that has already been created through the implementation of a comprehensive financial planning strategy.
  2. Estate planning and insurance – estate planning helps preserve wealth when transferring the business to the next generation by minimizing/deferring tax and maximizing liquidity; life insurance preserves wealth through funding a shareholder buyout, replacing lost income or paying estate taxes on death.
  3. Maintaining control – all business owners will exit their business either voluntarily (at at time of their choosing) or involuntarily (due to disability, departure, divorce or death).  A financial plan ensures you maintain control over this process and are prepared for an unexpected, involuntary exit.
  4. Not all financial planners are created equal - choosing the right financial planner is vital; some have experience with business owners and have built their own businesses; some have not; some are fee based; some are commission based.  For further information, check out this free consumer awareness guide on "How to Choose and Work With a Financial Planner You Can Trust" on www.ironshield.ca.
Scott recognizes the importance of a comprehensive approach to the financial planning process and has worked with other professional advisors as part of the exit planning process.  In particular, Scott routinely finds himself collaborating with his client’s accountant, business valuator and, at times, a family business advisor, banker and business broker.  Clearly defined roles on the part of each member of the exit planning team, however, is required for effective collaboration.
Knowing when to call upon experienced professionals to ensure that your exit plan is technically sound and will meet your identified goals is critical.  A financial planner is one of the first professionals to speak with.
If you want more information about how a financial planner can assist with your exit planning, contact Scott at www.ironshield.ca.  If you have any questions regarding the exit planning process in general or want to learn more about our VSP Exit Starter Program, contact us at www.vspltd.ca.

Tuesday, July 16, 2013

Is Your Distribution Company in Trouble? How to Add Value as a Distributor

If your business survives on the basis of being a distributor for one key supplier (i.e. selling another company’s product/service), it may be time to rethink your business model or, at the very least, rethink the way you view your business. 
When was the last time you used a travel agent, went to a CD store or rented a movie from the local blockbuster? Travel agencies have yielded to the rise of online travel booking companies. CD stores have succumbed to online music services such as iTunes. DVD rental stores have surrendered to the convenience of on-demand movie rentals. 
These businesses have fallen victim to the curse of the middleman.  When all you do is distribute another company’s product, the only value you have is your location.  In a world where content can be streamed and containers can be shipped overnight, being the local distributor is becoming irrelevant.  Even if you have a protected geographic territory, pricing information available to your customers through the easy access to information we have today, will eventually grind down your margins.
Distributorship can drag down your value
Not only do you risk losing sales and margin to online competitors, relying on being a middleman can drag down the value of your company. 
The Sellability Score Questionnaire is a tool that evaluates your business along eight dimensions that drive the value of your business.  One factor is called The Switzerland Structure, which measures your reliance on any one customer, employee or supplier.
If you are dependant on a single supplier to provide the goods you resell, you could be in trouble.  Having a single supplier means you could be at risk of an industry change (like the one that hit CD stores) or at risk of your supplier choosing to build its own sales force and start competing directly with you.
A valuable middleman - Henry Schein
If you are a distributor, you should rethink your value proposition.  Instead of relying on your location, think of yourself as a curator of great products/services for your customers.  You are no longer the local distributor.  Instead, you are the company that sifts through all the noise, tests and evaluates what is available, and supplies the very best for customers who value, and are willing to pay for, your services as a curator.
Henry Schein, Inc. is a FORTUNE 500 company and the world's largest provider of health care products and services to medical, dental, and veterinary office-based practitioners.  As a distributor, Henry Schein Inc. was one of Fortune Magazine's "World’s Most Admired Companies" in 2012.
Henry Schein’s role is to sift through all of the suppliers who want to provide products to dentists, doctors and vets and select only the very best to recommend to its clients.  They are the gatekeepers for their customers.
Dentists value the role Henry Schein plays in helping them minimize the number of sales people they need to see.  The loyalty to Henry Schein means that if a supplier wants to sell to dentists, they need to go through Henry Schein.  The balance of power has shifted because customers would prefer to buy from Henry Schein rather than directly from the original supplier.  That is the acid test for the value of any middleman: given the choice, would your customers rather buy from you or go direct?
If you’re curious to see how your business currently ranks on The Switzerland Structure as well as the other seven drivers of sellability, take The Sellability Score here: http://sellabilityscore.com/vsp/jason-kwiatkowski.

Thursday, July 04, 2013

The Mile Wide Trap – A Value Killer

If your revenue starts to plateau after a period of rapid growth, you may have fallen into The Mile Wide Trap - not a good situation if you are looking to maximize the value of your business.
To illustrate, consider a public relations (PR) firm started by an entrepreneur who originally spent ten years learning a variety of marketing disciplines (e.g. PR, advertising, direct marketing, social media, etc.) as an employee at a big advertising agency.
Given her experience and connections, she quickly landed General Motors (GM) as a client and was asked to handle certain regional dealer events.  Her business began to grow and she hired employees to assist her.  After doing a great job with the dealer events, GM asked her to handle their annual sales conference.  Again she delivered with style and creativity.
Impressed with her innovative approach, GM asked her to assist with their next advertising campaign.  She started the company to do PR, not advertising, but GM was a great client so she agreed to help with the ads.
Then GM asked her to take a look at their website.  Her employees had no experience with web design, but she had done some website jobs back at the ad agency.  Not wanting to disappoint GM, she started to personally handle projects that her employees didn’t have the ability to execute.  She also neglected new business development because the more GM asked her to do, the busier and more profitable her firm became.
Then one day the owner looked at her P&L statement and realized that sales for the month were flat compared to the prior month.  The next month it happened again and then again.  Sales had leveled off, the business was economically dependent on one customer, the business owner was spending all her time on client work and she had no time left to sell – she had inadvertently fallen into The Mile Wide Trap.
The Mile Wide Trap
The Mile Wide Trap occurs when you do an excellent job serving a small number of customers and they ask you to handle more of their business.  You keep delivering, and they keep broadening the list of products and services they want you to supply.
Your company is wildly profitable serving the expanding needs of this small list of "great customers" so you keep falling deeper and deeper into the trap.
Pretty soon, you’re an inch deep and a mile wide in offerings and the only person in your company with the depth of industry experience to deliver all of the services is you.  At this point, you’re trapped because your expenses have crept up as your revenue has exploded – leaving you dependent on the sales you get from a small group of demanding customers.
With no more hours in the day, your company stalls as you focus on trying to keep your "great customers" happy. This is a true value killer.
The Solution: Sell less stuff to more people.
Instead of selling more things to a few customers, concentrate on selling a few things to more customers.
Ethos3 is a successful design firm that avoided The Mile Wide Trap by focusing on one very small corner of the design business: PowerPoint presentations.  Rather than offering a broad range of design services (e.g. brochures, websites, signage, advertising, etc.) to a handful of clients, the founder decided to focus on providing a specific product to a number of clients.
This focus allowed him to train his employees to follow his system for designing presentations.  Everything from the proposal to project management to the final invoice was standardized so employees could follow a system that didn’t require the owner.  Ethos3 has scaled up nicely and counts Microsoft, Google and Cisco among its 300+ customers.
Flikli.com is a video production studio that also avoided The Mile Wide Trap by focusing exclusively on two-minute animated "explainer" videos that explain a company’s value proposition simply and effectively.  Instead of making different kinds of videos, the owner decided to focus on creating one specific type.  This allowed them to standardize their pricing and provide employees a step-by-step guide to making great explainer videos.  Flikli has scaled up to 22 employees and their work has been featured in everything from Wired Magazine to The Washington Post.
You can fall into The Mile Wide Trap innocently enough: you do great work and a customer wants more of you.  But it’s a trap that will eventually choke off your growth and the value of your business.  The way out is to follow Ethos3 and Flikli.com’s lead and focus on selling less stuff to more people.
If you’re curious about your company’s growth potential and the other seven factors that drive value and salability, take the Sellability Score questionnaire here: http://sellabilityscore.com/vsp/Jason-Kwiatkowski.