Category: Business Law Blog

The New Business Valuation

Business owners are creative and strategic about how they live their lives. Naturally, they are extremely cautious about spending money on things they don’t “need”. Traditionally, one of the things that falls into the “I don’t need it category” is a Business Valuation. This post serves to analyze a new kind of Business Valuation, and offers 6 reasons why business owners should get one on a regular basis.

A common misconception is that all Business Valuations were created equal. There are very specific times (i.e. immediately prior to an impending sale) when a formal Business Valuation – the kind that can cost upwards of $10,000 – may be required. 99% of businesses don’t require this type of valuation on an ongoing basis, and most business owners are unwise to buy one.

What most business owners don’t know is that another kind of business valuation is available. For purposes of this article, we will refer to it as an estimate of value.

Put simply, it is an informal business valuation that considers a narrower scope of factors than its counterpart. Less detail and no promise to defend the valuation in a court of law means the cost to own is typically less than $1,000. The kicker? If you know where to look, you can find an estimate of value that is continuously updateable (online), extremely accurate, and includes Key Performance Indicators. Now THAT is something most – if not all – businesses can and should be utilizing.

Here are 6 reasons why:

  1. Better understand your business and its potential. Estimates of value can uncover key insights into the effectiveness of your business operations. How? The RIGHT report provides more than just a value; they provide Key Performance Indicators (KPIs) that serve to benchmark your company against your peers. You’ll know exactly how you are stacking up against your competitors, both locally – and nationally. Taken a step further, you will understand the areas that your company can improve to become more attractive (more valuable) to potential buyers. KPIs and other financial metrics , when analyzed correctly, uncover a path to unlocking business value.
  2. Know the value of your largest asset so you can plan for retirement. According to multiple reports, the average small business owner has 80 – 90% of their net worth tied up inside their business. It can be incredibly difficult – if not impossible – to truly plan for your retirement if you don’t have a realistic expectation of what your nest egg is worth. On the contrary, if you have an annual income goal in mind for retirement, an estimate of value can help you and your financial planner assess whether or not you are on track to meet that income goal! If you find out that you are behind the 8 ball, you can take deliberate action to grow the value of your business to the level you need to retire.
  3. Ensure the business and your family are properly protected. There are various kinds of business insurance, from general liability to crime protection. Based on the industry you are in an experienced business insurance agent can easily tell you the kinds of insurance you need. The more difficult task is determining the correct amount of coverage. Because successful businesses increase in value over time, it’s very unlikely that the amount of business insurance you needed 5 years ago is the same amount you need today. Many small business owners are underinsured based on their business value, and it’s because they simply do not have a realistic idea of what they are worth (i.e. what they need to protect). You can help your business insurance agent take the guess-work out of the amount of coverage you need by supplying them with an updated business valuation on an annual basis.
  4. Develop an Exit Plan. Many small business owners have an idea that they will pass along ownership to the next generation of workers. Problem: Most of the time, those workers do not have the financial resources available to execute a buyout when the time comes. An estimate of value can help you set expectations with the future owners of the company. Future owners can begin to prepare their personal balance sheets for a buyout. You may also choose to incorporate an incentive program to assist in expediting the succession.
  • Even if you decide to sell your business to a 3rd party, obtaining an estimate of value early in the planning process can help you manage expectations and identify opportunities for improvement.

5. Create / update buy-sell agreements with partners. Some business owners think that if they die, their family could maintain an income stream by continuing to run the business themselves or by hiring someone to handle the day-to-day management. In reality, loved ones usually do not have the skills or the desire for the job. What’s more, your co-owners may not welcome the idea of an unintended partner. That’s why buy-sell agreements are important! They serve to protect owners and families by establishing a process to buy an owner’s share of the business at an agreed upon price in the event of death, disability or retirement.

  • Just as many businesses are underinsured for business insurance, most multi-owner entities have buy-sell agreements that do not accurately reflect the current value of the business. It is recommended that buy-sell agreements be updated annually to reflect the current value of the business. These agreements should also be funded by life insurance to provide liquidity in the event of an owner’s death. Failure to appropriately fund a buy-sell agreement can leave both the company and loved ones at risk

6. Establish a trust or create an estate plan. The current estate tax threshold for 2017 is $5.49 million per individual. For married couples, that means nearly $11 million is exempt from estate taxes. While this is more than enough for most individuals to have to worry about estate taxes, business owners are among the most likely to experience estate tax issues. Truly understanding and managing your estate tax situation is impossible without an updated estimate of value. An EOV, combined with advice from an experienced estate planning attorney and financial planner helps heirs avoid the 40% tax that currently affects estates exceeding $11 million.

Epiphany Law partners with BizEquity to deliver valuation reports as part of the firm’s Exit Planning Services. Non-Exit Planning clients utilize the service at a cost of $400 for the initial report, and an annual license fee of $400 thereafter – which includes an annual valuation update and continued use of the software.

So, for $800 you can get a current valuation that can be updated continuously. At that price point, there is little excuse for a business to NOT know what it is worth.

You can learn more about Epiphany Law’s business valuation services, and find our link to getting started HERE.

If you have questions or comments, feel free to get in touch!

Exit Planning: Why do Business Owners Avoid it?

Science has proved it to be an urban myth, but it was long believed that ostriches buried their heads in the ground at the sight of approaching danger.

Thus, the phrase “You have your head in the sand”, was born. It means: “To refuse to acknowledge or deal with problems, danger, or difficulty in the hopes that they will resolve themselves on their own.”

Business owners are notorious for “burying their heads in the sand” as they near the end of their runway. But why?

When so much can be gained by sucking it up and planning for an exit, why do business owners avoid it?

In no particular order, here are several reasons:

  1. Afraid of getting old. Exiting the business represents “the end” of youth.
  2. Feel trapped. Used to a high level of income that accompanies business ownership. Afraid that they will have to take a “pay cut” in the last chapter of their lives. The tendency is to stay in the business, pulling off a heavy salary, as long as possible.
  3. Don’t know what to do next. Don’t have a purpose in life after work. Business is their identity.
  4. Afraid of being bored.
  5. Don’t want anyone to know they are planning to exit their business. They have an irrational fear that employees, customers, suppliers will leave if they find out a transition is happening. In reality, these people are already thinking about the business owner’s eventual retirement, and they would feel more comfortable if they knew the strategy for moving forward after you are gone.
  6. Have priorities that feel way more urgent than exit planning. “I don’t even have enough time in the day to run my business, how am I supposed to have time to plan for an exit”. This is the classic “saving face” excuse that many business owners are willing to voice when they don’t want to discuss their soft/emotional apprehension toward leaving the business.
  7. Misinformed and confused about what to do. In a world where most professional services have stood as pillars of industry for hundreds of years, Exit Planning is still in its infancy as a practice. It’s an incredibly confusing and very time-consuming process. And different advisors preach different things. Unfortunately, many advisors right now are taking a micro-view of “Exit Planning” that fits their personal expertise, because there is money to be made if they can play a role in an owner’s exit. For example, a financial advisor may map out a business owner’s projected retirement assets/expenses + reallocate their investment portfolio and call it “Exit Planning”. This is not Exit Planning. It is a very small piece of the much larger Exit Planning process.
  8. Genuinely don’t want to exit. They still have the drive for it. They still thoroughly enjoy what they do. Can’t even comprehend leaving in the next 10 years. This doesn’t mean they shouldn’t familiarize themselves with the Exit Planning process. There are certain concepts – particularly in the area of risk management – that all business owners should implement correctly many years before they feel “ready”. Taking some time to understand the process – to understand what buyers are looking for – can afford business owners a strategic advantage.
  9. Control issues. Some business owners are simply attached to the operations. Can’t let go, even if there are people in place, ready to assume more responsibility. If they aren’t in place, it usually is a simple process to cross-train people to assume more responsibility or hire an additional employee to assume some of the burden.
  10. Don’t understand all the options available to them. Many business owners have very misguided beliefs about the market for their business. A common mistake is to ignore a sale to employees because they “don’t have any money”. In many cases, if time is on the owner’s side, there are strategic ways of helping employees build capital.
  11. Heir-apparent (successor) is not working out. The most common situation is that the owner’s “heir-apparent” child does not possess all the qualities that the owner would like to see. In some cases, the concerns are valid. In other cases, the owner is being overly-critical. Regardless, owners whose heir-apparent isn’t “just so” undergo a great deal of emotional turmoil as they grapple with “what to do”.
  12. Can’t figure out how to be “fair” to everyone, including: children, spouses, employees, etc.

 

Fear and other emotional distresses play huge roles in a business owner’s decisions near the end of their runway. It’s common for the owner to vocalize a “rational” reason (like #6) to others, while concealing the true reason. The sad and unfortunate truth is that many business owners never work up the courage to face the true source of their distress. They simply avoid the situation entirely until they are forced from the business by some health-related factor. Businesses rarely survive that situation.

Question for the Crowd: Do you have personal experience dealing with an owner who stuck their head in the sand near the end of their runway? We would love to hear your story! Tell us what your role was (employee, child, spouse, etc.) and what you think the owner was avoiding. Is there anything you could have done to help the situation?  Please comment below or send an email to [email protected] (Re: Head in the sand) and we will post your comments anonymously.

Exit Planning: Starting the Conversation

More than 70% of businesses put on the market never sell.   That’s 70% of those put on the market, don’t sell.  And countless more businesses never even get listed but rather die quietly due to an owner’s unexpected death or illness.

Only 34% of family businesses survive to the 2nd generation.  That’s 2 out of 3 never successfully make it from mom and dad to the kids.  And only 14% of family businesses survive to the 3rd generation.

Why?  Simple:  Failure to properly plan for the succession of the business to a buyer/next generation and failure to plan for the successful exit of current owners.

Bottom line: Business owners wait too long to begin planning for this HUGE transition. It’s a major issue afflicting our society, and one that will only grow over the next decade as hundreds of thousands of baby boomers look to sell.

As we well know, the first step in solving any problem is recognizing there is one. In the case of the aging business owner, the simple act of talking openly with someone about exit planning can spark action. And action can mean the difference between a seamless transition at fair value or a disastrous failure. If you are a loving spouse, child, parent, friend or confidant of a business owner that is avoiding tackling exit planning for their business, this article is written for you. As this tsunami swells, it is critical that you – the child, the spouse or the close friend – assume a vital role: Starting the Conversation.

Whether you are next in line for a business succession or simply a concerned loved one, here are some tips for starting the conversation with an aging business owner:

  1. Have empathy. It’s the ability to understand someone else’s feelings, attitudes, and perspectives. The ability to “put yourself in someone else’s shoes”. Start by opening your mind to think about the situation exclusively from their side. Think about how they feel about their business. Think about the hours they put into it, the hard times they have endured, and the success they have achieved. Respect and embrace those thoughts, and keep them with you as you talk. To further prepare yourself, understand the common concerns business owners have:
  2. Treat it like a business meeting. This is a BIG deal. Do not treat it as you would if you were talking about last weekend’s college football games. Don’t bring up in passing or with playful jests. Doing so diminishes the importance and may provide an avenue for the owner to continue avoiding the topic. Set aside time for this conversation, as you would with an important business matter. Ensure there are no distractions. Doing so will set the tone that it is a serious conversation. You words will instantly come across as more sincere and genuine.
  3. Prepare yourself. Come into it with a list of things you would like to say and questions you would like to ask. Mentally, have an open mind and be prepared to listen. Emotionally, try to remain neutral so they can express themselves completely.
  4. Understand your ideal outcome. The ideal outcome may be lightly different for everyone having this conversation, but it generally looks something like this:
    • You effectively express your own concern and love for this business owner.
    • You are able to ask a few questions.
    • You schedule a time to revisit the conversation at a later date (with more information, a 3rd party, after serious thought).
  5. Don’t be discouraged if they aren’t ready. It is very likely that they won’t be ready to open-up the first time you talk. Don’t be discouraged! Be respectful of their process for dealing with this, and focus on committing to another time to talk in the future (a couple weeks later). The business owner will probably think and process extensively over the next couple weeks, before coming to your next meeting much more prepared.
  6. Seek the help of a 3rd party — eventually. Not for the first meeting – you may risk blindsiding and/or offending the business owner. You want them to open up, not shut down. However, assuming an initial conversation went well, you may suggest having a 3rd party present for subsequent meetings in order to help facilitate discussion. Look for their most trusted advisor – whether a financial planner, banker, accountant or attorney. If they don’t have a most trusted advisor, look for a Certified Exit Planning Advisor (CEPA), as they have a deep understanding of common concerns, as well as strategies to move forward.
  7. Just do it. We all want to avoid having the difficult conversations – its human nature. Most will avoid it, ignore it, and make excuses not to do it. Be one of the few. You aren’t doing it for yourself, you’re doing it for someone you care about. Someone who is woefully unprepared. Someone who’s future happiness depends on you Starting the Conversation.   The difference between a successful exit and the destruction of a lifetime of work could be you!

The Importance of the Employee Handbook

 

Employee handbooks
Employee Handbooks Protect Employers

An employee handbook serves as a guide for employees and employers. The handbook is a tool to provide clear expectations and rules.  It defines ground rules and explains what is and is not considered acceptable behavior. Done properly, an employee handbook is a great first line of defense for a variety of legal issues.

However, if an employee handbook is done improperly, it can lead to confusion, anger and lawsuits. The sections contained in the handbook need to be carefully worded in order to avoid those pitfalls.  Generally, laws regarding employees and employees are drafted in favor of the employee so without the protections offered in an employee handbook, the employer is open to more risk.

Although some federal regulations such as Title VII and the Americans with Disabilities Act do not go into effect until you have 15 or more employees, a business of any size can be sued for other employment related issues.

To minimize your risks, it is important to have a relationship with an employment law attorney who will update you of any federal or state required changes.

Other ways to minimize risks include an annual handbook review. As the world changes, you may need to create new policies that reflect the changes in the law and your employee handbook should reflect those changes.  For example, think of the changes to the workplace over the past few years like health care reform, more employees are able to work from home, working parents and the balance between home and work life, the use of personal mobile devices and so many others.

In addition, the handbook should be reviewed to make sure the documented polices that are included in the book are consistently followed and are a reflection of the culture of your work enviroment.  If the policies in the handbook are not followed and not a reflection of your work enviroment, you will have a weak defense if a dispute arises.

Remember, it’s not enough just to update the handbook.  Clearly communicating any change or policy update to all employees is also required.

Small Business Owners: The Future Might Not Be All That Uncertain

If you are like most small business owners, you find it difficult to plan because your future has more unknowns than your non-business-owning counterparts. You might not know how much your business is worth, when you should sell, where to find the right buyer, how to fetch the best price, or even how much insurance to carry. If you have a family business or operate with a partner, you also have additional layers of both complexity and ambiguity.

When planning for the future, it is easy to become overwhelmed by all that isn’t known. When you step back and evaluate the questions marks that dot the path to your future, however, you might realize that not everything is unknown.

The value of your business is a prime example of a discoverable fact, yet if you are like 98% of the other small businesses in this country, you don’t know the answer.

With less than a half an hour of your time and innovative technology that harnesses the power of big data, you can get an accurate business valuation to illuminate your path. The valuation will give you an understanding of how much your business is worth, how it compares to others in your industry, and the levers that could drive future growth.

According to a Financial Planning Association/CNBC study, over 70% of small business owners have the majority of their wealth tied up in business assets. Knowledge of how much yours is worth brings clarity and insight into retirement and estate planning discussions, succession planning and exit strategies, and insurance protection decisions.

As Lieutenant General and former Deputy Director of the CIA, Vernon Walters, once said, “Uncertainty is the most chilling thing of all.” To reduce the amount of ambiguity you face by determining the value of your largest asset, consider obtaining a business valuation today.

Protect Your Business with a Business “Prenup”

If your business has two or more owners, you need a Buy-Sell Agreement.

A buy-sell agreement is simply a contract between two or more business owners that formally documents contingency plans if a life changing event occurs.  Some people refer to these agreements as “prenups” for business owners. In the agreement, the business owners agree upon what happens to the ownership structure of the company in the event of one owner’s death, divorce, disability, retirement or other life changing events.

Many business owners don’t realize until it is too late the importance of a buy-sell agreement.  For example, if an owner gets divorced, the business may become hostage to the marital dispute. Or if an owner dies, the surviving business owner(s) may inherit heirs for business partners, who care little about whether the business survives.

Without a buy-sell in place, you are opening yourself and your business up for unknown risks.  Protect yourself and your business from the unknown future with a buy-sell agreement. Ensuring that critical events are properly covered is essential to the long-term survival of your business.

Business Owners: There’s No Time Like the Present

The biggest asset for many small business owners is the value of their business and they count on it for retirement funds. However, most of those owners do not actually know the value of the business. How will they know when they can stop working or what to expect in retirement?

Having the information needed to prepare adequately for retirement is just one of the many benefits to a business valuation. Here are several others:

  • Increase value. In life, what is measured improves – this applies equally to business valuation.
  • Capital infusion. To raise money on the right terms you need to know your value.
  • Mergers & Acquisitions. You need certainty on your value to properly negotiate a deal.
  • Exit of an Owner. The more you understand the value, the more likely you will be to reach an amicable split.
  • Too often people guess or estimate and one side or the other losses.
  • Tax strategies. Good tax and financial planning requires beginning with good data. The best plan in the world won’t do you much good if the initial assumptions about value of your assets was wrong.
  • Employee incentive programs. Companies with employee incentive plans may want or need to share value information each year with employees.
  • Insurance planning. Many small businesses do not have adequate insurance coverage. In order to get adequate coverage, you need to know how much value you are covering.

Many business owners avoid valuation because traditionally it has involved an extensive, expensive, and invasive process. Epiphany Law is different and our technology has changed the process. Now we can provide a valuation report that costs a fraction of the traditional model and takes a fraction of the time.

To get started on your business valuation, simply go to https://epiphanylaw.bizequity.com/.

 

Ambiguity is the Fertile Soil of Litigation

Don’t ever think that a comma is not powerful.  Recently a court in Maine found wording of Maine’s overtime rules ambiguous due to the lack of that humble oxford comma. That ambiguity cost a company millions in overtime pay.

Ambiguity is the fertile soil of litigation.  A former law school professor used to say, “Words are the tools of our trade.”  She would make us chant it with her.  When we use language that leaves itself open to interpretation, we are inviting people to challenge us as to what our words actually mean.  In the context of a contract, that challenge can put us and our businesses in a very bad place.  That is what we saw in this highly publicized case with the Oxford, or Serial, Comma.  For the record, I love the Oxford Comma, and I have no idea how it became something that people felt was optional.  Some examples of problems that arise from misunderstandings that spring from lack of an Oxford Comma:

The Book Dedication:  To my parents, Ayn Rand and God.

You get the idea.  While there are other ways to edit that list to make it clear, the Oxford Comma should/could have been used to clarify.  A mastery of language is not just a legal vocabulary, but also a grasp of grammar and basic words and grammar and stuff…  Did I say that right?

In the end, how you use the comma isn’t the issue.  If your contract doesn’t use the Oxford Comma, but is otherwise clear and concise, then you don’t have the same problem this company did.  The big problem here is that a missing comma could have such an impact on a company’s liability.  When you hire a lawyer to protect your business, make sure they know how to use their tools properly.

Avoid Piercing the Corporate Veil

Piercing the Corporate Veil

A corporate veil is like a “bubble” that will surround an LLC or Corporation and protect its owners from being personally liable for the company’s actions. The veil is normally very secure; however, there are times when that “bubble” can be popped and owners of a company become personal avenues for law suits normally reserved for the LLC or corporation.

Tips to avoid personal liability: Continue reading “Avoid Piercing the Corporate Veil”

Exit Planning: It Takes a Team

Exit Planning is very comprehensive.  Accordingly, several key players must be involved including your financial advisor, CPA, banker, insurance professional, business broker, or investment banker and attorney.  When selecting your team of advisors it is important to identify players that will work well together and will be able to help with any of the issues in a comprehensive plan.  No one person or advisor has the expertise to design a comprehensive plan.

Continue reading “Exit Planning: It Takes a Team”