Takin' care of business (planning)! Business Success(ion)+Key Employee

If you own, work for or love someone who has a business,  you may want to join and/or share this "Planning for Business Succession and Key Employee Retention" session. Let's quickly run through 4 primary elements of business planning, as well as a couple of ideas to attract & retain top talent. All in 10 Minutes!

June 27, 2023

Transcript

 I hope you are doing well. I hope you're safe. I hope you're healthy. Today we're gonna get down to business. We're gonna talk about business owners. We're gonna talk about planning for business succession and key employee retention. Now, hang on. Some of you might be saying, Hey, Neel, I'm not a business owner.

I don't need to watch this. If you're not a business owner, Chances are you work for a business owner, and if you don't work for a business owner, chances are you know, and you love a business owner. Now, we're not gonna be able to go over the myriad of every single option, every single strategy that's out there.

But I had a client, I shouldn't say that. I've had multiple clients reach out to me to ask me specifically, Hey, I need to make sure that if something happens to me, I am gonna make sure that my business is gonna be okay. I need to make sure that my employees are gonna be okay. I need to make sure that my family's gonna be okay.

So the importance of strategic business planning, that's important. Business planning is just sound. Planning business succession planning is just sound planning. So how do we ensure that our planning actually gets implemented? How do we make sure that we're doing the right planning? Well, that's kind of like some of you know that, I am a certified exit planning advisor, and that does basically mean that we have gone through some training and I've got a certification, that actually helps me with, with some aspects of business succession planning.

And, it's always been a passion of mine. I've been representing business owners for over 20 years, and it's just something that's near and dear to me. I'm being a business owner myself too. So let's get right into it. What exactly are we talking about when we talk about business succession planning and in key employee retention?

Because succession planning to many, to a certain extent, is. Succession is a key employee retention. So like I said, you can't overstate the importance of this. Having a plan helps to ensure that your business continues on the path that you envision, and that's when there's a smooth transition. If the unexpected happens, because it's not if it's when, right?

We're always gonna succeed in a business. There's always gonna be a succession strategy. We either go out vertically or we go out horizontally. As morbid as that sounds. But what does business planning encompass? It's many different areas. Strategic business areas where we can best help. Are these areas?

We got business succession planning, we got exit planning, right? So that's actually important. But, attracting and retaining key employees is a key part of this, because who's gonna be the one who hops behind the counter? Who's gonna be the one who hops in? So having a plan in place for operating. For growing and ultimately transferring the business interests.

So succession planning is all about making sure that the work that you're doing now to create income and value in the business that's preserved regardless of what could happen in the future. But it's not just about ensuring a smooth transition of ownership. Succession planning can also provide this peace of mind for everyone involved in the business.

It can reduce the impact of unexpected events and more. More importantly, and I guess more, I shouldn't say more importantly, but it also winds up being a strong motivating force. It maximizes the value of your business for the potential sale and even for potential tax savings, right? If you're gonna buy a business, are you gonna buy a business that can actually run without the owner, or are you gonna buy one that's so dependent on the owner?

That if the owner's not there, it's not gonna be able to operate without you. So maximizing the business, value for potential sale and even offering those, those tax savings, that winds up being a strong enough motivator for many of our clients to actually do the planning. But there are four primary elements to proper succession planning, and they need to be considered together as you create your plan.

Triggers are events that could lead to the sale of a business or the sale of the shares of the business. Sometimes they relate often, most often they relate to the death, the disability, the retirement of the owner or the partner. But it could also include things like divorce, bankruptcy, removing a partner, if there's a forced sale.

Purchasers, are another element that could include a key employee. It could be a family member, it could be existing shareholder, it could be the company itself, and obviously third party people. And there's several ways to fund the purchase. How are you going to include the payments? Is it going to be an installment?

Is it gonna be all at once? Is it gonna be borrowing? Is there's gonna be life insurance or some sort of disability insurance in the case of, one of the partners passing away. So there's a bunch of various techniques as well that we need to consider depending on the purchaser and the overall goals of the sale.

Now this slide is gonna be hard for you guys to watch on this screen right now, or we're kind of focus it. So if you need any of these snippets, let us know. Or you could always go back and watch the recording on this too. But this is a closer. Look at some of the purchase techniques that we in the past have employed, many of our clients have employed.

So understand what's important in the transition, and that's gonna help us to determine which techniques appropriate for you. So for example, you've got things like a cross purchase agreement. Are the shareholders going to buy from one another? And we have things like trust related things. When the trust actually owns the interest itself and how's the trust gonna be divided, you could have things like a straight entity purchase, which means the company's gonna buy back the shares.

So how do we know which is right for you? Before you get started with any plan, there are some key questions we need to consider. Businesses that already have an operating agreement, a shareholder agreement, a buy sell agreement, you might already have some direction. So, As to what can trigger the transfer of a business interest, how's that transfer going to be funded?

It might already be in there. It may not be all detailed. It may not be as as specific as you want it to be. It may not even be what you want it to be, but there's stuff in there and that needs to be considered. So there might even be guidelines against who can receive those interests. There might be restrictions.

So any plan needs to consider those guidelines already, and then when those don't exist, it's important to know that there's current business owners. They need to identify what are those triggering events and what is the expectation of the result when a business does get transferred. Now, once we kinda get past that point, or sometimes simultaneous that point, key employees, can add equity to a business.

So make sure you could retain those key employees, but you might want an alternative to just simply giving ownership, interest or equity to those employees for your benefit, for the benefit of the company and for that employee itself. You know, just giving them shares of ownership may not have your achieved outcome for it, may not have their achieved outcome, may not have the company's outcome.

So one of the things that you need to understand is employees will often think that equity in the company is the goal or. Partners or actual owners might think that's the goal itself, but the reality is that might not be what they expect. For a lot of times that minority shareholder, it could involve buying in for the employee and that could result in less cashflow for them.

So that could be something that impacts them for a long period of time, and then the benefit of that ownership is realized upon the sale. It's not like they get a benefit right away in many cases. And if that's the case, and if the sale doesn't happen prior to the employees ex exit from the business, then.

Are they really benefiting at all? Are they really getting what they want? They might be disappointed. They may not have that desired impact. And there's also these psychological impact. So you gotta consider, right? So when an employee gets an ownership stake in the company, that might come with the expectation on the employee's part that they're gonna feel a bit differently about themselves.

So those expectations might be, you're gonna be here forever. It might be that, you do different things as a partner. Now it might mean that other employees or other coworkers might treat them differently. And if, if. They might be, they might expect that, that they will be treated differently. They might be expecting that they won't be treated differently.

And in either case, if it doesn't materialize their expectation, that can create disappointment. And you couple that with possible decreased cash flow because they bought in. You couple that with the idea that they may not get exactly what they want. So you could see that there's sort of this perception and reality, disconnect.

So, Between the two. So that's one thing to kind of consider with the whole giving shares. So one thing that I like to share before we break is a lot of times the non-qualified benefit, it's integrated along with the succession planning, and it's also integrated with the retirement planning. So using non-qualified plans, which I talked about a little briefly in the last, slide here.

I'm gonna show that again too. You wanna consider the non-qualified plan with some sort of vesting schedule. It's not gonna be right for everybody, but it's a solution that I think is often overlooked. And many of our clients have been considering these as well too. So what happens similar to a better solution?

Like similar to just,  like the solution where you actually gave them equity interest itself. Like what a lot of 401ks or profit share plans. With a non-qualified plan, you can actually provide a tangible benefit as well as a positive incentive for the employees to stay with the company. And it does create a disincentive for leaving, because many times they're gonna be leaving money on the table.

So it benefits the company because if the employee should leave, then obviously, you know, they're, they're not gonna be getting this quote unquote benefit. But in that instance, that extra money, that the employee kept on, held, held onto because they didn't have to buy in, they now have that cash flow still.

And then that extra money that would've been paid in salary is recaptured through the surrender of the company if they were to leave. So this non-qualified benefits are generally, these, non-qualified vendors are generally easier to implement because you're not really dealing with as many tax implications necessarily.

Not right away at least. So definitely something to consider with the non-qualified benefits. And as I was just saying a moment ago, these non-qualified benefits, a lot of times they're integrated with retirement planning. With or without tax benefits, the restrictions that you have on things like 401ks and other qualified retirement plans that make it difficult, if not impossible to create retirement income that's proportional to the income that they receive during the working years, right?

We just know that. But when you have a non-qualified deferred compensation plan, in addition to a lot of the 401ks, it's not one or the other. You can address a lot of the income gaps and you can provide improved retention, motivation and loyalty. The employees happy. Because the employee gets to benefit in the event of an exit or in the event of some sort of a transition event, they are also happy because they may get an increased bonus, or it might be more tangible itself.

But the business owner's also happy because you have a key employee who's got an incentive to stay. And in the event of an exit, you now have this team, which is incentivized to stay on, which therefore increases the value of the business. So the key to creating that right plan is to ensure that the incentives align with the business's cashflow needs as well as the employees cashflow needs, and then the optimal tax results for the employer and the employee.

So, I know we're getting a little longer this morning. It's a little more technical than sometimes we, we talk about, but hopefully this was a helpful conversation for those of you who either are business owners, love a business owner, or are employed by a business owner, because it's important to employ.

I understand the mindset of your employer as well too. I'm Neel Shah. Thank you so much for joining us today. If you have any questions, concerns, don't hesitate to reach out. I hope to see you soon.