Guest Post by HJ Glazer

Tune-up your Business Operations to insure that your team is using the best practices, tools and methods used by successful companies.

The symptoms below are opportunities to improve performance.

Check for these warning signs in your organization:

• No Cash Flow. There is never enough cash to pay bills.  You always find out you have less on hand then you thought.

• Customer & Client invoicing is slow.  It’s the 15^th of the month and you still don’t know what last month’s sales/revenue was.  Product companies should know the sales number on the first of the month.  Service companies by the fifth of the new month.

•  Customers Do Not Pay on Time.  Who in your company is responsible for making sure you get paid?  Increases to the  DSO ratio and the number of past due accounts are signs that the collection effort may be slipping and need to be sped up. Sales and senior account executives must be proactive in collecting the cash.

• Slow Closes.  Your books and financial statements are not final within ten days of month end.  By the fifth day you should have flash results available.

• Duplicate Payments to Vendors.
• Are you paying the same bill more than once?  This is often a sign of lack of proper approval procedures, poor training, or circumvention of the controls that most software applications have to prevent this.

• Staff Turnover. Where there is churn there is trouble.  These are often signs of burnout, poor management and lack of leadership by the senior financial executive.

• Timely Follow-up and Response. Accounting is a straightforward science.  The department must be able to provide timely and logical answers to questions.  Reports and responses that create confusion rather than clarity are a red flag.

• Manual Entries. The cost of basic accounting software and systems is lower than ever.  If the accounting staff spends all of its time entering data into Excel spreadsheets, it may be time for a new process or complete review of the systems being used.

• Restatement of Financial Statements.  Does your staff consistently tell you they found errors, in prior month’s data?

• Outrageous Audit & Accounting Fees.  High fees, not related to special events, can be a sign of poor preparation and lack of attention to detail during the year.  Close every month like it is the end of the year makes the end of the year just another month.

• Drawing the Line on Revenue Recognition. Sales should be aggressive about order flow.  Accounting should be aggressive about proper revenue recognition practices.  Both sides need to be clear what activity needs to occur for sales income to be recorded.  These practices should not be subject to negotiation or reinterpretation every month or quarter to achieve a desired income goal.

HJ Glazer, CPA
WinterView Group
Business Advisor and CFO for Private Companies

Guest Post by Dick Rossman

Most small business owners believe they are going to live forever and will remain CEO of their company for just as long.  Or that they have a family member who will be ready to assume the role as president whenever the time comes.  Or that they will easily be able to find a new owner of their company when they are ready to retire.

Unfortunately none of these assumptions is true.  Finding a successor to take over the helm of a small business is a process that requires planning and preparation, consultation with advisors, a period of time to implement, and active communication in order to execute successfully.  And, as the owner of your business, you owe it to your family, your employees and your customers to make sure that you are successful in this process, as they need the business to continue after you’ve left it.

Here are some best practices to ensure that success:

1. Start your succession planning today – regardless of your age or your company’s age.  Don’t wait until your company is in trouble.  That’s like buying homeowner’s insurance after your house has been broken into.  You may not need to name a successor today but put the framework in place and start thinking about the process.
2. Create a group of experts to help you plan.  Establish what the criteria for your company’s leadership will be.  Use them to screen candidates.  Empower them to act in the best interests of the company, which may not be in the best interests of your family or family members.  (You may need to make some hard decisions here!)
3. Evaluate your company honestly.  Know its strengths and weaknesses, its customer base, its marketing and sales niches, its operations capabilities.  Get a financial valuation.  Use all this to determine the type of person you want to lead the business and what that person needs to do to succeed in the future.
4. Begin the search and selection process slowly and carefully.  Look for people with character, competence and commitment.  Find a person who can build on your success and make the company even better.
5. Communicate with your family and your company.  A change in leadership makes everyone nervous and apprehensive.  Your family and your employees may not agree with your decision but they should understand it and respect it.  Explain why you chose this person, show them how this decision is in the company’s best interest, and present to them how they will benefit by supporting and working with the new leader.

Since we’ve determined that you won’t live forever, developing a succession planning strategy is your next best alternative.  In that way your company and your business legacy will remain and be strong.

How does entitlement present itself? What are its causes and consequences? And how do we cure it?

 By Paul and David Karofsky

While waiting for our table during a recent dinner with friends, someone in our party encountered a woman in her mid-20s speaking on a cell phone. The young woman, attractively dressed in designer garb, was overheard saying: “No, I told you we’ll break the trust. Dad simply doesn’t need all that money. He’s already got three homes and three cars. What does he need all that for? Why should it go to his new wife? It’s not right. We’ll get him declared incompetent, but we’ve got to move fast. That money should be ours now. It’s simply not right.”

That conversation brings to mind a dialogue from a recent episode of TV’s Desperate Housewives. Referring to her son, Bree, the character played by Marcia Cross, said, “My relationship with Andrew is complicated.”

A new character, Sam, replied, “I’m sure Andrew respects and loves you very much.… It’s not unusual for children in a family business to have a sense of entitlement…. It must be so hard for you.”

Webster’s describes entitlement as “the belief that one is deserving of certain privileges.” Family Business Wiki says, “Entitlement refers to a sense of being ‘owed’ such benefits as: wealth; employment; and status without having to work to achieve these benefits. Some children who grow up in a successful family business can be inclined to a feeling of entitlement.”

Entitlement is more than feeling “owed” or “deserving,” it’s about expectation as well. Indeed, usually the problem isn’t the feeling of entitlement; it’s how family members act, and how such actions are perceived by others. The consequences can be dire.

Consider the human resources director in a family business whose efforts at building a culture of responsibility and accountability become marginalized when members of younger generation fly off for vacation in the corporate jet the same day there are staff layoffs. Or the payroll clerk who’s been asked to implement pay cuts for everyone but the family members — do you really think she keeps that information to herself? The accounts payable clerk who prepares the American Express bill for payment sees the personal expenses that are being charged to the business.

Being the scion of a business family can carry handsome privileges, but the responsibilities are even greater. There’s a whole constituency of stakeholders who expect business owners to act as careful stewards: employees, suppliers and even the banker, who, when times are tough, can cast a disparaging eye on the spouse’s new Mercedes-Benz S-Class.

About 15 years ago, we encountered a 28-year-old son who was paid $750,000 per year for directing the sales efforts of the family business. His father had significant wealth and was trying to reduce his own assets through his son’s compensation. The only problem was, he forgot to tell this to his son, and his son actually believed his efforts were worth $750,000.

Whatever happened to “fair market value”? And if fair means “just and reasonable,” is fair market value even fair? One need look no further than the corporate executives on Wall Street, or the superstar football and baseball players, to question the assumptions and calculations used in determining fair value.

How did we get here?

Baby Boomers achieved staggering financial success in their family enterprises; their upward mobility, right up to the last couple of years, is truly remarkable. Many Boomers, with conservative portfolios and minimal debt, were barely affected by the recession. They raised their children as they wished they had been raised — skiing trips to Vail every Christmas, then to the family condo in Puerto Rico over spring break. A recent drive through the high school parking lot in an affluent suburb revealed as many Range Rovers, Mercedes-Benzes and BMWs as in the local country club lot. Wanting their children to have all the trappings of the good life, parents help their kids buy homes and even furnish them; they set up trust funds and 529 college savings plans for their grandchildren. And in these actions, there lies an expectation — that this might go on forever, that there’s a bottomless well somewhere.

So, have the parents been the enablers? Have they unwittingly fostered the belief in their children that money will always be available? Perhaps so.

Generation Xers will soon be on their own, and for many that newfound independence will be startling. Those in their 20s and 30s planned their careers with the anticipation that the numbers will simply keep going up. Many expected that they’ll be able to take the same luxury vacations with their children as they’ve enjoyed with their parents. For most, however, it just won’t happen. Thanks to the economy, “forever” seems to have come to a screeching halt. Gen Xers may inwardly — and some even openly — resent their parents for the derailment of the gravy train.

Meanwhile, the kids from Generation Y, despite a college diploma, have fewer career options than their parents. The job market is tighter and simply an undergraduate degree is often insufficient. As a result, many of these kids turn to the family business as a natural source of opportunity. But is that opportunity a path to further entitlement?

Finding a cure

For decades, educators, advisers and consultants to business families have touted the virtues of first working outside the family enterprise. If business families hope for their business to not simply survive, but rather prosper through another generation, rigorous entry criteria are no longer options; they are essential.

To succeed in an extremely competitive marketplace, the next generation of business owners needs outside work experience, additional degrees, qualifications and personal attributes that exceed the norm, a passion for the business, a sense of stewardship and respect for the contributions of their seniors. If business families hope to cure the entitlement epidemic, the senior generation must clearly define the younger generation’s roles and responsibilities, keep compensation at fair market value and make sure their offspring have a mentor-coach-guide.

Additionally, family members must speak directly about entitlement, and how the perception of an entitlement attitude affects non-family colleagues. Family meetings can play an essential role in cultivating values that will reduce a sense of entitlement.

In her book Reweaving the Family Tapestry, Fredda Herz Brown speaks to the core of what’s needed: “Stories are the fabric from which the family is woven.” More than a decade ago, a legacy family enterprise convened a three-generation family meeting with 45 family members, including the teenage grandchildren. There was a family tree on the wall and, as they entered the room, each member signed in under his or her branch. Family members brought old photo albums, and the grandparents recalled stories from generations past. Then family members, working together in teams, captured the values that emerged in a family coat of arms. They talked about money and the meaning of wealth, including a discussion of philanthropy and their faith. They planned to develop a family code of conduct and a process for resolving the inevitable conflicts that arise among family members.

It’s critical to openly discuss the family’s differing viewpoints. What often occurs is not necessarily a willful violation of ethics or what is “right” or “fair.” More often than not, it is “matter of fact”; simply the way things have always been and, thus, are expected to continue to be.

Let’s hope Gen Xers, Gen Yers and those who follow catch on. Long-term family well-being is at stake. FB

Paul Karofsky is founder/CEO of Transition Consulting Group Ltd. He was the third-generation CEO of his family’s business and is executive director emeritus of Northeastern University’s Center for Family Business. David Karofsky is president of Transition Consulting Group Ltd. He has more than 15 years of experience coaching executives and working with companies across the globe (www.ForTCG.com).

 

 

The story you are about to read is true.  The names have been changed to protect the guilty.

I am a cop, assigned to the Bureau of Missing Estate Plans.  My captain is Giuseppe Venerdi, my partner is Jose Viernes.  My name is Joe Friday.

 

The squad had been in the case review meeting for almost 2 hours when Captain Venerdi told us to open up the report on the next case.

José groaned. “Oh no, not another business succession case!”

“Well, there are a lot of problems in that area,” the captain said. “I’d like us to see if we can find probable cause against the lawyer. After an independent review, it turned out that the business owners had a redemption agreement, but owned their insurance as though it were a cross-purchase. “

A rookie, just out of the Academy, spoke up. “Excuse me, sir, but could you explain the difference?”

“Good question, Freitag,” the captain said. “In a redemption agreement, the Corporation buys the stock back, so that the insurance proceeds have to be paid to the Corporation. On the other hand, in a cross purchase agreement, the other shareholders buy back the stock, so the policy has to be payable to them individually.”

“I get it,” Freitag said. “So the stupid lawyer gave them the wrong kind of agreement.”

“It’s not quite that simple,” I jumped in. The agreement was drafted before they bought the insurance.” “So, why is it the lawyer’s fault then?” Freitag said, looking at the Captain.

“Well,” said Capt. Venerdi,” the lawyer didn’t check to make sure that they bought the right kind of insurance. And besides, there are tax reasons why almost nobody uses a redemption agreement anymore. It probably should have been a cross purchase to begin with.”

“Just a minute, Captain,” I shot back. “We really don’t know why the business owners ended up with a redemption agreement. They may have wanted one policy instead of several. They may have had a tax situation where the redemption agreement worked just fine. And besides, how many lawyers get involved in how buy-sell agreements are funded?  Most of them think their job is done as soon as the agreement is delivered.”

“Well,” the captain said, “if nothing else, the lawyer should have educated the owners about the difference. They don’t know what they need, and if the lawyer doesn’t tell them, who will? The business owners here were just lucky that it turned up in an independent review before it was too late.”

“That’s one thing we do agree on,” I said.

BMEP CRIMESTOPPER TIPS:

• Business owners need some basic education about their alternatives before they sign a buy-sell agreement.
• Owners tend to think that buying a legal document is like buying a television – only more expensive.
• This point of view is encouraged when attorneys sell clients a document out of a form book without taking the time, or charging the fee, that real planning would require.
• The reality is that without careful planning by a knowledgeable attorney business owners are unlikely to end up with a plan that accomplishes their goals.

The story you are about to read is true.  The names have been changed to protect the guilty.

I am a cop, assigned to the Bureau of Missing Estate Plans.  My captain is Giuseppe Venerdi, my partner is Jose Viernes.  My name is Joe Friday.

“Next case,” the captain said. You don’t have a report on this one. I wanted it to be a surprise. This is another business succession plan gone this wrong. You’ll never guess what the problem was.”

José rose to the challenge. “They didn’t have a written agreement?”

“No. In fact, they had a very well drafted agreement.”

“It wasn’t funded? So that there was no money to buy out the other shareholder.”

“No, it was funded with life insurance.”

“It was the wrong kind of policy. Or, it was owned wrong, like that redemption instead of across purchase case. Or, they let the policy lapse. Or, it was a universal policy and they didn’t pay enough in premiums to keep the policy in force.”

“No, no, no, and no.” The Captain was really enjoying this.

“Oh, I know. The buy sell was underfunded. The company had increased in value, but they never increased the amount of insurance.”

“Wrong again. Like I said you’re never going to get this. In this case the buy sell agreement was overfunded!”

“What?!” José and I said together.

“That’s right,” said the captain. “The owners owned the stock in a 60/40 split. They expected that over time the minority owner would buy his interest up to 50-50, but that never happened. The buy sell agreement said that each owner would purchase life insurance on the life of the other in the amount of $4 million. It also said that the full amount of insurance proceeds would be paid to the estate, regardless of the value of the stock.  The minority owner died at a time when his stock was only worth $2 million.”

“So there was a capital gain of the difference between the value of the stock and the amount received,” I said. “And $300,000 that could have gone to the survivor or the company went to Uncle Sam instead.”

“You’ve got it,’ said the captain.

“But I thought that life insurance proceeds were not taxable,”  Freitag said.  Pretty sharp for a rookie, I thought.

“There was no tax when the money was paid out to the beneficiary,” I said. “But there is a tax liability when the beneficiary uses the proceeds to buy stock for more than its fair market value.”

“If the owners had had an independent review done while both were still alive, they could’ve avoided the problem,” the captain said. “They could have rewritten the policy so that the extra money would be paid to the corporation as a key man insurance, for example.   But that never got done, and the company is out a lot of money.  I think we need to bring in the lawyer and the insurance agent for questioning. “

BMEP CRIMESTOPPER TIPS:

• Even well-drafted buy-sell agreements need to be reviewed to insure that they have been properly funded.

Even after proper initial funding, buy-sell agreements need to be reviewed periodically to ensure that they still work as intended in light of changed circumstances and failed expectations.

EE = EBITDA

How Increasing the Levels of Employee Engagement Leading up to Exiting Your Business Pays Multiple Dividends!

Jeffrey S. Deckman, Founder, Capability Accelerators

EBITDA is not the only number potential buyers look at but it does give you a good idea of the value of your business. And since many businesses are sold at some multiple of EBITDA any adjustments that you can make to improve your EBITDA number will be handsomely rewarded.

For instance in the late 1990’s I owned a telecommunications integration firm when that industry was experiencing a wave of Rollup activity. (Rollups are a technique used by investors, commonly private equity firms, where multiple small companies in the same market are acquired and merged.) We were contacted by a private equity firm and invited to become part of a national Rollup. To make a very long story short the method of valuation being used for each company was a multiple of EBITDA, in our case the multiple was 5 times EBITDA. So while we were considering many factors during the negotiations one thing we immediately set out to do were things that would increase our EBITDA. We knew that if we were to increase EBITDA by $10,000.00 for instance that would mean a $50,000.00 increase in company valuation after the multiple is applied.

So needless to say, that was when I made it my business to become more familiar with the various ways to improve a company’s EBITDA.

Many years later as a business consultant who specializes in helping companies “convert human capital into financial capital” I stumbled upon a very powerful, and natural, relationship between the levels of Employee Engagement (EE) and EBITDA. Which I describe using the formula of EE = EBITDA.

Once understood this formula reveals an exciting new tool anyone can use to increase the profits in any business, regardless of your industry.

The “blow up” of this formula is:

Employee Engagement = Earnings Before Interest Taxes Depreciation Amortization

Before going any further I want to say that Employee Engagement (EE) is certainly not the only factor that impacts EBITDA but it does have a significant impact on your bottom line. It just also happens to be one of the easiest ways to increase profitability you will ever come across.

Why?

Because, of all the ways to increase profits such as increasing prices; decreasing costs and generating more sales increasing your levels of EE is almost completely within your control. This is because EE is largely determined by the leadership culture of your organization. And you get to control that.

In fact, a recent Melcrum Employment Engagement Survey of over 1600 HR professionals found that “The actions of senior leaders and direct managers are the most important drivers of employee engagement by a factor of between 400% and 700%.

So not only is this “silent profit driver” largely in your control but the financial impact of increasing the levels of EE in your organization is undeniably real.

In fact, I doubt you could find a single CEO of a Fortune 500 company who even questions whether increasing EE increases EBITDA.

The Numbers behind the Science:

In an effort to be as informative as possible as quickly as possible let me get right to the math.

A recent study done by the Gallup Group in October of 2011 involving thousands of participants revealed that, on average, 71% of people are “disengaged” from their work. Within this group 55% are considered “not engaged”. These people do their jobs but not much more. The other 16% are considered “actively disengaged”. These are people who are actually working against the best interests of the organization.

This leaves only 29% of the workforce who are considered “highly engaged”. These are the ones who put in extra time; think about their jobs during off hours and are energized. They are the ones who generate the most per capita profit.

This means that 7 out of 10 people in organizations are not engaged in their work. Imagine the lost productivity and profits that represents! And in today’s economy this can spell death to an organization.

The High Cost of Low Employee Engagement

Lets look at how the level of EE in your organization affects your profitability.

The following EE vs Productivity numbers are generally accepted throughout the industry, give or take a few percentage points:

•  “Highly engaged” workers are 90% productive
•  “Not engaged” workers are 60% productive
•  “Actively disengaged” workers are 40% productive.

When you combine the EE and the productivity numbers the impact on profits becomes clear:

•  29% are highly engaged and are 90% productive.

                    .29 * .90 * 100 = 26.1% productivity level

•  55% are not engaged and are 60% productive.

                    .55 * .60 * 100 = 33% productivity level

•  16% are actively disengaged and are 40% productive

                    .16 * 40 *100 = 6.4% productivity level

This means that your overall productivity levels are:

26.1% + 33% + 6.4% = 65.5%

To make this real lets assume a company spends $2 million on employee compensation. Under this scenario their ROI on that investment is:

2,000,000.00 * 65.5% = 1,310,000.00.

This represents a $690,000 “payment vs. performance” gap.

 

The Big Difference of a Small Adjustment

Now lets look at the impact to your bottom line that will occur if you simply increase the highly engaged numbers by only 5% and decrease the actively disengaged numbers by the same amount. And if your company is like most, and if you decide to make EE a priority in your organization, moving your EE numbers 5% in this fashion is not unrealistic at all.

WARNING: These numbers are almost un-believable!

•  34% are now highly engaged @ 90% productivity.

                    .34 * .90 * 100 = 30.6% productivity level

•  55% are still not engaged and still 60% productive.

                    .55 * .60 * 100 = 33% productivity level

•  11% are now actively disengaged and are 40% productive

                    .11 * 40 *100 = 4.4% productivity level

New productivity levels = 30.6% + 33% + 4.4% = 68%

New Profitability Calculations: 2,000,000.00 * 68% = $1,360,000.00

This represents a $50,000 improvement in the “payment vs. performance” gap in only one year!

What is also important to realize is that as long as you keep your management teams fine tuned and your culture healthy this $50,000.00 continues to flow to the bottom line year after year. Imagine the impact to your Retained Earnings and the vaule of your business that this will have in just a few short years.

All of a sudden investing in developing solid management teams with excellent leadership skills becomes one of the most important and easy ways to drive significant profits right to your bottom line.

In Closing

For some it may seem counter intuitive to invest in building a solid leadership team and increase levels of employee engagement in an organization that you are looking to sell. But if you think about it more deeply it makes perfect sense for  each of the entities involved in a sale: the seller, the buyer and the organization.

 

This is because the seller has created a higher quality organization that is more profitable; the buyer is getting a healthy, efficient and profitable organization and the organization itself is healthier and better prepared to go through the transition without major disruptions to the operations.

However, If you are like I was when I first started looking at the relationship between EE and EBITDA I doubted the accuracy of the figures. But I can tell you that study after study from organizations ranging from the Harvard Business School to the McKinsey Group prove them out.

So while we have all been trained to increase profits by cutting costs; capturing more clients and negotiating for higher prices few of us have been taught how to activate one of the most significant profit drivers available to us: increased Employee Engagement.

And at a time when profits are very tight, competition is tough and the market is demanding it should be very comforting to realize that with just a few internal adjustments you can generate additional profits that will increase your bottom line, the value of your business and your level of attractiveness in the marketplace.

That is a very powerful trifecta that works completely in your favor.

Jeffrey Deckman is the founder of Capability Accelerators, a consulting firm that specializes in helping clients convert human capital into financial capital. If you have questions or comments he can be reached at JDeckman@CapabilityAccelerators.com

 

 

The story you are about to read is true.  The names have been changed to protect the guilty.

I am a cop, assigned to the Bureau of Missing Estate Plans.  My captain is Giuseppe Venerdi, my partner is Jose Viernes.  My name is Joe Friday.

It was a balmy spring day when Captain Venerdi called us into his office.   The captain started right in.  “I need your help with a determination of probable cause.  The decedent, Vic, was in business with his partner Tim.  They had a lawyer draw up a cross-purchase buy-sell agreement so that if anything happened to Vic, Tim would buy his shares at a price to be set in the agreement, and vice versa.  Vic and Tim were required to buy insurance on the life of the other to provide money for the purchase.”

“Sounds good.”  I said.

“Yeah”, the captain continued, “there was nothing wrong with the document.  But there is a blank spot in the agreement with the price was supposed to have been filled in.  It’s been 10 years since the agreement was signed, and the amount of insurance has never been adjusted as the value of the business increased, and to top it all off, each partner purchased a policy on his own life, and Vic made his policy payable to his wife.  Vic died unexpectedly two weeks ago.  He was only fifty years old.”

José interrupted.  “So the wife has the money, the estate has the stock, and Tim has an obligation to buy the shares, but no money to do it with.”

“You got it” the captain said.  “Vic and Tim had a cross-purchase agreement, but they never funded it correctly, and never updated it, so they never had a business succession plan that would work.  Tim says its Vic’s fault because he gave the insurance proceeds to his wife; the widow says it’s Tim’s fault because he was supposed to buy a policy on Vic’s life, not his own.  The widow doesn’t want the stock, but doesn’t want to make a gift to Tim, and other creditors of the estate don’t want a sale at less than fair market value.  So, who is responsible for the missing estate plan?  Vic?  Tim?  The lawyer?”

I was silent.  I was calculating the legal fees to straighten this mess out, and wishing I’d gone to law school.

BMEP CRIMESTOPPER TIPS:

• Clients tend to believe that their planning, be it estate planning or business succession planning, is complete as soon as the documents are signed.  They need to be informed, and reminded, that no plan is complete until it is properly funded.
• Like any other estate plan, business succession plans need to be reviewed regularly, especially if the agreement itself sets the purchase price.  A change in the tax laws may make a redemption agreement more favorable than a cross-purchase, or vice versa.
• A review of the funding of a buy-sell is also critical.  As the business increases in value, additional insurance may become necessary.  And as new insurance products are introduced, or as mortality tables change, the old policy may simply become a bad investment.
• The client’s advisory team needs to have a process for reviewing and updating the plan as things change.  Without a formal plan, it is likely that the updating will never get done.