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Life Health > Running Your Business

Get Back To Basics To Fill Void

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Every industry is subject to trends. Fashion, music, politics, and even life insurance experience trends that capture the popular imagination and then fall out of favor. And while trends bring new and useful ideas to our attention, we should never forget to maintain our focus on tried and true, time-honored practices.

Don’t get me wrong; trends do come in handy. They capture the imaginations of our clients and our own. A new product or strategy on the horizon is a great reason to call on an old client and continue to develop that relationship.

At the same time, a trendy solution may not always be the best answer to your client’s needs. Looking for creative applications of a new product to fill a client’s real need is one thing, but looking for a creative need to suit a new product is another thing entirely. That’s when it is time to fall back on the basics.

The small business void

Take small business planning as an example. How do you get back to the basics when counseling a small business owner? Our industry is privileged to provide experienced producers outstanding opportunities to offer abundant product features and planning strategies to small business prospects and clients. Our collective challenge is to appropriately address business owners’ needs and execute the fundamentals prior to even exploring product and strategic solutions.

Anecdotal evidence indicates that while the imposition of the federal estate tax can have substantial impact, the vast majority of small businesses eventually fail after the death of a business owner for the following reasons:

? Lack of a cohesive business succession/key person strategy;

? Lack of interim (short term) liquidity;

? Lack of long-term working capital;

? Neglected estate planning;

? Lack of intergenerational experience and leadership; and

? Intra-family litigation

How many times have you seen the following fact pattern: Owner formed and has operated his/her company daily for 30 years. Children are brought in over the years to perform various tasks with varying degrees of responsibility. But it was the owner who created and developed relationships with the company’s vendors, customers, employees and customers. While the company’s reputation and financial integrity supplement these relationships, the owner’s reputation and relationships drive the business.

Upon transition, vendors are concerned about the company’s ability to take delivery of inventory, supplies and services and continue payment on the same terms the deceased owner enjoyed. The company’s older customers may be wary of the owner’s children since they might not enjoy the same time-honored relationships.

Employees can quickly and easily sense leadership weaknesses and inter-family disputes. And the bank is concerned about the ability of the company to service debt given the likely problems with vendors and customers set forth above.

If the owner’s successors haven’t previously exhibited real leadership skills recognized by the company’s vendors, customers, employees and bank, problems quickly multiply. If there is no estate plan, or if the plan is inadequate, the business is probably up for sale or quickly in litigation among family members.

Back to basics

Get in front of small business owners and ask the tough questions:

–Do your successors know your vendors, customers and bankers?

–What impression have your successors made on these people?

–Do you have guarantees in place that upon your death your successors will be able to do business on the same terms you enjoy?

–Are your successors ready to run the business or will they need to hire key people to fill your role(s) when you are out of the picture?

–Have you integrated your successors into the business in a meaningful manner (i.e., can they operate without your supervision)?

–Will there be a leadership gap (either real or perceived)?

–Will the company’s employees put forth the same effort for the successors?

–Does your estate plan reflect your wishes and intent regarding the future operation or disposition of the business?

–Will your estate plan be perceived as fair and equitable to your heirs?

–How much involvement do you want your spouse to have with respect to additional planning after your death?

This investigation is part of a back-to-basics approach that, as professional advisors, we must never lose sight of. Our guess is that the vast majority of the small business owners you contact will have never tackled all of these questions. And unfortunately, it is unlikely that their attorneys, accountants and bankers have offered any suggestions or made similar inquiries.

The life insurance response

Chances are a business owner cannot get guarantees from vendors, customers and bankers that will allow the business to continue as usual after the owner’s death. But cash talks, and there is no better vehicle to provide necessary cash upon the death of the owner than the guaranteed benefits of a life insurance policy.

Vendors find a lot of comfort knowing that cash is available to meet existing inventory costs and future obligations. They are much more likely to continue filling orders on favorable delivery and payment terms when timely payment is assured. Having planned for this contingency, vendors are also more willing to believe that comprehensive business planning was put into place and the new generation is secure and able going forward.

Bankers love cash in all events. But upon the death of an owner, cash and/or its equivalents are very reassuring when it comes to transitioning the banking relationship to the new generation. Lenders may be far more motivated to continue existing lines of credit and make new loans when liquid collateral may be secured. This makes life a lot easier for all parties.

Customers may or may not be directly affected by the existence of sufficient liquidity in the business. But the new generation, knowing there is a substantial cushion during the transition/succession process, may be substantially more confident and active when servicing existing accounts and pursuing new relationships.

Managing the advisor team

It is virtually impossible to execute a small business transition strategy without the input and cooperation of the owner’s attorneys, accountants and lenders. The client should be educated to value the expertise of these advisors. The execution of a comprehensive business transition plan is not for the faint of heart.

Identify experts in the respective fields of practice and do your best to make appropriate introductions. Recommend that your client seek the best advisors available, even if the cost appears substantial.

You can dramatically increase your value, profile and involvement during the planning process by establishing a strategic timetable outlining each involved advisor’s responsibilities and when work needs to be completed to best serve the client. This can be done in a conciliatory manner and should be recognized as value-added by attorneys, accountants and lenders.

The end result of this back-to-basics process will be a comprehensive, collaborative plan for your small-business client that makes a meaningful impact on his/her family’s well-being by protecting their current and future financial situation.


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