The U.S. and world economies are changing … fast. That we know. What we don’t know, and what our business owner clients don’t know, is how the change will affect each of us.
As an advisor to business owners, you know that, as a group, they are not as uneasy about the stock market’s wild fluctuations as are the rest of your clients. Why? Proportionately, less of their wealth is tied to the performance of the Dow Jones Industrial Average than the “average” investor’s.
Does this mean business owners are complacent? While some take comfort from the fact that they have more control over the performance of their own companies than they do those of the 30 in the DJIA, few are immune to the anxiety we all feel about the possibility of a recession and/or inflation. As most baby boomers monitor the hourly value changes in their IRA accounts, boomer business owners ask, “What effect will an extended recession have on my company?” Business owners face different challenges than do typical boomers, but those challenges are no less worrisome.
Uncertainty and change stimulate boomer owners to act–if they only knew how and where to get help. Motivated by worry and frustrated by the fact that at age 50-plus they had planned to leave their companies in the next several years, yet seeing that plan disappearing in a puff of smoke, most are suffering in silence. Few are reaching out to the advisors who can offer them workable and proven strategies that could make them “the fittest” who will “win out at the expense of their rivals.”
You must reach out to your business owner clients. It is your job to understand that owners can still achieve their goals, to implement the strategies necessary to reach those goals and to share that information with your clients. Even a recession presents opportunities to some owners and you must know what those are.
Offhand, I can think of several strategies to help owners survive and thrive during times of economic uncertainty, but space does not permit a full explanation here. Let’s look at two: Reassessing an owner’s objectives/business value and installing key employee incentive plans.
Asking the right questions
To stimulate an animated discussion about an owner’s choice of successors, wants versus needs, how the market affects desired departure dates and what exit objectives are most important, I suggest that you start with the following questions:
1. Have you identified your exit path and/or successor?
2. Do you know how much money you need annually, after you leave your business, to live comfortably in your post-business life?
3. Have you established the date (for example, Jan. 15, 2011) on which you wish to stop working in and for your business?
4. Have you quantified and prioritized your exit objectives and goals?
Once business owners are clear about their objectives, you can evaluate the business and personal financial resources available to fund those objectives. Your task here is to determine how current (and anticipated) economic conditions affect business value. Further, you need to assess the impact conditions will have on company cash flow. Of course, ask all these questions in the context of meeting an owner’s retirement objectives:
1. Has your company been recently valued?
2. Based on future cash flow, do you know how much your business is worth today?
3. Do you know what value you want or need from your business in order to leave it on favorable terms?
4. If there is a shortfall between the value you need from your business and its current value, do you have a written plan to achieve the growth in value needed to leave your business in style?
Even if you have asked these questions before, current market conditions require that you review them with your business owner clients.
You and your clients need to know what they want and need and what resources they have to attain those goals. Posing these questions helps assess if goals or resources have changed due to economic or other circumstances.
Key employee incentive plans
If owners make no changes to the way they operate their companies, a recession will likely cause a decrease in profitability. Owners who install carefully designed key employee incentive plans, however, can break that link.
When profits are strong, owners often consider sizable cash bonuses to be sufficient incentive to motivate and retain their key employees. When faced with a sluggish or declining economy, however, few owners can afford to have their highest achievers leave when they are needed most.
Central to any company’s planning is the need to motivate management to attain specific performance standards, such as meeting budget or reaching a specific sales goal or perhaps a departmental profitability objective. Motivating and retaining the company’s key employees is indeed a key to meeting profit and cash flow goals, but it is only half the battle. The other half is keeping these key employees long-term. After all, most boomer owners want to exit their businesses in the next several years and it is vital that management is motivated to stay through the owners’ exit.
A common exit planning design mirrors the incentive-based cash bonus plan with a non-qualified deferred compensation plan. The NQDC plan’s benefit formula is the same as the cash bonus formula. The result? The plan not only provides short-term incentives that increase the company’s bottom line, but can also reward long-term employment as the key employee’s NQDC is subject to vesting.
The opportunities for you to take an active role in relieving your clients’ pain are many. And baby boomers–who would like nothing better than to make this recession their last–are especially receptive to your efforts. You must reach out to the silent majority of owners who want to, but simply do not know how to, respond to change.
The current financial storm is not life threatening for most of your business owner clients–if they respond. Never before have owners been so motivated to act. Those of us who advise business owners (especially those whose practices have been product-driven) must also adapt so that we offer services of value to our clients. Working with your business owner clients to ensure that they both survive this storm and are ready to move forward once it ends is the most valuable service of all.
John H. Brown is the president of Business Enterprise Institute, a Golden, Colo.-based provider of exit planning education, marketing support and plan design for business owner advisors. You can e-mail him at email@example.com