Category: Breakfast at Epiphany’s

Introducing a new weekly blog that covers legal matters, business strategy, and life perspectives… all from the mind of a non-attorney (Project Specialist: Kelton Dopp).

 

Exit Planning: Make it Rain

Legal matters, business strategy, and life perspectives from the mind of a non-attorney.

 

First, a quick recap of where we’ve been on the Exit Planning parade:

What is Exit Planning?
How long does Exit Planning take?
Transfer a Business to Children
Private Equity
Due Diligence
Selling the Family Farm

Today, a new perspective: Making STACKS by participating in Exit Planning.

That’s right. I said it. Stacks.

AKA

Skrillas. Cheddar. Guacamole. Benjamins. Cabbage. Dough. Paper.

Whatever you want to call it. We’re talking about the same thing here: MONEY.

 

That beautiful, disgusting green parchment that people will die for and kill for.

 

What if I told you that you could make money by spending 40 hours in the next year focusing on Exit Planning?

The natural question is: How much?

What if I said $400? Probably not worth it, right? Most business owners probably value their time a little more highly than that.

What if I said $6,000? Maybe… $150 / hour isn’t TOO bad…

What if I got crazy on you and said $80,000? $2,000 / hour.

What if I said you could easily exceed that?

Fair. If I was in your shoes, I probably wouldn’t believe it either. There are too many frauds out there these days looking to make a quick buck.

But before you close the page, please hear me out.

This isn’t some magic pill that instantly helps “cut the fat” from your business. No, what I’m talking about is much more “pushups and situps” than it is “scientific breakthrough”.

It requires sound business strategy, commitment, and a long-term focus.

 

Making Stacks

Exhibit A

If you are a business owner, one of two methods of valuation apply to your business:

  1. The business is worth the fair market value of the assets it owns
  2. The business is worth a multiple of the income it generates

 

1) Adjusted Book Value

If a business is completely dependent upon the business owner, that business will likely be valued based upon an adjusted book value of the assets on its balance sheet.

 

Example:

ASSETS

ASSETS (ADJUSTED)
      Current Assets       Current Assets
            Cash……………………………… $50,000             Cash……………………………… $50,000
            Accounts Receivable……… $200,000             Accounts Receivable……… $160,000
            Inventory………………………. $50,000             Inventory………………………. $30,000
      Fixed Assets       Fixed Assets
            Equipment…………………….. $400,000             Equipment…………………….. $300,000
            Land……………………………… $50,000             Land……………………………… $60,000
            Building……………………….. $200,000             Building……………………….. $220,000
TOTAL ASSETS……………………. $950,000 **TOTAL ASSETS……………………. $820,000**

Adjusted book value also applies if there are major risk factors that prevent the transfer of customers, revenue and ultimately the income stream to a new buyer.

 

2) Multiple of Income

If a business IS transferrable, a new valuation method applies:

EBITDA * Risk Multiple = Value

 

Example:

EBITDA………………………………………….. $300,000
Risk Multiple Range………………………….. 3x – 6x
Business Value…………………… $900,000 – $1,800,000
1) Adjusted Book Value vs 2) Multiple of Income

It doesn’t take a rocket scientist to understand that small business owners want to be on the green line.

Exit Planning does that.

It takes a business that would be on the white line, and – using sound business strategy – helps reorganize the business so a future buyer will see them as a “safer” investment.

In this case, simply moving from the white line to the lowest possible value on the green line means an increase of $80,000 in value.

 

Exhibit B

The next step in the Exit Planning process is taking a business that is situated on the green line and making calculated steps to move them up.

The average small business has a myriad of risk factors that – when seen by a potential investor – serve to constrain the value toward the bottom of the green line.

 

A good Exit Planner knows what those risks are and tells you to correct them so you can increase your value.

A great Exit Planner gives you tools, advice, and essentially becomes an active stakeholder in your business to help you get the job done.

 

Some examples of risk factors that we see in small businesses:

Weak culture

Poor communication

No long term strategy

High customer concentration

Weak management team

No contingency plan

 

Identifying when you have a risk and telling you to correct it is easy. Our process is literally built for that.

We also have tools and expertise to share that can help make change happen.

 

Conclusion

Exit Planning is THE way to maximize value as a business owner approaches retirement.

Obviously true potential depends on the facts involved, but you know that old adage “the sky is the limit”? Yeah, it applies here.

 

Cynical minds will say I “made up” numbers to serve my own agenda.

My response: Yes. You are correct. Those are fictional numbers. I did not think it a prudent idea to throw balance sheet and income figures from our actual clientele up on a public blog. However, I needed numbers to help you visualize and solidify the concept. In the end, this isn’t a submission to the Harvard Business Review. It’s a casual blog dedicated to teaching complex subjects in a way that people can easily understand. We accomplished that purpose today.

 

Last thing: what I did here – particularly as it relates to the art and science of business valuation – is EXTREMELY rudimentary in nature. Individuals who want to learn more should seek expert counsel.

 

Give us a call or shoot me an email if you have more specific questions!

Thanks for reading! To subscribe to our weekly content, you can enter your email on our homepage. You can also follow me on Instagram (@kelton.official), where I regularly post links to new blogs, as well as random pictures of my life.

Protecting What’s Rightfully Yours

Legal matters, business strategy, and life perspectives from the mind of a non-attorney.

 

Asset Protection

Asset Protection is a type of planning intended to safeguard one’s assets from creditor claims.

Aaaaaand most of you have already tuned out.

That’s the challenge.

It’s really difficult to write about complex legal topics in a way that makes sense.

I mean… Creditor? Safeguard?

They aren’t quite on the level of, “hippopotomonstrosesquipedaliophobic” (the fear of long words).

But still.

We don’t use those words in our daily life, so when the brain reads them it has a tendency to shut down.

I guess that’s why I’m here.

 

Please don’t absquatulate, I resolve to disambiguate this axiom.

 

Let’s Try Again

Asset Protection is a type of planning that helps you protect your assets from someone trying to get them.

So… A bank vault provides asset protection?

Well, yes. But that’s not the kind of Asset Protection I’m talking about.

I’m talking about Asset Protection in the world of lawyers, judges, and juries.

 

So tell me, who would try to come after your assets by using lawyers, judges, and juries?

Someone that’s suing you would, right!?

 

Right… But Kelton, I’m a good person. I’m not going to get sued. So does that mean I can stop reading?

No.

There are over 100 million new cases opened in the United States each year (fun fact: that’s over 95% of the WORLD’S lawsuits). Out of those, how many times do you think the person getting sued said, “Yeah. This isn’t a surprise. I’m a bad person. I was planning on getting sued.”

Probably not too many.

GOOD people get sued all the time in this country. Life happens. Mistakes happen.

 

Asset protection is about putting your assets – your cash, your investments, your property – inside the right vehicles so that even if you make a mistake, nobody can take them!

 

Wait, what? Are you saying there are places I can put my money so that – no matter what happens – people cannot sue me and take it?

Yes. That’s exactly what I’m saying.

 

Asset Protection Vehicles

Here are some basic Asset Protection vehicles to be aware of:

Personal Exemptions

Homestead: In Wisconsin, each single individual is protected for up to $75,000 of home equity. For a married couple, this means $150,000 of home equity is “untouchable”.

Life Insurance / Annuity Contracts: In Wisconsin, each single individual is protected for up to $150,000 of cash value in life insurance and annuity contracts. For a married couple, this means $300,000 of cash value is “untouchable”.

Retirement Benefits: In Wisconsin, effectively ALL value that is allocated to qualified retirement accounts (401k, IRA, Pension, Disability Benefits, Profit Sharing Plans) is protected.

Irrevocable Trusts: In Wisconsin, effectively ALL assets that are gifted / sold / held by an irrevocable trust are protected.

 

There are many other strategies that can be utilized, but explanation of those strategies requires too many big words.

Regardless, the point has been made.

 

The Catch

When something sounds too good to be true, it usually means there is a catch.

This time, the catch is fairly straightforward: You cannot move assets around after you have committed the act that leads to a potential lawsuit.

Meaning, you can’t hit someone with your car, and then transfer all your assets into an irrevocable trust. It doesn’t work that way.

You need to do things ahead of time. Just like you can’t buy a better homeowner’s policy after your house burns down.

 

Common Asset Protection Clients

These are the people who are most likely to be the target of a lawsuit, and therefore benefit the most from diligent asset protection planning:

  • Medical Professionals
  • Financial Professionals
  • Lawyers
  • Architects
  • Engineers
  • Recipients of Large Inheritances
  • Business Owners
  • Signors of Personal Guarantees
  • Officers of Public Companies
  • Owners of Boats, Airplanes, etc.
  • Real Estate Investors
  • Independent Contractors
  • Celebrities
  • Wealthy Spouses
  • Children of Wealthy Individuals

 

Conclusion

When you put together an asset protection plan with Epiphany Law, you get an expert opinion on where you should put your assets to achieve maximum protection.

Better yet, you get a list of action items and a due date for completion.

We say, “Hey, Mr. Client. In the coming year you should focus on putting the maximum amount possible in your fully protected 401k and IRA account. Then next year, you should come back and meet with us about creating an irrevocable trust to put your family cottage in.”

Nobody can do everything all at once. But everyone can take palatable, bite-sized steps toward protecting more of their assets.

 

Give us a call or shoot me an email if you have more specific questions!

Thanks for reading! To subscribe to our weekly content, you can enter your email on our homepage. You can also follow me on Instagram (@kelton.official), where I regularly post links to new blogs, as well as random pictures of my life.

What can “The Office” teach us about Non-Compete Agreements?

Legal matters, business strategy, and life perspectives from the mind of a non-attorney.

 

 

Fans of NBC’s hit show “The Office” will enjoy this one.

“I quit.”

Midway through Season 5, Dunder Mifflin’s fun-loving, crass, brilliant, idiotic, borderline-bipolar boss (Michael Scott) shockingly and abruptly hands in his two week notice.

The episode closes with Michael announcing: “You have no idea how high I can fly.”

For the first-time viewer, it’s an altogether jaw-dropping moment.

 

What happens next is a case study in why ALL companies must have Non-Compete, Confidentiality, and Non-Solicitation agreements in place for their key employees.

 

The next episode opens with Michael playing out his remaining two weeks as Regional Manager. Within the first 8 minutes of the episode, his persona spirals from taunting coworkers with his “I don’t give a f*** because I’m outta here” attitude – to legitimate fear when he finds out that the job market is bad – to utter desperation as he scrambles to steal company information and poach employees in an ill-advised attempt to start a rival paper company.

The episode culminates in a scene where Michael is literally sitting on the floor of the office – just out of sight of the interim boss – begging his former coworkers to join him on his new business venture. Nobody obliges and eventually Michael is escorted from the premises.

The camera shifts to receptionist Pam Beesly, who – for a brief moment – seems to contemplate all of her life’s decisions. Never a risk taker, Pam experiences a moment of impulsivity as she gazes upon an office that has just experienced major upheaval. As if sealing her own fate, she mutters, “Oh no…”, before standing up and running after Michael.

In that moment, the Michael Scott Paper Company is born.

As the remaining episodes of Season 5 play out, Michael Scott Paper is able to undercut Dunder Mifflin’s prices and steal away dozens of clients.

 

Let’s tie this into real world insights.

 

The Agreements

The opening remarks indicated that all companies should have three Agreements with their key employees. That might be a little aggressive. I’ll soften my stance:

All companies should understand what these agreements do, and consider the benefits of implementing them.

What are they? I repeat:

Non-Competition. Confidentiality. Non-Solicitation.

In theory, they can all be standalone documents. In reality, most companies mash them together, wrap a neat binder around them and call the whole deal an Employment Agreement.

 

If we pick it apart, here’s what each section says:

 

Non-Competition

Mr. Key Employee, by signing this agreement, you are specifically restricted from:

Owning;

Managing;

Working for;

Associating with;

(Fill in the blank);

Any business that is substantially similar to our company, and operates within ___ (fill in the blank) miles of our current location.

 

Confidentiality

Mr. Key Employee, by signing this agreement, you are specifically restricted from:

Using or disclosing our proprietary information (including customer lists, pricing methods, vendors, etc.)

 

Non-Solicitation

Mr. Key Employee, by signing this agreement, you are specifically restricted from:

Encouraging company employees at (fill in the blank) location;

Encouraging company employees who you had direct relationship with;

Encouraging (fill in the blank)-level employees of the company;

To terminate employment with the company or otherwise solicit such individuals in a way that would diminish that employee’s service to the company.

 

Conclusion

These restrictions generally become effective upon the employee’s official hire date and may last up to 24 months after termination (depending upon a bunch of legal factors).

 

Would these agreements have stopped Michael Scott from starting his own company, while stealing clients and other employees in the process? Probably not. His character embodies .1% critical thinking.

BUT it is likely that any one of them would have given his former employer, Dunder Mifflin, legal recourse to shut the company down the moment he started it.

Having all three is an iron-clad no-doubter. Point. Set. Match. Game. Game Over. End of Game: Dunder Mifflin.

 

In the end, I wouldn’t rewrite a single line of “The Office”. It is one of the single greatest comedic masterpieces ever created.

But unless you want your business to become the inspiration of the next great comedic masterpiece, I recommend protecting yourself. The Agreements are a good start.

 

Give us a call or shoot me an email if you have more specific questions!

Thanks for reading! To subscribe to our weekly content, you can enter your email on our homepage. You can also follow me on Instagram (@kelton.official), where I regularly post links to new blogs, as well as random pictures of my life.

 

 

Private Equity

Legal matters, business strategy, and life perspectives from the mind of a non-attorney.

 

The business model of a private equity firm is easy enough to understand. Right?

Per Investopedia.com: “Private equity is composed of funds and investors that directly invest in private companies, or that engage in buyouts of public companies, resulting in the delisting of public equity. Institutional and retail investors provide the capital for private equity, and the capital can be utilized to fund new technology, make acquisitions, expand working capital, and to bolster and solidify a balance sheet.”


Uhhh… What?

Don’t worry, I got your back.

 

Here’s how it all begins: A group of individuals (collectively, the PE firm) raise money by presenting an investment strategy to other companies (financial institutions, for example) and wealthy individuals.

 

Once money is raised, the investment period closes. The PE firm takes the money they raised and – following the core investment strategy – buys businesses.

 

Once a business has been purchased, the firm uses their expertise to manage the business for a period of time (5-ish years) before selling it (either back to the management team or to an entirely new party). If they’ve done their job successfully, the value of the business has grown, and they have a net profit to take home to their own investors.

 

*PE Firms usually want to buy a majority stake (over 50%) in the businesses they acquire. Why? Simple: They want to call all shots.

 

Example:

XYZ Equity is a new PE Firm. Their core investment strategy includes the following:

  • Industries:
    • Niche manufacturing
    • Business services
    • Food processing and packaging
  • Company Characteristics:
    • Enterprise values ranging from $5 to $50 million
    • Stable and consistent cash flow
    • Midwestern location or focus

XYZ Equity conducts multiple presentations of this core investment strategy in front of potential investors. Thanks to the soundness of their strategy and the experience of their consultants, they raise $10 million in the initial round.

XYZ Equity goes shopping for companies that meet their criteria.

XYZ Equity buys a 100% stake in AB Drilling, Inc., a niche manufacturer of Deep Sea Drilling Equipment in central Indiana, for $3.5 million.

It’s an ideal acquisition for XYZ Equity, because one of their senior consultants previously owned a profitable heavy-equipment manufacturing company, and two more of their consultants have extensive engineering backgrounds.

Over the course of 2 years, XYZ Equity invests another $1.1 million to grow the company, and successfully flips it to a competitor for $7.6 million. A $3 million gross profit!

 

Appealing to a Private Equity Firm

 

So that’s all fine and dandy, but the real question is… How do you – the small business owner – take advantage of Private Equity as a resource to sell your company?

It depends.

All of these PE firms are looking for something a little different.

Lucky for you, I did the research. Here are the criteria for six PE firms that work with Wisconsin businesses:

 

Mason Wells

Lubar & Co

Progress Capital Group

Lakeview Equity

PS Capital Partners

Blackthorne Partners

Minimum Size

$5 million EBITDA

$5 million EBITDA

$500k EBITDA

$5 million Enterprise Value

$10 million Annual Revenue

$1 million EBITDA

Geographic Focus

Midwestern US

Midwestern US

Within 2 hours of Milwaukee, WI

Midwestern US

Upper-Midwest US

Southeastern WI

Facilitate MBO?

Yes

Yes Yes Yes Yes

Yes

Will Accept Minority (<50%) Ownership Stake?

No

Yes No Yes Yes

Yes

Industries:            
   Building Products

X

X     X

   Construction  

X

       
   Consumer Goods

X

X

 

X

X

 
   Energy

X

X

X

     
   Engineering

X

X

     

X

   Financial Services

X

X X X

 
   Food

X

X   X

X

 
   Healthcare Products

X

X

X

     
   Healthcare Services

X

X

       
   Niche Manufacturing

X

X X X X

X

   Packaging

X

    X

X

 
   Real Estate            
   Retail            
   Specialty Distribution

X

  X X  

X

   Specialty Services

X

X X X X

X

 

*Keep in mind that these are general guidelines. In many cases, PE firms have the ability to remain flexible with their investment criteria. It is recommended that business owners contact a PE firm directly to discuss any potential investment opportunity.

 

Meeting the initial “screening” criteria of a Private Equity firm is just the beginning. Moreover, ALL Private Equity firms are seeking companies that meet the following requirements:

  • Strong, experienced management team
  • Positioned for future growth
  • Limited customer concentration
  • Non owner-dependent
  • Competitive advantages
  • Solid strategic vision
  • Stable financial history
  • Quality reputation
  • Realistic expectations

 

Epiphany Law’s Exit Planning Program is designed to prepare a business for sale. It is designed, specifically, to help a business become more attractive in the eyes of a 3rd party buyer – like a Private Equity firm! It addresses each of those ^ criteria, and many more.

 

Your first step is completing a State of Readiness assessment, which offers an unbiased opinion on the preparedness of YOUR COMPANY for a transition / sale. If you’re ready, great! Keep up the good work until it’s time to hit the ‘eject’ button. If you aren’t, we will recommend ‘next steps’ to get you where you need to be.

Give us a call or shoot me an email if you have more specific questions!

Thanks for reading! To subscribe to our weekly content, you can enter your email on our homepage. You can also follow me on Instagram (@kelton.official), where I regularly post links to new blogs, as well as random pictures of my life.

Due Diligence

Legal matters, business strategy, and life perspectives from the mind of a non-attorney.

 

So you want to sell your business, eh?

Obviously, the reality is somewhere in the middle. Which end of the spectrum does it fall on? Hard data indicates that reality is much closer to the latter.

70% of businesses placed on the market NEVER sell.

That’s 7 out of 10.

If you’re a small business owner, I want you to think about your top 2 competitors. If you all went on the market today, statistically speaking, only one of you is going to sell. The other two would be liquidated. Yikes.

 

Even if you are fortunate enough to receive an initial Letter of Intent, you are not “home-free”.

According to Forbes, nearly 50% of all deals fall apart in the formal due diligence process!

That means, in a TON of cases, the money and mutual interest is there, but it doesn’t get to the finish line because of something that happens in Due Diligence!

 

What is Due Diligence?

Merriam-Webster says, “Research and analysis of a company or organization done in preparation for a business transaction.”

I really like that definition. It’s simple and straightforward. Unfortunately, Due Diligence is anything but simple and straightforward.

 

It’s a HIGHLY complex process that requires a TON of time, for both the buyer and the seller.

 

The process of formal Due Diligence begins when a Letter of Intent is executed. This letter is generally non-binding, and usually discloses a range of possible purchase prices.

Next, the buyer will likely sign a non-compete and non-disclosure agreement in exchange for the ability to review the seller’s sensitive documents.

Then, all H*** breaks loose.

A well-educated and experienced buyer will look for every conceivable way to “re-negotiate” terms of the original offer. They analyze and scrutinize until they are satisfied that every stone has been overturned. This includes:

  1. Financial Documents
  2. Organizational Documents
  3. Physical Assets
  4. Technology
  5. Intellectual Property
  6. Customers
  7. Strategic Direction
  8. Contracts
  9. Employee Benefits
  10. General Employee Issues
  11. Key Personnel
  12. Litigation
  13. Environmental Issues
  14. Tax Matters
  15. Insurance Matters
  16. Professional Affiliations
  17. Press Releases

These are just a handful of the topic areas typically covered. Have you ever seen an actual Due-Diligence Checklist? A short checklist is 10 pages long. An extensive checklist can push 25 pages without blinking an eye.

What if you can’t find some of the information requested?

…Or it takes you a few weeks to deliver the information because you’re ‘busy’?

…Or you feel uncomfortable disclosing the information?

As the selling party, that’s all your prerogative. I can promise you, though, it doesn’t paint you in a good light.

 

Buyers generally are given 30 to 60 days, just to review the material once it has been received. At that point, all parties may come back to the negotiation table to try and close the deal.

Start to finish, most deals take at least 6 months to close. Many can take significantly longer. Can you imagine the pain of having a deal fall apart in the final stages?!

If the Due-Diligence process equates to actual wartime preparation (in terms of the planning and strategy required to do it well), most business owners act like they are preparing for a casual water gun fight in their backyard. Woefully unprepared.

 

Practice Makes Perfect

Wouldn’t it be nice if you could get a practice run at Due Diligence? You know, get bruised up a little bit – maybe a few years in advance of your exit. That way, you could figure out the things that you need to correct while you still have time on your side. Plus, you wouldn’t be blindsided by anything when Due Diligence happens for real, because you’ve got experience on your side. No surprises.

Man… That would be perfect…

 

By Exit Planning with Epiphany Law, you can do just that.

Your first step is completing a State of Readiness assessment, which offers an unbiased opinion on the preparedness of YOUR COMPANY for a transition / sale. If you’re ready, great! Keep up the good work until it’s time to hit the ‘eject’ button. If you aren’t, we will recommend ‘next steps’ to get you where you need to be.

 

Give us a call or shoot me an email if you have more specific questions!

Thanks for reading! To subscribe to our weekly content, you can enter your email on our homepage. You can also follow our new Instagram account (@breakfast.epiphany), where we regularly post links to new blogs!

What is Exit Planning?

Legal matters, business strategy, and life perspectives from the mind of a non-attorney.

 

If you would be so kind, please share this with others. The madness needs to end. People need to know what Exit Planning is. Thanks in advance!

 

If you’ve been following this since the beginning, you may remember that I wrote a post with this same title last November.

Fast forward 6 months, despite many related posts and marketing efforts, I remain convinced that people still have no clue what I do.

That’s on me. I haven’t found easy, simple ways to explain it.

All of that changes now. For once – and for all…

 

What is Exit Planning?

From the dawn of time, business owners have sold their businesses just like they would sell their homes:

 

“Alright, I’m sick of doing this, I want to retire.”

*Contacts Business Broker* *Business Broker lists the business for sale* *Interested parties make offers*

 

Everything goes pretty smoothly until an offer is accepted.

 

“Sweet, I have offers. I’ll accept the highest one.”

*Accepts best offer.* *Interested buyer conducts due diligence, finds a bunch of things wrong with the company.* *Offer is ‘renegotiated’.*

“Damnit. That’s a lot lower than before.”

 

At this point, the business owner is exhausted after spending MONTHS negotiating the deal. They feel mediocre and insecure due to all the nit-picking that the buyer is doing.  They are stuck between a rock and a hard place – backing out means restarting the whole painstaking process and trying to find a new buyer, but moving forward means accepting a reduced offer.

 

“I just want this to be over with. Tell them they have a deal.”

*Deal closes* *Business owner goes to meet with accountant*

 

“Oh shoot. I forgot about taxes.”

“Pay off debt? I thought the buyer was assuming my debt!!”

 

And THAT is why 75% of business owners who sell their business feel “profound regret” about when, why, and how they sold within 12 months of the sale.

 

Don’t sell a business like you would sell a home

Selling a business is like WAY more difficult than selling a home.

 

EXAMPLES:

When you sell a home, you have thousands of potential buyers.

When you sell a business, you have a handful.

 

When you sell a home, your buyers are not highly educated and often let emotion or feeling dictate when making their decisions.

When you sell a business, your buyers are highly educated and rely on concrete fact and skilled negotiations when making their decisions.

 

When you sell a home, an accepted offer may lead to a closing in a matter of days (and that offer is unlikely to change).

When you sell a business, an accepted offer may lead to a closing in a matter of months (and that offer is likely to be renegotiated along the way).

 

Practice makes perfect

Your kid wants to get better at basketball. What do you tell them?

“Practice! You need to get your butt out on the court instead of playing Fortnite all day.”

 

Heed thine own words.

 

You want to exit your business smoothly? Here’s what I tell you:

“Practice! You need to put the time in and plan out your exit if you want to avoid disaster.”

 

Exit Planning offers business owners an opportunity to learn, practice, and strategize in a safe environment. It offers business owners the opportunity to simulate the Due-Diligence experience so they can correct areas of concern before a potential buyer ever sees them.

 

Business owners get a “report card” and a detailed list of action items that they would be wise to accomplish before listing the company for sale. If they want our help in implementing the plan – great, we can do that! If not, there’s no hard feelings.

 

Succession Planning

But what if a business is being passed to family or management team? In that case, is there anything to practice?

YES!!!

Read this.

Basically, all the same principles apply AND we are faced with the additional challenge of helping your successor obtain financing.

 

Epiphany Law will conduct Due-Diligence on your company and tell you what to do in order to sell your business for more money.

 

Business Owner Beware

Exit Planning is a new practice, and it is becoming “trendy” among advisors who see it as an opportunity to generate new business.

I can vouch for the process we have. We give WAY more value than we receive for our services. I cannot definitively say the same for others.

 

 

Give us a call or shoot me an email if you have more specific questions!

Thanks for reading! To subscribe to our weekly content, you can enter your email on our homepage. You can also follow Epiphany Law on Facebook and LinkedIn for regular updates from the Firm. Finally, you can follow me on Instagram (@kelton.official), where I regularly post links to new blogs, as well as random pictures of my life.

How To: Transfer Ownership to Children

Legal matters, business strategy, and life perspectives from the mind of a non-attorney.

One of my life’s obsessions is empathy.

For those who don’t know what that is, empathy is the ability to understand and share in the feelings of another.

Put another way: It is the ability to put yourself in someone else’s shoes. To understand what they think, how they feel – and beyond that – why they feel the way that they do.

Empathizing with someone is one of the kindest, purest things you can do for another human being. It takes TIME to empathize. It expresses true care.

 

Beyond that, the practice of empathy helps YOU succeed in life. By empathizing, you instantly become a better communicator.

Practicing Empathy

Example:

Here is how most people give advice:

Friend: “My boss is such a jerk. He treats me like I’m an idiot or something, constantly patronizing me. I don’t know if I can handle working there anymore…”

Advice-Giver: “Yeah, I remember when I had a boss like that. I wouldn’t put up with that if I was you. You need to get out of there. Just move on? You deserve to be treated better than that.”

Friend: “You might be right…”

 

Here is how someone practicing empathy gives advice:

Friend: “My boss is such a jerk. He treats me like I’m an idiot or something, constantly patronizing me. I don’t know if I can handle working there anymore…”

Advice-Giver: “Yikes, that doesn’t sound good. Does he treat everyone like that?”

Friend: “Sort of. I’ve heard other people complain about it too.”

Advice-Giver: “Do you like the other people that you work with?”

Friend: “Yes, I really do. There are a lot of good people there.”

Advice-Giver: “Do you enjoy what you do?”

Friend: “Yeah, I actually love it. And they give me a ton of flexibility with my hours too. I just wish he wouldn’t treat me like that sometimes. It’s so frustrating!”

Advice-Giver: “That would frustrate me too. Definitely a confidence/morale killer for you. How do you respond when he talks down to you?”

Friend: “I don’t know… I guess I usually just not and bite my tongue. Try not to say something smart back to him, you know?”

Advice-Giver: “That’s definitely a good thing to do. It amazes me how some “leaders” can be so out of touch with the abilities of their employees. I had a boss like that once. Only thing I could say is that if you want something to change, you might have to experiment with how you respond to him talking down to you.”

Friend: “What do you mean?”

Advice-Giver: “Well, obviously you know the situation better than I do… But when you just nod and bit your tongue, he might walk away having no idea if you really understand what he said. It might kill you to do it, but you could try vocalizing your understanding, having more positive body language. I mean, don’t be overtly sarcastic about it, but force yourself to be genuinely positive and express your understanding. It might take a while, but eventually he might start treating you differently.”

Friend: “Huh. I never thought about that. I guess I could give it a try.”

 

Who gives better advice?

 

The best communicators are selfless. They take the time to gather more information. They figure out how the other person feels. Then they adapt their own actions/behavior/advice accordingly.

 

Communication is a huge key to the successful transition of a family business. As the current owner of the family business, you are in a great position to extend empathy to any children who are next in line.

 

Transfers to Children

Here are a few tips:

  1. If you want them, tell them. If there is an opportunity for them to “take over”, it is up to you to make it known. “Well they haven’t shown any interest” is a cop-out. Ask yourself why they haven’t shown interest. Talk to your spouse about it. There are likely some obvious reasons. If they aren’t clear to you, they may be clear to your spouse. Above all else, have an open and honest (non-confrontational) conversation with your kid(s). It’s up to you to be the leader that your family and your business needs. If you don’t do it, you will always wonder, “what if?”
  2. Don’t expect them to be you. It happens ALL THE TIME. There is a named successor. Maybe it’s the owner’s daughter. She has a solid role within the family business. Business owner: “I don’t know if this is going to work out. She just doesn’t have the sales skills to drive new business and that is an important part of what I do.” Stop it. Focus on her strengths instead of her one glaring weakness. Figure out if there is a way that you can restructure the business so that sales no longer fall on the owner’s shoulders… i.e. hire a sales team!
  3. Address concerns directly. If there ARE unavoidable concerns with your successor, address them directly. Don’t make backhanded comments hoping to send the message. Don’t embarrass them in front of other employees. And most of all, don’t sit on your concerns “hoping” that something will magically change. If you do, you are setting everyone up for failure.
  4. Don’t forget about non-family employees. Whether you made specific promises to key employees or not, don’t forget about them as you begin making a transition. Allow them to express any concerns, and let them be a part of the solution to those concerns. This will help them feel valued and “in control” as the transition begins to take place. Also, there are many ways to reward key people for their years of loyalty without giving them cash or a stake in the family business.
  5. Don’t get greedy. We see this one a lot too. A business owner will have an outstanding successor lined up, the transition of duties will go extremely smoothly and all-of=-a-sudden the business will experience a growth period. Of course, no formal agreements were made so the owner decides to hand on and reap the rewards a little (or a lot) longer. Make formal agreements and stick to the terms of those agreements, otherwise conflict is inevitable.
  6. Show them how to buy-in. It is entirely possible (likely, in fact) that you cannot afford to “give” the company to your successor. Don’t let this deter you from keeping the business within the family. If time is on your side, there are ways of helping your successor build enough capital to buy you out.
  7. Multiple children. The absolute worst thing you can do is ignore the conversation and keep the future of your estate a mystery to your children. In the face of mystery, most people begin to act very irrationally. Starving for clarity on the situation, they will formulate their own (false) set of facts to try and control the narrative. Depending on their outlook on life, those facts will be heavily slanted for or against them, and fracture within the family will ensue. This can all be avoided if you – the leader of the family – are willing to step up and provide a clear and well-reasoned agenda for how the business will be distributed. You should do it the moment you sense it becoming a concern among your children.

 

Above all, be selfless and practice empathy while exploring the possibility of business transition. For those that are able to do this, the logistics of “who, when and how” become exponentially easier. If you need someone to help you plan out the logistics, give us a call. J

 

As always, give us a call or shoot me an email if you have more specific questions!

Thanks for reading! To subscribe to our weekly content, you can enter your email on our homepage. You can also follow Epiphany Law on Facebook and LinkedIn for regular updates from the Firm. Finally, you can follow me on Instagram (@kelton.official), where I regularly post links to new blogs, as well as random pictures of my life.

Selling the Family Farm

Legal matters, business strategy, and life perspectives from the mind of a non-attorney.

Farming runs deep in my bloodline.

My ancestors were homesteaders. Farmers by trade. According to the Portage County records, Henry H. Dopp settled in the BOOMING (there were 3 families total) township of Belmont, WI around the year 1852.

Fast forward 166 years and natural selection hasn’t taken its course on the Dopp family.

But it has taken its course on the Dopp Family Farm – at least our portion of it.

My Grandfather still farms a small portion of the original Dopp homestead today. But it’s just a fraction of what ‘Dopp Farms’ was in its hay day.

I grew up less than a mile from that homestead. We drove past those fields every day on our way to and from school. I still drive past it every time I go home to visit.

I sometimes wonder how life would have been different if somebody else had been given the keys to the operation after my great-grandfather stepped out. If some better – more proactive – planning had been done, maybe the operation wouldn’t have failed while my dad was graduating high school.

Would my dad have followed in the family footsteps and become a farmer himself? The answer is likely yes. After all, his lifelong idol – my great-grandfather Russ Dopp – was the very man who had built the operation to one of the largest in the area.

WHAT WOULD I BE DOING?

It took only one generation of mismanagement – no, no. One PERSON making a series of terrible, erratic decisions – to unravel the whole deal.

Boom. That was it. Dopp Farms – for all intents and purposes – was gone.

The rest is history.

Dad went into Ag sales instead of Ag production, and my brothers and I haven’t spent but a handful of days working in the fields.

Amazing how life goes sometimes, isn’t it?

Whether you’re considering an internal transition or a sale to a 3rd party, here are a few tips so your farm doesn’t implode like my family’s did.

Things to consider as you transition your family farm.

Fair does not mean equal.

This is a big one for farms. Inevitably, most farm operations have some children who are an active part of the farm and some who have moved on to “bigger and better” things. How do you split it up ‘fairly’ among all the kids?

I can’t answer that question confidently without having a conversation with you, but I can tell you what not to do:

  • Don’t avoid the conversation. The absolute worst thing you can do is ignore the conversation and keep the future of your estate a mystery to your children. In the face of mystery, most people begin to act very irrationally. Starving for clarity on the situation, they will formulate their own (false) set of facts to try and control the narrative. Depending on their outlook on life, those facts will be heavily slanted for or against them, and fracture within the family will ensue. This can all be avoided if you – the leader of the family – are willing to step up and provide a clear and well-reasoned agenda for how the farm will be distributed. You should do it the moment you sense it becoming a concern among your children.
  • Don’t discount sweat equity. The children who have an active role on the farm have likely contributed to the growth of the business as a whole. In addition to helping you grow the business, they have worked longer hours, taken on a greater amount of risk, and potentially earned less compensation than they would have if they had never come back to the farm. While it is difficult to quantify what this is worth, it is a great mistake to ignore sweat equity entirely. Doing so will likely fracture the business and personal relationship you have with your children who are active in the business.

Finding – and keeping – a Successor.

It is no secret that the farming industry as a whole is having a very difficult time finding and retaining hard-working, trustworthy, talented employees.

Suppose you don’t have any children who are interested in taking over, or perhaps you do, but you know they – alone – won’t be able to manage the whole operation. What do you do?

Once again, I can’t answer that question confidently without having a conversation with you, but here are a few good ideas:

  • Update your employee benefits. You are not allowed to complain about “no good employees” if you aren’t offering the most basic employee benefits. This isn’t 1980 anymore. You need to offer a 401k, a basic healthcare package with dental and vision, and a smattering of PTO days.
  • Offer a clear path to ownership. Handshakes and verbal “promises” of future ownership aren’t going to cut it anymore. It’s your responsibility, as the employer, to offer a written plan that leads to ownership for your successor. Tell them what they need to get better at. Tell them how much money they need to save. Offer them a creative incentive program that helps them accumulate wealth.
  • Contact a reputable “Ag” University. If all of your ducks are in a row and you still can’t find a successor, it might be time to start working with a reputable University to start getting talented young people in the door. Contrary to what you may have heard, there are still several thousand students pursuing ag-related degrees this year. UW-River Falls and UW-Madison produce the most. You can coordinate with their department coordinators to offer internships, schedule interviews, and promote post-graduate positions.

Growing the value of your business.

Understand something: As a farm owner, you can choose to think about the value of your business in one of two contexts.

  1. The value of the assets your business has accumulated.
  2. The value of the ongoing income your business generates.

By thinking along the lines of #1, you are not transferring a business upon your exit. Rather, you are selling assets. There is certainly nothing wrong with that, as your assets likely have a substantial amount of value…

However, by thinking along the lines of #2, you have much greater upside. If you are selling a business – a business that will continue producing income even in your absence – you have the opportunity to demand a premium on top of the Fair Market Value of your assets.

Whether you are seeking an internal transition or external sale, you likely want to drive the value of your farm business upwards in the years leading up to your exit.

Here are some things that can help you drive the value of your farm business upwards:

  • Strong brand reputation.
  • Valuable land base – difficult to replicate.
  • Cross-training among management. Owner has delegated the majority of day-to-day tasks.
  • Strong culture.
  • Dependable management team.
  • Customer base and/or special contracts that bring the business higher margins.
  • Intellectual property (patents / unique processes).
  • Highly efficient day-to-day operations.

 

Give us a call or shoot me an email if you have more specific questions!

Thanks for reading! To subscribe to our weekly content, you can enter your email on our homepage. You can also follow Epiphany Law on Facebook and LinkedIn for regular updates from the Firm. Finally, you can follow me on Instagram (@kelton.official), where I regularly post links to new blogs, as well as random pictures of my life.

 

Don’t Panic, it’s just a Will!

Legal matters, business strategy, and life perspectives from the mind of a non-attorney.

 

I was diagnosed with a Panic Disorder in February 2014.

If you’re reading this and you know what a panic attack feels like: I am sorry.

If you’re reading this and you don’t know what a panic attack feels like, the first part of this blog post is for you; to help you understand what the rest of us go through.

 

What does a Panic Attack feel like?

Now, once again I feel the need to preface my comments by saying that EVERYONE IS DIFFERENT. For some, panic attacks might not be quite as dramatic as I describe. For others – unfortunately – they are every bit of what I describe, and even more.

Imagine this:

You’re in your car at dusk, driving along the winding back roads on your way home from a weekend of camping with friends and family. It’s a dark Sunday evening, heavy cloud cover concealing the moon and the stars. That’s the least of your concerns, though. All you can think about is what you have to do to get ready for work tomorrow morning.

Really shouldn’t have stayed that late on a Sunday… But the Packers had the Sunday Night game, so whatever, it was worth it.

Then, strangely, your right foot starts falling asleep.

Why is my right foot falling asleep? That’s annoying.

You shake it to try and get the blood flowing. Adjust in your seat. No help.

How am I supposed to drive with a tingly foot?

Angrily, you slam down the remainder of your now-cold coffee.

UGH.

You adjust the radio to a different station.

Just as you turn the dial, three (3) things happen simultaneously:

  1. Your right foot gets extremely heavy. It slowly depresses more and more on the accelerator. You try and lift your foot off the pedal, but for whatever reason YOU CAN’T LIFT IT OFF.
  2. The volume on the radio starts increasing.
  3. The headlights on your car shut off. Complete darkness.

All you can do is sit and watch as the RPMs go red. You’re FLYING down the road at 120… 130… 140 mph.

You can see nothing.

You know that trees line both sides of the road. Curves in the road are coming up soon.

Def Leppard blaring in your ears.

Do you feel like you’re going to die? Of course you do. It’s the only logical explanation based on all the facts you have.

That is what a panic attack feels like.

It feels like someone grabs ahold of all the figurative “levers” inside your brain and whips them into overdrive, all at once, for seemingly no reason at all.

Heart rate approaches 2-3x its normal speed. Thoughts begin racing and swirling so much that you physically cannot hold a conversation. Breathing becomes incredibly short and thin – a 1000 lb. weight is sitting on your chest.

Roughly 6 times a year I will wake out of a dead sleep in the middle of the night to this happening to my body.

Half the time I am able to control my thoughts enough to remember what is going on. I utilize some of the tactics I have developed over the years, and my ‘episodes’ end more quickly.

The other half of the time, my world spirals out of control and I all-but pick a spot on the floor for myself to die.

Eventually my world always stabilizes. It feels like hours while I’m going through it. The reality is that it last 20-30 minutes.

I guess you could compare the “post-panic” feeling to the feeling of waking up from a particularly disturbing nightmare. The pure thankfulness to be alive – to have your family happy and healthy – to have everything be ‘normal’ again.

I’ll say it again:

If you’re reading this and you know what a panic attack feels like: I am sorry.

It is living through a state of hell that nobody should have to experience.

 

As for the rest of you: When someone you love comes to you and complains of panic-like symptoms, please do not blow them off. Please do not demand that they “get over it”. Please do not seek out “real” explanations for the symptoms they are having. Want to get them checked out for a heart arrhythmia? – great. Beyond that, seek a reputable mental health professional for a consultation. And most of all: Love them. Support them. They feel stupid enough already, don’t do anything to add to it.

 

Drafting your Will

According to a 2017 study conducted by Caring.com, only 42 percent of U.S. adults have estate planning documents such as a will or a living trust.

For those with children under the age of 18, only 36 percent have those documents in place.

Those are not opinions. Those are facts.

I’m not here to lecture. I get it (probably better than most): Facing your own mortality is extremely difficult.

But guess what? You’re not doing it for yourself. You’re doing it for the people you love.

You need to be able to answer these questions when drafting your will:

  • Name a guardian for your children.
  • Name a caretaker for your pets.
  • List specific personal property assets. Name desired beneficiaries. Name alternate beneficiaries.
  • Name a ‘personal representative’ to make sure your will is carried out. Name an alternate representative.
  • Name a beneficiary of any property left over.
  • Specify how debts, expenses, and taxes should be paid.
  • Specify instructions for the care/upkeep of real estate.

 

The time is now: Just do it. I know that you can handle it.

 

My tips for dealing with Panic Attacks:

  • If you are able to recognize that you are having a panic attack, focus intensely on breathing. Force yourself to take long, exaggerated breaths. In for 4 seconds. Hold for 4 seconds. Out for 4 seconds.
  • Have a “go-to” person to call or talk to. It could be a parent, a significant other, or a friend. Coach this person on your condition. Tell them to talk “at you”. They shouldn’t expect a response. They can talk about dreams, sporting events, or even just recount their day. The simple act of listening to someone talk can be enormously helpful.
  • Ice on the back of the neck. No idea why, but the change of sensation helps me.
  • Take a shower. Again, no idea why, but the change of sensation helps me.

 

Thanks for reading! To subscribe to our weekly content, you can enter your email on our homepage. You can also follow Epiphany Law on Facebook and LinkedIn for regular updates from the Firm. Finally, you can follow me on Instagram (@kelton.official), where I regularly post links to new blogs, as well as random pictures of my life.

 

What does Tax Reform mean for Departing Business Owners?

Legal matters, business strategy, and life perspectives from the mind of a non-attorney.

 

Do you remember that sinking pit in your stomach you got after you received an exam back from the teacher and it was a bad score?

68% D

That feeling has got to be one of the worst things ever.

At least it was for me.

I’ve always been my own worst critic, so it killed me inside when I didn’t live up to the standards I set for myself.

Thankfully, my mom always knew what to say to get me back on track.

“It’s done now. Control what you can control.”

Simple, but great advice. It helped me refocus my perspective and move forward with new energy.

Talk to the teacher, do extra credit, and above all else: Bust my a** to make sure it didn’t happen again.

 

2018 Tax Reform

Whether you were a big proponent of the Tax Cuts and Jobs Act, or a harsh critic, my mom has some advice for you:

“It’s done now. Control what you can control.”

The bill was passed and signed. Barring something unprecedented, it will be effective for at least the next 4 years.

If you’re a small business owner nearing the end of your runway, in some respects this bill should feel more like “100% A+” territory than anything else.

Why?

2 reasons.

1. Higher Net Cash Flows Leading to Higher Valuations

BizEquity recently published a white paper predicting trends for 2018 valuations of privately-held businesses. The spark-notes version of their findings is that valuations are expected to trend upwards, across the board, in 2018 due to positive GDP growth and tax cuts.

The overall methodology is pretty simple: The economy is doing well, so in general, businesses should make a little more money than last year. Those businesses also don’t have to pay quite as much in taxes as they did last year. These two elements result in more money on the table for the owner(s) of the business at year-end. Increasing the “bottom line” is one way to increase the value of your business. The bottom line of every business in the nation was just increased, by virtue of the 2018 tax bill.

2. Lower Taxation of Asset-Based Sales

According to wbjournal.com, more than 90% of business sales to an outside 3rd party (where the purchase price is < $10 million) are Asset-Based sales.

So?

Asset-based sales are confusing. I won’t get into the details of how they differ from stock-based sales this time (we’ll save that for later), but this is what you need to know:

  • 99% of the time, an asset-based sale requires the seller to pay ordinary income tax on some portion of the gain from sale.
  • Sometimes, like in businesses that have a large amount of fixed assets, accounts receivable, or work-in-progress, the amount taxed as ordinary income is quite large.

Thanks to the new tax bill, the highest marginal rate fell from 39.7% to 37.0%.

2.7%, for many business owners, can mean tens – if not hundreds – of thousands of dollars in tax savings – if you sell your business in an asset-based sale under the current regime.

I would get into an example, but again, it’s highly complex and I don’t want to distract from the point (look for a future post on asset vs stock sale).

Bottom line: Business owners who are approaching the end of their runway just received an A+. Especially when you consider that tax rates could have easily gone the other way

 

What will tax rates do in the future?

Look, I’m not here to speculate. I’m here to bring you facts. Period.

Some people like to look at the past to predict the future. If that’s you, you’ll enjoy the following chart. The blue line represents the United States’ highest marginal tax rate for each year since 1913. The orange line shows the current highest marginal tax rate.

Based on that chart, in the last 100 years (since 1918), there have only been 22 years of MORE FAVORABLE tax environments to departing business owners.

Other people like to look at the Nation’s current Debt situation as an indication of where taxes might head in the future. If that’s you, you’ll enjoy the following chart. The blue line is the same. The grey line represents Debt / GDP (an indication of our country’s ability to repay debt) for each year since 1913.

Based on that chart, it’s interesting to see that the last time our Debt / GDP trended downward was between 1946 and 1981. The average highest marginal tax rate in that time? Over 80%. Current highest rate: 37%

I don’t know what the tax situation will look like the next time someone rolls out a new tax bill.

To be honest, I don’t care.

Neither should you.

I’ll say it again: CONTROL WHAT YOU CAN CONTROL.

If you are a business owner who is approaching retirement, you were just given an A+ grade.

Now you control the situation for at least the next 4 years.

It’s time to strike while the iron is hot.

Use your time to develop an Exit Plan. Control your risks. Maximize the value of your business. And get out on favorable terms.

None of us know what the future holds, so there’s no sense wasting any more time worrying about it.

Let’s get to work.

 

The time to start your Exit Plan is NOW. Contact Epiphany Law to do so.

 

 

Thanks for reading! To subscribe to our weekly content, you can enter your email on our homepage. You can also follow Epiphany Law on Facebook and LinkedIn for regular updates from the Firm. Finally, you can follow me on Instagram (@kelton.official), where I regularly post links to new blogs, as well as random pictures of my life.

http://www.taxpolicycenter.org/statistics/historical-highest-marginal-income-tax-rates

https://www.usgovernmentdebt.us/spending_chart_1900_2020USp_XXs2li011tcn_H0sH0lH0f_Combined_Gross_Public_Debt#copypaste