I recently had the awesome experience of a lifetime attending a Football Hall of Fame induction celebration for Chargers linebacker Junior Seau. Juniors career spanned 20 years as a linebacker for San Diego Chargers, Miami Dolphins and the New England Patriots. Known for his passionate playing style, he was a 10-time All Pro, 12-time Pro Bowl selection, and named to the NFL 1990s All-Decade Team. Seau started for 13 seasons with the Chargers before being traded to the Miami Dolphins, where he spent three years before four final ones with the New England Patriots.
Seau retired from pro football after the 2009 season. A standout on San Diego’s only Super Bowl team, he was later inducted into the Chargers Hall of Fame and the team retired his number 55. Seau committed suicide with a gunshot wound to the chest in 2012 at the age of 43. Later studies by the National Institutes of Health (NIH) concluded that Seau suffered from chronic traumatic encephalopathy (CTE), a type of chronic brain damage that has also been found in other deceased former NFL players.
The outpouring of love and friendship was overwhelming. This event strengthened my belief in “opportunity.”
Each and every day we have we have opportunity, how we decide to use it creates our reality. People tend to focus on lost opportunities and the negative effects these moments have on their life or business. Speaker after speaker talked about the lost chance to tell Junior how much he meant to them – an I love you, buddie! The sadness in their voices rocked many to tears. All present were focusing on their own lost moment to share their feelings with Junior or someone of importance in their life.
Reflecting on my missed opportunities, I created a new positive affirmation statement to be added to my morning richual. So now not only do I have “I am” statements to remind myself that I am a great custodian of my finances, I am an understanding, caring father of a daughter BUT I have a reminder to tell those around me how much meaning they bring to my life.
Now I make it a priority to to let everyone know I care. Don’t let the opportunity slip away. Take the time to REALLY want to know “how’s it going?” It takes only a minute of your day yet means so much.
Coach Rich Phillips
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There are five areas where business owners, who want to both survive in today’s economic climate and emerge from it poised for growth (or sale), can focus their energies. Those areas are:
• Preserving and Protecting Value
• Identifying Value and Cash Flow
• Creating Revenue
• Creating Value
• Excuses Owners use to Avoid Exit Planning
Most owners are currently waist-deep in the first area: cutting expenses and minimizing risk and taxes in order to protect their companies. For that reason, we kick off this BEI Educational Series with a discussion of each area by focusing on the final one: creating value. While this may seem exactly backwards, it is not. While owners are busy cutting expenses and minimizing risk and taxes, they should be keeping an eye on their endgame: someday leaving their business for an amount of money that will enable them to live the rest of their life in style. The actions you and your client take today must not only preserve value, but must ultimately create value for a future owner.
Even the most pessimistic among us acknowledge that these tough times will not last forever. We may never return to the days of an over-heated M&A market, but once credit loosens and confidence returns, good companies will sell. Will your client’s company be one of them?
Demographically, we know that the future holds many more sellers than buyers. What we don’t know is how this crisis has affected that imbalance between the number of sellers and the number of buyers. We suspect that the market’s inability to support business sales over the past few months has put the sale plans of many owners on hold. We also suspect that many owners are not having a whole lot of fun getting lean and mean. If those two assumptions are true, when this market turns around, there will be a host of owners scrambling for their exits. If (or when) that happens, only the “best” companies will sell.
What can be done today to prepare for tomorrow’s scramble? Re-examine and realign your client’s objectives to adjust to today’s realities.
Assuming, as we do, that the most effective strategies for dealing with crisis are those that address short-term challenges and support long-term goals, let’s understand the long-term goals or your business owner client:
Most owners have a preferred successor in mind: a child (or children), a key management team, a third party or an ESOP. We encourage all owners to re-examine their choices. You may, for example, feel that your only viable exit strategy for the owner is to just not leave the business; that a sale to an outside party is just not in the cards — now or in the future. That feeling may very well not be accurate, especially given the changes in the Small Business Administration loan programs promoted by the Obama Administration.
As we mentioned above, the current economy has forced many owners to postpone their exit dates. We encourage you to talk candidly with your clients about how to re-set their exit clock including in that discussion the fact that for most owners, their sale dates do not equal their retirement dates. (Most buyers require sellers to work past their closing dates to ensure that the company continues to perform.)
Most owners have some idea of the amount of money they need (from both the sale of their businesses and from other investments) to fund a comfortable “life after sale.” (If your client does not know that dollar amount, a financial needs analysis is required today.)
What your client may have overlooked in their focus on surviving today’s challenges, is that both the amount they can expect from the sale/transfer of their company and the value of their other investments have changed. Every owner should be working closely with his or her financial advisor not only to re-assess the make-up and performance of non-business assets, but also to establish a new benchmark of the value of their business today.
In addition to your client’s desires about successor, departure date and definition of financial security, we think they should include long-term growth in their short-term decisions about expenses and risk. As they prune expenses – especially in management – make sure those cutbacks don’t prevent new growth. This can only be done if your client has a good sense of where they want to take their company in the future.
Try to keep in mind that future owners (of whatever stripe) will not be interested in investing millions of dollars in a company that either does not have a motivated management team or in one whose management team is not willing to stay on after the sale.
What do we mean by cash flow? The amount of cash left over after the company has paid its expenses. Common add backs to cash flow include:
We recommend that owners take a hard look at their company’s monthly cash flow statement. Do they really understand what it is telling them? Today every owner must become an expert in reading cash flow statements. If you client is not as comfortable with their company’s financial statements as they are with their favorite novel, they should ask for help. You can quickly teach them to “read” or analyze their financial information so that they can quickly determine, on a monthly basis, their company’s cash flow.
Why is cash flow “king?”
Cash flow has always been hugely important in both running a successful company and in orchestrating its successful sale, but today cash flow is king. Why?
Once your client has a handle on current cash flow they need to create, based on today’s economic climate, a projection of future cash flow. Begin with an accurate picture of current cash flow. Then, create three projections: one for the best-case scenario, one for the worst and one for the likeliest scenario. All of those projections should include assumptions about:
Keep in mind that the owner’s employees may not be able to create these projections. They may have their hands full managing the day-to-day issues. If that’s the case, they should seek the help of a CPA, or consider hiring someone on a temporary or project basis. These projections are simply too important to put off until next week, next month or next quarter.
In the next White Paper, we will talk about how cash flow can be used as a tool to predict the efficacy of strategies designed to preserve and protect value.
Working with business owners I am often asked, “What I think a fair pay raise is and when do I give them.” Twenty five or 50 cents an hour, a dollar an hour, a hundred dollars a month or more… Do I give them once a year, twice a year, at their anniversary or at the start of the New Year? None of the above!
Firstly, you should have pay bands established with a very clear pay raise policy. I see businesses with pay all over the place and no logical pattern. This will cause upheaval within a business and also opens the door for team confrontation within the business.
These are my usual recommendations when working with business owners in establishing the following.
1. Establish position pay bands with a min, mid and max for each position.
2. Only give pay raises based on a percentage basis. DO NOT give raises based on Dollars.
3. Have a set time each year to give pay raises. Usually this will be within the quarter following the businesses fiscal year end for the business or with the yearly anniversary of the employee. The owners are able to determine profitability and affordability. (Note: Since budgeting should be completed, raises should be within the budget and planned for.)
4. Effectively communicate the pay raise policy to all employees and also to all new hires during their hiring process.
5. Drop the employee Performance Evaluation process and put in place a Self-Perform Development process that is not tied to raises.
6. DO base raises on employee engagement and contribution to the success of the business.
There are a few things that come into play to establish the pay raise percentage per employee. The first thing that I look at is what is in the budget for pay raises. For example let say that you have budgeted 10% increase in the payroll