Are You Making Business Financial Decisions by Default?

Back in second grade, it didn’t really matter much if you failed to make a decision. If one of your parents called out into the back yard to ask if you wanted a PB&J or grilled cheese sandwich for lunch and you were intent on climbing the tree and didn’t answer, you suffered no lasting harm from being served your second choice lunch option that day. But things are different now that you’re a business owner.

Decision overload

What’s for breakfast? Who’s picking Johnny up after school? Which route to work has the least construction this morning? Skim milk or soy in that latte? Where to go on vacation. Most of us make multiple decisions every day, fueled by an internet full of expectations and options. But business owners?

Between the business, your employees, your spouse, plus your immediate and extended family members, it can seem as if people are asking you to make decisions non-stop all day. Some are big, and many are small, but it is well documented that making decisions over and over again drains you and leads to decision fatigue  and worse decisions as the day goes on.

“The more choices you make throughout the day, the harder each one becomes for your brain, and eventually it looks for shortcuts, usually in either of two very different ways. One shortcut is to become reckless: to act impulsively instead of expending the energy to first think through the consequences. … The other shortcut is the ultimate energy saver: do nothing. Instead of agonizing over decisions, avoid any choice.”

By the end of the day, no wonder doing nothing about how to save, invest, or protect your money feels like the best choice.

Procrastination

For an entertaining and enlightening look at the effects of not making rational decisions, or procrastination, check out Tim Urban on TED [VIDEO]  and his Forbes interview .

My key takeaway from Tim’s TED talk is the distinction between deadline situations when the ‘Panic Monster’ wakes up and rescues you, and the non-deadline situations where opportunities are lost and decisions are made by default.

“Well, it turns out that there's two kinds of procrastination. Everything I've talked about today, the examples I've given, they all have deadlines. And when there's deadlines, the effects of procrastination are contained to the short term because the Panic Monster gets involved.

But there's a second kind of procrastination that happens in situations when there is no deadline. And it's this long-term kind of procrastination that's much less visible and much less talked about than the funnier, short-term deadline-based kind. It's usually suffered quietly and privately. And it can be the source of a huge amount of long-term unhappiness, and regrets…. The frustration [for people] is not that they couldn't achieve their dreams; it's that they weren't even able to start chasing them.”

Poor business financial decisions made by default

Here are some of the decisions without deadlines that I have seen busy business people make by default (or non-action):

• The current 40-something year-old second generation business leader is suddenly given a life-threatening diagnosis or another serious illness, making it too late to purchase disability income or life insurance that could provide funds to hire a seasoned manager or support their immediate family.
• Your top salesperson is a member of the family business through marriage, then there is an ugly divorce that leaves the business without the industry contacts and relationships to sustain your sales pipeline.
• After the unexpected death of a key investor, you discover their business partner’s heir is a 17-year-old with a full-blown substance abuse problem.
• The co-owner of your business dies with no last will and testament. [Regardless of your wishes, the probate court will decide whether your business continues and how to dispose of its assets based on its business structure and state law.]
• You have decided you want out of this traditional business in order to start a new social impact, purpose-driven business, and your buyout agreement does not stipulate the price or how it will be determined by the owners. Now, as the selling owner you are pushing for a high value while the remaining buying owners want a low value.

Stimulate your ‘Panic Monster’ to act

I can think of at least one business owner I know who keeps a red stuffed ‘Panic Monster’ behind her desk to chase away procrastination and delayed decision-making. What about you? Is it time for you to act on important decisions that you need to make?

Resources

Do You Suffer From Decision Fatigue? New York Times

Inside the Mind of a Master Procrastinator, TED talk [VIDEO]

Tim Urban: How He Turned His Blog Into A Global Movement, Forbes

Surviving Family Business Transition Nightmares

Is Your Money Invested Where Your Values are?

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What is Hybrid Long-Term Care Insurance? (And When to Consider it)

If you’re re-evaluating how much, and what types, of insurance you need in 2022 and beyond, you are not alone. The global pandemic brought many topics to the foreground that were often being pushed aside in the past and finding the right insurance coverage was a big one. While you may be focusing on healthcare insurance options, don’t forget to evaluate your life and long-term care insurance options too, no matter what age you are. 

We have had an increase in clients, both younger and older, that actively want to meet with us to start a financial plan, or evaluate their existing ones, and many were not shy to share that the pandemic was a big factor in the timing of these meetings. However, when it came to insurance, it was more common that we would be the ones approaching them with questions about their coverage during these meetings, but as soon as we started the conversation, clients quickly understood the importance of insurance and were eager to find the right solutions for them to cover gaps.  

According to a study done by Urban Institute, even though half of adults turning 65 today will develop a disability serious enough to require assistance with daily activities of living, only 11% of them have a long-term care insurance policy that will help pay for it.

Where to start: A gap analysis

When we meet with new clients, or existing clients going through a life transition, we include a “gap analysis” as part of the evaluation when working on updating or creating a plan. During a gap analysis we can work with clients to clarify what kind of coverage they already have, pinpoint areas that are lacking in coverage, and start a conversation about what options are available to them to help address the gaps.

The goal during these meetings is to determine if you have coverage for any potential “catastrophes” in the future and provide an objective second opinion. As we like to say, it’s something that you hope you never have to use, but you’ll be glad to have it when you do.

While traditional life or long-term care insurance is something people are usually familiar with (at least by name), hybrid insurances are a newer option that provides more flexibility and are increasing in popularity among clients who are looking for insurance that can adapt as their lives and situations change. There are multiple types and names for these insurance  products, but we’ll focus on two: hybrid long-term care insurance and living benefit life insurance.

What is hybrid long-term care insurance?

A hybrid long-term care policy merges the death benefit of life insurance with a long-term carepolicy. This coverage lets you have access to parts of your life insurance benefits to pay for professional help when you are no longer able to care for yourself. These policies are usually designed for maximum long-term care benefits. For the long-term coverage to apply, you must meet your insurance provider’s  qualifications for benefits, which are usually the “activities of daily living” (ADLs), a term used to describe fundamental skills needed to care for yourself on your own. You also won’t be able to use the coverage for costs usually covered by your normal health insurance such as surgeries, regular check-ups, and prescriptions.

This kind of hybrid insurance allows you to pivot to use the benefits when you need it and also allows the flexibility to keep the costs of care from negatively impacting your estate, or your legacy to heirs or charity.

For some, having individual coverage for life insurance and long-term care insurance separately, while also protecting your estate assets, might not be financially feasible; a hybrid insurance plan might be a more cost-effective solution.

Pros and cons of hybrid long-term care insurance

Hybrid insurances have started to gain so much popularity, that many of the big-name insurance companies who had previously started to back away from life and long-term care insurance have re-entered the market with hybrid coverages. While we have been focusing on hybrid long-term care insurance, there is also living benefit life insurance, but the hybrid has been much more popular with our clients.

One of the reasons hybrid long-term care insurance is more popular is because you only have to pay for a set time period. You also have the option to exchange your policy for the cash you’ve already paid into it if you no longer want/need the policy (surrender charges may apply). If you never end up using the long-term care benefits, then your beneficiaries will receive a death benefit.

Living benefit life insurance however, while it still allows for the flexibility of using your policy for long-term care, puts the life insurance need first, and resembles a more traditional life insurance policy. This means that you do not have a set payment period; you would be paying the same way you would for a whole-life insurance policy, and that is a big factor for some choosing hybrid long-term care insurance as their preferred hybrid plan - especially for younger folks.

So, what’s the catch?  

The cost of hybrid long-term care insurance is not a set number, and you will find different prices depending on your age, health, insurance company, and other factors, which could end up being more than a traditional insurance plan. Similar to traditional life insurance, these long-term care riders must be elected specifically when the policy is first issued and cannot be added later to an existing policy.

Is hybrid long-term care insurance right for you?

While hybrid long-term care insurance has a lot of flexibility and benefits, it’s not the best insurance for everyone.

If you’re on a group insurance plan through your employer, a hybrid long-term care insurance plan is likely to be more expensive  and most employer-based insurance programs only cover you while you’re employed there; coverage ends when you leave.  

Long-term care insurance (whether hybrid or traditional) is stricter in its health screening and underwriting process than other types of insurance.  Depending on your health and/or age, coverage may be very expensive or you may be considered uninsurable.

Make a date with yourself

As it is with all insurance, the “best” choice for you is dependent on the unique factors of your life. But that makes it even more important to sit down and review your coverage on an annual basis, either with a professional, your family, or just by yourself. Insurance can be tricky, and there are changes every year, whether it’s rules and regulations, or your own personal life. Ensuring that your insurance is adapting and changing to match your priorities as you go through life’s transitions is key to help give you peace of mind.

Resources

The Urban Institute

Definition of Activities of Daily Living

Consumer Resources from NAIC

Related Articles

Why a Family Meeting on Finances is a Good Idea – Christina Ubl

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Succession Planning: Key to a smooth business ownership transfer

From the outside looking in, it may appear that transferring a business (through a sale to an outside party or succeeding control/ownership to an employee and/or family member) is an easy, if bureaucratic, process. But the tiniest of scratches to the surface reveals all sorts of issues that require careful consideration; not the least of which is maintaining the success and profitability of the business throughout the ownership transition.

Whether your business is family-owned, sole-proprietorship, partnership, franchise, LLC, or corporation, there are some sound practices and approaches common to all types of organizations considering an ownership transfer.

It Takes Time.

Like so many things in the world of financial management, business owners need plenty of time to make this transition. The continuity and success of the business is sometimes sacrificed if an ownership transfer occurs suddenly or due to a crisis. The entire process becomes more difficult under rushed time constraints.

Communicate.

Open communication about the succession process and plans with employees and family members actually builds trust and security. By informing business stakeholders about succession planning, the owner is demonstrating thoughtfulness and transparency. No one likes surprises when it comes to the future of their jobs and income, so discussing the ownership transfer can be very reassuring. There is no need to divulge private or financial details – only a requirement to let stakeholders know about your plans and timeline.

Plan Ahead.

The ownership transfer is literally all about plans, plans, plans. Experts recommend preparation of a strategic plan, estate plan, succession plan, and a business valuation report as critical components of this process. Realizing that the actual ownership transition will take years (some estimate three to six years) it’s a good idea to seek guidance from professionals that are familiar with your specific business enterprise, such as legal specialists, accountants, financial advisors.

These plans and reports help reveal steps to take to:

• minimize the tax liability of existing and new owner(s),
• build a sound retirement for the existing business owner,
• devise client/customer retention strategies during the transition,
• financially and personally prepare the new owners and managers to take over the business.

Let Them Practice.

Prior to permanently exiting the business, it is very helpful to the new managers/owners to “practice” running the organization in your absence. Plan to try to take trips away from your company so that the new managers and owners can try on leadership and decision-making independently.

Then, Let Go!

Part of completing detailed succession planning is identifying a date of departure. It may be difficult to really let go – but it can be detrimental to the business and new owners for you to only "semi-retire". It is best if you pick a date – and stick to it, although it will be a big adjustment for you.

The Devil is in the Details.

These tips and sound practices are common for helping any business transfer ownership smoothly and successfully. However, the type of business you own, the organizational structure of it, your preferred choice of a new owner, and the method of transfer are all unique, and have distinct legal, estate, and tax implications that must be addressed accurately and thoroughly. And if it’s a family-owned business, these considerations potentially become more complex and sensitive.

Small Business Administration:
http://www.sba.gov/category/navigation-structure/starting-managing-business/managing-business/getting-out

Entrepreneur:
http://www.entrepreneur.com/management/familybusiness/successionplanning/index.html

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Surviving Family Business Transition Nightmares

There are times when imagining the worst-case scenario helps you prepare most effectively for the best case. The transition of a family or closely-held business is one of those times.

Ask yourself, why is it that while Harvard Business School reports at least half of all companies in the US are family businesses - and just over half of all publicly listed companies in the US are family owned - that the most-cited family business statistic is from John Ward’s seminal study finding only 30% of firms survive through the second generation, 13% survive the third generation, and only 3% survive beyond that?

The Family Business Institute identifies a major cause as the failure to imagine and plan for worst-case situations that could dramatically affect not only ownership succession, but management succession planning and leadership development as well.

Worst Case Scenarios

You could start with the classic movie, “The Lion in Winter”, which is an inspired lesson in how not to transfer a family business from one generation to the next. Peter O’Toole, as an aging King Henry II, spars with his calculating queen, played by Katharine Hepburn, over which of their three sons will inherit the throne.

But you do not need to look to Hollywood for unhappy examples. Imagine the impact of any of the following all-too common situations on your own small business and family.

1. The current 40-something year-old second generation business leader is suddenly given a life-threatening diagnosis or another serious illness, making it too late to purchase disability income or life insurance that could provide funds to hire a seasoned manager or support their immediate family.
2. Your top salesperson is a member of the family business through marriage, then there is an ugly divorce that leaves the business without the industry contacts and relationships to sustain your sales pipeline.
3. After the unexpected death of a key investor, you discover this business partner’s heir is a 17-year-old with a full-blown substance abuse problem.

Over the years, I have seen each of these situations unfold.

Common Barriers to Planning

I also see over and over again, the same common obstacles to planning for a business transition.

• Founder-itis. In contrast to publicly owned firms where the average CEO tenure is six years, many family businesses have the same leaders for 20 or 25 years, and these extended tenures can increase the difficulties of coping with shifts in technology, business models, and consumer behavior. While the founder of the business may officially ‘retire,’ actually letting go on a daily basis can be difficult.
• Avoidance. Your life is full. Family dynamics are complicated. At the end of a long day, it can be easier to convince yourself that nothing bad will happen than it is to raise difficult issues with family members, especially across multiple generations.
• Culture versus business myth. Many small business owners seem to believe in an either/or approach to management and business operations. Either the business culture maintains a warm, informal approach to day-to-day operations with a tightly knit group of long-time employees (like a ‘family’) — or, there are formal processes, procedures and a chain of command in place (like a ‘business’). Yet there is nothing inherently antithetical to sustaining a positive and unique business culture in having a clearly defined chain of command, SOPs (standard operating procedures), or investor clauses in your bylaws. For evidence, look at the consistent winners in the annual “Best Places to Work” lists.
• The plenty of time myth. Business transitions take longer than you may think. After you have decided where you are headed, it will take another 2-5 years to prepare a small business for transition either to the next generation, or for sale to an outside buyer. Sales to a third party are usually less complicated than intergenerational sales.

Five Steps to Take

A five-step approach can help to avoid a nightmare family business transition. Involving multiple generations and maintaining open communication throughout the process is the ideal, however some families find success with one internal champion who takes the lead on doing the ‘homework’ and presents findings to other business family members for decision-making at scheduled planning retreats.

1. Spend some time imagining the unexpected, worst-case scenarios for your extended family, business and industry. Ask yourself, for example:
   • What if, one of the founders or next-generation managers suddenly fell gravely ill?
   • What if, this or that major investor or partner needed cash and pulled out of the business quickly?
   • What if, this or that key employee decided to leave the organization?
2. Rank in order the impact of each scenario risk or outcome for your family, your business, and key non-family member employees.
3. Explore the business transition planning tools and options available for you, the business and your family with your financial advisor, an attorney, and other professionals on your team. Estate planning, tax planning and leadership development need to be in sync. You want to understand the time frame and the cost to implement each.
4. Based on the risk, timing, and cost assessment for each option, develop a work plan and schedule to tackle and resolve the major risks over the next twelve months.
5. Remember that transitions do not happen automatically. With the major risks minimized, continue to work on implementing the planned change in roles and operations, so both the older and younger generations, - and key employees - know the details about how the business runs and what to expect in the future business transition.

Resources

Family Firm Institute
http://www.ffi.org/about/

Ward, J. (1987). Keeping the family business healthy. San Francisco, CA: Jossey-Bass.

Related Articles:

Is an Amicable Divorce Possible? Christina Ubl

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Buyer or Seller: You Need the Right Business Transition Plan

Whether you are a member of the baby-boom generation born between 1946 and 1964, or a member of the generations of younger people that follow, you may be surprised to learn boomers are as likely to buy a business as to sell one.

The myth of the young entrepreneur

The numbers from the California Association of Business Brokers are staggering:

• Boomers 55 to 64-years-old form businesses at the highest rate of any age group.
• Retiring business owners will sell or leave to others $10 trillion worth of assets held in more than 12 million businesses over the next 20 years.
• The sale of these 12 million businesses over the next two decades will represent a major increase in the number of businesses sold annually.
• Many of the small and mid-sized businesses likely to change hands are projected to involve a large number bought and sold by baby boomers.
• In the coming decades, not only are we likely to see millions of baby boomers selling businesses, but we will also see additional millions of boomers (those of you who’ve spent your lives working for someone else), buying businesses.

Largest financial transaction of your lifetime

The purchase or sale of a small or mid-size privately held business will have a major impact on your personal financial situation. Research from BizBuySell.com paints a picture of the typical buyers and sellers of small businesses in the U.S.

Buyers

If you feel too young to retire, you may be considering buying a business. You have talents and job-related skills honed through a lifetime working and you may have become disillusioned from company layoffs or corporate bureaucracy. Perhaps you are frustrated by not being paid what you feel you deserve. You typically have ample capital through savings, investments, or other assets accumulated over the years. You want the decision to buy a business to be an informed one with the potential for a significant return — financially and emotionally. You are likely to be a white, college-educated married man in your late 40s, and yet as a group, prospective buyers are slightly more diverse in age, ethnicity, and country of origin than prospective sellers.

“The number one motivation for purchasing a small business is the chance to be your own boss, cited by 63 percent of all buyers.” Source: BizBuySell.com

Sellers

If you are considering selling your business, you may either be ready to retire, burned out, or you may be ready to move on to buy what can become a bigger business in a different field. While most of you are likely to be a white, college-educated man age 50 or above, many of you are not. A full 40% of you are in your 40’s or younger, 29% lack a college or trade/vocational degree, and 22% of sellers of successful businesses are women. If you have a parent or grandparent who owned a business, or you yourself have owned and sold a business before, you are the most likely to be a serial entrepreneur.

“Once you get into small business ownership, it tends to be something you stick with. Fifty-eight percent of sellers have owned a business before.” Source: BizBuySell.com

Whether you are considering buying or selling a business, you need to assemble a professional team to advise you about what is often the largest financial transaction of your lifetime.

Where to start

Start with your end in mind. Five years from now, how do you want your life to be different?

• After 20 years of following the dreams and systems set by others, are you ready to be your own boss?
• Do your loved ones understand your dream of being a business owner — and the impact it will have on your future together?
• After years of long hours building up your business are you now looking forward to a complete break in retirement with the classic golf course and grandchildren scenario?
• Is it important to you that whoever buys your business shares your values and loyalty to your employees?
• After years owning one type of business, are you ready to buy and grow something larger in a different sector?

Three basic transition strategy options

With your end goal in mind, you have three basic strategy options for selling (or buying) a business:

• Selling to/buying from an outside third party
• Selling to your employees, or buying with your colleagues
• Selling or gifting your business to family members, or buying the family business

Each business transition strategy has its own challenges — or rewards, depending on your goals as well as the sector, size, and situation of the business. That means each business transition strategy requires a careful assessment of the business being bought or sold, as well as the impact on your personal financial situation.

Due diligence documents to gather or review

Recommendations vary based on the business sector, size, and situation, but you can expect your financial planner, business broker, attorney, or CPA to ask for:

• Personal financial information (account statements, complete copies of federal and state tax returns, estate documents)
• Business financial documents:
• A minimum of five years of financial documents
• (Audited) financials for three years
• Pro-forma sales and cash flows for two years
• Three years of tax returns
• Company insurance documents
• Customer lists
• Vendor lists and relationships
• Contracts with vendors, suppliers, customers and clients
• Employee profiles and employment contracts
• Corporate legal documents and records
• Intellectual property rights and assets
• Operating systems and procedures for every major part of the business

Developing the business transition plan for your chosen strategy

Now that you have done the heavy lifting, you are ready to develop a business transition and financing plan that will work for you. Local communities want to retain jobs to support a strong economy and there are many resources available to help you.

As noted in previous articles about family business transitions, the SBA is a great resource and provides information on the basic differences between an outright purchase/sale with immediate payment, a gradual purchase/sale, and a long-term seller-financed purchase/sale. The Vermont Employee Ownership Center is another resource that provides educational seminars if you want to sell your business to your employees or for employee groups interested in purchasing a business.

Can you imagine yourself in five years?

If you started with the end in mind, you will have a clear picture by now of your future as a business owner — or former business owner. Small business ownership is as much about freedom as it is about money, and both are simply tools to achieve your personal life goals.

Resources

Demographics of U.S. Small Business Buyers and Sellers, BizBuySell.com [PDF]

Baby Boomers: Incredible Numbers are Buying and Selling Businesses (CABB)

Close or sell your business (SBA)

Forget Startups–Just Buy A Small Business From A Retiring Entrepreneur (Fast Company)

Vermont Employee Ownership Center

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