Succession and Exit

Is a Team Sport

By John E. Anderson, MS Management

          Entrepreneurs are confident in their abilities. Over-confidence can lead to bad results. You have a specialized team for your business operations. Do you have a specialized team to assist you with concluding your current business?

          Practicing the alternative perspectives of subjectivity and objectivity can increase one's understanding of the multiplicity of relative truths. You have inner and outer teams to compare perspectives for greater clarity and deeper understanding.

          Certainty of knowledge is frequently position related. Change positions and one can see a new truth, not realized from other positions. Insights realized in one team can be applied to other contexts. Thus, we build, refine and maintain our varied team(s).

          This is why business leaders depend upon advice on finances and the law, for example. It's why the ambitious are curious about performance and systems. To whom can you turn for intelligent business conversation?

          A robust team of external advisers can introduce you to new ideas before you risk being the last in your industry to know about competitive dynamics and innovative trends. YouTube, blogs, books and national industry conferences keep us connected across the country and globe, but who can you sit with to gain direct insights?

          Yes, technology allows us to isolate for focus, but life in dynamic business communities offers other advantages.

          In our experience, some owners sell their business without proper representation and suffer the consequences, i.e., getting full cash price but not planning for taxes in advance, then having to pay more than 50% to the IRS. Or how about the case where a key employee in a business about to be transferred threatens to disrupt the sale if not compensated to remain with the venture.

          Learn more about things to do and not do when selling or transferring your business ownership or in the legal transference of a not for profit entity you've begun or for which you are responsible, go to www.BeCauseBusiness.com and call the Be Cause Team to participate in our leadership study and practice groups.

Business Resources, Inc.

 

Social Security Average Benefit

Is Equal to $1M Safe Savings

By John E. Anderson

Management Consultant

The good news is that the average Social Security benefit of $1,262 is equivalent to what you'd earn on a $1 million guaranteed principal investment. Do the math: $1 million at 1.5% is a monthly interest income of $1,250. Plus, the payment amount is linked to inflation so it adjusts to annual cost of living and it's among the safest investments on earth.

The bad news is $1,262 doesn't go very far these days. For too many Americans, it represents the largest part of their retirement income. Social Security is 90% of the total retirement income for 23% of married couples and 46% of unmarried persons, according to the Social Security Administration website.

Like many things in life, if you have knowledge, pay attention and are willing to change your behaviors you can improve your financial health. The sooner you begin and consistently adjust to changes, the better you and your family will be.

We're in the midst of a retirement avalanche across the country. "More than 10,000 Baby Boomers will reach the age of 65 every day for the next 19 years" reported the New York Times in January 1, 2011. We still have 16 years to go.

Interesting to note:

1) Social Security taxes apply only to the first $117,000 of 2014 wages;

2) The Social Security Trust Fund had a $69 billion net increase in 2011;

3) Benefit payments will deplete the fund in about 2033, and thereafter payments will be 75% until 2086, unless Congress acts.

Your Benefits

Benefits are determined by two things: 1) your age when you begin to collect  and 2) the highest 35 years of earnings on which you've paid the Social Security payroll tax.

If you begin collecting at age 62 and continue working, your earned income can temporarily reduce your benefit, but that amount will be available to you later. If you collect early, your  adjusted gross income may exceed legal limits and you could be required to return the funds.

If you choose to collect early, your benefit will be significantly lower than if you wait until age 66. If you delay collecting until age 67-70 your benefit will be higher each month you delay. The difference between collecting at age 62 and 70 can mean as much as twice your total benefit. Each person's amounts will vary and your optimal age can be determined and compared to your life expectancy so you can intelligently decide.

In addition to your base payment, an annual cost of living adjustment is linked to the Consumer Price Index. The COLA was 1.5% for 2014, 1.7% for 2013 and the historical average is 2.5%. The COLA figure is typically announced in November or December for the following year.

You can estimate your Social Security benefits with quick and detailed calculators at http://www.ssa.gov/planners/benefitcalculators.htm

Your Options - Augmenting Your Social Security

The original Social Security Act of 1935 was intended to supplement your company pension. In the last 5-25 years organizations have moved away from defined pension benefits to defined contribution plans such as 401(k) and IRAs. As this has occurred, more and more people are depending upon their Social Security as their main retirement instead of as a supplement.

I recommend that to the extent that you can, you build a portfolio of savings and investments which can create an income stream to match or exceed your expected Social Security. It's great that Social Security is like a million dollar annuity, but we must all work to build further secure retirement income for ourselves and our family. What else can you do to increase your retirement income? Consider what is the best age for you to begin your benefits. Delay collecting your benefits and continue earning and saving. Additional earnings may increase what Social Security benefits you receive. Segment your savings for emergency cash needs, replacement of your car or major appliances and choose some portion of your savings to be paid to you late in your life, as an annuity stream to continue until your death or have the account balance go to your heirs.

Financial experts used to be responsible for our retirement. "The financial risk of retirement has been transferred from those best able to bear it ... to those less knowledgeable and least able to bear it...." according to the Wharton Financial Institutions Center.

Difficult as it is, each of us must spend significantly less than we earn and save the difference. If a person begins to collect their benefits at age 62 it will be 25% less than at the full retirement age of 66. If a person delays until age 70, the benefit will be 32% greater than at age 66. Most break-even points are between age 78 and 81. People are living longer.

It's challenging to watch your resources and make careful choices to save more and spend less at any time. It will only become more difficult to do this later than if we begin now, particularly if you're still working and have the option to make more, spend less and save.

The life expectancy for a 65 year old is 84.2 years. For a married couple, there is a 50% chance that one of them will live past 91, according to the US Department of Health and Human Services 2011 and the Institutional Income Council.

The voting block of retired persons is large. If the wage cap of $117,000 were to be removed, Social Security would be funded in perpetuity. Social Security will be there for those of us facing retirement now or in the near future. If the cap were removed, benefits could also be guaranteed for younger contributors.

If you are 42 or older, it is very unlikely that your benefits will be reduced. If you are younger than 42, and if Congress fails to address the issue, either your benefits will be reduced or your cost will be increased.

In summary, options to be considered include:

  ▪ Saving more and doing ongoing financial planning for your future,

  ▪ Delaying your Social Security as long as possible,

  ▪ Continue working, earning and saving until age 70, regardless of when you begin benefits.

  ▪ Encourage Congress to act, possibly by removing the $117,000 wage cap.

  ▪ Go to www.socialsecurity.gov/myaccount to set up your account and review the earnings record to be sure the information is correct.

Sources and further reading list:

Gary Duell, financial advisor, Duell Wealth Preservation, Happy Valley, Oregon

Research on SocialSecurity.gov

Richness of Life Social Security class, Clackamas Community College, Milwaukee, OR

Strategies To Boost Your Social Security by Knight Kiplinger, Kiplinger.com

Visits to and phone conversations with Social Security Administration

Making a Graceful, Smart Exit

Audio of a 12-minute talk on Making a Graceful, Smart Exit by John E. Anderson, February 18, 2014 at the Institute of Management Consultants - Oregon & SW Washington Chapter held at the Multnomah Athletic Club, Portland, Oregon. John is preparing to publish a book on the subject. Audio Link - WMA format file.

Making a Graceful, Smart Exit

A guide is needed for a business owner to prepare and execute a graceful transfer of his or her business.Smart Exit outlines a process that begins with increasing a venture’s value, then identifying a suitable successor and gradually stepping away, first operationally and then with the final transfer of your business.

The audience for this work is business owners age 50 and older who have operated a business for 10 or more years. However, these principles apply equally to a teenager envisioning an “app” that could revolutionize mobile use.

The organizations we create represent the intelligence of our brain. Intelligence is a collection of nested conditional statements such as “if a then b, when a is, if m then n, and b is, if r then s.”

I assert that if an entrepreneur approaches the venture as if it were a real estate investment, he will have an easier time building great value, then efficiently turning the business over to the next leader. A professional real estate investor buys a property after a careful appraisal. He or she has researched what it will cost to make improvements, possibly gain rental income than the mortgage and upkeep for a time, then sell for a final profit. The investor strives to have operational income and a final return on his investment of time, money and risk.

A venture capitalist operates in a similar fashion, infusing money and talent into a great business “idea” to build value, earn operational returns, and then sell for a final profit. If business owners do the same by identifying a theoretical date in the future by which they will systematize, they will first have operational profit, and then solid profit when the business is sold.

   

But how? A functional business with value is one which is systematized such that it operates with staff independent of the owner. First, you systematize the business so it’s profitable. Then develop staff talent in the system so they can operate it without you and still be profitable. Document the system and why it’s worth the value you assign to it. Identify a new leader who can become the owner. The new leader/owner candidate needs enough commitment and ability for you to mentor their success. They need to commit only enough money to prevent them from giving up while they struggle to learn and apply what you teach them. Design your business system such that the profit is adequate to pay the new leader a living wage while funding the purchase of your stock equity.

The book, Smart Exit, is an elaboration of “how.” Use it to create a story of how your venture meets the needs of customers delightfully and efficiently. Then identify your new leader and make your own smart exit.

Succession and Exit

Succession and Exit
As Crucial Issues

By John E. Anderson
Succession Strategist

Succession and exit are of crucial concern for you, other current leaders in your firm and those who will follow.

For many leaders, succession and exit are in the future, years from now, so why worry about that today? To these executives, and really any active leader, I say, “Congratulations!” Amid the layoffs, liquidations, closures and foreclosures, your venture is standing. WOW!

But, your challenges aren't over. Having survived, you are now facing a new career hurdle. Can you identify your organization's next leader who, with mentoring, can take your organization to the next level? Succession takes time, sometimes more than one try. If you say your exit is years away, that’s great because you'll probably need every one of those years.

You’ve brought the company this far, who can take it further? Besides, it’s time for you to find your next project. You probably have a new idea. You have them all the time. Maybe a new enterprise, a lifestyle venture like a bed and breakfast or sports shop. Maybe you'll buy stock in a resort you’ll move to and serve on their board.

Regardless of whether you are considering your succession and exit this year or in 20 years, now is the time to begin preparation. You object, “Oh, but I have a plan.” When was this plan last updated? Most organizations with less than 50 employees have exit plans like they have business plans, strategy and budgets – mentally but not written intelligently so their attorney, accountant and family members could understand and implement.

Attorneys suggest including dissolution provisions in partnership and corporation agreements when firms are begun. They recommend succession and exit options from the very beginning for good reason. For similar reasons, it’s of great importance to have and maintain succession, transfer and exit plans for you and your key employees. Cross training and key person insurance are part of it, but there is much more that works together to improve your firm’s stability and sustainability. You and, I am sure, several other employees, are very important to your firm for maintaining major client, banking and financial relationships.

It’s one thing for a leader to be absent a few days or a week. If one or several of you were absent for an extended period, would your operations be endangered? It’s good to review and improve the ability of multiple persons to step into different leadership roles for several reasons:

          1) Prepare for the eventuality of someone important being unavailable or,

          2) Stimulate change and innovation when a department has become sedentary.

Given our current technological, social and competitive environment, change is rarely comfortable but like it or not, it’s good for us and the organization.

Besides, entrepreneurs don’t or can’t stop being entrepreneurial, they (or we) are serial entrepreneurs. Once a person is successful in a venture, it’s hard not to want to do it again, only better.

It’s fun. It’s exciting. It’s dynamic, challenging and rewarding. It can also be terrifying when a business goes sideward fast and crashes. Let’s avoid crashing! Let's routinely do staff development. Let's identify and mentor our future leaders. There will always be surprises but we can minimize loss by preparing in advance.