Jason No Comments

Bonus Incentive Plans for Employees: What’s the Point?

When we ask business owners about the possibility of installing an employee incentive plan, we often hear one of two responses:

  • “I would like to do something to reward my key employees for their performance.”

OR

  • “You know, one of my best employees left last week for a company for more money. I think I’d better do something to stay competitive in the marketplace. ”

May I suggest that these two motives are not nearly self-serving enough? The purpose of installing a bonus plan for your employees is to motivate them to help you pursue your goals.

While owners differ about when they want to leave or how they wish to leave, or even whether they want to leave their companies, the underlying goal is consistent: whatever the ultimate departure – be sure to leave in style. No matter what type of employee incentive plan you create, it should be designed to support your fundamental goals by motivating your key employees to stay with your company and help build its value.

Consider the following realities:

  • Some owners may rarely take an extended vacation much less cut back on their ongoing involvement without leaving capable management in place to run the business.
  • A sophisticated buyer may not seriously consider your company if it lacks a good management team;
  • You may, at some point, entertain the idea of selling the company to key employees; and
  • Transferring a business to children can be especially risky in the absence of key employees who will remain with the new owners.

Whether your goal is to sell to a third party, transfer the business to children or to employees, or to retain ownership long-term, the success of your strategy may depend on the presence of motivated, high-performing key employees.

We measure the effectiveness of an employee incentive plan in part by how well it motivates key employees to increase the value of a business. Effective plans necessarily reward employees as they increase the value of the business.

Usually, this means that owners must develop an incentive formula that links increases in the key performance indicators of the business to the employees’ rewards. In its simplest form the incentive plan gives the key employee a bonus. In designing a strong incentive plan, consider the timing of the bonus that creates the best incentive.  You may want to consider designing a bonus program with an additional incentive for key people to stay with your company – a “handcuff” of sorts.

Let’s look at how one owner set up his company’s incentive plan.

After meeting with his advisors, Mel Houston decided to give two of his key employees 30 percent of the company’s pre-tax income above $100,000 (the company’s historic performance level). After Mel installed this plan, the company’s pre-tax income increased to $300,000 so his key employees shared 30 percent of the excess income ($200,000) or $60,000.

Because Mel wanted to retain his key employees over a long period of time, he decided to pay half of this bonus after the company’s year end, and subject the other half to a non-qualified deferred compensation plan with vesting over several years.

Mel’s plan (like yours should) provides that as the cash flow of his business increases (and thus the value of the business increases), he rewards his key employees accordingly. In doing so, both he and his key employees attain their goals.

Notice that Mel does not have to reach into his own pocket to pay the bonus.  Instead, he is merely sharing a portion of the growth that they create.  You may also notice that Mel benefits in two ways from the increase in income.  First, he shares in the increased income and cash flow.  Second, the value of his ownership interest most likely increases by some multiple of increased cash flow.

Keep in mind that the formula you create for your company can and should reflect the specific characteristics of your business. The head of the sales department might be rewarded for increasing the adjusted gross profit margin. A chef in a restaurant might be rewarded for reducing food costs (without affecting the quality of the meals served). Whatever factor you identify as a key to increasing the value of your company can be incorporated into your key employee incentive planning.

If you would like to discuss your options for installing employee incentive plans to support your goals, please contact us.  We can collaborate with you and your other advisors to develop a customized incentive plan tailored to your business and your future.


The information contained in this article is general in nature and is not legal, tax or financial advice. For information regarding your particular situation, contact an attorney or a tax or financial advisor. The information in this newsletter is provided with the understanding that it does not render legal, accounting, tax or financial advice. In specific cases, clients should consult their legal, accounting, tax or financial advisor. This article is not intended to give advice or to represent our firm as being qualified to give advice in all areas of professional services. Exit Planning is a discipline that typically requires the collaboration of multiple professional advisors. To the extent that our firm does not have the expertise required on a particular matter, we will always work closely with you to help you gain
access to the resources and professional advice that you need.
The example provided is hypothetical and for illustrative purposes only. It includes fictitious names and does not represent any particular person or entity.
Jason No Comments

Creating Value in Your Business to Get Top Dollar When You Leave it

Creating Value in Your Business to Get Top Dollar When You Leave It

Did you ever wonder why one business has buyers lined up willing to pay top dollar while another sits on the market for months, or even years? What do buyers look for in a prospective business acquisition?

There are many opinions about what attributes or characteristics buyers seek, but here’s what we know: the characteristics buyers seek must exist before the sale process even begins and it is your job as the owner to create value within your business prior to the sale. We call characteristics that impact value “Value Drivers.”

Walk A Mile In A Buyer’s Shoes

To get an idea of the importance of Value Drivers when preparing to sell your business, it is important to put on the buyer’s shoes for a minute. Let’s look at a hypothetical case study that illustrates how a buyer might compare two similar companies with a different emphasis on Value Drivers.

The A Factor Company has EBITDA (Earnings Before Interest, Taxes, Depreciation and Amortization) of $2 million, an owner who runs the business and the systems and processes that create growth. The A Factor Company doesn’t have a real management team in place and the owner generates a majority of its sales. The owner is the center point of the company, holding both the CEO and CFO positions. With this level of responsibility, the owner is burning out quickly.

In comparison, The B Factor Company also has EBITDA of $2 million and a solid management team that runs the business, systems and processes. The management team creates efficiencies within the business and the owner vacations for six weeks a year.

If you were a buyer comparing these two companies, which would provide a more attractive business opportunity? How much more would you pay for a business with a strong management team (one of the most important Value Drivers)? Would you even be interested in buying a business whose management team (the owner) walks out when you walk in?

Investment bankers understand that companies that lack strong Value Drivers also lack a bevy of buyers. Those buyers that do come to the table do not arrive with pockets full of cash.

Let’s look at several of the more important Value Drivers common to all industries:

  • A stable and motivated management team. If you can wait a year to sell your business, we suggest that you consider an incentive compensation system, cash or stock-based, that rewards key employees as the company performs (usually measured by increases in pre-tax income). Sophisticated buyers know that with a solid management team in place, prospects are good for continued business success. Without a strong management team, it may be very difficult to sell your business to a third party or transfer it to an insider.
  • Operating systems that improve sustainability of cash flows. Operating systems include the computerized and manual procedures used in the business to generate its revenue and control expenses, (i.e. create cash flow), as well as the methods used to track how customers are identified and how products or services are delivered. The establishment and documentation of standard business procedures and systems demonstrate to a buyer that the business can be maintained profitably after the sale.
  • A solid, diversified customer base. Buyers typically look for a customer base in which no single client accounts for more than 10 percent of total sales. A diversified customer base helps insulate a company from the loss of any single customer. If the majority of your customer base is made up of only one or two good customers, consider reinvesting your profits into additional capacity that will make developing a broader customer base possible.
  • A realistic growth strategy. Buyers tend to pay premium prices for companies with realistic strategies for growth. Even if you expect to retire tomorrow, it makes sense to have a written plan describing future growth and how that growth will be achieved based on industry dynamics, increased demand for the company’s products, new product lines, market plans, growth through acquisition, and expansion through augmenting territory, product lines, manufacturing capacity, etc. It is this detailed growth plan, properly communicated, that helps to attract buyers.
  • Effective financial controls. Financial controls are not only a critical element of business management, but they also safeguard a company’s assets. Effective financial controls support the claim that a company is consistently profitable. The best way to document that your company has effective financial controls and that its historical financial statements are correct is through a certified audit or perhaps a verified financial statement by an established CPA firm.
  • Stable and improving cash flow. Ultimately, all Value Drivers contribute to stable and predictable cash flow. It is important, especially in the year or so preceding the sale of the business, that cash flow be substantial and on an upswing. You can begin increasing cash flow today by simply focusing on ways to operate your business more efficiently by increasing productivity and decreasing costs.

You can install these Value Drivers and better position your company to secure a premium price upon your exit with the help of a trained Exit Planning Advisor.

In future articles, we will look at the most common Value Drivers in more detail.

If you have any questions about increasing the value of your business prior to your exit, please contact us to discuss your particular situation. We can help you identify and strengthen the current Value Drivers in your business, install additional Value Drivers, and create a road map to meet your overall exit objectives. We also have additional resources that explain Value Drivers in more detail and help you apply these concepts to your business. 


The information contained in this article is general in nature and is not legal, tax or financial advice. For information regarding your particular situation, contact an attorney or a tax or financial advisor. The information in this newsletter is provided with the understanding that it does not render legal, accounting, tax or financial advice. In specific cases, clients should consult their legal, accounting, tax or financial advisor. This article is not intended to give advice or to represent our firm as being qualified to give advice in all areas of professional services. Exit Planning is a discipline that typically requires the collaboration of multiple professional advisors. To the extent that our firm does not have the expertise required on a particular matter, we will always work closely with you to help you gain access to the resources and professional advice that you need.

This is an opt-in newsletter published by Business Enterprise Institute, Inc., and presented to you by our firm.  We appreciate your interest.
The example provided is hypothetical and for illustrative purposes only. It includes fictitious names and does not represent any particular person or entity.

Jason No Comments

What Does Your Business Value Tell You?

No one wants to spend money on something they don’t need. So why do you need an estimate of your company’s value when you don’t expect to leave for several or many years?

You may not — if you fall into one of two groups:

  • Owners who are sure that their business exits are more than 10 years away.
  • Owners who are certain that the value of their companies is miniscule compared to what they will need upon sale or transfer.

Many owners, however, look to the value of their businesses as the chief source of liquidity for their post-exit lives. We intend to leave as soon as it is feasible rather than when we are completely burned out. Therefore, most of us need to know the value of our companies now so we can be smart about creating greater business value in as short a time as possible.

Knowing the value of your business today is critical whether you plan to leave your business tomorrow, or in five years because:

  1. An estimate of value establishes your starting line and distance to the finish.
    An estimate of value tells you where your unique race to your exit begins. Your job, whether your company is worth $500,000 or $50M, is to fill the gap between today’s value (the starting line) and the value you need when you exit (the finish line). Based on today’s value, your race to the finish may be shorter, longer, or perhaps much longer, than you expect. Once you know how far you and your business need to travel, you can begin to create timelines and implement actions to foster growth in business value.
  2. An estimate of value tests your exit objectives.
    An estimate of value helps you to determine if your exit objectives are achievable. Let’s assume that you decide that your finish line (financial objective) is to receive $7,000,000 (after taxes) from the transfer of your business interest. You also want to complete your race in three years (timing objective). An estimate of value will tell you if the distance between today’s value and the finish line is too great to reach in three years. If a growth rate is unrealistic for your business, you must either extend your time line or lower your financial expectations.
  3. An estimate of value provides important tax information.
    First, an estimate of value gives you a basis for analyzing the tax consequences of Exit Path alternatives. Once you choose your path, the value estimate provides a basis for your tax-minimization efforts. Taxes can take a significant chunk out of a business sale price so the value of your company (what a buyer pays for it) must usually exceed the amount of money you need to fund your post-exit life. The size of that excess depends on how you and your advisors design your exit, and exit design in turn begins with knowing starting value and the distance to your finish line.
  4. An estimate of value gives owners a litmus test.
    When owners know how much value they need to create to meet their objectives, it helps them determine where they need to concentrate their time and effort. Instead of growing value for the heck of it, dedication to a goal may enable owners to exit sooner with the same amount of after-tax cash than owners who do little or no planning. Pursuing exit plan success all begins with a starting value.
  5. An estimate of value provides an objective basis for incentive plans.
    As you design incentive plans for key employees (such as Stock Purchase, Stock Bonus and Non-Qualified Deferred Compensation Plans) to motivate them to increase the value of your company (so you can work towards a successful exit) you must base these plans on an objective estimate of value. You and your employees need a current value (or starting line) that you all can confidently rely on.

This is Not a Full-Blown Valuation!

We know you are thinking, “How much is this going to cost me?” But we’re only suggesting that you need an estimate of value to establish a benchmark, not the opinion of value which may precede your transfer of ownership, years from now.

Estimate of Value

An estimate of value typically:

Costs about half as much as a standard valuation opinion,

Is the basis for the (later and) complete valuation, but

Lacks the supporting information contained in a written opinion of value, and

Is used for planning only. It cannot be relied upon for tax or other purposes.

Failure to Value

On some level, we all recognize that we will leave our businesses someday. While you may not yet have a vision for the second half of your life, you do understand that the exit from your company is likely to be the largest financial transaction of your life. Does it make sense to go into that transaction and into the second part of your life without an objective understanding of your company’s value?

An estimate of value can save precious time as you build value and pursue the exit of your dreams.

If you would like more information about the role of business valuation in Exit Planning, please contact us.


The information contained in this article is general in nature and is not legal, tax or financial advice. For information regarding your particular situation, contact an attorney or a tax or financial advisor. The information in this newsletter is provided with the understanding that it does not render legal, accounting, tax or financial advice. In specific cases, clients should consult their legal, accounting, tax or financial advisor. This article is not intended to give advice or to represent our firm as being qualified to give advice in all areas of professional services. Exit Planning is a discipline that typically requires the collaboration of multiple professional advisors. To the extent that our firm does not have the expertise required on a particular matter, we will always work closely with you to help you gain access to the resources and professional advice that you need.

This is an opt-in newsletter published by Business Enterprise Institute, Inc., and presented to you by our firm.  We appreciate your interest.

Jason No Comments

The Most Valuable Asset is Yourself

Carl RichardsYears ago, my colleagues and I conducted a fairly large-scale research project. We interviewed a bunch of high-income professionals who provided professional services. This group included doctors, dentists and lawyers, and like most of us, they earned money only when they were working. In essence, they traded their time for dollars.

Our finding was this: Homes and retirements accounts aside, the most valuable asset they owned was the person staring back at them in the mirror each morning. Chances are, the most valuable investment you own is the investment called you.

A more technical way to think about it is that the most valuable asset you own is the present value of your future earnings. But here’s the problem: Despite what your spouse may tell you, the investment called you is getting less valuable with every year that passes.

It’s nothing personal. I’m sure you’re great. But this is simple math. Every year that goes by means you have one fewer year to earn money. If I were to sketch this for you, it would look like this.

Traditional financial planning spends almost no time on this issue. Instead, the traditional financial services industry focuses on getting you to take as much money as you can and put it into other investments, like mutual funds, stocks and hedge funds. That’s all fine and, to be clear, a very important part of your overall plan. But far more needs to be said about the investment called you.

One person doing some fascinating work on this topic is Joshua Sheats at his site, Radical Personal Finance. If you’re interested in this subject (hint: you should be), you might want to check out his more technical treatment.

But for this column, I want to focus three ways you can think about this.

The Beginning

Make your starting salary as high as possible. Remember that friend from high school who had a great summer job? At the time, he made what seemed like a lot of money. Everyone was jealous. Then when you headed to college in the fall, your friend’s summer job turned into a full-time job. Why would he quit making money to go to college? But you put in the time and graduated a few years later.

Now your friend is a supervisor, but you’re a doctor. By investing in education and training, you increased your starting point and initial value. Obviously, not all us of really want to become doctors, but you get the idea. In the beginning, don’t let short-term rewards get in the way of increasing your long-term value.

The Middle

Make more money each year. Yes, I know this advice is obvious. But rather than being satisfied with just the annual cost-of-living adjustment, look for ways to increase your value where you work. Pick up new skills. Take extra classes and projects that no one wants. Don’t settle for doing just enough. To borrow a phrase from the author Cal Newport, make yourself so valuable they can’t ignore you.

Outside of your 9-to-5 job, find a side gig if you can make time. What could you do to earn an extra $1,000 each month? What happens if you start earning enough to cover your mortgage? What happens if you build a business that earns more than your regular job? This phase reminds me of Aesop’s fable about the ant and the grasshopper. Do a little more today and avoid being the grasshopper.

The End

Make your working window longer. Look, I know most of us really like the idea of retiring, but it’s a myth. Most people don’t simply work their guts out until 60, then suddenly pull that plug and put on the golf shoes. People are living longer, and you might be facing a very boring 20 or 25 years without work.

You can only golf so much.

Instead, most people find they still want to be doing something. Contributing value to the world. Working. So plan on it (and invest in your health too, so you’ll still be physically capable of working).

But think of this side hustle as an opportunity to do something you love to do. Maybe it looks a bit more like this: You work at your day job until 55 and then slow down a bit. You do more of the work you love. Maybe you’ve always wanted to be a teacher, or perhaps you’d really love to become a guide at your local botanical garden. Whatever the work, it lengthens your overall line.

You may love the job you’re doing now, but your employer might have a set retirement age. Could your value be so great that they might consider working with you as a consultant for a few more years? Adding a little time at the end will give your line another upward bump.

These are just a few of the ways we can invest in ourselves. And by now, you’ve probably thought of a dozen things you can do that are unique to your own life. If you’re willing to share, I’d love to hear your ideas. You can find me on Twitter @behaviorgap or send me an email, carl@behaviorgap.com. Just don’t ever forget that more we invest in ourselves today, the more valuable we become over time and the less we need to worry about that line on the chart.

This commentary originally appeared December 14 on NYTimes.com


By clicking on any of the links above, you acknowledge that they are solely for your convenience, and do not necessarily imply any affiliations, sponsorships, endorsements or representations whatsoever by us regarding third-party Web sites. We are not responsible for the content, availability or privacy policies of these sites, and shall not be responsible or liable for any information, opinions, advice, products or services available on or through them.

The opinions expressed by featured authors are their own and may not accurately reflect those of the BAM ALLIANCE. This article is for general information only and is not intended to serve as specific financial, accounting or tax advice.

© 2015, The BAM ALLIANCE

Jason No Comments

The Advantages of a Well-Conceived Buy-Sell Agreement

If owners agree in advance of any transfer event about how to appraise business value, and about the terms of payment, they can avoid the heated and often damaging negotiations that can occur when one owner leaves the company.

We begin making our case by outlining several other advantages of a (well-drafted and recently-reviewed) buy-sell agreement.

Controls Transfers

A buy-sell agreement can control all transfers of business ownership to the benefit of both the owner wishing to transfer ownership and the other owner (or owners) wanting to acquire ownership. This agreement can assure a selling owner (or his/her estate) of a purchase for fair value and upon terms and conditions that are acceptable to all parties.

Further, the agreement assures remaining owners that any transfers of ownership must be at least offered to them. This eliminates the potential for an outside party or a co-owner’s spouse or children to assume ownership of the business, thereby diminishing management, control and value.

A Valuation For All Reasons

A buy-sell agreement sets forth an agreed-upon method of valuing the business that applies to all transfers.
Your idea of your business’s value may be much lower than the IRS’s or a co-owner’s. If you rely on a “stated value” or on a formula-based value, you may run into difficulties with both the IRS and with other owners because value in privately owned business- es changes often and rapidly. If your buy-sell agreement is not revised every year, its valuation formula will favor either the buyer or the seller and provide ample opportunity for disputes. Avoid this by requiring a value determination by a certified business appraiser—even that provision needs to be carefully drafted!

Similarly, if you are buying a living co-owner’s interest, the value of his/her interest will likely be lower in your opinion than his/hers. If, however, your buy-sell agreement requires the involvement of a business appraiser, you can avoid this impasse.

It is best to agree—today—upon a method of valuing the business when no owner knows on which side of the transfer table he/she will be sitting. Not knowing whether one will be a buyer or a seller tends to ensure that all owners work to protect the interests of both buyer and seller.

If you don’t have an existing, binding process for valuing the business, ideally using a credentialed business appraiser, you can expect disagreements when one of the owners leaves the business. We strongly recommend that you take the reins and de- sign a valuation appraisal process suitable for your company.

The Fine Print

In a buy-sell agreement, you can fix the terms and conditions of any transfer of ownership, including interest rate, length of buyout period and security. In addition, it is often possible to provide for the funding for future ownership acquisition at either lifetime or death.

Finally, Saving Income Taxes

Buy-sell agreements should be drafted to anticipate the likeliest transfer of ownership event: the sale of an ownership interest from one owner to another. While it requires additional planning and document drafting, intra-owner sales can be designed to save as much as 30% of the company’s cash flow from taxation. For example, if the purchase price is $1 million, the cash flow required to pay a departing owner could be reduced by $300,000 or more. To repeat, this does take additional tax planning—but the result is well worth it!

If you have any questions about establishing a business continuity agreement for your company or its role in helping you exit your business in style, please contact us to discuss your particular situation.


The information contained in this article is general in nature and is not legal, tax or financial advice. For information regarding your particular situation, contact an attorney or a tax or financial advisor. The information in this newsletter is provided with the understanding that it does not render legal, accounting, tax or financial advice. In specific cases, clients should consult their legal, accounting, tax or financial advisor. This article is not intended to give advice or to represent our firm as being qualified to give advice in all areas of professional services. Exit Planning is a discipline that typically requires the collaboration of multiple professional advisors. To the extent that our firm does not have the expertise required on a particular matter, we will always work closely with you to help you gain access to the resources and professional advice that you need.

This is an opt-in newsletter published by Business Enterprise Institute, Inc., and presented to you by our firm.  We appreciate your interest.

Jason No Comments

The Avoidable Failure to Act

“I haven’t decided what I ultimately want to do with my business, or when I want to exit, or how much money I’ll need, or whom to sell to, so how can I plan my exit? Besides, I don’t want to exit right now.”

If you’ve said this, or thought it, you are not alone. Many business owners are either overwhelmed with the thought of exiting or are so busy fighting daily business fires that they assume they cannot plan their exits.

If you aren’t sure about what you want, or when you want to leave, why is it important to act today?

First, recognize that when you take a passive attitude toward the irrefutable fact that you will—one way or another—leave your business, you are settling for less than the most profitable exit for yourself and for your family.

Second, understand that preparing and transferring a company for top dollar takes time—on average five- ten years. Most of those years will be spent preparing your business for the transfer and, if you decide to sell to employees or children (two groups who rarely have any money), giving them time to earn the mon- ey to pay you for your interest.

The more time you have to design and implement income tax-saving strategies, build value, strengthen your management team, and begin a gradual transfer of ownership (not control) to key employees or children, the more likely you are to reach your goals.

Third, if you decide to sell to a third party, remember that the market does not operate on your schedule and may not be paying peak prices when you are ready to sell.

If the prospect of leaving your company with little to show for it is unacceptable to you, let’s look at your three options.

Wait for a buyer. According to Deloitte’s Entrepreneurship UK: 2008 survey, 35 percent of business owners said they will wait for a third-party offer for their businesses. Owners in this group believe that one day a buyer will contact them, negotiate a fair price, and that will be that. Well, this is a course of action—but one that flies in the face of reality. There is a pent up supply of businesses owned by Baby Boomers who, as soon as the M&A market recovers, will be clamoring to sell their companies. The simple law of Supply and Demand tells us what kind of mar- ket that will be for sellers.

In a buyer’s market, only the best-prepared businesses sell for top dollar. And the owners of those well- prepared businesses will be those who made the decision to prepare their company years ahead of the actual sale.

Liquidate. Liquidation is a common exit path for owners of companies whose cash flow is declining and has little probability of improving—absent the design and execution of a business/exit plan. If this description fits your company, we recommend that you meet with your tax and other advisors to do the plan- ning necessary to create the most tax-efficient liqui- dation possible.

Decide to exit and plan accordingly. Start today and take the following steps:

  1. Fix a departure date.
  2. Determine your financial needs.
  3. Decide whom you want to succeed you.
  4. Have your business valued to see if: a) you should sell today; and/or—b) it has the value necessary to meet your financial and other exit objectives.

Based on your objectives and the realities of your business, use a skilled Exit Planning Professional to forge a plan with accountability/decision deadlines.

Acting today to create your best possible exit path is not difficult. Simply, pick up the phone and call me and lets begin the conversation.

Your failure to act, however, can potentially be fatal to your successful exit. You and your family depend on the success of your business exit.

Can you afford to fail to act?


The information contained in this article is general in nature and is not legal, tax or financial advice. For information regarding your particular situation, contact an attorney or a tax or financial advisor. The information in this newsletter is provided with the understanding that it does not render legal, accounting, tax or financial advice. In specific cases, clients should consult their legal, accounting, tax or financial advisor. This article is not intended to give advice or to represent our firm as being qualified to give advice in all areas of professional services. Exit Planning is a discipline that typically requires the collaboration of multiple professional advisors. To the extent that our firm does not have the expertise required on a particular matter, we will always work closely with you to help you gain access to the resources and professional advice that you need.

This is an opt-in newsletter published by Business Enterprise Institute, Inc., and presented to you by our firm.  We appreciate your interest.