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Implementing the Buy-Sell Agreement in a Closely-Held Business

There are owners of closely-held businesses who become disabled or must terminate their employment at the business and fail to realize a meaningful value for their business interest. There are owners, not holding a controlling interest, who will have nothing to say about the outcome of certain business transactions or their departure from the business. There are owners, failing to recruit new owners, who have no one to buy their business at their death. There are owners, failing to extricate themselves from management, who demean the value received for the business because they are an essential part of the business and can no longer be involved to insure profitability. There are many and all varieties of examples of owners not receiving maximum value from their business interest. All of these owners should have implemented a buy-sell agreement in their closely-held business to have received maximum value for their business interest.

Most businesses do not have a buy-sell agreement among the owners because it is quite difficult to negotiate a buy-sell agreement between the owners of a closely-held business. Often the subject matter is difficult to discuss, and the pressures of operating an owner-managed business make it difficult to find the time needed to accomplish this task. As with most complex and difficult tasks, it is best to use a segmented approach and address the various issues one at a time.

The issues that must be discussed and agreed upon can be generally described. The business entity type of the business should be understood in terms of liability and tax consequences for each owner. The group of individuals or entities that own the business should be defined and appropriate restrictions put in place. The governance of the business, including who will make policy and who will be the chief executive, should be clearly defined. The events (triggers) that will cause one or more owners to transfer interests in the business should be defined. The procedure of the transaction occurring after each type of trigger, including funding and payment, should be provided for in detail. For each transaction, the price of the interest transferred should be defined. If the business will act as a buyer in certain procedures, then the means of the business accumulating the funds for the transaction should be provided for in detail. The final task is the consolidation of the decisions into one coherent written document.

There should be a meeting of the owners and appropriate stakeholders to discuss each one of these general issues. For each issue there should be a separate meeting. The meetings should be held at regular intervals. The results of the meetings must be documented in writing. Where issues are technical or outside resources would be helpful, they should be utilized. The documented agreements resulting from these discussions as consolidated into one coherent document will constitute a succession plan.

The succession plan is the basis for the drafting of the buy-sell agreement, a written, legally-enforceable document. Even though there is a written plan to which the owners have agreed, each owner must have separate counsel to review and advise each owner concerning the buy-sell agreement. The exercise of creating the plan will save legal fees overall, but that agreement cannot remove the necessity of each owner reviewing the buy-sell agreement with that owner’s lawyer with the perspective of the best interests of that owner as the primary concern.

There are three general phases in the life-cycle of an owner-managed or closely-held business. The first phase is the startup, where the value of the entity is initiated. The second phase is continued profitability, where the business stabilizes, earns a profit, and the owner changes from a producer to a manager. The third phase is where the owner participates only in policy-making and hires management. In the third phase the owner will receive highest value for the business interest because the owner’s participation in the business will not be a requirement for the business’s continued profitability. An implemented buy-sell agreement can contemplate and assure the transactions necessary to attain the third phase of the business life cycle. Moreover, if the inevitable transfer of the owner’s interest happens before the third phase, an implemented buy-sell agreement will provide value for that interest that will be more than would be otherwise received.

Although it is difficult to implement, the buy-sell agreement will provide maximum value for a hard-earned business interest.

Top 10 Tips for Creating a Winning Business Plan: Improving The Odds

Creating a winning business plan demands a mixture of precise business thinking, art, timing and luck. You need business planning skills and these can be learned. Many excellent books and courses can help you develop a business plan. But creating a business plan that stands out from the crowd, a winning plan, takes more, and achieving this target takes experience- no way of getting around this. Many talented professionals have their business plan preferences and I have my own which I have fine-tuned working with scores of new ventures. Based on my experience, while there are never any guarantees, here are 10 tips to improve your chances for creating a winning new business plan:

1. Maintain a “market and opportunity” focus and view technology as an enabler. Don’t be seduced with what I call “gee-whiz” technology. Define a tight, focused opportunity with a well-defined target market- technology may be the enabler used to create the business. Suppose you develop a new wireless device and your plan proposes new wireless service for monitoring patient data- the business addresses a real, quantifiable market opportunity. Compare this to an opportunity for a new proprietary wireless data monitoring technology. In today’s highly competitive market, specific, well- defined, opportunity-driven ventures are preferable to pure technology plays.

2. Understand the Difference Between Feature, Function and Benefit Image transmission is a function. Moving high resolution images via telephone lines is a feature. The ability to send a high resolution image in 5 seconds via a telephone line using a $99 device is a benefit. Sell benefits and make this the cornerstone of your plan.

3. Use the “So-What” Tool To Define Your Target Opportunity A very important management tool and not used as often as it should be for new venture development. A simplified “so-what” analysis goes something like this. Our new service offers a unique encrypted data solution for e- commerce applications. So what? We can provide authentication using voice recognition. So what? Our voice authentication technology instantly identifies buyers’ interests and demographic profiles. So what? We can identify and route e- commerce customers based on voice response and past history. The results? Using the “so what” tool, we refocused our thinking to create a more unique, defensible business opportunity.

4. Reinforce Your Assumptions Using Sensitivity Analysis Tools You need to ‘exercise’ your financial model, examine “what-ifs” and boundary conditions. Reduce sales and/or increase costs by 10, 20, 50, 80 percent-what happens? Delay product launch plans, reduce competitors’ costs by the same amount-how do these impact ROI and total cash needs? Formal analysis tools exist to complete these analyses.Properly done, these analyses show that you understand your market, business, elasticities and sensitivities. This is a “must-do” in any business plan effort I am involved with and find this shows you understand your business.

5. Appoint An Advisory Board Develop a “hands-on” Advisory Board. Carve out roles and responsibilities. Provide incentives, typically options, vested based on time served and milestones achieved. Powerful, well-known names and impressive marquees may look great, but you need contributors who can help you move the business forward. Again another “must-do” in any business plan effort I am involved with- high upside with minimal investment. I also serve on these Boards where needed.

6. Develop Strategic Alliances Same points as for Advisory Boards. Developing marketing alliances with GE, IBM and others sound impressive, but make sure there is defensible substance here. Are there any revenue guarantees? What resources have your partners committed to the venture? Any joint promotion plans among their customer bases? Often, targeted alliances with smaller firms may provide more strategic or revenue benefit.

7. Don’t Believe In “The Sanctity of the Business Plan” Another important concept. The completed business plan looks impressive; bound, laser-printed, color charts, and maybe 200 to 300 hours to prepare- sure looks and feels like a finished product. The reality is this document is probably out-of-date before the ink is dry. The plan is only the starting point, a work-in- progress, showing what your team is thinking, assumptions, strategies and projected results. These will tested, attacked by investors and others, defended and changed as your business proceeds. A hard lesson sometimes for those investing more than 200 hours in developing a business plan, but that is reality. There is no sanctity of the Business Plan- as you progress, you will create a revised plan. Revising always adds value and is the norm.

8. Adapt to Change To Avoid the Icarus Paradox In strategic management courses, we relate the story of the fabled Icarus from Greek mythology. Icarus’ greatest asset were wings of feathers and wax that let him soar higher and higher closer to the sun. He kept going to the sun, ignored his father’s warnings about getting too close, the wax wings melted and he crashed and burned. This is often used to explain management failures such as pursuing a single-minded business strategy even in the face of disaster, management hubris, and also believing that achieving great past success ensures future success. (it doesn’t). Avoiding the Icarus Paradox means that new business “trajectories” must be examined, refocused and assumptions tested even when performance is strong.

9. Emphasize Precision Don’t say you are addressing a large, growing market for ‘gizmos’. Instead say “… the market for ‘gizmos’ is $20 million in 2011, increasing to $35 million by 2013.” Specificity and quantitative precision shows clarity of thinking and understanding of your market and business. And also improves your ability to secure funding. In my recent book, I shared similar examples of what I call “fuzzy thinking” and how these can be improved. If you have the “fuzzy thinking” affliction, I recommend focus on tightening your thinking- this skill can be learned.

10. Conduct Business Operations Frugally Running out of cash and inability to secure new funding is most often cited as the reason new ventures fail. However, studies show that ventures funded with minimal capital have a higher probability of success, which I am sure will surprise many readers. The fact is a “frugal” investment structure demands tight management and strong financial controls at the outset. The message here is to tightly define cash needs, operate frugally, particularly in the early months, and demonstrate that you know how to manage cash and resources to win. Achieving this objective often smooths the path to secure new funding.

Entrepreneurs know there are plenty of minefields and absolutely no guarantees in the entrepreneurial world. Follow the above guidelines however and you may improve your probability of creating a winning business plan.

Do Home Business Owners Need a Small Business Marketing Consultant?

Ideas are at the core of your business. It is what drives profits and enable you to build the foundation of your company from. The resurgence of home businesses today has enabled lots of budding entrepreneurs generate their own income even when staying at home. But this process is not as glamorous as it seems because this actually involves a lot of work. There are several instances wherein a home business owner will contemplate into hiring a small business marketing consultant. But is it really worth it? Or will it be an unnecessary business expense?

Home business owners look into various options to generate ideas or motivate them to get their business to the next level. Some even attend workshops in order to figure out new ideas. At the start, most business owners do just fine working on their own. But over time, they will struggle to look for fresh ideas to maintain their business performance. This is true with coming up with marketing strategies for small business because you need to think of ways to keep up with larger businesses.

The one-on-one mentoring of a small business consultant can help you overcome these minor but critical challenges. When you are working alone, you can be so engrossed or too busy with handling various aspects of your business that you do not notice it when ideas pass you by. Hence, you are losing out on an opportunity to explore a new way of looking at your business so your loyal consumer base will continue to do business with you.

A business consultant will not only help you with building marketing strategies for small business. They can also help you organize cost cutting ideas, managing your website design and features, building relationship with clients, tax handling issues, among other components needed for your business operation. A consultant is also emotionally detached from your business. Thus, you can leverage their objective point of view to make accurate assessment of your business’ current status and whatever steps it need to take in order to achieve your goals.

Another reason to get a consultant for your business is when you are trying to explore a new direction. Most home business owners rely too much on their ability to run their business and keep the operation smooth. But after a long time, it will require some sort of motivation and that extra drive to take that next big step. You can therefore consult various ideas with them while leveraging the consultant’s expertise in the business industry to understand which will promise better results. Additionally, they can help you cope with the day-to-day operation and analyzing the system you have in place.

The final reason why a home business owner should hire a small business marketing consultant is to stay abreast on latest marketing trends. It is up to you to decide if you want to quicken your business’ ability to see results, or if you just want to incorporate new ideas for running your business. The expertise of a professional consultant will provide you with additional motivation for success, especially with unique challenges that are involved with running a home business.