Follow Dallas Linkedin
Email Dallas Email
Financial
Nov 16, 2018

Reducing Risk Can Build Value

Sponsored Content provided by Dallas Romanowski - Managing Partner, Cornerstone Business Advisors

Building a successful business and minimizing risk may seem like opposite strategies but, typically, they go hand in hand.

Once a business matures past the early, sometimes-chaotic stages of development, business owners often turn toward actions that can protect them from the unexpected. Common examples of risk mitigation include purchasing life insurance on owners’ lives and insuring any assets crucial to business success. These are valid ways to minimize risk but rarely are they enough to protect owners and their businesses as they approach their business exits.

As you consider how to best protect yourself and your business from risks to your business exit, consider three often overlooked methods of risk minimization.


Management Incentive Plans

Well-designed incentive plans for top management personnel can minimize the risk that key employees will jump ship just as you are heading into the safety of the harbor. It’s more likely that a key employee’s departure will negatively affect your exit timeline than a death. This implies that having a plan to keep the employee with the company both during and through your transition to your next phase is valuable to minimizing risk.

In addition to the risk-minimizing effects of incentive plans, you can also encourage actions that help grow the business in the same plan, thus potentially growing business value.

There are countless formulas you can use to incentivize your key employees to stay in the business as and after you leave (e.g., Stay Bonus Plan, Phantom Stock Plan). No matter which incentive plan you choose, your incentive plan should do four things:
  1. Be specific.
  2. Be substantial.
  3. Handcuff employees.
  4. Be based on a written performance standard.
Incentive planning can protect you and your business’s value because properly incentivized key employees are less likely to leave the business and throw a wrench in your planning endeavors.


Key-Employee Life Insurance

An important aspect of successful business exits is the presence of key employees. Key employees are employees who have a tangible effect on the business’s performance. Their absence would do potential harm to the business’s operations, cash flow or value to potential buyers.

Given the importance of key employees, you might assume that many business owners take out life insurance on their key employees.

However, many business owners don’t do so, primarily for two reasons:
  1. They don’t know who their key employees are or mistake employees they like for key employees.
  2. They assume that the business will be fine even if key employees die unexpectedly.
Most commonly, business owners don’t examine or admit which employees are crucial to the business’ value. Without that knowledge, it’s impossible for owners to purchase life insurance on them. A proven way for owners to find out which of their employees are key employees is to consult with advisors to determine which employees impact business value and would be difficult, if not impossible, to replace.

Typically, exit planning advisors construct advisor teams to help business owners determine (a) which employees are key employees and (b) the most appropriate types of insurance to purchase to protect against their sudden death.


Contingency Plan

An Emergency Operating Plan is a written strategy that addresses how the business should react to a sudden death or departure of a co-owner, key employee or yourself.

Insurance proceeds cannot replace business functionality or know-how. Having a plan for how the business functions in the absence of an important person can protect you if a co-owner or key employee is suddenly unavailable.

It can protect the business (and vicariously, your family and employees) if you suddenly become unavailable. A strong contingency plan can tie the funds you and your business receive from insurance to the operational strategy the business may need to overcome the absence of a crucial contributor.

Each of these aspects can more effectively minimize risk than simply hoping things go well. However, incorporating these methods into your business can be complex. If you’d like to talk more about ways you can minimize risk to your business exit, please contact us today.

© Copyright 2018 Business Enterprise Institute, Inc. All Rights Reserved

As a member of the Business Enterprise Institute (BEI), Cornerstone Business Advisors is an authorized distributor of BEI’s content and Exit Planning Tools.

The Cornerstone team includes former C-Level executives, successful entrepreneurs and advisers who offer unmatched experience in delivering advanced, custom-tailored, results-oriented solutions for business leaders. We developed the Performance Culture System™ to help clients implement best practices and drive high performance throughout their organization. For more information, visit www.launchgrowexit.com, call (910) 681-1420 or email [email protected].

Other Posts from Dallas Romanowski

Bizjournalblockad
Ico insights

INSIGHTS

SPONSORS' CONTENT
Billhunter300x300 b&w

Old School - The Hidden Value of Handwritten Notes

Bill Hunter - Wilmington Design Company
Img 1576c1

What We Think is Unique About Our Firm

Eddie Nowell - South Atlantic Capital Management Group
Headshot 1016184145

Functional Expense

Ryan Skuce - Earney & Company, LLP

Trending News

Entrepreneur Richard Johnson's Latest Project Aims To Boost Burgaw

Johanna Cano - Jun 14, 2019

Nearly Done With The Pearl, Developer Plans 32 More Downtown Apartments

Cece Nunn - Jun 14, 2019

Plastics Molding Manufacturer Gets Its Start In Wilmington

Christina Haley O'Neal - Jun 14, 2019

New Hanover Regional Grows To A $1.2B Operation

Vicky Janowski - Jun 14, 2019

Field Of Vision

Jenny Callison - Jun 14, 2019

In The Current Issue

Manufacturer On Board To Invest $25M

With its proximity to the Cape Fear River and customer markets, the Wilmington area provides an essential location for National Gypsum, a gy...


MADE: Production Capacity

From power cords to nuclear fuel, manufacturing companies across the Cape Fear region are making a wide range of products. Here’s a recap of...


Providers Keep Close Eye On Measles Issue

With the largest measles outbreak in the U.S. in 25 years, area health providers will continue to promote the need for keeping up-to-date on...

Book On Business

The 2019 WilmingtonBiz: Book on Business is an annual publication showcasing the Wilmington region as a center of business.

Order Your Copy Today!


Galleries

Videos

2019 WilmingtonBiz Expo Keynote Lunch - CEO, nCino, Pierre Naude`
Transporting the Future - Power Breakfast 3.12.2019
Health Care Heroes 2018