Posts Tagged ‘financial’

When “What If?” Becomes “What Now?”…

Tuesday, September 4th, 2012

 

This week’s guest is Howard Lerner, Partner at SBLR LLP Chartered Accountants, a full-service accounting and business advisory firm located in mid-Toronto.  With 9 partners and over 40 team members, including a strategic tax department, SBLR specializes in providing creative income tax solutions and high-level growth and exit strategies for profitable, privately-held companies.

 

One of the most important – but often ignored – reasons for preparing for the future succession of your business is to minimize the fallout from the unexpected.  While things don’t always go according to plan, the business has a much better chance of surviving if you’ve made preparations, in advance, for it to continue without you there.

The following is based on an actual story, illustrating the importance of planning ahead.  In a real-life situation, Karen, 56, started Staywell Corp, a health services business, 23 years ago. Her son John, 27, and daughter Beth, 24, have worked in the business since graduating from university.

Karen recently contracted a life-threatening virus leaving her paralyzed and unable to work.   Not having developed a strong senior management team, much of the business knowledge resided with Karen.  With the help of a few loyal employees, Karen’s children kept things together for several months, hoping in vain that their mother would quickly return to work.

Karen and her family never discussed what would happen in case of a tragic event, so John and Beth were completely unprepared for the responsibility resulting from their mother’s lengthy absence.  After six months of declining sales, John and Beth realized it was necessary to sell the business. The value received for Karen’s shares was substantially less than it should have been, as much of the intellectual capital was tied up with her.  The proceeds still resulted in a taxable capital gain to Karen of $1.2 million, thereby costing her family $110,000 in capital gains taxes.

After the sale, John and Beth left the company; only one has since found new employment.  Karen’s disability insurance, a fraction of her former CEO’s salary, means the family is struggling financially, as Karen needs full-time nursing care, and the after-tax proceeds were used to pay down debt.

How could this family have experienced a better outcome?  The answers all have one thing in common:  PLANNING.

1. Succession Planning – Karen could have developed a strong and capable management team and delegated as much responsibility as possible to the team, with the objective of making herself redundant to day-to-day operations.

2. Insurance Planning – At least bi-annually, life and disability insurance policies could have been reviewed to provide adequate coverage in case of death, illness, or disability.  Insurance strategies can often include funding the premiums using corporate assets certain situations.  This planning also involves the preparation and updating of proper wills and powers of attorney.

3. Tax Planning – A proper corporate structure also might have allowed Karen to multiply the Capital Gains Exemption on the sale of Staywell Corp’s shares, possibly eliminating all of the $110,000 of capital gains tax.

4. Exit Planning – Karen could have been developing and communicating her plans for the business, so that the key stakeholders (her family and senior management) would know and understand Karen’s wishes and how to execute them in case of disability or sudden death (yes, that happens, too).

5. Financial Planning – a solid financial plan could have established family assets in addition to the business investment, making the group less reliant on Staywell Corp for support.  Debts could have been managed to maximize interest deductibility.

Karen and her family have a tough road ahead of them but their situation offers an important lesson to the rest of us. Call your trusted advisors today and put some plans in motion to mitigate the implications of unexpected yet potentially disastrous situations.  After all “What if” can often turn into “What now?” but with a phone call or two, you can avoid that.

For more information, please contact Howard Lerner at SBLR LLP Chartered Accountants at 416-488-2345 Ext. 222 or at hlerner@sblr.ca

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Winning Business Ideas from “Kinky Boots”…….

Saturday, August 15th, 2009

I was indulging in one of my favorite Friday evening habits a couple of weeks ago, relaxing and watching a movie. On this particular Friday night my wife had decided (isn’t that how it works in your house?) that she wanted to see a movie that a number of people in her office had enjoyed. It’s called “Kinky Boots”.

It’s about a family run shoe manufacturer in the U.K. that has been producing a high quality product for four generations. (By the way the movie is based on a true story.) The hero inherits the business only to find that, while his father had led everyone to believe that the business was holding its own, it was, in fact, in very serious financial trouble. A visit to one of the firm’s largest customers revealed that its traditional market had been taken over by cheaper, lower quality, imported products (can anyone relate to that problem?).

The young owner has to begin immediately laying off long serving members of the workforce. While doing so, he gets a lecture from a young female employee who tells him that, instead of moping around asking “What can I do?” he should get out and find a new market niche (really, they actually use the word “niche” several times in the movie). She goes on to suggest that this was perhaps something they (management) should have done long before the firm got into trouble.

Without spoiling the plot for you – let’s just say there are alcohol and female impersonators involved – our hero does manage to find a new niche. It’s an easily identified group with a specific need which is not being met by the firm’s competitors. The group is large enough to generate sustainable profits and they want a quality product. The company uses its experience and knowledge base to develop a unique solution. It supplements that by attracting a designer with specialist knowledge of the niche’s thinking.

I couldn’t believe it. Right there in the middle of my Friday evening, was a movie about “Kinky Boots” giving pointers on leadership and an excellent example of how to develop a winning marketing strategy. And it was doing it in a far more entertaining way than many of the books and articles I’ve read or courses I’ve attended.

But there was more. The movie went on to deal with some of the other issues we face in this fast changing, demanding world in which we operate. For example, reaching quality standards which are different from those of the traditional business demands more of workers than has ever been done in the past. As an owner how do you communicate the absolute necessity of making the change? And make them understand that even if they are willing to do their traditional best it is no longer good enough? How do you push and how far do you push to maintain their enthusiasm while motivating them to do even more?

We know things never happen one at a time so while driving up quality our hero also has to meet a deadline for launching the product line. When the pressures mount on you how do you communicate a sense of urgency to a work force that already believes it is doing its best? And while you’re expecting them to change, is that enough, what about you, the owner? The movie’s example of the personal challenges owners face began at the beginning of the film when our hero decided to leave the firm. A simple sense of duty to his heritage and the employees after his father’s death pulled him back. But the changes required by the new strategy were so radical and the risks (including the personal, financial risks that all entrepreneurs take) of implementing it were so great that he had to develop enormous commitment to the success of the new direction.

Then there were the people issues which seem to dominate our lives. The company culture reflected the solid, traditional values and roles on which it was built. The potential solution, however, involved embracing customers with very different roles and values. And bringing the specialist designer into the firm raised all of the challenges associated with integrating minorities into the workplace.

Recognize any of this? Ever found yourself in a similar situation? Realistically most of us have had to deal with one or more of these issues one time or another. And it’s hardly unusual for several crises to erupt simultaneously (the perfect management storm).

I’m working with a couple of companies at the moment which missed opportunities to develop new niches when they were busy. I also see situations where owners ask “What can I do?” without knowing where to find the answer. (Alcohol and female impersonators are not universal “cure alls” and I certainly don’t recommend either or both.) Then there are companies that had a product for which they went to find a market, rather than starting with a market need first. Finally, some companies also pick niches that are too small or which require too much investment to ever yield a reasonable, sustainable profit.

But the challenges inherent in change, motivation and communication are ones which we all deal with on a day to day basis. And are ones with which we can all use some help.

Watch the movie and you’ll see how the characters made out. You’ll also see some examples of excellent strategies being put into practice – and the courage and persistence in the face of adversity that you know, as business owners, are required to implement them. You may even pick up a few tips – I know I did. And if you get nothing else out of it, you will be entertained.

 (In case you missed it…………..”Kinky Boots” is from the same team who created “Calendar Girls”).

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