I have been asked over time what goes into a Business Plan, here is the start of a recent plan:
Business Strategic Plan – ******* Batteries
Company: ******* Batteries
Is a distributor of truck and auto batteries to supply car shops, auto dealers and trucking companies. The company is a proprietorship and has a book value of $730,000 but it is highly profitable. The market value is now $1,200,000. There are 10 employees, but only one is critical to operations – John’s son Billy.
Business Owner: John *******, age 53
John established the company 20 years ago, and has focused his attention on it almost exclusively, as he has no special hobbies or sports and rarely takes a vacation.
Owner’s Spouse: Elizabeth *******, age 51
Elizabeth is not employed. She has no plans or interest in returning to work.
Owner’s Son: Billy *******, age 30
He worked at ******* Batteries during high school. He completed college and started work in the company at age 26. He handles all sales and is gradually learning the company’s accounting and billing programs. Billy is engaged now, and has just purchased a local home for his fiancé and himself.
Owner’s Daughter: Barbara (*******) *********, age 28
She is married to Reggie ******** who is a minister. She is very active in the small church where he is the minister. They have two small children.
Owner’s Desire: John wants Billy to continue his outstanding job in sales, gradually expanding their customer base. John has observed that Billy has the education, talent, interest and is a very hard worker.
Business Indebtedness: The company has no bank loans. Accounts payable are approximately equal to receivables.
Survivor Income Goal for Elizabeth:
- $60,000 per year. They consider this would be adequate, since the house and all business debts are currently covered by life insurance.
- If the business is willed by John to Billy, he would control most of the income and the family assets.
- If the business was willed to Elizabeth, and then she divided her estate equally, the company ownership would be split between her son Billy and her daughter Barbara, although Barbara has no interest in the company nor does she feel it fits the interest of her husband whose ministry career choice will likely cause them to change locations about every ten years.
Sibling Relationships: Billy and Barbara are cordial, but not real close and Barbara’s husband is devoted to his religious career.
Estate Planning: None. John has focused entirely on the business and has felt that ******* Batteries would provide for Elizabeth. However, he has no idea how this would be achieved. Neither John nor Elizabeth have wills or trusts.
Estate Distribution Objective: John wants to provide an equal distribution of his estate between Billy and Barbara.
Family History: John’s older brother, Samuel, died leaving a fairly large estate to his widow Susie, who has remarried. Susie is very close to her new husband’s children who are always wanting and getting financial support. The family is concerned that if Susie (who has serious diabetes) dies, all of her substantial estate will go to her second husband and that Samuel’s two daughters, who are both self-sufficient teachers, will get nothing.
Income for Spouse: Where would Elizabeth get her income if John died?
Succession Challenge: If the business were left entirely to Elizabeth, how long would Billy run a business if he had no ownership? He and his father have discussed the future and Billy “expects” to be the successor owner – but there is no guarantee. After he is married, Billy may easily become more concerned about these issues. He has commented that his sister Barbara “Knows nothing about the business, and neither she nor Reggie have ever expressed any interest in it.”
John *******: Self-employed income of $186,000
Billy *******: Salary of $4,000 per months ($48,000) plus commissions of $92,000 – total $140,000
Two roads diverged in a wood, and I—
I took the one less traveled by,
And that has made all the difference.
Starting your own business can be like having a baby — a very important life decision that might not always be a rational one. 9 months into your 9-5 insipid job and you might decide to take the proverbial exit from the freeway, onto the smaller more challenging road less travelled.
But it’s not always smooth sailing. Akin to raising a baby, your business is bound to give you many sleepless nights, demanding all your attention and testing your resolve at every stage. Persevere, and you shall be rewarded.
While watching your business take its first steps towards success will fill your heart with joy, there are a few steps you must take in order to witness this. Here are a few healthy business practices every small business owner must practice —
- Assess your product— as a businessman, one must always strive to deliver products/services of the highest quality. You need to ask yourself several questions before starting your business — will my product fulfil consumers’ needs? Is there a market for the product/service I’m delivering? Is the pricing right? A thorough SWOT analysis of your product will shed light upon different aspects of your product, and will help you identify key strengths and weaknesses, and how they can be overcome.
2. Gauge the market and your competitors— the business environment can be like a warzone, you often don’t have complete control, and your fate depends on the exterior environment, your enemies, and your comrades. There can be landmines everywhere, so one must tread with utmost caution, or result going kaput.
It is thus imperative for a businessman to have adequate knowledge about the market his product/service exists in and the competitors in that market. This knowledge is indispensable for a businessman. It serves as a crucial decision-making factor in charting the growth route of a business. The product/service should be strong enough to be able to withstand blitzkrieg marketing campaigns by competitors.
- Evaluate yourself— a successful small business owner always monitors the value of his business. The value of a business plays a fundamental role in making future business decisions and financial planning, especially when matters such as the sale of your business or an insurance evaluation are at hand.
4.Transparency — make sure to keep a record of all financial transactions undertaken by and for the business. In an environment where fraud and lawsuits are rampant, being transparent will add credibility to your business, and create a favourable perception in the minds of the consumers. Maintain the transparency of your business like a ruby smitten by the Sun, and it’ll go a long way in adding goodwill to your business, ultimately leading to a gradual increase in equity.
- Set realistic expectations— don’t expect to go win 8 Olympic golds like Phelps in 2008 in the nascent stages of your business; it’s important to set expectations that are reasonable and achievable. Don’t trudge into waters deeper than you can survive in. Typically, you should give about 12 months before starting too see a customer bring more value to your business than how much it cost you on-board that one customer. It’s essential to take an as much as you can handle, and no more. If not the case, you might end up compromising on the quality of your product/service, and this can have a detrimental effect on the credibility of your business.
While starting a business is a path several people have chosen to tread in recent times, sustaining it and maintaining its viability are the biggest hurdles. The aforementioned business practices will help you take obstacles head on, and ensure a first place finish in this ultra-marathon.
Contact my office at 215-886-2122 and lets talk.
Prudent business owners establish buy-sell agreements if there are partners or shareholders in the business, and sometimes even in a one-owner business. With a buy-sell agreement, the owners agree that if one owner leaves the business because of death, retirement, disability, or other triggering events, the remaining owner(s) will buy out that owner or the owner’s estate.
Too often, however, business owners use canned buy-sell agreements, with little thought given as to how the contract best fits their particular needs.
FAILURE TO FUND
One of the most common mistakes business owners make is failing to properly fund a buy-sell agreement. Let’s say two partners, each owning half the business, agree to buy the other out in the event of death or other triggering event. However, how is the remaining owner going to pay for the other half of the business?
Few owners will have the cash, and banks will be reluctant to loan, especially if the business is still young and unproven. Bankers will question how the business, having just lost a key person, can service the debt of a new loan.
A new partner could be brought in, but the remaining owner may not want the new partner. The most common solution, though not the only one, is for a life insurance policy to be taken out on each partner or shareholder in the amount of the value of the interest of the owner.
There are many different methods of structuring the policies (ownership of the policies by the business can have severe tax consequences, for example), so business owners should work with a qualified financial advisor.
DECIDING THE PURCHASE PRICE
This may seem an easy question in the beginning, when the owners mutually agree on the value of the business. However, what happens several years down the road? What is an acceptable evaluation to the Internal Revenue Service? If the owners have not re-valued the business each year, there could be serious disputes. If one owner leaves in a way that is detrimental to the business (such as taking clients), should the departing owner receive a smaller price for his or her interest?
ALL OWNERS MAY NOT BE EQUAL
Buy-sell agreements are usually easier to develop if the owners have equal shares of the business. However, what if there is a majority owner? The majority owner may not want the minority owners to buy his or her stock, preferring to have family members or a key employee take over. A standard buy-sell agreement may not allow this to happen.
Perhaps two, completely different, buy-sell agreements are needed. One for the minority owner might call for the interest to be sold to the majority owner(s). The majority owner might wish to have an agreement that calls for other family members to acquire his or her shares. Perhaps a stock redemption agreement may be the most suitable arrangement for one of the owners.
Nearly all buy-sell agreements allow for the death or the retirement of the owners to trigger the buy-sell option. Sometimes overlooked is the disability or divorce of an owner.
In the event of divorce, for example, the stock could end up in the hands of the spouse, which the remaining owners may not want. Other triggering events can be the firing of a minority owner, or the personal bankruptcy of one owner.
REFUSING THE RIGHT OF FIRST REFUSAL
A common provision in buy-sell agreements is the right of first refusal. The departing owner cannot sell his or her interest without first offering the remaining owners the opportunity to buy it. This may sound like it puts each owner in control, but in reality that is not always the case.
A minority owner of a small business, for example, will probably have a hard time finding an outside buyer willing to pay for fair market value for a minority interest.
On the other hand, if the departing owner does find a buyer, the remaining owners may find it difficult to come up with the money to buy the owner out in order to avoid bringing in an undesired new co-owner.
By tailoring an agreement to your needs, these and other common buy-sell agreement problems can be anticipated and avoided.