Four goals for owners

Take out your business plan when reading this article and see if it needs to be revised and updated. If you don’t have a business plan, then this article should be used as the basis of the plan for the year.

The one thing that owners need to remind themselves of is that they should run the business like a business. It is too easy, especially for smaller firms, to let standard business practices be deferred. Too much business related “stuff” is left on to-do lists or just ignored because the owner is too busy “working” at the business instead of on the business. Well, if an employee held this attitude, that same owner might very well fire them.

As financial and management consultants, we find a pattern of issues that many owners ignore, poorly address or may be ignorant on the matter. This article highlights the most common of these topics and provides a review of solutions.

Don’t be a “C” corporation

Any agency that is still a “C” corporation should fire their CPA for providing bad advice. Most buyers will only buy the assets of a firm and not the stock. This creates a double-tax situation for “C” corporations that can be as high as 48 percent of the gross proceeds depending on the state of residence. There are creative tactics that can mitigate this heavy tax burden, but why go through the hassle when there are simple alternatives.

The double-tax situation is not an issue with “S” corporations, LLCs or partnerships. Keep in mind that a conversion to an “S” corporation will require a 10-year “phase-in” of “S” level taxes. Plan for the eventual sale of the business and create a mechanism for tax efficiency. Even if you will not be selling to a third party, “S” corps cannot be challenged by the IRS for giving owners “excess” compensation.

Create or update buy-sell agreements

Every agency needs to have a buy-sell agreement, whether the business has one owner or 20 owners. Buy-sell agreements define the agreed to terms when the need to buy out an owner’s interest occurs upon retirement, death or disability. If structured correctly, the buy-sell ensures that the owner’s heirs receive a reasonable value and the business is not put into a financial bind making payments.

Buy-sell agreements not only set the price and terms of departing owners, but can also prevent the introduction of unwanted new partners. Make sure the firm’s buy-sell agreement includes provisions for disability, bankruptcy, divorce or legal actions that threaten an owner’s ownership interest.

For the sole-owners, contingent buy-sells are similar to “regular” buy-sells. It is an agreement between an owner of one business and someone else in order to sell the owner’s interest if and when some triggering event occurs, such as the death or disability of the owner. The contingent buy-sell can, and often does include parties outside of the business as the potential future buyers.

The purpose of the contingent buy-sell is to have a known buyer with known terms to allow for the orderly sale of the business. It is an attempt to prevent a “fire sale” or total collapse of the business upon the death or disability of the owner.

Make sure existing buy-sells do not have outdated formulas for the agency value. It is better to put in a requirement that a current business appraisal is used rather then a multiple of revenue, since there are many more factors that define value.

Re-invest in the business

There is good money to be made in the insurance business. Problems arise, however, if the owner drains all the money and does not re-invest into the business. A business that is successful year-after-year will require a certain amount of capital to buy new equipment, hire that highly qualified person, embark on a new sales campaign to increase sales or acquire a book of business.

Re-investment should also include taking care of the employees. Bonuses and perquisites are nice, but also focus on training employees. Aside from the required CE classes, send employees to learn new technical skills in insurance as well as computer skills, interpersonal skills and life skills in general.

Be a replaceable employee

There is nothing more satisfying for most people than the feeling of being wanted. In the right context, this can be a good thing. Business owners that started the business will often create a position that will make them irreplaceable. Only that person can … fill in the blank. This however, can be a bad thing.

Sure, most owners enjoy the work and would do nothing else. The problem is that the irreplaceable owner can never leave.

Owners need to be able to delegate the various tasks they perform. Qualified employees should be trained to handle the functions, at least temporarily. Let the key employees work on account issues, market relations and sales management. This way, the owner can then choose to show up, or not.

A final thought

Owners need to not only take care of their business; they need to take care of themselves. A business owner that properly addresses the four topics above will have less stress and more time to enjoy life. Employees and spouses and children will appreciate it, too.

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