How Will Your Business Survive?

Imagine you died last night. Don’t think about how, just think you’re dead!Now what happens? What will happen to your family? What will happen to your business? What VALUE will be placed on your business?In many instances, we treat the value of a business as just a number, which is estimated by the amount of income the business generates. However, we don’t probe into this number to understand the assumptions that are used for its determination.A key component that needs to be understood is how dependent the business is on the owner. An examination of this will have a direct and significant bearing on the value of the business. We have all heard the term goodwill, however, do we really understand what it means?Goodwillcan be defined as the difference between the capitalized earnings value of a business and the value of its net assets. There are a number of factors that attribute to a company’s goodwill. The physical location of a business may result in a competitive advantage and, therefore, increased earnings as compared to the same business in a different location. The products or services a business sells may have created a positive reputation or identity in the minds of its customers, which leads them to purchase products and services from this business instead of from your competitors.Certain contracts or licences held by your business may give it a competitive advantage and greater earnings than a competitor. Employees also add value to the business by the skills they bring to work each day. Most of us would agree that without people a business would not exist. However, not all employees of a business are critical to its success. In many owner-managed businesses, the key individual is the owner-manager. A key question is: “could the business survive the death, permanent disability or retirement of the owner?” Many businesses are inseparable from their owners. If one of the proceeding events occurred without proper planning, then the business would fail.Possible scenarios Let’s look at what could happen. You have owned a building materials store for 17 years. You died last night. This morning, your spouse calls one of the employees to inform them what happened. The employees first thought is what about their jobs – this will affect their lives and income they bring to their household. They may lose confidence in the ability of the successor to continue the business and will look for employment elsewhere; customers may lose confidence that the business will be a steady source of supply; suppliers may lose confidence in the company’s ability to pay; and financial institutions may believe that their loans are in jeopardy.Alternatively, the business may be so well organized that someone else could perform the owner’s duties and responsibilities without any serious loss. However, there are two different aspects to the added value that people can bring to a business: personal goodwill and individual goodwill. It is important to understand the difference -Personal goodwill has been described as the unique advantage an individual enjoys because of his or her particular abilities, good name and/or reputation. These advantages are not transferable by contract or otherwise. Personal goodwill ends when the individual who provides them is no longer involved in the business. Since personal goodwill is not transferable, no commercial value can be attached.On the other hand, individual goodwill accrues to a business because of an individual’s abilities, business contacts, good name and reputation. It could, or would, be harmful to the economic well being of the business if you can’t substitute other people to fill the role. In an open market context, it is non-competition agreements that often result in individual goodwill having commercial value.For example, if the business owner were absent and someone else could step into his or her shoes and maintain the relations with the customers, then the goodwill is individual goodwill and would therefore have value as long as there is some assurance that the current owner will not compete with the new owner.Goodwill opportunities
The opportunities to be gained by understanding the nature of the goodwill can be identified under different objectives that a business owner may have:Provide for the family.Quite often a business owner is asked to provide personal guarantees to the bank or leasing companies. The death or permanent disability may cause a business crisis due to lack of management strength. The crisis could result in a default on loans or leases. This, in turn, could cause the estate or disabled owner to be required to pay the principal amount to the lender under the personal guarantees. Therefore, where evaluating the dependence of the business on the owner, an assessment must be made of the risk that the owner’s estate would be required to meet any personal guarantees. Steps can then be taken to protect against those risks with life or disability insurance. Alternatively, other capital can be set aside to pay the liability. If the business is very dependent on the owner, then insurance policies and investments that are meant to provide for the family should be owned outside the business, which will reduce the risk that these would not be available to the family when the funds are needed.Maintain the short-term value of the business.If the plan is for the business to continue, then steps need to be taken to reduce its dependence on the owner. This will maximize the value of the business by minimizing the individual goodwill and maximizing the personal goodwill. As well, it will allow for an orderly succession for family or employees. Until dependence is reduced, there is a risk that the business will fail in the event of a sudden loss of the owner. In that case, insurance can be used to provide cash to the business to allow it to meet the obligations to suppliers and employees as they fall due. If the dependence on the owner is not too great, this may allow the business to continue until new management can be put in place.Provide for the long-term succession of the business.Most business owners have plans in place for the event of their death or retirement. The owner may decide that the business should be liquidated on death and wish to ensure that an orderly liquidation takes place. The owner may want customers’ outstanding orders filled, suppliers paid and any long-term employees paid salary due, plus some severance for their years of loyal service. This can be achieved by insuring the owner’s life for an amount that would meet the estimated obligations.On retirement, however, the owner may want a son or daughter to take over the business. Even if this occurs, the dependence issue still exists. Now, the concern is how dependent the business is on the successor. If the business it very dependent on him or her and the parent has a significant investment remaining in the business by the way of loan or shares, then the parent’s investment is at risk. If the successor were to die or be permanently disabled, the business could fail and the parent would be unable to recover all of the investment. This remaining parental investment may represent the retirement capital and/or equalization payment to other children. Therefore, it may be of value to provide for the buy-out of the parent’s remaining investment through life or disability insurance taken out on the successor it is unlikely that someone who has been retired for many years will want to take over a business in crisis.Minimize tax.Recent changes in the insurance industry have limited the ability of life insurance proceeds to flow through the capital dividend account to reduce a tax liability. However, all is not lost. If a surviving spouse inherits the shares on a rollover, these can be redeemed with the resulting taxable dividend reduced to the extent there is a balance in the capital dividend account and an election is made. Also, the tax changes allow for a grandfathering of some current arrangements. Finally, if all else fails, the life insurance proceeds can be used to actually pay the tax liability. Remember, people don’t plan to fail, they fail to plan!

Business Suicide: Taking The Life Of Your Own Business

Are You Killing Your Own Business?There are many acronyms in the business world – some that really make sense and some that make you scratch your head in wonder.Well, it is time to add one more.This new acronyms is “S.A.D.” – This acronyms can help you determine if you or your business has risk indicators (risk factors) or characteristics that could lead to the demise of your venture.In the end of all businesses, it is essentially the person running the company that will decide if it lives or dies. And, if it dies, when it should not have, it means you (the business owner) have committed business suicide – unnecessarily. So, are you or your business at risk of business suicide?Let’s look at these risk factors through the acronyms S.A.D:S – Strategic Direction:Is your business on the right path – a path that utilizes the business’s assets and resources (from capital to people) in the best possible way?Can you or anyone else take those same set of assets and deploy them in a better way and earn more in revenue/return from them?Far too many businesses fail these days or don’t even get out of the starting gate because they fail to plan properly or fail to change direction with their business when market conditions or changing customer preferences demand it.Planning means understanding your customers’ needs and providing a product or service for those needs while utilizing the least amount of assets – resources are scarce after all and you don’t want to spread yours too thin on one segment or product line.I have seen businesses that have say 50% demand yet they spend unnecessarily on 100% capacity. Its just waste. And, waste will kill your business.A – Accounting:Are you properly managing your business’s cash flow to ensure that your business has the wherewithal to withstand a slow period or future recession?Does your business have the working capital to meet future customer demand?Is your business spending cash faster than it is collecting it?Far too many businesses fail by growing themselves broke. They have the customers yet, either through miss-management or poor collections, they don’t have the money ( working capital on hand) to service those customers. If your business can’t meet customers’ needs, your competitor will.D – Discipline:Are you, the business owner, doing the right things each and every day?Daily items should include things like marketing (daily marketing) or actually listening to customers in anticipation of their needs and wants.Or, are you taking away needed assets from the business – like drawing too large a salary, taking needed money from a cash starved business?Know that there will be a time to plunder your own business – but, if it is growing and your plans are to grow it – this is not that time.Far too many business owners get complacent and their business erodes over time. Or, they think that their business should pay them a huge salary from day one. While that would be nice, it is not reality.These are indicators of businesses or business owners at risk of doing themselves in.While not all businesses that show these risk factors will fail, it is highly likely that if your business or you, the owner, demonstrate these characteristics, you are on the path of business suicide – and that would be SAD.

Why Business and Law Go Hand in Hand

If you are getting ready to start a new business, or if you have already done so, it is important that you understand the areas where business and law intersect and rely on one another. There are a wide variety of potential legal situations that business owners might find themselves in when starting a business or growing an existing one. Because the average person might not be aware of the minute details of business law, they could end up facing severe financial consequences.The best way to properly protect yourself from legal liability is by hiring or consulting with a business lawyer. However it is also important that you learn about the general concepts of business and law, so you will be able to know when you need legal protection. If you want to adequately protect yourself and your new business, here are some things you should understand about business and law, and why the two should go hand-in-hand.Starting a BusinessStarting, running or growing a business can be a very exciting venture. Unfortunately many people are so eager to get up and running that they often overlook very important legal aspects of starting their business. And because of the nature of a new business, even if legal issues are known, the business owners might not have enough financial resources to obtain legal assistance.No business is exempt from the potential of being faced with some common legal problems, including discrimination or harassment claims, dissatisfied customers, patent or copyright issues, disgruntled employees, and many other legal issues. If large and small companies alike do not have the help of experienced business lawyers on their side, they could end up mishandling certain situations and facing disastrous consequences. Even seemingly minor legal issues could quickly spiral out of control if they are not handled properly by someone who is familiar with the ins and outs of corporate law.Even the most optimistic business owners can find their lives turned upside-down by a single harassment claim by a disgruntled employee or a claim of errors and omissions by a customer. In some situations, business owners may unwittingly admit to something they are not guilty of just to calm down an angry customer or employee.These risks should not dissuade people from starting businesses, but should instead serve as examples of what could occur if the proper precautions are not taken.Legal ConsiderationsWhen you start a business and are offering goods or services to a particular market, there is always the possibility that a transaction could go wrong, that a customer or employee could feel they have been wronged, or that a contractual agreement may fall apart. In these situations, it is crucial that you and your assets are protected. An important step in running a business is choosing the proper legal entity that it should be. Different entities have different levels of protection, shielding individuals from liability, offering different tax benefits and establishing roles between partners. Another step in protecting yourself is obtaining and implementing the proper type of insurance, that might be relied on if a particular dispute arises.Other legal considerations of running a business involve the use of clear contracts between you and those you do business with. One of the biggest causes of business disputes is where two parties are involved in a business arrangement, end up disagreeing what that arrangement is, and either have an inadequate contract, or no contract at all that describes each of their obligations. Individuals and businesses can lose large amounts of money simply because they failed to properly define their legal obligations and put a contract in place.Business AttorneysAt any time during their operation, both small companies and large corporate entities can be faced with unexpected legal issues that they are simply not prepared for. One of the best ways to prevent such dangers, and to protect yourself if a dispute arises, is to hire or consult with a specialized business lawyer.A lawyer who is experience in the areas of business law will be able to help you avoid potential liability in the future, and can help defend or enforce your business against others if a dispute arises. If you want to make sure that your company is able to reach its full potential without being sidetracked by legal problems, you can significantly increase your chances of success by hiring an experienced lawyer.As long as businesses continue to exist, there will always be the need for competent legal protection. Make the smart move for the future of your business by hiring a qualified lawyer to make sure your company is always represented and prepared for unexpected legal situations.Business and LawThe areas of business and law are intrinsically connected and will always go hand in hand. Our legal system has many regulations and laws in place to govern those operating a business, and it is important to have at least a basic understanding of the legal implications of starting a business. With a little research, basic knowledge, and ideally help from specialized business litigation lawyers, you can continue to grow your business while implementing best practice strategies, and protecting yourself, employees and customers at the same time.