Brian Bewley: Good afternoon, this is Brian Bewley.

Enpo Tu: Good afternoon Brian, this is Enpo with My Financial Coach. As a background for our listeners, I am happy to announce that My Financial Coach is reaching out to a few of our subject matter experts and today I have Brian Bewley on the line. Brian, why don’t you give us a little bit of background about yourself?

Brian Bewley: Well, I’ve been in the financial services business for approximately twelve years now and what I have done is started in the insurance portion of the business and thoroughly learned how to evaluate insurance in the context of things through the financial lense. I’m not just looking at it as a kind of risk management component but rather how insurance impacts your ability to control your finances. Insurance allows you to offload certain risks through insurance carriers and the impact that this has on your balance sheet. More recently, I’ve gotten into the investment advisory side of the business as well. So that’s my background and part of what I do is work with individuals and business owners and help them tackle complex problems.

Enpo Tu: All right, well Brian I believe that one of the most difficult things to tackle, especially if you’re a wealthy business owner, is this idea that at some point change is coming around the corner and you may not be a part of that change. So let me set a scenario for you. So imagine that a long-time client of yours who’s been successful in business comes to you and says: You know I’ll probably never retire. I built this company from the ground up and I still have a lot of years to give this company. Then again, I’ve got a lot of help along the way. My business partners know my thoughts and they definitely want me to stay on as long as I am able. Still, I have considered I need to spend more time with my family. I just don’t want to give up control of the business. I still want to be the boss.
So thinking about this, the real question that this business owner is asking is: my business partners are all younger than I am and want to continue the business after I retire.
What are your immediate thoughts if they come up to you and have this conversation with you?
Brian: My immediate thoughts are: what stake do those younger folks in your business currently have in this business. Are they partners? Do they have a profit-sharing plan? Do they have any kind of executive benefits package that would further expose them to you know ownership in that business in a gradual transition into an ownership role? Is that envisioned currently?
Enpo: So a lot of background work that you’ve just laid out. A lot of it has to do with: Hey what’s the current structure of the business what have you already done with maybe a financial professional in the past, which, by the way, maybe you considering that this a long-time client of yours. So let’s maybe peel this scenario back a little bit and say that when they first started it was just a few guys working out of their garage and they hired a few people along the way. This was the business owner’s idea so they have majority control of fifty-one percent. All the other partners own an aggregate forty-nine percent and maybe along the way you were in a position to give them some advice. What would you have given them along the way before this conversation even happened?

Brian: Hmmm, what advice would I have given them along the way to better prepare them for an eventual transition? So I think what I would have recommended is that they implement a plan. Because right now we’re not distinguishing what that forty-nine percent is split up amongst the various partners and maybe there are one or two key people that are really capable of that leadership role. Had we taken the time upfront in years past that you can identify that leadership role in the person that can meet that role. We would then have structured that ownership and even voting rights accordingly to acknowledge the cultivating of a relationship with that particular individual.

Enpo: Well that’s very interesting Brian that you mentioned that there is not just a number and functional tax savings component or even a technical component to the transition. Rather, you mentioned that there is actually a human element where you have to have these conversations. Could you tell us a little bit more about that?

Brian: Well most people, when they evaluate finances, stick to the numbers. However, when it comes to running a business it’s truly about being able to lead other people. You can’t lead other people with a financial statement and that kind of analysis, it’s about having other people believe and your mission, or your methodology, or your style of leadership. So it goes far beyond who’s the top sales performer in the business. Let’s say because a sales personality isn’t always the person that can take on that leadership role. I see it’s more the intangibles when it comes to evaluating leadership and it is beyond the the the sales quantifiable. So I think that aspect of leadership is actually more important and it’s looking at how we might tailor our compensation package and transition of ownership to reflect that.

Enpo: Okay well let’s say that everything that you had just said was was done before this transition. You have this conversation, you spoke with the business owner when everything was just starting to grow. You’ve structured a compensation package that might make sense and you thought about how there may one day be that transition point that the business partners will initiate. How do you think this transition will go? I mean. What is the best-case scenario what is the worst-case scenario here?

Brian: Well the best case scenario in that transition is that you don’t lose any of the other employees and the other partners and that’s the best-case scenario. The worst-case scenario is that you’ve chosen incorrectly and the other partners do not feel that you’ve made the correct choice in the leadership. You might find that some people feel that they’re more qualified. Maybe even feeling qualified themselves for that role, they may go and undermine your business by deciding that there are greener pastures and to compete in the industry that you’ve trained them for. So definitely if you’ve done this, it can be a minefield because ultimately you could undermine your entire business and watch it in this transition get decimated. Because the folks that you thought were loyal and committed as owners or partners decided that they could do better and destroy the value of your business. The value of your business is the kind of institutional knowledge that you’ve created and that institutional knowledge resides in those individuals. If they choose to leave it’s not like you can just replace them.

Enpo: Absolutely, So let me ask you then Brian. Of course, we want to keep all details, identifiable details confidential but could you give us some, examples for either case in our scenario?

Brian: Where I’ve had individuals be undermined? Absolutely! I’ve had some business owners who were looking at selling their business. Maybe this case, in particular, is not as relevant as it needs to be but it does speak to the issue somewhat and they were looking to sell their business and not retain control. They wanted to bring in a third party to take on a majority stake. But what ended up happening is somebody that was responsible for thirty to forty percent of total revenue in that business left. They had no golden handcuffs so to speak so they had nothing tying them to this business. The producer did not have any kind of monetary incentives and so that person ended up going out on their own and not only did they lose by having a major reduction in their revenue because he took their clients with them, t hey also lost out on the sale.
Enpo: Gotcha.
Brian: I’d say it was a pretty ugly scenario and everything that this particular business owner was expecting at that point in time which was: An exit, a profitable exit from his business got delayed several years because of this key employee walking away and taking the book so the buyer was no longer interested. I mean there are some really some poor outcomes if you don’t plan ahead and you’re not communicating effectively with your key people, and incentivizing them.

Enpo: Absolutely so what I’m feeling here is that if you do a little bit of planning ahead of time, it could be helpful in the long run because you can always assume the best-case scenario. But, if you’re not at least giving yourself the opportunity to consider some of the worst-case scenarios that could come up, then you’re maybe setting yourself up for failure. So in this case, how would you have saved this company sale and retained that key employee?

Brian: Well, one of the pieces of advice, and maybe it’s a little bit generic, but it’s what I always tell these business owners is I always tell them: When you’re looking at the eventual sale of your business, one of the things you want, is to maximize the enterprise value. You want to get that evaluation up there and get that multiple up there. Okay, so what does that mean? It means you’re optimizing your business and then adding the rest of the equation to that. What I find really interesting is that business owners wait until they’re looking to sell their business to optimize their business, and so I say:
Well you know the better question you should be asking yourself is what could I be doing today to maximize that value of my business today. The question in my mind is why aren’t you always acting as if your business is for sale? What that forces that business owner to do is to start looking at components of their business and not just looking at that from traditional valuation standpoints but also how would that business sale impact your employees. It just begs the question. So I always tell them just pretend that your business is for sale today or going to be for sale in six months. What are you gonna do and why wouldn’t you always act that way to maximize the value of your enterprise?
Enpo: Okay, that makes sense especially if you have younger business partners. You want to make sure that you’re setting in a good place as well. As the key players and partners in your business and even above and beyond things, you can do for your key
employees. Of course, most employers are thinking of 401(k) plans, group life, group health… Etc. But even doing the planning for your key business partners, some of the people that helped you do the early heavy lifting, it’s good to think of them as well.

Brian: Yes it is.

Enpo: Right well, hey Brian thank you so much for sharing your insight with us I am sure that our listeners will be glad to have this unbiased look and I’m looking forward to speaking with you soon!

Brian: All right same here thank you, Enpo.

Enpo: Thank you, Brian.