BRIDGING THE BUSINESS OWNER PLANNING GAP: Creating a Win/Win/Win for Business Owners, the Business, and their Stakeholders: Nearly every CEO has a business plan to achieve financial success for the enterprise. However, few have a single overall financial plan integrating their personal needs as a business owner with their enterprise needs as a CEO.

In the article below—presented with the permission of the author--Mark C. Bronfman calls this lack of personal and enterprise planning integration the “Planning Gap.” He defines the planning gap, provides tools for identifying a potential planning gap, suggests a process for closing the gap, identifies three common CEO blind spots, and supplies valuable diagnostic questions relating to each issue.

Mark is a Private Wealth Advisor in Vienna, VA for Sagemark Consulting, a division of Lincoln Financial Advisors, a registered investment advisor. He assists CEO/business owners in repositioning business assets to achieve long-term objectives, specializing in serving high tech, government contracting, and professional services clients.

Please feel free to forward this newsletter to friends, colleagues, and networking contacts. (Go to www.focusbankers.com for newsletter archives.)

Active FOCUS Deals

Although our firm has over 23 years experience across many verticals, FOCUS currently has active transaction engagements in the following specific business sectors:

• Business Services
• Call Center Software
• Construction (multiple assignments)
• Consulting
• Digital Printing Services
• Government contracting (multiple assignments)
• Healthcare Business Services
• Information Management
• IT Outsourcing (multiple assignments)
• IT Services (multiple assignments)
• Leisure
• Library Services
• Luxury Residence Club
• Media
• RFID Technology
• Security (multiple assignments)
• Software

Our transaction process provides us with up-to-the-minute market knowledge in these sectors that may be corporate development of interest to you.

Inquiries should be addressed via e-mail to info@focusbankers.com, by telephone to 202-785-9404, x1967 or by fax to 202-785-9413.

FOCUS Expands Chicago Regional Office:
G. Stanley Cutter and Michael R. Zook, Sr. Join as Partners; Paul Manzano Joins as Principal

FOCUS Enterprises, Inc., a national investment banking firm providing merger, acquisition, and corporate finance services to middle market companies is adding two Partners and a Principal to the firm’s Chicago office, located at 330 North Wabash Avenue, Suite 3100, Chicago, IL 60611. New Partners are G. Stanley Cutter and Michael R. Zook, Sr., bringing the total number of FOCUS Partners to twenty-one. Paul Manzano is joining the FOCUS Chicago team as a Principal.

“Chicago is a dynamic business city, and the two seasoned Partners we’ve added recently—G. Stanley Cutter and Michael R. Zook—as well as our new Principal, Paul Manzano, all have significant experience in the business community here and are accomplished dealmakers and advisors,” said William S. Lear, Midwest Regional Managing Partner.

About G. Stanley Cutter

Prior to joining FOCUS as a Partner, Mr. Cutter was a Managing Director with MASI Ltd., a boutique M&A firm serving the Midwest. Formerly, Mr. Cutter was a Senior Executive with IPA Advisory & Intermediary Services where he completed over 100 business valuations. Prior to this, he spent seven years as the CEO of Wheelchair Getaways of Illinois. Previously, Mr. Cutter spent fourteen years with Citicorp in New York, Hong Kong, and Chicago and four years with Security Pacific Merchant Bank (now Bank of America).

Mr. Cutter, a former US Army officer, has a BA in Economics from Bowdoin College and an MBA in finance from Columbia University…more.

About Michael R. Zook, Sr.

Prior to joining FOCUS as a Partner, Mr. Zook was a Managing Director at MASI, Ltd. where he completed divestitures in the printing, software, business services, and distribution industries. Previously, Mr. Zook worked for Capital for Business, an SBIC and wholly owned subsidiary of Commerce Bank in St. Louis. Prior to his SBIC experience Mr. Zook was a Senior Vice President for The Northern Trust Company in a wide variety of assignments.
Mr. Zook has an undergraduate degree from Dartmouth College and an MBA from the University of Chicago, Graduate School of Business…more.

About Paul Manzano

Prior to joining FOCUS as a Principal, Paul Manzano was President and CEO of EVO Knowledge, Inc., a digital media content and platform infrastructure company. Formerly, Mr. Manzano was a Managing Director of Finlay Benson Group, LLC, a management consulting and strategy firm. Before joining Finlay Benson, he was a transactional attorney with the Family Office Enterprise Planning Practice of Handler, Thayer & Duggan, LLC. He also was a Portfolio Manager at William Blair & Company, LLC, Chicago’s largest investment banking firm.

Paul has a BS in Finance from Indiana University, studied law at St. Edmund Hall at Oxford University, and received his JD and MBA degrees concurrently from the University of Washington in Seattle.

Bridging the Business Owner Planning Gap:
Creating a Win/Win/Win for Business Owners, the Business, and their Stakeholders

By Mark C. Bronfman, MBA, CPA

Nearly every CEO has a business plan to achieve financial success for the enterprise. Rarely, however, do we see a Business Owner/CEO with one overall financial plan integrating their personal needs as a Business Owner with their enterprise needs as a CEO. In absence of such a plan, the CEO lacks a robust financial design to achieve his or her long-term personal objectives. We call this lack of personal and enterprise planning integration the “Planning Gap.”

The most common CEO planning gap “blind spots” include:

• Lack of coordination between personal financial planning and enterprise planning;
• Unnecessarily diluting owner’s equity and control;
• Overexposure to estate taxes and personal income taxes; and
• Delaying the repositioning of business assets to be used for eventual retirement.

This planning gap is more insidious than it may appear. These blind spots can create a financial loss for many of the stakeholders closest to the business owner including partners, key employees, investors, customers, or often the most important stakeholders–spouse and family. Business-rich and cash-poor owners with limited resources outside of the business often have the most to lose by failing to bridge this planning gap.

This article defines the planning gap, provides some tools to identify specific blind spots, and outlines a process to close the overall planning gap expeditiously.

The Planning Gap Defined

A business is a non-liquid asset. Many business owners are astonished with the total shrinkage they experience when they seek to convert the business asset to a liquid asset for personal use. Shrinkage can come from taxes at all levels, dilution, loss of enterprise upside, leadership voids, capital costs, inadequate benefits design, and other issues.

As a result of this planning gap, CEOs bear financial losses as well as unnecessary emotional stress related to these business and personal challenges.

The most common culprits causing business owner value shrinkage include:

• Taxes: An interrelated and complex series of taxes assessed on a business owner – including income, capital gain, estate, and gift taxes.
• Dilution: Loss of value and control due to diluted equity ownership as a result of bringing on new leadership or capital resources.
• Loss of Enterprise Value: Loss of value from an ill-timed or poorly orchestrated exit event (e.g., merger, sale, ESOP.)
• Inadequate Benefits Design: Forfeiture of retirement capital available to owners (e.g., profit sharing) and executive incentive programs poorly linked to business objectives.
• Management Void: Loss of value of the business by virtue of incomplete succession management planning.
• Asset Protection: Overexposure to creditors and predators due to a lack of asset protection strategies and titling.
• Lack of Investment Coordination: Failure to assess total risk (personal and business), often resulting in excessive investment risk with their personal portfolio.
• Cost of Capital: Assuming more than the required personal guarantees for business loans.

Why is the typical CEO planning gap so deep and wide? Many of these planning gap issues fall into an enterprise/personal “white space” not covered by traditional advisors such as CPAs, attorneys, or stock brokers. Often the business owner has a cadre of specialists, thus creating the illusion that the planning is complete – when it is not. In fact, many of these specialist advisors never talk to one another.

A well-coordinated plan should incorporate the breadth of topics critical to the business owner’s long term success. The issues may be as broad as personal objectives, business growth, business succession, rewards and incentives, business transfer, investments, estate planning, retirement planning, tax planning, charitable giving, and emotional issues related to the plan. Without a quarterback and an advocate for the overall plan, many critical issues remain unaddressed.

Lastly, the planning gap is often invisible: the typical CEO/business owner may not understand the factors that result in wealth shrinkage which may jeopardize the overall long term plan. We often hear CEOs say, “My business success will drive my personal long-term financial independence. Therefore, I don’t need an integrated financial plan.” Translation: the business owner has not found an appropriate venue in which to conduct this very critical planning.

Helping Stakeholders Identify the Planning Gap

Stakeholders such as family members, bankers, key employees, and other advisors have a license to help the CEO/business owner significantly increase the personal value extractable from the business. Awareness is the first step – stakeholders can help the CEO become aware of a potential planning gap and can help him/her get started on an improvement program.

It is beyond the scope of this article to outline all the planning gap issues. Still, three of the most common “CEO blind spots” are identified below. Diagnostic questions that stakeholders can use to explore each of these three issues follow.

BLIND SPOT #1: Over-Willingness to Offer Equity Ownership In the Business to Attract and Retain Top Talent

Equity, while a powerful reward incentive, is very expensive compared to other options that are available to manage the costs of human capital. Other strategies such as simulated equity or deferred compensation solutions often achieve the same objectives without diluting the owner’s control.

Case Study # 1

Barry Smith, age 60, is the CEO Owner of Smith Architecture, a $30 million company. Barry gives 20 percent equity to two key managers each and retains 60 percent for himself. One of the managers leaves the company after he fully vests his equity position. Barry then gives 20 percent of the company to attract the next senior hire – thereby diluting his position to 40 percent and Barry now has a lack of control.

Diagnostic Questions for Stakeholders

• What financial strategies have you (the business owner) employed to attract and retain key employees?
• What is the cost of this plan to you – especially if you are giving equity (stock options, etc) to the key employees?
• What non-equity derivatives have you considered for employee retention?
• Will your strategies be effective in retaining key employees should your company have a change of control?

BLIND SPOT #2: Waiting Until a Major Liquidity Event to Reposition Business Assets to Personal Assets

Recent studies indicate that approximately 40 percent of business owners anticipate a change of control in the next five years.* Many “business-rich cash-poor” business owners are relying on this liquidity event to fund long-term financial independence. By waiting to reposition assets, the CEO often forgoes the ability to “lock-in” significant retirement benefits over a five to ten year period of business ownership – all contributed on a tax-advantaged basis.

Case Study #2

To fund his personal endowment, Barry Smith (CEO) takes taxable distributions out of his C-Corporation. After double taxation at corporate and personal level, the Barry may only be investing 40-50 cents on the dollar to build his retirement plan. Barry may have foregone the opportunity to place up to $200,000 a year into an ERISA-based plan – thereby putting pre-tax money to work and providing the company a tax deduction for the contributions.

Diagnostic Questions for Stakeholders

• Have you (business owner) estimated your lifetime liquidity goal – the amount of funds you/your family needs to fund your lifestyle for the rest of your life?
• How confident are you in the calculation of this personal endowment?
• What plans do you have in place to reposition business assets most effectively to achieve your long term goals without a forced sale of the business?
• Are you taking advantage of the tax benefits associated with your business to achieve your long term personal goals?

BLIND SPOT #3: Unnecessarily Paying Too Much in Estate and Capital Gains Taxes

Many “business-rich/cash-poor” owners have limited personal assets outside of the business – and therefore see little need for estate planning. However, in absence of adequate liquidity or titling, the death of an owner can often create a significant tax bill to the family – sometimes forcing a business to be sold or liquidated. Similarly, capital gains taxes can cause significant shrinkage to the owner’s estate. We often see business owners who forfeit “freebee” IRS exemptions that permit the transfer of value to children or charity on a tax-advantaged basis.

Case Study #3

Barry Smith (CEO) dies in a plane accident and estate or transfer taxes in excess of $10 million may be due. The company may need to be liquidated at a substantial discount in order to pay the taxes – thereby reducing significantly the interests of certain key employees, lenders and family.

Diagnostic Questions for Stakeholders

• Have you (the business owner) had your estate tax estimated?
• What source of liquidity does the business have should the business owner die or become disabled?
• What steps have you taken to reduce your tax exposure (income, cap gain, estate tax?)
• What strategies have you employed to defer or eliminate potential capital gains on sale of your company?
• How do you plan to integrate charitable gifts up front to freeze your tax liability?

The Barry Smith cases above appear to pose non-related issues of benefits/ownership structure, retirement funding and estate taxes. However, there are a set of multi-dimensional strategies that may help address each of the issues and Barry’s overall situation. Remember, the planning process is not about curing the symptoms (blind spots). Rather, the real goal to help a client achieve long term objectives across the business and personal domains. The overall process works:

• Identify long term objectives,
• Explore design solutions,
• Craft an integrated plan,
• Gain emotional buy-in from key stakeholders, and
• Proceed to implementation.

Bridging the Planning Gap: A Win/Win/Win Proposition

Third party stakeholders who care about the business owner should advocate integrated planning to address the planning gap. Stakeholders do not need the answers – but they need to be prepared to ask the hard questions regarding business owner wealth preservation and growth to incite action.

Stakeholders can do many things to help address the situation:

• Help the business owner focus on long-term objectives.
• Ask the hard questions related to common blind spots.
• Make introductions to advisors who may have the breadth of experience to provide an integrated plan.
• Create a supportive environment for the planning.

Yes, the business owner needs to guide and “own” the process – still stakeholders who care can do a lot.

When completed, a well-constructed financial plan will address personal needs of an Owner, enterprise needs of a CEO, and the planning gaps in between. The prize from integrated planning: a very special win/win/win for the business owner, the business, and the stakeholders.

* Source: Raymond Institute American Family Business Survey, 2002.

Mark C. Bronfman, MBA, CPA (licensed, not practicing) is a Private Wealth Advisor in Vienna, VA for Sagemark Consulting, a division of Lincoln Financial Advisors, a registered investment advisor. He assists CEO/business owners in repositioning business assets to achieve long-term objectives. His specialty is working with high tech, government contracting, and professional services clients. Mark can be reached at via email at MBronfman@LNC.com and via telephone at 703-749-5064.

“Bridging the Business Owner Planning Gap,” copyright © 2005 by Mark C. Bronfman, MBA, CPA. All rights reserved.

FOCUS Upgrades Washington DC Telephone System

While the main telephone and fax numbers for the FOCUS Washington DC headquarters office remain the same, effective Monday, June 20, 2005, all FOCUS Partners, Principals, and staff in the office will have a direct line. Instead of using extension numbers, as in the past, each person can be dialed directly without going through the main number.

New direct numbers for individuals based in the Washington office can be found at www.focusbankers.com/staff/staffbytitle.asp.

About FOCUS Enterprises, Inc.

Headquartered in Washington DC, with offices in Atlanta, Chicago and San Francisco, FOCUS provides a range of investment banking services tailored to the needs of middle market and emerging companies. FOCUS specializes in transactions for entities with $5 to $100 million in revenues, serving entrepreneurs, corporate owners, public companies, private companies or operating units and various types of investors.

For 23 years, FOCUS has successfully integrated corporate development consulting and transactional expertise with its extensive research capability. The firm has long standing experience in completing mergers, acquisitions, divestitures, capital formation assignments, corporate development consulting projects and financial advisory engagements.

Operating nationally and internationally, twenty-three FOCUS Partners and Principals provide over two centuries of C-level operating experience in a variety of industries.

Please contact us at: info@focusbankers.com.
Visit the Focus website at http://www.focusbankers.com.
Click here to be added to the FOCUS Mailing List.