Business Transition In Focus

Global economic disruption uniquely affects each business. Whether you are being hit with a hammer or expect to suffer a slow burn, your reaction to changes and proactive planning will play a major role in how your future unfolds.

Planning for Business Transition – Realistic Timelines

After recovering from the effects of Covid-19 and the subsequent shutdowns, the world economy is in a recovery stage. But as you may have seen, we are now facing threats from a new surge of variants, RSV, and a powerful post-pandemic flu outbreak. Again, whatever the challenges, businesses that sustain will rebuild and recover from any losses. At that time, now and after any future challenges, business owners will need to ask themselves if they are willing to weather another major disruption or transition out of their business while they can. It is best to plan now, while we are in the recovery stage of the crisis rather than in the eye of the storm so your business has the best chance of supporting your personal and financial goals. Even if those goals are changing based on recent events, your timeline is likely changing too – making a plan has never been more crucial.

To get a better idea of the urgency, here is a breakdown of tasks that may be involved in planning for the future of your business and the time each one might take to complete.

Setting (or Resetting) Your Goals

No matter what the impetus is to plan, it’s a good idea to revisit your goals periodically. During times of change and volatility, this review is even more important. It’s a good time to look at what your goals have been, especially concerning how much longer you want to stay involved in your business, how much you’ll rely on your business for financial security, and to whom you want to transfer ownership in the future. In this review ask these two pertinent questions:

1. Have any of your previous goals changed?

2. Are there partners, advisors, or family members with whom you want to discuss possible changes to your goals?

This review is so important that it might be a good idea to give it the time and space it deserves. Take 30 to 60 days to truly review the goals or changes therein.

Planning for a Changing Business

Start with your preliminary plan. What aspects of your previous planning still make sense and which of your plans will need to change given new circumstances? Your task here is to get ideas and strategies on the table and start to weigh your options and investigate alternatives. This may require assembling some new data and conferring with specialists. It’s likely that some options previously available to you no longer make sense; it’s just as likely that new alternatives are now worth considering. Depending on how much planning you’ve accomplished in the past, expect this phase to take anywhere from 90 days to 9 months.

Implementing Business Strategies

Next, you’ll start implementing the strategies you’ve identified that you believe will take you where you want to go and put you in a position to transition your business when and to whom you want. Preparing yourself, your business, your management team, and your situation brings your greatest chance of long-term success. Many business owners have a sizable gap between the resources they have and the resources they need to achieve their goals. Your gap may be changing. This is where the important work gets done. It can take six months (if you’re trying to get out of your business soon) or five years (if you need to build value and prepare team members).

The Ownership Transfer

There are many ways to transition out of ownership when you are ready. Your options tend to fall into one of two primary categories: you can sell to a third party, like a strategic buyer or investor, or transfer to an insider, such as a child or your employees. If you and your business are prepared for the transfer, and you commit to pursuing a third-party sale, you can sell your business and be completely out within a year or so. On the other hand, it’s common for transfers to insiders to take longer, usually because new owners don’t have an immediate ability to cash you out. It may still be possible for you to get the value you want and need for your ownership interest, but it can take time. A well-prepared business can transition to insiders and deliver a fair value to a departing owner in three to five years.

The Full Timeline for Transitioning Your Business

Planning for the future of your business, and taking the steps necessary to get there, will have a timeline that is unique to you and your company. It’s common for the process to take anywhere from one to ten years. That’s a pretty big range, but you are probably already applying the process to your situation and getting a sense of your timeline.

Now is a great time to take a second look at the planning you’ve done in the past. Look at how flexible and dynamic your planning was previously. Take this opportunity to build a new path toward your future. When everything is changing around you, it’s important to adapt so that you can react to your situation instead of being a victim of your circumstances.

We strive to help business owners identify and prioritize their objectives for their business, their employees, and their family. If you are ready to talk about your goals for the future and get insights into how you might achieve those goals, we’d be happy to sit down and talk with you. Please feel free to contact us at your convenience. u

Keven P. Prather is a registered representative of and offers securities and investment advisory services through MML Investors Services, LLC. Member SIPC. Call 216-592-7314, send an email to kprather@financialguide. com or visit transitionextadvisors.com.

BY RUTH KING FINANCE

Do You Have the Mercedes-Benz Syndrome?

Acolleague was helping a business owner look for funding for his business. He introduced him to a potential investor at lunch. The next day the investor called my colleague and told him that the person was nice, however, he would never invest in his business. My colleague asked for a reason.

The investor said that he had “Mercedes-Benz syndrome”. “What’s that?” asked my colleague.

Invest in Business Growth, Not Your Lifestyle

After further discussion, the investor explained that during the conversation at lunch, he discovered that this person was funding a $2,200 Porsche lease through the business. What that said to the investor was that this person appeared more interested in having the business pay for his lifestyle, rather than growing the business. The investor explained to my colleague that he was unwilling to put his money toward the payment of a car lease. His investments were supposed to help grow the business, not the owner’s investment in the “finer things of life”. He then went on to explain that this is what he referred to as the “Mercedes-Benz Syndrome”. It’s a term used to describe when business funds are used to pay for unnecessary personal assets, i.e. the owner’s “Mercedes-Benz”. An investment that is supposed to be directed toward the business needs but instead goes towards the owner’s personal needs.

Cash in the Bank Isn’t a Pass to Spend It

It struck me that I’ve also seen many HVACR owners do this too. These are the owners who don’t understand that cash does not mean profit and that having cash in the bank does not mean that you must spend it. They assume if there is cash in the bank, then they can spend it on whatever they’d like to spend it on. After all, it is “their business.” But that is not smart business.

These “Mercedes-Benz” business owners use the business cash to buy boats or have the company pay for expensive trucks and cars. They write off vacations, build an expensive home, have a non-working relative on the payroll, use company credit cards for personal expenses, and the list goes on. Instead of investing in the business, they invest in themselves.

Don’t mistake my sentiment – there is absolutely nothing wrong with enjoying the fruits of your labor and the labor of your employees. However, you can’t do it at the expense of your business. If you need evidence of why this is poor business management, I’ve included the following examples.

Do as I say, not as I do. If employees see you using company credit cards to fund personal expenses, they think they can do it too. A technician goes to the gas station and purchases gas. However, he also purchases a drink, food, and other personal things on the company credit card. He thinks, “The boss does it. I can do it.” If no one checks the credit card statements, then the technician CAN and WILL do it.

Business and personal expenses do not mix. Clean books are critical to know the true profitability of your company. Business and personal expenses must be separated. If your goal is to sell your company to outside investors, then profits will be decreased by the amount the investors deem “personal expenses”.

Family on the payroll should be held to the same standards. When employees see sons, daughters, wives, or other relatives on the payroll who are not working or are not productive, this affects their productivity and in turn, your company’s bottom line. What would happen to your net profits if non-productive employees (including relatives) were not on your payroll? Or, perhaps you should do a review to make sure all employees are being held to the same standard.

Save money for the slower season. Saving for a rainy day helps eliminate the “Mercedes-Benz Syndrome”. How is that, you ask? If you keep the big picture in mind, you will be less likely to spend frivolously. So that, in years with lower profits, you have cash reserves that keep your operations going. If we had to endure another world shutdown like in 2020 during the pandemic, could your company survive for six months without revenue coming in the door?

A GOOD Rule of Thumb

Formula: Take the total payroll plus payroll taxes for your busiest month and add that number to the total overhead in your busiest month.

Multiply this sum by 3 to 6 depending on your risk tolerance. That final amount is how much you need in savings.

To generate these savings, put 1% to 2% of every dollar that is collected in a savings account. Put at least 50% of all residential maintenance plans and 5% of all commercial maintenance plan dollars that are received in a savings account. Resist the temptation to use the money for “Mercedes-Benz” items when the dollar amount is large and your company had a very profitable year.

Saving IS a Smart Investment

Please avoid the “Mercedes-Benz Syndrome”. Make sure that you are earning enough on your revenues to generate reasonable profits. Save some of the money you generate from collections on those sales.

Refraining from spending company money on personal assets, good profits, unproductive family employees, and other unnecessary expenses is the only way to grow. Always put money in savings. You’ll have the cash when an unexpected major expense or another pandemic arises. If you follow this advice, you enjoy the fruits of your labor the right way. u

Ruth King has more than 25 years of experience in the HVACR industry and has worked with contractors, distributors and manufacturers to help grow their companies and become more profitable. Contact Ruth at ruthking@hvacchannel.tv or at 770729-0258. The official publication date of my book (when it will be available on Amazon) is in 2023. But if you would like an advance copy, before the official publication date, go to: bit.ly/3FuYgIU if you want to order the book.

Climatemaster

The Trilogy QE with iGate2 is a variable system that exceeds 45 EER while providing heating, cooling, and domestic hot water needs of a typical residence, while also providing today’s homeowners more transparency into their system’s daily operations and energy consumption data ClimateMaster’s iGate2 Communicating Thermostat provides intelligent recommendations based on user behavior for maintaining at top performance. The mobile app My Uplink® allows remote access into Trilogy system for control and monitoring and provides service professionals the realtime diagnostic tools they need to better serve their clients.

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Daikin

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Danfoss

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Greenlink Engineering

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Heatcraft Refrigeration Products

The intelliGen™ Refrigeration Controller by Heatcraft Refrigeration Products delivers unmatched temperature control. It reduces temperature fluctuation, brings the system to optimal temperature faster, and optimizes cooling time through fan cycling. Additionally, it detects when the system needs defrosting, which automates the defrosting cycles and saves energy costs. With a reduction in energy costs of up to 30 percent, the intelliGen Controller can pay for itself in as little as one year. Ensuring consistent temperatures is not only essential to keeping food fresh and safe, but it’s also necessary to prevent costly food loss from spoilage.

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LG COMPRESSOR & MOTOR

LG UniRotary™ provides reliable & state-of-the-art compressors and motors based on advanced technology that keeps customers up to date with the latest parts. LG's rotary compressor products provide a wide range of single, and twin cylinders with variable and fixed-speed compressors. The unitary compressor, unlike other compressors which do not always offer the durability required for unitary applications, the advanced design eliminates that issue. LG Compressor & Motor revolutionizes the way you will do business.

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Mars Delivers

Mars Delivers Residential Heat Pumps with R410A Refrigerant, deliver high-quality condenser coil with aluminum tubing and enhanced louvered fin for maximum heat transfer capacity. The top discharge directs hot air and sound away from living area and shrubbery All units are run-tested with louvered panel coil protection and easy access to electrical panels, pre-wired for easy hook-up. Bi-directional liquid line filter drier factory installed discharge muffler for quiet operation to ensure reliable, solid-state defrost control. The units are capable of reducing noise during defrosting and are ETL and ETLC approved and AHRI Certified. Visit the website for more.

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Waterfurnace

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