In this podcast, Chris Roehm, partner at Freedom Business Advisors, talks about:

  • Why business owners aren't engaged in completing business continuity plans;
  • Planning for the continuity of operations and ownership in the case of an unforeseen event such as disability or premature death;
  • Who should design and lead a business continuity plan;
  • Implementation of compensation structures that entice management team members to stay in case of unforeseen events; and
  • The importance of leaving instructions behind for the next owner.

About the Guest

Chris Roehm is a co-founder of Freedom Business Advisors. Chris' practice is focused on protecting the families of privately held business owners, their partners, employees, customers and vendors from the ravaging fallout caused by the premature death or disability of one of the owners. A buy-sell agreement funded with insurance is widely recognized as the best way to do this.

Freedom Business Advisors performs financial and estate planning for owners of closely held and family businesses.

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Noah Rosenfarb: Hello and welcome! It’s Noah Rosenfarb from Freedom Business Advisors, and host of the Divestopedia Exit Strategy Podcast. I’m so glad you’re listening. I’ve got with me today my business partner, Chris Roehm. Chris is a certified financial planner and also sold his software company. I thought he’d come on the call today to talk about continuity planning and some of the research that we’ve been doing at our firm with business owners around the issues between the owners, their employees, their integrating their estate, and financial plan, so Chris thanks for joining us today.

Chris Roehm: You’re welcome! Glad to be here.

Noah Rosenfarb: So why don’t you start? A lot of our listeners are thinking about selling their business and you sold your software business a while back, why don’t you tell me some of the lessons that you learned from that transaction?

Chris Roehm: So I had a software company that provided time billing and accounting to law firms and had 300 law firms as clients throughout Florida, Georgia, and Alabama. My dad used to say he was so proud of me because I was the only person he knew that made money off of the lawyers. In 2006, I’d like to say I was the victim of a hostile takeover. Because I was a dealer for software, it meant I sold it, I did the data conversions, and I supported the clients but I didn’t own the software and so I say the biggest lesson that I learned from selling that company was really two things. One is that the buyer knew a lot more about my business than I did, and so it was sort of an unequal footing. Number two and probably the biggest lesson is that I should have planned for the transfer for the exit from the business from day one.

Noah Rosenfarb: When you say you should have been planning, what are some of the things you think you might have done and how might it have impacted you?

Chris Roehm: Well I should have thought about how marketable the business would be one day and who the potential buyers were. I was young and I think like a lot of entrepreneurs when they started their company, they see the growth and they see an exciting future, but they don’t see the end game. They just think that as long as sales and revenues and growth continues to happen that nothing is going to change and it will go on forever. What I should have realized was that I wasn’t operating on my own timeframe - that some other people in that particular case were calling the shots.

Noah Rosenfarb: So when you sold your business, how did you end up becoming interested in helping owners with business continuity?

Chris Roehm: I decided that I wanted to become a financial planner and I wanted to find a niche. Right around that timeframe in 2006 and 2007, there was a lot of buzz about the baby boomers off selling their companies and the ten trillion dollars of business transfer and that got my attention because I felt like that I’d walked in their shoes, I’d made payroll, I ran a business and I sold one so I thought I could see this type of planning through their eyes a little bit. So I got involved with a couple of the organizations that provided training for professionals to become a specialist in exit planning.

What I quickly learn was that exit planning, it’s something everybody wanted but it was nothing that they wanted now, 'Hey Chris, yes, I would definitely need to do some exit planning. I’m really interested in that, but call me back in five years.’ So exit planning was important, but not urgent. And I just began to listen more carefully to what the owners were saying that I was talking to and I realized that while exit wasn’t on their mind, the possibility that they might die prematurely or become disabled was a bit more urgent and I realized that business continuity was an area that very few people were focused on exclusively and I started taking to that and decided to make that my specialty and my focus.

Noah Rosenfarb: One of the things that we’ve done at Freedom Business Advisors through your efforts is interview a lot of business owners. I know you developed this list of six common issues that you’ve uncovered through these interviews that owners face around their continuity. I’d like us to kind of cover them one at a time and maybe you could discuss how they manifest and what some of the solutions are. So the first one is that the owners don’t have a will or they don’t have a buy-sell agreement. Why don’t you just kind of talk about what you see when you speak with owners around those issues?

Chris Roehm: Sure. Actually, it goes back a little bit to that last question about why I decided to get involved with the business continuity. When I meet with an owner and I see they don’t have a will or it hasn’t been updated since the kids were born or that they have a partner without a buy-sell agreement, I realize that the reasons that they haven’t done that are usually just procrastination and that it’s something that they put it off or if they’ve done it at all, it was done badly. I just felt like that’s where I could bring some value to people by asking them the right questions and getting them to focus on what was important, and so I would say around half the time and I interviewed to date around I think it’s 45 entrepreneur business owners so far that about half the time, they will admit that they will need to be updated or that they don’t have a proper continuity plan in place.

Noah Rosenfarb: And the other half of the time?

Chris Roehm: Well, the other half of the time at least they’re saying that they recently updated their will. If they do have a business continuity plan, I’m not taking that as it’s said face value. I’m going to ask him a few more questions and make sure that they understand what their agreement says and that it says what they wanted to say and that it’s going to accomplish what they wanted to.

Noah Rosenfarb: You and I have had some discussions around this issue that owners don’t have wills and they don’t have buy-sell agreement. You’ve told me that one of the reasons is that owners aren’t engaged in the conversation. So why don’t you just describe to our audience how you are able to engage owners in this conversation so that they can actually sign the documents that the lawyers draft and they don’t sit on the lawyer’s desk for sometimes years at a time.

Chris Roehm: I believe that’s really the key. It’s that most advisors are own their own agenda, so the accountant wants his client to update the valuation of the business. The life insurance guy wants to sell a policy to fund the agreement. The lawyer says we should redo your operating agreement. Even the dentist is calling and saying, 'Hey, Noah, it’s time to come in and get your teeth cleaned.’ It’s the old analogy that people don’t go to the hardware store and buy a drill because they want a drill. They go to the hardware store and buy a drill because they want a hole in the wall. I think that as advisors as a whole professional community, we lose that focus. I try to focus on what they do have in place and what do they want it to happen if this trigger event or this event happens. When they realized that, 'Oh yeah, you’ve asked some questions that I really haven’t thought about in a while and that’s something that I need to focus on.’ That’s very motivating and also when they understand it.

Number one, they have to be on their agenda, not your agenda. Two, they have to understand their options. I like to say that when an advisor asks a question, and the owner says, 'I don’t know. What does everybody else do?’ That’s not permission to hold court and start telling them what they should do. I think a lot of us fall into that trap and we do that and we like to show how smart we are and how much we know and we start getting very technical and running off at the mouth, when in reality is that if they say, 'I don’t know. What does everybody else do?’ We need to say, 'Well, here are the options. There are two sides to this coin. Here’s the good side and this is the bad side of this. Do you have any questions? Do you want to do something in between A and B?’ When the owners are clear on their goals and they understand their options, then I think it’s a matter of you better get it done quickly or get out of their way because they’re going to get it done.

Noah Rosenfarb: So the second thing you’ve uncovered is that owners don’t have a plan for the continuity of business operations. I think that’s a great part of the value that you’re delivering to clients. Why don’t you describe what that continuity of operations looks like and why maybe you could go back to why the owners don’t have that?

Chris Roehm: In the cases where they do have a will and/or a buy-sell agreement, they plan for the continuity of ownership. They haven’t in many times thought about the continuity of operation. That just means that, Noah, you’re the founder of this business, and a lot of the very important business functions are done by you if you’ll allow me to role play with you for a minute. So, Noah, had you died last weekend? What are the contributions that you are providing to this company that would have to be replaced if you’re not here? What would be happening here on Monday morning, this past Monday, if you had died last weekend? And they realize that the continuity of the operations is something that hasn’t been planned for. So essentially it’s who would make the executive decision, who would make financial decisions, who would be responsible for this development, sales, and marketing, and who would be responsible for administration and/or personnel human resources.

Noah Rosenfarb: Why do you think that deficit exists in the planning community?

Chris Roehm: That’s a great question. I think it’s because nobody is getting paid to do that. Life insurance guys get paid by the insurance carrier when they sell a policy to fund a buy-sell agreement, but I must say you don’t need life insurance to find a continuity of operations plan. That’s not true. We can get to that in a minute. But I think it’s just ignorance, and no one is really doing comprehensive planning. No one is as I like to say the quarterback coach who’s up in the skybox and can see the whole field. And it's not the quarterback as owners are clearly the quarterback, they want to be in control, they want to call the shots, but they very much appreciate somebody who can radio play into their ear and give them options. I just think that people don’t think deep enough about the continuity of operations when they’re helping somebody put together a plan. Who’s going to do that? Is it going to be your banker? Is it going to be your financial planner? It might be an investment banker type. I recently got a case that I’m working on from the bonding insurance agent because the bonding agency insisted that they have a business continuity plan in place before they would renew or increase their bond limit. I think it’s a lack of just awareness and then no one has really clearly thought it through.

Noah Rosenfarb: What are some of the key points to that continuity plan? You mentioned having an individual allocated, but then you also talked about some life insurance and I know in a lot of the plans that you implement, there are compensation structures in place for the management team members that stick around. Maybe, you could just talk specifically about one of those strategies.

Chris Roehm: Well, this is the strategy that I’ll give John Brown credit from Business Enterprise Institute, because he’s the first person that I heard speak about this. It’s such a great idea and it’s something that every time I presented it, the owner has adopted it and 'why didn’t I think of that.’ It’s basically this.

Let’s role play again. Noah, you died last weekend. First of all, that’s going to spook the herd. Everybody here, your key employees or even beyond your key employees, but all your important employees are going to think, 'Oh my goodness, Noah is gone. The business is going to suffer. I better start looking for a new job.’ One of the components of a continuity plan that we put in place is a stay bonus which is again the idea that I think John Brown, and it’s really written and spoke about more than anybody else. Here’s how it works, you make a list of your most important employees and you put it in a spreadsheet and you list their salaries. And then you decide that you want to give them let’s say a 50% bonus if they stay for the next 18 months. It’s very important to communicate this to the rank and file employees that this is not a guarantee of employment, but if something happens to Noah, we’re going to implement a stay bonus where every quarter, as long as you’re still here, you’re going to get a bonus equal to let’s say 50% of your salary. The owner says, 'Well, that sounds great. I understand the importance of that, because if my people leave, contracts might not get fulfilled, orders might not ship.

The value of the business is going to suffer if the owner dies and just think if the operations of the business suffer too, then what’s the chance of that business is going to survive is very little, but when the owner sees that to do a stay bonus for all their important employees is going to cost a million dollars over the next 18 months. They’re like, 'Well, how am I going to fund this?’ That’s when you put a life insurance proposal in front of them and give them some options that this could be a temporary problem. We only need to buy a 10-year term policy on you and for $5,000 a year, we can address this problem.

Noah Rosenfarb: That’s great. So let’s move on to the third common issue.

Chris Roehm: I’m sorry to interrupt you. Before we leave that, we should also hit that this other financial contribution that the owners make into the company that we ought to include in the insurance planning and that would be any kind of a lease guarantee as whether it’s for office space or equipment, any kind of obviously guarantees on lines of credit or many times the owner will sell finance the payroll account by transferring money back and forth. Now that the owner is gone, those financial resources go away and that’s part of business operations. This needs to be planned for to.

Noah Rosenfarb: I was going to mention the third thing you have is that the owners aren’t leaving instructions behind for the next owner and they’re not telling them whether they should sell, whether they should go acquire businesses, whether they should hold the company.

Chris Roehm: Yeah, I can open the window to the interviews that I’m having with these people and this will really illustrate exactly what the answer to your question. I say Noah, 'Do you have a will?’ They would say, 'Oh yeah.’ 'Well who stands to inherit your company right now?

Noah Rosenfarb: My wife.

Chris Roehm: What should she do with it? Would you just want her to continue to own it and run it? Or should she start to package it for sale?

Noah Rosenfarb: Well, you know, if it happened yesterday, then I would want her to sell it, but if my kids are in college, maybe she could hold it, wait to see if one of them wants to come in.

Chris Roehm: So it’s a great question that gets them to realize, 'Wow. I haven’t thought of this.’ That’s the last thing I want to do is to leave my wife in that situation obviously when she is grieving my death. I wouldn’t want to put her in the position of having to make all these decisions. So that’s the best way of motivating the owner to realize that they need to do a little bit of planning in this area.

Noah Rosenfarb: What do you see as the kind of options for instructions to leave behind? Is it as simple as hold, sell, or kind of option C which I’m not sure what it might be.

Chris Roehm: Well, there aren’t a lot of options especially in the smaller companies as many of our listeners will know if you’re a larger company, there are trust banks that can come in and be in charge of a business and own a business and run a board of directors and so forth, but in the smaller businesses, there aren’t a lot of options. I think very much this is a question that sort of ties the whole thing together. You died last weekend and your wife just inherited your business. What should she do with it? Should she continue to run it? Or should she sell it? Well, the family depends on the cash flow from this business. It’s not only the largest asset in part of our estate but we depend on this cash flow to support our lifestyle and pay for our kids, go on to college, and everything else.

So it ties everything together because it realizes how important the continuity of operations plan is. But it also ties together what the transfer plan ultimately one day will be if this is a business that you would like to see your children or other family members move into one day or if it’s something that you want to be a passive owner and enjoy the cash flow of this business for a long time and have that basically supplement or pay for your retirement. It really does tie together the whole continuity, how you’re going to protect, grow, and ultimately transfer your business when you start to get into a question like that.

Noah Rosenfarb: Let’s move into number four, because I think it kind of ties it altogether as well which is that owners don’t integrate their equity in their company into their financial and estate plan. Tell me what you’re seeing there, because I guess it’s kind of putting up a bunch of these pieces together.

Chris Roehm: Yeah. We listed these common issues that come up in my interviews. I think this one is probably the most important. That is that owners and even the advisors to owners don’t think about how the equity, value of the equity on some of this business and even the cash flow from somebody’s business. How does that integrate into their overall financial and estate plan? I think it’s also because they don’t have that quarterback coach overseeing most trusted advisors that is looking at all things. If you think about the stereotypical business owner who has got a $10 million manufacturing business or he runs 60 people on a commercial painting crew or whatever it is, they get approached by a lot of advisors and their plans are kind of peace mail. They have got a junk drawer full of investments and insurances and buy-sell agreements and wills and promised this guy stock in the company or promised the CFO a 10% bonus if he ever sells, but it’s really all over the place, and it’s so important that even something as basic as life insurance on a breadwinner that owns the company as well, that all integrates together with their estate plan. Just having beneficiary designations that make sense and that flow through with the other parts of the estate plan on the simplest level. On the most complex cases with buy-sell agreements and with stock changing hands and with complicated goals that even like intergenerational transfer that come into play, it has to integrate with their financials with their estate plan. So many advisors miss that.

Noah Rosenfarb: One of the things that we have discussed in our company is that typical wealth managers are focused on portfolios of stocks or bonds and alternative investments that are outside of the equity that the owner has and the company because that’s how they get paid and that the investment bankers are focused on helping the owner transfer their company when it’s time for them to exit because that’s how they get paid, plus the estate planner, they’re focused on avoiding estate taxes in most instances and making sure that they avoid probate if that’s the goal of the owner but not necessarily again focused on how each of these pieces is integrating, so who’s the right person to be this quarterback coach. Clearly, we’re focused on them at Freedom Business Advisors, but for those advisors that are listening to the call, how could they go about helping their clients integrate their equity into their financial and estate plan?

Chris Roehm: I think it comes just as a conscious decision that I’m going to be that person to my business owner clients and that want to make that my entire professional focus. So I think it’s hard not to do that. There are so much to keep up with and so much to be on top of and it’s hard enough to have these conversations with owners with prospects and clients to keep them moving forward in implementing these planning and executing these plans. If you’re trying to do a lot of other things, I think it’s very difficult. One other thing is I think the owner oftentimes undervalues what their company is worth and they don’t even think about how it’s going to affect their estate or financial plan, especially their estate plan. They tend to drastically undervalue the business, when the attorney is calculating potential exposure to estate taxes.

However, and almost ironically or the opposite way of thinking is so many of these owners are counting on the business to fund their retirement. 'How are you going to retire?’ 'Well, I’ll sell the business one day.’ So they have these sort of broad strokes, but none of the important plan is painted in between them.

Noah Rosenfarb: Let’s talk about two more of the common issues that you found. One is that insurance policies that owners own, they’re not managed, they’re not monitored, they might be inappropriate. Talk about that.

Chris Roehm: Businesses and business owners buy life insurance to facilitate what we’ve been talking about to facilitate the transfer of their ownership or in some cases the continuity of their operations, and so many times, it’s really more than just the insurance. Also, it’s really the three elements of a buy-sell agreement that have to work together to be successful. The first is the agreement itself, it has to be correct. The second thing would be the valuation of the business. Then, the third thing would be how are you going to fund it. So many times people buy life insurance. You form a business. Let’s do a buy-sell. Okay how much is worth? A million dollars. So we’ll each buy a half million dollar policy. If I die, you’ll get the money. If you die, I’ll get the money. Okay done. It is taken care of. Time goes by as the business grows, they haven’t addressed any of the other potential triggers that they might want to address in a buy-sell agreement like what if one of the partners just decided they didn’t want to do this anymore. What if one of the partners is disabled and can’t come to work on a daily basis? What if one of the partners gets divorced and the other side wants half of the business value? There are tons of things that they don’t address. But even more common and possibly more damaging is the value the company has gone up. Within the buy-sell agreement, they say, 'Well, every year, we will reassess and every year we’ll agree what the value of the company would be. Of course, they never do.

The third thing is back to the point of your question that the insurance policies aren’t managed what may be enough insurance for the beginning, what the company is worth, but as the company grows in value, they haven’t increased the amount of insurance and they may or may not be insurable at this point. They often buy term insurance to fund the policy, because, 'Hey, we’re going to sell this company before 20 years so let’s just buy some term insurance and we will forget about it.’ That may not be appropriate. It may be the least expensive way to fund it, but it’s many times not the most financially savvy or smart way to fund a buy-sell agreement. That’s part of the subject of one other call if you want to get into the intricacies of advanced buy-sell planning.

Noah Rosenfarb: Maybe, we will do that. So how about the sixth one which is business value isn’t monitored like their other investments. You know, most owners they get their portfolio statements. Some of them are logging on every day to see how the market is doing. The first question is, 'Is the market up, the market is down?’ But yet when it comes to business value, they don’t monitor how much their business is worth. They monitor their cash flow but not value. We just had Michael Carter on as a guest. He is the owner of BizEquity and we’re an avid user of that software, because for a couple of hundred dollars you can get a valuation done, there’s really no more excuses. Right?

Chris Roehm: Correct. So we’ve all had friends that work for fast-growing public companies. And to your point, they glance at their iPhone during lunch to see how much their stock options have gone up since they sat down that day. But yet, the owner of a closely held or family business, they don’t really think about what have they done today, this week, this month, this quarter, this year to increase of their often times most valuable asset. I think it’s just a bit of the entrepreneur mentality, 'pay me now.’ I know when I come home from work, my wife says, 'How much money for me today?’ She doesn’t say, 'Did we increase the value of our stock in the family business?’ That’s just a difficult one because it’s very difficult and often times expensive to educate a market place and to get people thinking about value. Public companies are sort of a given that they have to report every 90 days and CEO’s of public companies, that’s how they’re evaluated and that’s how they’re compensated. That’s why they’re fired, is when they don’t grow shareholder value and I think it’s part of our job to educate entrepreneurs that they should be thinking the same way about the equity in their company.

Noah Rosenfarb: This is all great stuff. I think we could talk for probably a few hours or more on a lot of these issues each individually, but maybe let’s just back it up a little and have you describe why you think owners should be spending time on all this stuff.

Chris Roehm: I think it’s obvious. If anyone got far into this interview, it’s extremely valuable the equity that people have in these businesses because it’s so important to the family, because it’s so important to the economy of the world - these jobs and these cash flows, not to mention the growth of the net worth of the owner. If they don’t spend time on continuity planning, on how to protect the value of their company, it could evaporate overnight. I’ve read many authors that say, any small business can go out of business. We’re one phone call from oblivion. It’s so true with the continuity planning of a key employee leaving or the death of a key person or the premature death of the owner obviously, all these economic value that they work so long and hard to build up can go away overnight. And it’s a tragedy because with a little bit of planning, it doesn’t have to.

Noah Rosenfarb: So with all that said, get back to how advisors can be motivating their owner clients and how owners themselves can become motivated to complete the plans.

Chris Roehm: I really think that this is the key to the kingdom or the way that I’m helping to save the world and that is every advisor knows - every investment advisor, every insurance advisor knows that there are untapped hundreds, thousands of business owners that need this type of planning, but they aren’t accessible. They don’t come to Chamber of Commerce events. How do you meet these people? The professionals that already serve them aren’t always comfortable making introductions or referrals. Half of these guys don’t even go to the country club because they’re too busy working. What’s most compelling is that if we change the focus about this type of planning by not telling them what they have to do or what they should be doing, but by instead asking them questions in like an interview format. Then, it becomes their idea and not your idea. So as I said before, when they get clear on what they want to do, you better be ready to help them get it done because they’re going to get it done. When they understand it and they’re engaged, they become very motivated to complete these plans.

Noah Rosenfarb: Yeah, great. Well said. So what else would you like to share with our listeners before we end today’s call.

Chris Roehm: I think that there is a terrific need for collaboration especially between financial planners, attorneys, and accountants, and then also the other advisors. You ask also who’s going to take responsibility for this. I think if you the advisor have a trusted relationship with the business owner and you’re not asking these questions, how are you going to face that widow one day when she asks you what’s in place? What have you done for my husband? Where are we now? Where are we looking at? I personally had two clients die that had proposals on their desks for these type of planning, and I think about that every morning when I wake up and I use that as a motivation against the slings and the arrows that you face in the marketplace that these people need us to motivate them to do these planning and if we don’t do it, nobody is. They’re not going to do it themselves. They’re not going to Google search and put these plans together on their own.

Noah Rosenfarb: So Chris, if any one in our audience would like to get in touch with you, what’s the best way?

Chris Roehm: Well, I still have a telephone. My number is 954-239-7344. It’s my direct dial. My email is chris@freedomadv.com. I think a lot of people are very comfortable reaching out through the LinkedIn today. If you go on LinkedIn and you search for my name, Chris Roehm, I’m pretty easy to find because that’s a funny way to spell Roehm, so I should come right up on the LinkedIn and I welcome anybody who wants to connect that way too.

Noah Rosenfarb: Great. Well, my partner, Chris Roehm, thanks so much for joining us today. To all our listeners, I hope you enjoyed the interview, don’t forget to share your feedback with me. I’ll put it up on iTunes, subscribe to the podcast, and share with a friend. We look forward to always having you on the call to listen in and to share with us your feedback. If you have any guest that you’d like us to interview for the show, don’t hesitate to reach out and recommend them and we hope you join us again. Have a great day!