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Jul 27, 2017

Table of Experts: Successful management: The business life cycle

Featuring Sean Killgoar

As seen in the Boston Business Journal

Having the right team of advisors is critical in good planning. Businesses must cultivate a team of experts to handle accounting services, financial planning for the business and personal wealth, protect the assets of the business and implement cutting-edge products.
 
The Boston Business Journal’s Table of Experts program highlights those topics. Here’s an edited transcription from the program discussion, which included Rob Brown, Partner, Apexium Financial LP; Sean Killgoar, Partner, Citrin Cooperman; and Michael C. Robinson, Chairman, Rogers & Gray Insurance.
 
BBJ: We’re going to be talking today about handling growth companies, about exit strategies and managing in between as well. When is it time to hand off to someone else, and how to manage that exit piece. That can be about selling to someone else or succession planning and transition in a family or other type of business.
 
Sean, construction is an important piece of your business. It’s a good place to be if you’re in that business. Any insight into how long and how high that growth is going to go?
 
Sean Killgoar: What we see with our client base over 130 to 150 contractors in the Boston market is backlogged through 2018. If you go to downtown Boston, you see the skyline. It’s cranes everywhere. I think a lot depends on the current administration. We’d like to see some more infrastructure spending. Certainly the roads around here need the help.
 
BBJ: Talk about your experience with the companies that you work with and how you help them handle rapid growth in industries that tend to be cyclical.
 
SK: One of the misnomers in construction is that on a growth period everyone’s doing well and healthy and viable. And it’s actually the opposite. Surety companies see more failures in an uptick in the economy and the balance sheet can be beat up a little bit, working capital can be low. When the economy goes to an uptick and there’s a big demand for labor and bigger projects and more cash outflow, then the timing of cash flow can really impact the construction company. We work with our clients on building up that balance sheet in the good times to prepare for the downturns and it’s cyclical. So that when it comes back up the balance sheet’s strong and they can handle the growth and get the work that they need to be successful.
 
BBJ: Rob, how do you help your clients handle that rapid growth?
 
Rob Brown: When we’re looking at clients, they typically fall into three different categories in terms of their business success. The first is struggling where they’re just scraping to get by. The second is doing well where they have enough money to put some aside. And the third is legacy planning where they’re thinking about succession planning and the next generation. In terms of the first bucket (which is struggling to get by) what we do really runs the gamut. It depends. A lot of times the focus is on just paying the bills and keeping creditors off your back. But it’s also laying the groundwork from a planning standpoint which would be buy sell agreements, key person insurance, trying to attract and retain employees. And then when we start to move into that middle bucket which is doing well, how do we think about taking money out of the business and diversifying. We’re looking at different types of programs where owners can transfer money out of the business and really start to build wealth. And then finally the legacy bucket, it starts to get interesting where we might be doing some advanced estate planning, gifting, charitable contributions.

BBJ: Mike, talk a little bit about growth and what you do for clients to help them manage that.
 
Michael Robinson: The number one thing we hear from company leaders is in regards to human capital management. Regardless of industry, growing companies are trying to find the right talent. One of the things that we’re doing (at Rogers & Gray) that’s really been helpful is creating a strategic business plan around that human capital and talent management. Number one is making sure that you have the right people. The other thing we’ve done is getting the right processes in place. For years we’ve built our organizational chart where it’s always five years ahead of where we’re at. As we grow, some people wear multiple hats and as we meet milestones, we take those hats off but we are always planning for the future and for growth.
 
BBJ: What are some of the other key challenges that you see in dealing with growth, how do you scale up, or down?
 
SK: Talent is key. I think having people to do the work and do it properly is crucial. What we’ve seen over the last two years is a real push to come up with incentive plans and not entitle the employees. I think historically incentive plans rewarded people and it becomes a habit and people look for it. So we’ve really pushed our clients to get away from that structure and more to a model that when the company does well, you do well. More of an ownership type approach with the employees. I think the more ownership they can have within the company, the better.
 
RB: I agree with Sean in that business owners need to reduce entitlement programs and replace them with incentive based programs. An example of this can be seen in the retirement plan space - we’ve seen a massive shift away from pension plans into defined contribution plans which transfers retirement responsibility from employer to employee. And, much like in the past, employers can have profit-sharing provisions that reward key employees if the company does well.
 
BBJ: How do you fund that? How do you get the resources to make sure it happens?
 
RB: Funding comes from operating cash flow but, one of the nice things about profit-sharing plans is the flexibility: in good years, employers can contribute more and in lean years, the contributions can be less. This needs to be communicated with employees so their compensation expectations are properly framed around collective success.
 
MR: We set a baseline that’s competitive in the marketplace and then as results improve or we have a strong year, we profit share with our employees. We generally do this towards the end of the year but it’s planned for and as we have good results, we share.
 
RB: It’s important for employers to know what their competitors are doing. Mike said baseline -- it’s a matter of doing market intelligence for employers which Malcolm Gladwell talked about it in his book, “The Outliers.” It’s the insider view or the outsider view. And the outsider view is just trying to get that idea of what all your competitors are doing, what people have already done.
 
BBJ: Construction is a competitive industry. Is it hard from the talent standpoint?
 
SK: From the construction point of view, there’s definitely a shortage in skilled labor across the country, not just here. So it’s extremely competitive. We have clients that will tell stories of competitors going up to the trucks and offering $10 more an hour to go over to their job site. One of the things that we’ve tried to implement is this ownership thinking where we actually come in and educate the employees throughout the year on how to read a balance sheet, income statement and educating the employees what the profit margin is and where the money goes. The more transparent companies can be, the more buy in they get from their employees. It gets people in the field thinking, how do I save costs, how do I save time, how do I save resources because at the end of the day 30 percent of that savings is going into my pocket. From the accounting market point of view, again in a good economy, it’s very difficult to find good and talented CPA’s.
 
BBJ: I’d love to hear from each of you on the talent piece.
 
SK: I think we really try, especially with some of the younger staff, to get them to look long term and show them the opportunity for growth within Citrin Cooperman. We want them to look beyond the next two to three years and look towards what you want out of your career for the next 10 years. Show them there is a possibility of becoming director or partner or whatever they want. And we try and get people that want to row in the same direction.
 
MR: One of the most important conversations we’re having is about corporate culture. It’s beyond vision and values - it’s making sure that Rogers & Gray is a great place to work. We work hard at that. Second to that is training and the investments we’ve made in training. We believe that you can bring on folks without experience and we can teach our way of doing things. Word is getting out and we’re getting many more applicants than we ever have. We’re starting to see the fruits of all the investments in the labor that we’ve put in. You have to be good at recruitment and have a strong corporate culture, but this becomes more challenging as you grow and add more positions.
 
BBJ: We mentioned that Rogers & Gray is one of BBJ’s Best Places to Work. So congratulations on that!
 
RB: Within my business - and for a lot of businesses outside of the service sector - the mindset of the workforce has changed considerably over the past 20 years. We’ve seen a shift from the Fred Flintstone days of punching the clock when you get to work and punching the clock when you leave work to a more flexible schedule. It seems to me that there is a seismic shift in how people are approaching the work/life balance. A lot of this is driven by technology and the ability to work remotely but a large part is also driven by the demands of younger workers. And employers need to realize that and have a little empathy around that - if they want to keep high performing employees. We have mandatory meetings at my firm but we try give staff as much flexibility as possible. In other words, at our firm, we don’t really care when you’re working. We just need to make sure the work gets done and gets done well and if you need to take time off go and do it. We like to give our employees enough rope to either pull themselves up the corporate ladder or to hang themselves.
 
BBJ: That’s a great analogy. Any other comments?
 
SK: The CPA profession in general has a bad reputation for working long hours and being in all weekend. We came up with a different approach similar to what Rob said. If you work best sitting in the office, that’s great. Work here all day, work here all night. Whatever you want to do. But we’re not a face time firm. So if you want to go home and see your family and have dinner and you have a couple of things you want to do late at night and that’s how you work, great. It’s about being really being flexible and treating every single employee unique and understanding what their circumstance are.
 
RB: Just because people put in face time doesn’t mean they’re effective. So the challenge for employers is really understanding what makes each employee work at their best capacity, most efficiently.
 
BBJ: From each of your perspectives, discuss how to manage the assets of the company and of the owners and what kind of tools they need to maximize their growth.
 
SK: From my perspective, we focus on the business primarily. Because for most of our clients that is their number one asset. We work on understanding what the goals of the company are, what revenue goal that is and what working capital they need to sustain that goal. And then we get the balance sheet strong. We get the working capital to where it needs to be to sustain the growth or the level of revenue that they have. We work on getting the money out of the company and investing it and that’s where we’d work with Rob to understand what we want to do with this excess capital. We don’t want to leave it in the risk of the business. We want to begin to develop personal wealth so that at some point in time down the road whether it be a generational transfer, or a sale or whatever the exit strategy is, and constantly revisit it so we have individual wealth built up just beyond the corporate wealth.
 
BBJ: Rob, do you want to take off on that?
 
RB: When we sit down with a business owner what we’re really trying to identify is two things. Obviously they want to maximize the value of the business and they want to maximize the exit price on the sale of the business. Before that, we try to help business owners understand how much they will n eed to live the life that they want to live. Meaning all roads lead to retirement income. Do you have enough money outside of the business to supply that retirement income for the rest of your life with very little risk? So if the answer is yes, it gives us more flexibility on the exit price in the business. It’s incumbent upon us as advisors to step in and go through that exercise. Let’s run the cash flow reports. Let’s try to give you more clarity around your retirement situation. That’s really the part that we find is missing for a lot of business owners.
 
BBJ: Mike, talk about the things they need to protect the assets and some of the advice that you give them.
 
MR: Obviously our job is to protect those assets whether it be on the personal side or business side. These days, it’s not just the traditional insurance - property, casualty, liability, worker’s comp, etc. We’re seeing much higher activity for claims around employment practices liability including sexual harassment, wrongful termination, and more recently cyber liability. We used to be worried about the slips and falls or work being done, but as technology changes, so do the exposures. The insurance industry is keeping up with it and there are good products that can provide the right protection for clients.
 
SK: One of the things that we’ve seen a big uptick in our services is in cyber. And we actually have a group that goes out and does an evaluation of your system. It just shows you how far we’ve come in the market.
 
MR: Many insurance companies will help bring value to you and help you with the risk management when it comes to cyber liability. But you have to be open to the discussion. We’ve made a lot of investments ourselves in security and making sure our systems are secure. We’re currently going through the audit process to get our own report card. Similarly, many carriers have hotlines to help companies with employment practices liability and tough employee issues. So making sure that you’re getting the bang for your buck for the premium that you’re spending is important and a lot of people don’t take advantage of it.
 
BBJ: Talk about what advice you give your clients when they’re considering an exit strategy. And when they should start thinking about that.
 
SK: As part of our year end meetings we discuss succession planning. As I mentioned we work with privately held companies. Depending on the industry they’re in, construction in particular, most of the time we see succession planning either through management buyout or generational shift. In those instances we start early on what the owner, depending on the generation, what they need to survive in the future and that kind of starts the baseline of the discussion. And we advise our owners to start this discussion years and years in advance. We actually want them to come up with a succession plan before they’re even thinking about retiring. I think once you get to a point where you’re ready to retire, the discussion becomes more emotional for a variety of reasons. If everything’s laid out in advance in how the company will transfer it just makes, it makes the transition a lot smoother. It takes the emotion out of transitioning. Especially when you’re talking a family generational transition. What is in place to make sure that the company can continue on and provide benefits for the families that work for that company? We try and hit all those issues as well as if you have multiple shareholders working a buy-sell agreement so you prepare for every risk that can come into the business.
 
RB: From a legacy planning standpoint, there are some fantastic things we could do around transferring portions of the company to the next generation or just transferring portions of the company into a family trust to get it out of the estate. If there’s going to be a large sale of a business what we’re trying to do is minimize taxes, not only on the income and capital gains tax side which Sean would help with, but also on the estate tax side. It really comes down to business owners just thinking ahead and being proactive. And I think one of the things that Sean and Mike and their teams do very well is strategic planning and getting ahead of the curve. If we’re talking about business growth and exit planning for our three businesses to be sustainable and effective, we have to be thinking about how we can be invaluable to our clients. It’s all about advice and working together and trying to give clients a holistic plan. And that comes with really incorporating different advisors into the equation.
 
MR: I think you mentioned two words, proactive and planning. A successful transition takes many years of planning. For our company my father was given the opportunity to buy it in 1980. And shortly thereafter he determined he wanted to perpetuate the company versus sell the company. He put 25 years putting that plan together in terms of getting the right people on board, creating the right structure, the transaction itself. For us it was a seven year transaction yet the people part and getting roles and responsibilities set up took much longer than that. So the planning was huge for us. They were very separate decisions for us when my father retired a few years ago. And thankfully they were through good planning.
 
BBJ: Is your experience that your clients are doing such a purposeful, methodical process? Or are they really not thinking about it? Is it difficult to get them to think about that succession planning or exit planning?
 
SK: They’re thinking about it. Even if we have owners in their early 40s we’re already speaking with them about what’s their goal with the company? Because if the goal with the company is to sell it’s a very different plan than if the goal of the company is to be like Rogers & Gray with what they did. It’s two different paths. You want to grow the company and be successful. But there’s also ways to position the company for a sale versus how we would do it as Rob says whether it’s a stock transfer, trust, into trust–minority transfer. Different classes of voting stock. Very, very different techniques if you’re going to keep it within the family. So I think for us as advisors we need to know what they want to do with this asset. It might change and it changes constantly.
 
MR: I would first suggest that every company conducts an annual appraisal to assess the value of the company. From there there’s lots of different ways to structure things. Some of our clients are going the Employee stock ownership plan (ESOP) route, others are creating partnership tracks. Even though complex, I consider this the fun part of it all because there are just so many different ways to go with it. But I think the annual appraisal is one of the most important pieces to just establish the value of the firm.
 
BBJ: Talk a little bit about how you help them with that process?
 
RB: Ultimately it all comes down to goals and objectives. And really trying to understand where the client is and where they want to go. And our job is really to try to put ourselves in their shoes and then to think about different options that they should be considering. Is it going to meet your personal family goals? Is it going to meet your retirement income goals? Is it going to meet your legacy goals and even your emotional goals? Some people like having their name on the building and they want that to continue and to perpetuate. So it’s really trying to understand what clients are looking to accomplish. It’s sitting down, being proactive, having these discussions on a periodic basis and typically we find if we’re not doing it once a year then, then shame on us.
 
SK: Every individual client is so unique. The client determines where the discussion goes. But I agree if we’re not discussing this at least yearly then we’re not doing our job. So it is crucial.
 
BBJ: There is a big interpersonal component of succession planning. All the good advice goes out the window if there’s not that people piece of it. Any advice you’ve given and your own experience in terms of who’s doing what as that transition happens?
 
MR: We’ve spent a lot of time on the people part of it. It’s my brother and I in the business. We have a non-family member who has some shares as well. And we spent a couple of years with consultants really doing an inventory of strengths and weaknesses and then matching that with roles and responsibilities. It certainly had its emotional peaks and valleys, but we found when we aligned those strengths and weaknesses to roles and responsibilities it’s kind of like one plus one equals three. It’s worked really well for us and if we didn’t spend the time on that we certainly wouldn’t be having the success that we have experienced. But we wouldn’t have as much fun as we’re having now. The transaction itself is relatively easy even though there’s so many different variations of how you get it done. But most of our time was really spent in the people part of it.
 
SK: Some of the succession planning we’ve done, the majority of time is not spent on the tax structure or what we’re going to gift or not gift. It’s a year or two spent on understanding the personalities. We’re trying to find out what drives an individual and what do they want - all while trying to get some of the emotion out of it. Emotion, especially in family businesses, makes succession planning from one generation to another one of the most difficult things you can do with business. Especially for a first generation to second generation. You really see someone who started the business, now that second generation comes along and can grow the business and you have kind of a conflict of interest at times as to who takes credit for what. At the end of the day, it’s more about how to get them to work together to say this is about the family legacy and how do you get there. It’s a lot of understanding the people and working with them. And whether that’s bringing in different points of view at times to help, a different voice in the conversation that helps quite a bit.
 
MR: We focused a lot on growth and on the culture and how key employees are to success. And then we focused on succession planning. Succession planning becomes much easier if you’re growing and you have the right people on the team. So it’s nice how they all tie together. But you can’t really have one without the other.
 
BBJ: Well said, for sure.
 
RB: For business owners, you just have to get experts on your team. And sometimes it’s painful to write a check to an attorney to get documents drafted the right way but you want to have experts on your team that can help you think strategically about your business and one of the interesting things about the three of us here we all think the same way. We all thinking about planning. We’re all doing proactive sessions with our clients. But we fully recognize that we are not experts at everything. So we need to bring in other players that can help us ultimately serve employers and their employees well.
 
SK: I think it’s really important to surround yourself with a team of professionals that are looking out for you beyond just the day to day operations. Not only one key individual, or a CPA or a lawyer but really a whole team and as Rob said, I think you really need to understand your strengths and weaknesses as a professional and bring in people who know what they’re doing.
 
BBJ: Absolutely. Well said by all. And I think it sort of caps off – the purpose here is really to showcase the different, the three different areas that you each bring to the table. It would be three people like you that would be a great team for a business owner whether small, large or otherwise.