ESOPs & The Pandemic

by Kevin Jennings | Nov 10, 2020 | Business Owners

Massive layoffs, record applications for unemployment, “Closed” signs displayed on businesses we love most. All are commonplace in today’s pandemic world.

All businesses are impacted by this pandemic. ESOP companies show more success in dealing with it. Recent research from Rutgers University proves this.

At ESOP owned companies, the median job loss was 4 percent. For all other firms, it was 13 percent. At all companies deemed essential, ESOPs laid off staff at only one-fourth the rate of other essential companies. Among those companies deemed non-essential, ESOP companies laid off employees at a rate 2.77 times lower than the non-ESOP company.

For those of us in the ESOP world, these statistics are not surprising at all. Similar statistics are reported for the recession that began in 2008. In 2010, 12.1 percent of private-sector employees reported being laid off. For those who worked in ESOP companies, only 2.6 percent were laid off.

While layoffs are a major concern, this pandemic recession carries the additional worry about personal safety. It is estimated that 98.3 percent of ESOP companies took protective measures for their workers. Only 88.9 percent of firms overall took these measures.

Though there are fewer ESOP owned companies than non-ESOP owned companies, this data still should be considered conclusive. According to the National Center for Employee Ownership (NCEO), the 6,000 ESOP companies in the United States hold assets over $1.4 trillion.

How do ESOP companies beat the norm?

At an ESOP company, because they have skin in the game, employees have a sense of unity. Their ownership gives them an extra incentive to work towards the company’s growth and success. ESOP employees are more likely to come up with those outside-of-the-box ideas a company needs to thrive during these challenging times.

As the ESOP company grows in value, so does an employee’s personal wealth.

Is an ESOP right for you?

Increasingly, business owners facing retirement turn to ESOPs as all or part of their succession plan. ESOPs keep an established company intact. The business continues to run with its current management. Often when a company is sold, the new owners change the way business is conducted. This can be disastrous and may lead to losing key clients and key employees. The seamless transition ESOPs offer eliminates those concerns.

ESOPs can be a great option many business owners don’t know about. But ESOPs are not for everybody. Contact JBVal today to see if an ESOP is right for you.

Optimize business, optimize life.

by Kevin Jennings | Oct 26, 2020 | Business Owners

A Cautionary Tale…

A client heard some horrible news: his wife was diagnosed with an illness that would end her life. Doctors advised that she should have 10-15 years of reasonable health before her early demise. This man is an entrepreneur. He turns the most difficult obstacles into opportunities. He didn’t sit and mope. He decided to cash out his business and start the life he and his wife had always dreamed about. The electronics wholesale company he started a quarter of a century ago was renowned in its industry and very profitable. He expected a big check when selling it. Our valuation disappointed him. The company’s “Fair Market Value” was much lower than he needed and deserved. This happens way too often. Entrepreneurs who went the extra mile for decades do not see the return they expect when selling their business. All the nights and weekends at the office – were they worth it?

Remembering the Dream

Remember the dream you had when you first opened the doors to your brand-new business? The great life you envisioned? Has that dream become a reality? Countless hours of working inside the business blur that vision. The focus is on projects not on the steps needed to take to realize that dream. When the electronics company owner wanted to sell his business, he saw his mistake. The business had value, but most of it is tied to him!

Optimize Your Business

Entrepreneurs: take a step back to look at your business. By optimizing your business, its value and the cash flow it generates will increase tremendously.

Processes

In 30+ years of business valuations, the most common profit leak I see is a lack of relevant reporting and processes. A recent survey reported 42% of firms believe outdated, inefficient business processes and frameworks contribute to a decline in employee productivity. This means lower profits! “Set it and forget it” does not apply to either how your team operates or the information you need to best guide your business. Optimizing your processes is not just eliminating redundancies, automating simple tasks, improving communication and cutting unproductive tasks. These are important, but the crucial ingredient is getting timely information that easily shows how you’re doing.

Measure the right things

Business is data driven. There are analytics for everything. It becomes overwhelming – information overload. Managers focus on so many analytics they lose focus on what’s important. There are a small number of key metrics that will improve profitability. Decide which analytics that directly affect your company’s profitability. There is not a cookie cutter answer to this challenge. You built a business that serves a particular niche or provides a unique product or service. Will the key indicators be the same for you as for anyone else? No!

Delegation

Many of the great entrepreneurs I work with are solopreneurs – they work alone. This can be a great model for those looking to dissolve their business when they move on. Isn’t that like leaving money in the table? Delegating responsibility adds value to a business. The less your company needs you to generate profits, the more valuable it becomes to a buyer. (Learn more about delegation as a leadership style here) No one employee can be indispensable.

Optimizing Business, Optimize Life.

Business optimization is what separates the most profitable companies from the rest of the pack. Optimization can add as much as 10% to 20% (and more) to the owners’ take-home pay. Fact: the same processes and key metrics that optimize your business and cash flow will enhance the “Fair Market Value” of the business. A buyer will pay more for a well-run, optimized business. With over 30+ years of business valuation experience with thousands of businesses, JBVal has the expertise to spot and plug profit leaks. If you need a fresh look at this, contact us today.

Are you squeezing all the juice out of the fruit that is your business?

by Kevin Jennings | Oct 14, 2020 | Business Owners

Over the past 30+ years, I have completed valuations for thousands of small businesses. I have seen businesses rise to the top and become successful beyond the owner’s dreams. I have seen many seemingly great businesses with passionate owners fail. It’s hard not to question why. Running a business is tricky. There is no cookie-cutter formula for success. For every “success rule”, there is an exception. There is an overlying theme among successful companies. Many aspiring entrepreneurs are unaware.

The Illusion of Value

If you are a business owner, chances are that starting a business was the fulfillment of a dream. The decision to take that extraordinary leap of faith came after a great idea, being extremely dissatisfied at their job or as a natural progression for someone at the top of their field. A survey from Cox Business states – the biggest motivator for starting one’s own business is being one’s own boss. Most business owners get consumed with working inside the business instead of working on the business. While business owners grind away on the product or service they offer, nobody is working on the business to increase cash flow and value. The result is one I’ve seen too often – a hard-working and passionate individual runs a successful business for many years but it does not have the value the owner deserves. Hard work creates an illusion of value. The business has a great reputation and generates a strong income for its owner. Often, it is not the business but the business owner that holds the value. This rude awakening dawns on many blissfully ignorant business owners when they are ready to move on; in whatever form moving on may take. I’ve seen many owners sell their business for much less than it was worth. They were too focused on working in the business to optimize it for maximum, repeatable cash flow and saleable value. At lunch recently with a trusted business colleague, this topic arose. She and her business had an amazing reputation recognized throughout the community. I asked her if she thought her business had a high value if she were to sell it. “Of course, it does,” she answered. I dug deeper. “So, if you were to go away for a month, without checking in even once, how would the business do?” Her eyes widened at the disappointing reality. Her business wouldn’t survive without her for even a month. She now realized that her business didn’t have any true value… only she did!

Optimizing the highest valued company

Luckily for my trusted colleague, it is never too late to optimize, to achieve the highest value possible while providing higher repeatable cash flow on the way. Creating simple and repeatable processes is the beginning. Consistency is the goal – processes are the building blocks to get you there. The most valuable companies make their processes so simple that every worker is expendable. A company that relies on any single person loses value. Create a dashboard of the metrics that are key to you. You’ll be surprised at how many reporting systems already have the data you need. Routine monitoring of your dashboard lets you quickly correct issues and duplicate successes.

Is it too late?

Nope. I have seen many owners in this situation adjust their operations to optimize their business value right up to the buzzer. Though better than completely ignoring the issue, the highest value will always occur when a buyer can see the impact of having your optimization in place for several years. Sometimes just a few changes increase business value tremendously. It may also lower the time you spend running the business. Is your business valuable without you? Will it provide the value you want to live the lifestyle you dream of? Shouldn’t it? JBVal helps businesses optimize their value. Contact us today to take the first step in creating the highest valued company possible.

Your Business Needs an iPhone™ Update

by Kevin Jennings | Oct 8, 2020 | Business Owners

You open up your iPhone™ to a new notification: YOUR PHONE IS IN NEED OF AN UPDATE. But you can’t update it now. At least that’s what you tell yourself. You need it now to check that important email or play that last round of Candy Crush™. After a few weeks, you begin to notice that your phone is malfunctioning. Your apps shut down unexpectedly. Long loading times haunt your every move. You finally admit to yourself that you need that update. Unfortunately, our businesses do not come with update notifications. We must update our business just like we do our phones. People are “too busy” working on their business to devote time to reflect on it. Without taking the time to update our business, it will slow down and malfunction just like our phones.

The Ultimate Vision

Successful businesses do not “go with the flow.” Successful businesses have a clear-cut vision of where they want to go. Without this ultimate vision driving every decision it makes, a business is wandering aimlessly with no real direction. Even businesses that have an ultimate vision in mind get thrown off track. In the high-pressure business world we live in, decisions are often made under pressure and the ultimate vision may be disregarded when these decisions are made. Businesses who take a step back and truly evaluate their operations understand where their business does and does not align with their ultimate vision. A “software update” on the business should get your business back on track with your ultimate vision, so it is not wandering aimlessly. An old Japanese proverb explains that “vision without action is a daydream. Action without vision is a nightmare.” If a company does not align its operations with the ultimate vision of the company, it will malfunction just like a phone that needs a software update.

A “State of Affairs” Business Valuation

In over 30+ years of doing business valuations for thousands of companies, it astonishes me the obvious profit holes reputable businesses are oblivious to. Most business owners are so focused on their day-to-day operations that they never take a step back to truly evaluate their business and give it a much-needed update. A true, in-depth business valuation uncovers profit holes and presents opportunities that owners were previously blind to. I have dealt with many passionate entrepreneurs in my career who have unknowingly squandered potential profits. These entrepreneurs are so passionate about and focused on their product or service that they are unaware of the profit holes they fall into. In most instances, evaluating a company does not foster just one-time solutions. A “state of affairs” business valuation often fosters solutions that enhance your bottom line and generate ongoing profits and cash flow.

The Update Your Business Needs

Business owners must regularly take a step back from the day-to-day. They must understand where their business is running smoothly, where there is room for improvement and make sure everything is aligned with the company’s ultimate vision. JBVal helped companies evaluate their business for over 30 years. Get an unbiased, independent and fair valuation report. Get the update your business needs today.

Poll of ESOP companies and professionals September 2020

by Kevin Jennings | Sep 22, 2020 | Business Owners

I found the results of our poll last week of ESOP companies and professionals surprising and somewhat pessimistic.

Our respondents believed ESOP companies would fare slightly worse than their non-ESOP competitors with a respondent’s rating of 2.3 out of 5. 

The National Center for Employee Ownership (NCEO) in a 2013 study found that “…firms offering ESOP significantly outperform firms not offering ESOPs. Further, on average, as ESOP participation increases within organizations, so too does firm profitability.”

“Research on Employee Ownership.” NCEO, www.nceo.org/employee-ownership-data/academic-research.

When asked if the current economy would lead to more, fewer, or the same number of new ESOPs, the average answer was 2.56 out of 5, leaning to more over flat. I personally would not start an ESOP in an uncertain economy, particularly if my company’s value is being depressed.

The attitude towards the Election is interesting.  With an average rating of 3.67 out of 5, respondents thought a change in Administration would be a positive for ESOPs.  With an average rating of 2.67 out of 5, respondents thought a continuation of the current Administration would be a positive.  Apparently, some respondents believe that neither a change nor no change would affect ESOPs.

Lastly, the average respondent thought the status of ESOPs would be basically neutral in 5 years compared to today, with an average rating of 2.4 out of 5.

Share your life experience and knowledge.  What do you think the impact will be?  Post your comments below.

For more information on ESOPs visit esop.org