Case Study

The Situation:
History. The business is owned by a husband and wife team. In 10 years, business has grown to $7 million in revenue with strong cash flow. The husband has been the sole driver of business culture and revenue growth but is 59 and not in perfect health.
 
Operational structure. The wife is 53 and runs administration very capably. The business, however, has grown to the point that she can’t continue in her current role without improved systems and support. Accounts receivable aging is slowly becoming a problem. The business has six departmental managers that are strong technically but have never been relied on to generate revenues or manage to the numbers. The business has also never had a plan – it has been managed purely by the founder’s intuition.
 
Employee compensation. Employees are well-compensated in the form of salary and benefits. The company has a SEP initially designed to allow the owners to maximize their retirement contribution; but the projected growth of the company means the annual SEP contribution necessary for the owners to maximize their own contribution will exceed $600,000, with less than 15% of that going to them.
 
The future. The outlook is bright. The business is well regarded in the industry but is totally identified with the owner. The owner, by his own admission, could never work for someone else after a sale.

The Need:
Simplification. The income statement includes more than 300 line items, and is so complicated it cannot be used as a management tool. The owner just skips to the bottom line and has to rely on intuition to guess why the company made or lost money in the period. Simplified systems and processes will also allow his wife to focus on accounts receivable management.
 
Transition. Because the business is so currently reliant on the husband, it’s not likely the business could continue successfully after he retires. As a consequence, it has limited value for an acquirer or for the founder himself. Given the owner’s age and health, he cannot continue at his current pace. At the same time, while attracting strong managers hasn’t been an issue, the owner has never taken the time to train them how to run the business – they’re just “doers”.
 
Retirement planning. The business has begun to make real money over the past few years. While a transition plan will be critical to creating long-term value, the owners need to design a retirement plan for themselves and their company that doesn’t carry the massive future cost of their SEP.

The Solution:
Business financial planning. Based on a simplified recast of the historical financials, and a focus on the few key drivers that really affect business growth, CTP worked with the owners to develop a five-year financial plan (built up month-by-month). Instead of relying now on a 300-line item financial statement to measure performance, the owners report against a one-page financial statement and monitor five key operating metrics.
 
Transition plan implementation. Using the goals established by the financial plan, CTP worked with the owners to develop a key management incentive compensation plan focused on the things that have made the business successful – revenue growth and employee utilization. Managers receive incentive compensation for the revenue growth in their department and for the effectiveness of their teams. Seventy-five percent of incentive compensation is deferred and subject to vesting, motivating managers to stay long-term. Over time, the plan will have the effect of changing the face of the company from the founder to the key manager, and the vesting concept of the plan will reduce the risk those employees will leave and take customers with them. Because the true mark of a potential owner is someone who can accept “deferred gratification”, the transition plan will have the effect of weeding out those who may not be qualified to become actual owners of the company. Finally, a business with key employees who can run it after the owner leaves has high value to an acquirer, and to the owner, who could choose not to sell and instead sell a portion to his managers and continue to receive distributions on the portion he did not sell.
 
Retirement plan implementation. In conjunction with the design of the key management incentive plan, CTP worked with the owners to design a 401k plan, in combination with the transitional participation in the incentive plan, to replace the SEP and the massive future cost associated with it. CTP and the owners also used the business financial plan to build a cash distribution model for the owners that meets their retirement needs but leaves sufficient cash in the business to sustain growth.
 
Key management reporting and training. CTP is working with the owners to, over time, develop progressively more detailed reports for the key management team that will help them understand how the business is progressing according to its plan. Initially those reports will have general information and metrics reporting only, so that people who have never seen business financial information before won’t have to learn about the company’s entire financial profile so quickly. As the owners begin to identify members of the team as “core people” they can trust to both understand more detailed information and keep it confidential, CTP will help them produce and deliver that information. CTP will further work with the owners and all the key management team on a quarterly basis to interpret and present company performance.