“Work From Anywhere” Comes Full Circle

Work from anywhere has been a necessity, an epithet, an obstacle, and an opportunity over the last 3 years. To paraphrase Aristotle’s axiom about Nature (“Horror Vacui”), business abhors a vacuum. Where one occurs, it is quickly filled.

Work from anywhere started as a COVID-induced necessity. During the lockdowns of 2020-2021 (and longer in some places) we all had a crash course in video calling, VPNs, and virtual meetings.

Employees quickly expanded the definition of anywhere. They tired of shunting the children off to a bedroom during conference calls, or using office-like backdrops to hide their kitchen cabinets. Soon they began changing their backgrounds to something more aspirational, like a mountain cabin or a scenic lake.

From there it wasn’t much of a leap to make the mental shift from a make-believe environment to a physical one. Pretty soon employees were calling in from real mountain cabins. In many cases, they shifted to someplace where the cost of living was much lower than in their former metropolitan workspace.

Work from Anywhere as an epithet and an obstacle

As employees moved further afield from their office environment, bosses began to sound off. “We aren’t going to pay Los Angeles wages to someone who has a Boise cost of living,” was a commonly heard complaint.  Most put up with it because qualified help was getting harder to find. Hiring remotely was too hard a new skill to master.

The complaints of employers grew louder as they began to ask employees to return to their former location of working activity. They made arguments about deteriorating corporate culture or a lack of mentoring opportunities.

At the same time, stories surfaced about workers who were getting full-time paychecks from multiple employers, or who were “quiet quitting” by doing as little as possible. The “Great Resignation” forced many organizations to put up with it. If you wanted to keep employees, you needed to accommodate their demands.

Then the work-from-anywhere poaching started. If an employee could do the job from a thousand miles away, why not just hire people from a thousand miles away? Now recruiters could dangle Los Angeles wages at candidates from Boise. Many employers saw work from anywhere as a curse costing them their best talent.

Work from Anywhere as an Opportunity

But as I said at the outset, business abhors a vacuum. Every action has a reaction. When the job can be done from anywhere, does that mean anywhere?

work from anywhereIf the higher cost of living centers can fill their needs by hiring people who are accustomed to earning less, why shouldn’t employers look at those candidates before the local talent? The Internet allows almost-instant communication across countries, what about across oceans?

In the last few months, I’ve worked with employers who are hiring accountants in India, staffing recruiters in the Philippines, programmers in Argentina, support techs in Colombia, and screening nurses in Nicaragua.  None of these employers are multinationals. Each one fits the SBA’s definition of a small business.

Their new employees are educated, English speaking, have the same hours as the employer, and are thrilled for the opportunity. Some are hired directly through a local placement agency. Others work for an organization in their home country that makes them exclusive to the client and promises to replace them if needed.

Most of the wages appear to be about 50% more than the same job would pay in the country of residence, and roughly half of what the position in the U.S. would cost.

Business has once again filled a vacuum. I wonder what is next?

Posted in Building Value, Entrepreneurship, Leadership, Management, Thoughts and Opinions | Tagged , , , , , , , , , , , | 4 Comments

4 Responses to “Work From Anywhere” Comes Full Circle

  1. Rick Simpson says:

    Great post John. As a retired employee that worked from home for 30 years, you have pointed out the good and the bad. I know from experience that many people can’t give 100% when at home; too many distractions. Glad I’m not hiring anymore.

  2. John Seybol says:

    Great article John. Certainly lots to consider for business owners.

  3. Jason Myers says:

    Hi John,

    Thanks for presenting several sides of this situation. As someone who has worked remotely since our agency was formed in 2010, we were at a slight advantage because our culture didn’t change during the pandemic and we had all of our systems in place. Yet we saw the challenges many of our clients faced with their changing workforce demands and expectations. I can sympathize with workers who got their first taste of WFH recently (I know I never want to go back to a traditional office). But I also feel for the business owners who want and need some of their folks back in the same physical space. Tough to get that genie back in the bottle.

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The GAAP Traps

GAAP traps often occur when a business owner sells a company to a third party. The transaction is commonly memorialized by a Purchase Agreement. That agreement contains certain representations (or “reps”) and warranties.

Some of these are common sense and should pose no problem to someone who has operated a good business. The Accounts Receivable represent money that is actually owed to the company. Taxes have been filed on a timely basis. The seller doesn’t know of any pending litigation. The owner has the right and authority to enter into a sale agreement.
There is one, however, that is frequently required by attorneys who don’t understand privately held business, and agreed to by owners and their attorneys who don’t understand what they are guaranteeing. They are Generally Accepted Accounting Principles, or GAAP.

What is GAAP?

To start, the term “Generally Accepted” is misleading. It could easily be interpreted as “what everyone typically does.” Nothing could be further from the truth. GAAP is determined by two organizations, the Financial Accounting Standards Board (FASB) and the Securities and Exchange Commission (SEC).

Per Investopedia.com “GAAP is not law, though violating GAAP can have costly ramifications. Errors and omissions can impact a company’s credibility with lenders, investors, and other parties who rely on financial statements for an accurate picture of a company’s finances. The SEC does not take a kind view of companies that fail to conform to GAAP.”

Of course, the SEC is concerned mainly with publicly traded companies, and GAAP is intended to provide investors with consistent, reliable financial information on the companies whose shares they buy. Nonetheless, many attorneys have come to include GAAP financial statements as standard in all of their transaction agreements.

GAAP Traps

The problem begins when the agreement asks the seller to represent that the financial statements are in accordance with GAAP. The reaction of many business owners is “Sure. I record all my income, pay all my bills, and give a substantial portion of the rest to the IRS. That sounds like generally accepted accounting to me.”

But GAAP is designed for keeping tabs on giant enterprises. Here are a few areas that are required, but almost never accounted for in smaller companies.

Contingent liabilities in the event of a sales tax nexus. Companies that sell in states other than where they reside may owe sales tax on those sales. That is determined by a “nexus,” which is established by each state. In some states it is a total of $100,000 in sales in the course of a year. For others it is 100 transactions. Some states levy taxes if you reach either limit, in others it s both. The limits may be as much as $500,000 in sales and/or 500 transactions.

The GAAP trap is that companies are supposed to be booking a contingent sales tax liability on each sale in case they reach a nexus. When they don’t, that liability can be canceled at the end of the year.

Of course, most businesses know that they aren’t going to reach the nexus, and therefore never even make the entry only to reverse it. Nonetheless, they are in violation of GAAP.

Other GAAP Traps

Warranty liability. If you sell a product that is guaranteed in any way, part of that purchase price should be reserved to cover the cost of warranty claims. Ideally, the revenue is recognized over the life of the warranty. For most companies, the warranty cost is minimal, and they absorb any cost in the course of normal operations. Fine in practice, but (you guessed it) not according to GAAP.

Accrued expenses. As employees become eligible for paid time off, that liability should be carried on the balance sheet and adjusted each month.

Lease recognition. Beginning in 2022, long-term leases for both property and equipment must be recognized in full as liabilities. There is an offsetting “right of possession” asset to balance it out, with the liability reduced each month as rent is paid.

False Representation

There are others, but those listed here are commonly seen in almost every privately held company. Their financial statements fairly represent the profitability and strength of the business. The problems start when the seller signs a contract promising that it’s all done “according to GAAP.”

Owners are usually eligible for post-sale damage claims if they violate the representations and warranties. Be careful of the GAAP traps.

Posted in Entrepreneurship, Exit Planning | Tagged , , , , , , , , , , | 1 Comment

One Response to The GAAP Traps

  1. JT Knight says:

    All true. It seems having a top corporate CPA literally audit their books as if it were public is a best practice.

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Family Succession Planning: Who Gets the Office?

Sometimes the most sensitive question in family succession planning is “Who gets the office?”

Dad’s (or Mom’s) office is usually perceived as the center of authority by the employees and other family members. That is where you got called on the carpet, where you were informed of promotions, or where you took an insolvable problem.

When a parent/CEO is handing off operating responsibility, there is often a lag, sometimes measured in years, between stepping back from the daily decisions and completely separating from the premises. There is great value in having that experience available for coaching, mentoring, or just to lend perspective on new problems, but where should they sit?

Timing

Family succession planningThe question of the appropriate timing for an owner to surrender his or her seat of power can be sensitive. The retiree often worries about becoming irrelevant. The fear of appearing irrelevant is just as strong. The boss’s office is a symbol. Often the owner who is stepping down would rather have no office at all rather than a smaller, less prestigious location.

I’ve seen owners elect to use the conference room as their “temporary” post. That can create other issues of its own. Are scheduled meetings now subject to last-minute relocation if the boss (who will always be the boss, regardless of title transfers) commandeers it for his own use? Equally distracting is when the conference room is scheduled as before. Then the boss arrives planning to do some work and winds up wandering through the offices looking for a place to camp out.

Perception

The situation is exacerbated when multiple children are assuming ownership. Who gets the office? Parents often have a vision of equality among their children. Ricky will handle sales, Peter does the accounting, and Ellie takes care of inventory and purchasing. The three will make business decisions jointly.

Regardless of voting rights, or any amount of explanation to the employees, one of the children will be perceived as functioning at a higher level of authority by assuming possession of the boss’s office. As in George Orwell’s Animal Farm, all are equal, but some are more equal than others.

Family Succession Planning

Settling who gets the boss’s office is an important part of any transfer. Too often it is treated lightly, only to be more seriously addressed after the issues are recognized. The symbolism of moving offices is strong, and sends a message to everyone. In some cases, remodeling to change the whole office configuration may be the best solution. New drywall is a cheaper fix than lingering resentment among shareholders or confusion in the ranks.

It’s often the little things in family succession planning that matter. One owner who was continuing in his office after his son was named President asked what he could do to make their shared space better reflect the change.

“Well Dad, “ the son responded, “maybe you could take down those pictures of our fishing trip when I was 11 years old.”

Posted in Exit Options, Exit Planning, Exit Strategies, Leadership | Tagged , , , , , , , , , , , , , | 1 Comment

One Response to Family Succession Planning: Who Gets the Office?

  1. Holland vanValkenburgh says:

    Well stated

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The Exit Planning Coach Handbook is Out!

So excited to announce The Exit Planning Coach Handbook.

This represents the assembling of experience in over 12,000 hours of coaching business owners. It was written for advisors but would be useful for anyone who sells to or works with business owners.

The paperback and Kindle versions are both currently available on Amazon. Watch this space for the announcement of the audiobook.

We hope that The Exit Planning Coach Handbook will be a reference work for any advisor who works with owners.

 

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Prepared for 2023 – Is This the Year to Exit?

What does being prepared for 2023 mean for business owners who are approaching, at, or already beyond normal retirement age?

It’s become fashionable to pontificate about the “inevitable” recession in the coming year. There is an argument for not talking ourselves into making it happen. Unfortunately, there are indisputable reasons why it is going to occur regardless of whether we discuss it or not.

2023 Is this the year?Inflationary stimulus (including $6 trillion of ”quantitative easing”) in the US, combined with over-dependency on Russian gas supply in Europe and falling industrial production from COVID lockdowns in China have created the proverbial slow-motion car wreck for the world economy. All three will come home to roost for the world’s major markets in 2023.

What will happen?

Just as the result of these failures in leadership is eminently predictable, the impact on businesses in transition is equally plain.

  1. Company valuations will decline. Inflated multiples fueled by low interest rates for leveraged buyouts have already disappeared. If you are planning your retirement around the value of a year or two ago, it is time to reassess.
  2. A corollary to declining multiples will be a lack of financing. Market conditions directly impact the availability of acquisition funding. Already, Wall Street has seen a 90% drop in IPOs.
  3. Running a business will get tougher for some time. The ”Great Resignation” is actually only half driven by increasing worker mobility. The other half is from Boomer retirements. As employees seek a counterbalance to inflation, staffing will be an even bigger issue than sales volume.

Many owners will look back at 2022 as the year they finally decided that enough is enough. Owners overcame the dot-com crash, 9/11, and the Great Recession. Now a combination of resurgent inflation, supply chain headaches and a lack of qualified workers will tip the scales toward developing an exit strategy.

What can an owner do?

Lower valuations call for creativity in structuring transactions. Employee buyouts and ESOPs that maximize the benefits of sustainable cash flow can provide owners with income that wouldn’t be available from a hard-negotiated third-party sale.

Seller financing or installment sales may offer flexibility that brings more qualified buyers to the table. Stretching out proceeds as recurring income can help a seller wind up with more in his or her pocket, albeit over a longer time period.

Retaining your top talent will be more important than ever, especially if wages continue to rise. Structured equity sales can act as both an incentive and “golden handcuffs” to ensure that a company’s best employees, and consequently its enterprise value, remain intact through dips in revenue.

Prepared for 2023

Many owners were lulled into a false sense of security by frequent calls from business brokers and private equity groups. They may have postponed their planning in the belief that a transition could always happen whenever they felt the urge.

When the phone stops ringing, they will need cooler heads to help them understand that there are options besides a fire sale. Equity can be retained, and retirement can be secured. Work with an advisor who understands the alternatives to “List it and they will come.”

Companies will still be sold in the coming year. Prices may be lower, but are only falling from the unrealistic high driven by cheap money. It may feel like you are getting less than market value, but multiples have only receded to their historical mean.

If this is the year for you to begin your “second act,” it’s still the same approach as it was before. Being prepared for 2023 is a matter of researching the market, planning the process, and hiring qualified professionals.

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