The majority of people are right to thing that one should take special care for things of great importance and value, primarily those that put us in a lot of debt, such as our home mortgage. Usually a regular family is unable to deal with their mortgage payments should the breadwinner pass away. As a result, mortgage life insurance is a really sensible solution. The idea is worth considering, but so are its drawbacks.
Mortgage life insurance is a decreasing term policy. What this means is that the amount of your insurance is reduced yearly along with the mortgage you own. While the premiums are still the same the real cost of your insurance rises as the insurance decreases. It is possible to deal with it by means of a level term policy. You can buy level term for 10, 15, 20, 25, or 30 year terms. There is a strong competition among insuring companies and the increasing life expectancy have made level term as affordable as decreasing term. If a death occurs in the later period of your mortgage there would funds remaining for other expenses after paying off the mortgage.
Mortgage life automatically names the lender as the beneficiary. It may not be in the best financial interest of the beneficiary to have the mortgage paid off. What if, for instance, the insurance proceeds could be invested in a way which would provide more interest than what is currently being paid out in mortgage interest? What if someone faces more current financial issues than paying off the mortgage? A level term policy with a designated beneficiary allows the customer to have control of the death benefits and makes it possible to decide whether or not to pay off the mortgage.
After you have completed the Partner Compatibility Analysis, you are ready to begin the Plan step of the PDCA cycle again. The questions then become:What do you plan for? Do you need to discover more partners? Can you select a partner from the present list? Do you need to go back and interview some of the prospective partners again because some clarifying questions may have been introduced?
Once you’ve selected your partner and have agreed to participate in an initial activity, it’s time to do a process observation check with each other.How did your process work? Are you both feeling good about how you formalized the commitment to participate? Did the exercise build trust between you? Did you communicate well with each other? Was each party open and direct?
If you are satisfied with the commitment to participate, you are now ready to move to the next Stage of Partnership Development: Initiate. If you’re not satisfied, you need to plan the next step. Do you want to approach the partner again and address the commitment to participate? Or should you go back to the Explore stage and look for a different partner?
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Contact your list of potential partners. Ask to set up a meeting with them. Tell them what you are hoping to accomplish. I encourage my clients to be as straightforward as possible. Remember: How you act in the initial meeting will form the mental map your partner will carry for some time to come. Tell the potential partners what you need. Explain how you think you can work together to fill that need. Ask them about their needs and discuss whether you are in a position to satisfy them. It could be as basic as: “I’m a manufacturer and need a product to sell; you have a retail business and want products that will draw customers.” It’s not complicated. Getting down to basics helps identify the core needs of each partner and clearly shows how the strategy of partnering can help both parties achieve their goals.
After you’ve interviewed all your potential partners, complete the Partner Compatibility Analysis. What does it tell you? Is there one potential partner who meets more of your requirements than others? Are there no potential partners? Do you need to go out and look for others to interview? Continue to contact and review potential partners until you’ve found one who meets all your criteria. Once you have identified it, you need to ask whether it views the partnership as a mutually beneficial idea. Can it commit to engaging in the initial activity with you?
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The first step is to determine the type of partnership you want. To close the gaps you identified using the Needs Assessment, ask yourself the following questions:
- Do I have a natural partnership?
- Do I need to partner internally before partnering externally?
- Do I need technical, distribution, marketing, development, sales, or other expertise?
- Do I have a partnership with my employees or their union?
Now that you have determined the type of partnership you need in order to close the gap, make sure that you’re clear about the need you want your partnership to fill. Brainstorm a list of potential partners who could fill your need best. Complete a Potential Partner Matrix (like the one in Table 7, p. 217) to help you narrow your list of potential partners. Determine the criteria you’ll use to identify these partners. Once the potential partners have been identified, think about how you want to approach your partner to ask for a commitment. In general, it’s best to come right out and ask for the commitment. If your partner is ready, he or she will already be thinking about the partnership and will be grateful you popped the question.
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Here your buyers could be competitors from your industry sector, larger institutions, or VCs. These buyers could be looking at your business not as a stand-alone entity, but one that has attractive synergies with (or addons to) their existing business. These synergies or add-ons could come from such things as gaining access to your customers, contracts or geographic market; adding your products to their own; taking over your management and staff (see below); or merging your overheads with theirs.
Where your target buyer is a larger institution, you could have a dilemma with regard to what you should do about senior management. In some cases, the institution will wish to acquire sales turnover only and will strip away most of the overhead of the target business, including most of the staff. In this case, having senior management in your business will be an impediment to sale, because the purchasers will not wish to take them over and incur the cost of redundancies.
On the other hand, some institutions might wish to keep your business as a stand-alone entity, thus relying on its senior management to keep it operating efficiently. In this case, not having senior management could be an impediment to sale! The only answer to this is to try to find out in advance who, specifically, your buyers might be. In many closely-knit industries this is not too difficult. For example, if you have an optician’s business you might be aware that the most likely purchasers of your business are franchise groups who are looking for operations like yours with a view to converting them into franchisees. In this case, it is obviously worth your while to establish in detail what these groups are looking for in target businesses (both with regard to management structure and, perhaps, gross margin levels) and then to tailor your business specifically with these buyers in mind.
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Generally, a trade sale buyer will be looking either for:
- a business from which to earn a living (and make a capital gain); or
- an investment from which to earn a return, either on its own or to add to an existing operation.
Those who are primarily looking to make a living from the stand-alone business are usually considered to be financial buyers, whilst the investors with wider aims are usually considered to be strategic buyers.
From the seller’s point of view the key issue is to discover what particular aspects of your business will assist buyers to achieve their aims. For example, is it your particular products that a strategic buyer wishes to add to his existing business that will make your business attractive to him, or your customer base, or the geographic area in which you operate?
Financial purchasers are usually individuals who wish to run the business full-time as owner/operators; or investors who will not, necessarily, wish to put all their time into managing the business. In either case, they will usually require that key senior management remain in the business after transition. Where you believe that you are likely to sell to a financial buyer, it is important therefore that you:
- ensure that you have competent senior management in your business well before you exit; and
- put in place retention strategy procedures (for example, a bonus or profit sharing scheme) that improve the likelihood that these managers will stay in the business after transfer.
Also, many individual financial buyers are not very sophisticated when it comes to accounting, so for these buyers your accounts should be presented in a straightforward manner.
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At this stage partners begin defining how the partnership will affect them. Since the idea is still an unknown quantity, many will feel anxious and insecure. This is a good time to begin practicing some of the partnering skills. Think about the Six Partnering Attributes. Examine your personal feelings about the unknown. Explore your vision of the future. Talk about the changes and ask for insights into what will build trust between the partners and help you feel confident about the commitment.
You have decided that you are ready to incorporate the strategy of partnering to help you achieve your goals. You understand, having conducted a systemic needs assessment, how the organization’s vision, values, ethics, and culture affect its mission, strategies, processes, products, and services. Now it is time to go exploring for a potential partner.
You will now need to decide what type of buyer you are targeting and what these buyers are likely to be looking for in your business. It will help if we establish some basic concepts and definitions about buyers in trade sales.
Trade sale buyers are usually divided into two groups, called ‘financial’ and ‘strategic’ buyers. Financial buyers consist ofowner/managers and those wishing to operate the business on their own. Strategic buyers are institutional and other buyers who look to take over, or merge the target business within their own operations. The strategic buyer classification also applies to what are known as ‘industrial partners’, or a ‘big brother’ from your own industry.
Disposals though a trade sale can be for all, or a majority, or minority part of a business. Minority sales in the UK are often to venture capitalists (known as VCs), or private investors (who are often known as ‘Business Angels’). Majority sales could be to strategic buyers or industrial partners.
You should also be aware that a strategic investor (who could be a public company) is likely to take a very long-term view of its purchase, whilst the financial purchaser could have a short-term exit strategy.
It is usual for VCs and Business Angels to take minority stakes in businesses, and rely entirely on senior management to run the business. Here your approach might be to partly exit the business as step one in a two-staged exit plan. Your first step could be to sell a minority interest to investors and remain in the business as CEO for an agreed period. Step two could be to sell the balance of the equity to the investors after you have groomed a senior manager for the CEO role. Alternatively, the investors will have their own exit strategy, which could be for a sale of the whole business through a flotation, or through a secondary buy-out (that is, a sale to another VC), thus ensuring that you fully exit the business at this stage.
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Where you have built up large stocks that will make it difficult for you to receive a fair market price for your business, you might need to start selling off stock at least five years prior to your planned sale.
Business premises
If the problem is leased premises that are unfavourably situated or unsuitable in any other way, early action will need to be taken depending on the amount of notice required to quit.
Large turnover of key staff
This can be a complex issue and you need to undertake a broad review. Some of the issues you could consider include the following:
- Examine your pay structure compared with your industry as a whole.
- Do your competitors have employee share acquisition schemes in place?
- How does your in-house pension scheme compare with those of your competitors?
- How good is your working environment?
- Do key employees have a clear understanding of their promotion prospects?
- Do you communicate with key employees about such things as business strategy?
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Your team members can help you update your market rent information. Management company and broker contacts will be particularly helpful. I must emphasize, however, that to be successful in this business, you need to know this information on an ongoing basis. You can see from the example above how quickly a small $35 rent difference can result in loss of cash flow and loss of value. This is a business you’ll want to stay on top of.
Now that you know the importance of maximizing the future po¬tential income of the property, you’re probably wondering how you accomplish it. There are two ways:
• You re-rent vacancies at the market rent (retail).
• You renew your current resident leases at the market rent (retail).
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The majority of people are right to thing that one should take special care for things of great importance and value, primarily those that put us in a lot of debt, such as our home mortgage. Usually a regular family is unable to deal with their mortgage payments should the breadwinner pass away. As a result, mortgage life insurance is a really sensible solution. The idea is worth considering, but so are its drawbacks.