Protecting Value

Human Capital a.k.a. Key People – Who are they, how should you treat them and why?

By John Chionchio – Financial Advisor, Northwestern Mutual

First things first. Why should you be concerned about Key Person planning, and when? After all, you got this far without it and things are okay.  If the “going concern” value of your business is something you’d prefer to keep, grow and eventually receive, exploring the cost/benefit of Key Person planning should be a part of your business plan. Typically, there are three primary motivations in a closely-held business to plan for key people.

  1. Financial

    1. To maintain the financial health of the business no matter what may happen to Key People

    2. To preserve the value of the business

    3. To maintain focus on accomplishing the business plan rather than dealing with crisis

  2. Lifestyle - to maintain the desired lifestyle of the owner(s) and Key People rather than risking “double-timing”, burnout, poor quality of life or all of the above.

  3. Retention of Key People – you can’t make them stay, but you can make them want to stay

Who may be a Key Person in a privately-held business? Often, it’s more than just the rainmaker, the owner/CEO and other owners. Let’s take some Key Person inventory. Key people may be:

  • Anyone fundamental to the continued success of the business

  • Someone who would be significantly more costly and/or take a long time to replace due to

    • No local talent available

    • A unique, organically grown skillset

    • Someone doing the work of two “normal” employees

  • Someone fundamental to maintaining the company culture

Why do key people leave an organization? There are three main circumstances that typically cause the loss of Key People:

  1. Death

  2. Incapacitation – sickness or injury

  3. Disinterest -  in continued employment either by the Key Person or the company

Death and incapacitation are easily planned for if the Key Person is insurable for life and disability. Insurance monetizes these Key Person risks. Like so many other decisions business owners get paid to make, you get to choose to either consciously roll the dice or to eliminate the risk in exchange for the premium.

There is no insurance for disinterest. It must be planned for in other ways. There are two main tools to do this.

  1. Incentives -  provide financial motivation, in some greater way than for non-key people, for a Key Person to stay for the long term, usually in exchange for non-disclosure, non-compete and non-solicitation agreements.

  2. Retained earnings - basically “self-insurance” to handle disinterest departures that are beyond your control.

There are tools to simultaneously accomplish both of these planning goals in very tax-efficient ways, often cash flow neutral to the company. But, like so many other business planning strategies, the most powerful tools are medium and long term by nature. Quick fixes late in the game are almost always more expensive, less effective and often unavailable.

So, you’ve worked hard, survived start-up, attracted some talented people and created a business with significant value. Things are okay. Congratulations! Consider Key Person planning to continue growing your business with confidence and to raise the probability of one day returning the value you have created to your personal balance sheet.


Protect your business. Keep your people. Create a market.      

By John Chionchio – Financial Advisor, Northwestern Mutual

How important is it to you to be able to leave your business when you want, how you want and to receive fair market value for it? What are you doing to make that happen, or are the daily operations of your business occupying all your time?

Who will buy your company when you’re ready to exit? Will it be someone who currently works for the company, a group of employees, family? Will it be an investor? Will that investor be a financial buyer or a strategic buyer? What planning should you be doing to help ensure a market for your business? How many years in advance should you start planning for a successful exit?

Compared to your other financial assets like your home, your retirement accounts and other investments, how important is the value of your business? At what point should you protect the value you’ve created in your business? How do you protect this value in anticipation of returning it to your balance sheet one day?

Are there people other than you in your business who are critical to its growth and success? What are you doing to keep them? How would it affect your exit plan and your lifestyle if they left, perhaps to one of your competitors? Are there ways, other than competitive pay and benefits, to help make sure they stay?

When you put on your CEO hat, how do you feel about these issues? What is your gut telling you? Selling your business is likely to be the largest financial transaction of your life! These are critical issues to successfully selling your business so it may better serve your life, as you envisioned when you decided to start it. Achieving that balance of working “in” your business vs. working “on” your business is often difficult for entrepreneurs, but critical to getting the most from your hard work, risk and investment. Some of the most successful owners of private businesses realize their core values to their business lie elsewhere and seek an experienced team of advisors to help with these critical “ownership” issues.

An experienced team of advisors can help you address these issues in a time-efficient manner so you can continue to build your business with confidence. The most powerful strategies to protect your business, to keep your key people and to create a market for your business are longer-term in nature. Strategic planning is a process, not an event. The biggest mistake of all is waiting to start.

You probably wouldn’t take a driving vacation to a new place without getting out the map and planning a route. Why would you have a grand vision of owning a business, and of all the wonderful things it could do for your life, and not have the route planned to get you there with confidence? Planning vacations is fun and rewarding. They say retirement is the longest vacation of your life. Are you well-planned for it?


What’s on your balance sheet? What’s Lost in Space? Why should you care?

By John Chionchio – Financial Advisor, Northwestern Mutual

Starting, growing and operating your own business keeps entrepreneurs busy. So busy, in fact, that some important “business ownership” issues are often overlooked or unattended. What issues? How important?

Have you ever had your business valuated (not the hard assets, but the going concern)? Think of your business as a box with a crank on the side and a slot on the front. You operate your business (turn the crank) and, eventually, money spits out the slot. Once your business has a track record of consistently spitting out money, it has value.  The more it spits, and the more consistently it spits, the more it’s worth. You have no doubt invested a great deal of blood, sweat, tears and money to build that profitability and value. Have you ever thought about how to realize this business value on your personal balance sheet?

The most obvious way is to stop re-investing all the profits for growth. Once your business has survived the initial growth phase, most entrepreneurs are anxious to take more out of the business toward their lifestyle goals. But what about the value of the box itself? You may have a number for this on your personal financial statement, but it’s not real until you successfully sell, and get fully paid for, your business. Until then, in spite of all your hard work, it’s truly lost in space.

When you invest in a publicly traded company by owning stock, getting an acceptable return can be as simple as waiting until the market is good and making a phone call to your broker to sell your shares. However, when you own part or all of a private business the game changes – dramatically! Starting, growing and operating your business has likely been one of the most significant accomplishments in your life. Selling your business is likely to be the single most significant financial transaction of your life! What percentage of your net worth is tied up in your business? What can you do to be more certain of getting a fair price for your privately-owned business?

  • Have you ever been advised about the four fundamentals required to maximize the sale price of a privately-held business?

  • Does your business plan include accomplishing these things?

  • Is your business likely to be attractive to a financial buyer or a strategic buyer?

  • Do you know how many years it typically takes to set your business up for a successful exit?

  • Do you have an advisor relationship to help get these things right and make it time-efficient for you?

  • How important is it to you to get full value for your business and exit on your terms?

Whether you envision a third-party sale, an inside transfer to a group of key employees or transfer to family, it takes sophisticated planning by a team of experienced professionals to get it all right and create a high probability of success. It also takes a proven process that is time-efficient for you or the likelihood of success drops like a rock.

The bottom line is this, if you envision exiting your business within the next ten years, wake up to these realities of “ownership” and find a team of experienced professionals to help you make it happen. The sooner you are aware of what needs to be done, the sooner you can implement powerful strategies to accomplish your goal. Getting a rocket back to earth successfully doesn’t happen by accident. Neither does retrieving the value of your business that is currently lost in space.

Northwestern Mutual is the marketing name for The Northwestern Mutual Life Insurance Company, Milwaukee, WI (NM) (life and disability insurance, annuities, and life insurance with long-term care benefits) and its subsidiaries. John Hunter Chionchio is an Insurance Agent of NM and a Registered Representative of Northwestern Mutual Investment Services, LLC (NMIS) (securities), a subsidiary of NM, broker-dealer, registered investment adviser and member FINRA and SIPC.

John Chionchio

Financial Representative


To learn more about Northwestern Mutual Investment Services, LLC and its financial representatives, visit: FINRA BrokerCheck