September 17, 2020

How Businesses Can Add Value to Recover from COVID-19

If you’re like most business owners, the first quarter of the year was progressing like any other. Then, suddenly a world-wide pandemic hit. As the world started shutting down, some businesses had to start closing their doors and rethinking their sales strategies. Perhaps you’ve stabilized your company, or you might still be experiencing the worst of it. Either way, you’re probably a different person and business owner as a result of this pandemic.

While we all hope for a quick return to pre-coronavirus activities, it’s hard to estimate when that will happen. Below we discuss two constructive options business owners can consider to help overcome the virus stress.

Option #1: Rebuild a More Durable Business

Another constructive reaction to this crisis is to commit to building a more durable business that can better withstand shocks to the system in the future.

Option #2: Sell

Many owners—especially those that experienced the brunt of the 2008–09 global financial crisis—have been so traumatized by this pandemic that they don’t have the stomach for another disaster. As a result, they’ve decided to start planning their exit proactively. 

How to Add Value

If you find yourself choosing to rebuild or sell, your immediate action plan will be the same. There are some things you can do now that will make your business more durable in the long term as well as more sellable:

  1. Focus on the products and services where you have a point of differentiation. You’ll have more pricing authority in the short term, have better cash flow, and be more attractive to an acquirer in the long run.
  1. Create recurring revenue streams that generate sales while you sleep. These can be in the form of service contracts, subscriptions or maintenance plans. Aim to get the majority of your revenue automatically.
  2. De-risk your business, ensuring you’re not too reliant on a single customer or supplier. 
  3. Create an employee handbook and systematize your processes to lessen your dependence on a key employee, or you calling all of the shots.
  4. Clean up your bookkeeping.
  5. Generate as much cash as possible from customers up front to create a positive cash flow cycle.

Speaking to an advisor about how this pandemic has impacted your business can be therapeutic and help pave a way forward, and Anders is here to help. Anders can help your business add value to build a more durable business coming out of the pandemic and help transition the business when you’re ready. Learn more about our Business Transition Planning or COVID-19 Business Recovery services or contact an Anders advisor below.

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July 28, 2020

How to Beat the Odds and Successfully Transition Your Family Business

If you want to find examples of failed family business transition plans, you don’t have to search very hard. Less than 30% of family businesses make it to the second generation, and a small fraction of those make it to third or fourth generations. While the odds may be against family businesses, a successful transition can and does happen with proper planning.

Potential Hiccups When Transitioning to a Family Member

Too often the founder of a family business stays in control too long and doesn’t involve the next generation in management decisions. Disagreements between siblings often arise when the second generation does not have insight into how their parents made decisions and their vision for the future. 

Other times, an unexpected illness or death accelerates the transition time from one generation to the other. The next generation may lack maturity and the skillset necessary to take over the business.

Creating a Successful Plan to Transition

Effective planning and implementation of a transition plan is key to making sure the family business survives and thrives. Future leaders should be designated and developed over time to give them the best chance of taking over the company. There are some steps business owners can take now to create a smoother transition.

Start the Conversation

Identify who will be part of the next leadership group and talk with them about it to make sure they see their future role in the company in the same way you see it.

Put Contingency Plans in Place

If a family member is unwilling or unable to run the business, is there a trusted third-party who can step in to fill the void, at least temporarily? Sometimes an outsourced CEO or other executive-level person can be brought in to fill a gap and help until the next generation is ready.  If you have a relationship with someone you think could fill a role like this, it may be worth discussing it with them now in case they are ever needed.

Begin Stepping Back

Involve the designated successors in decisions and start stepping away earlier than your retirement date so the next generation gets an understanding of what it takes to run the business. They get the benefit of having you available for guidance and support and can start to get comfortable with leading the company with a safety net.

Set Expectations

Establish responsibilities for siblings to help to control future disputes. Disagreements can always happen when siblings have competing goals and different management styles. However, when the first generation can lay out their vision, the sibling disputes can be lessened. Siblings have a plan to follow and can have some ideas to fall back on rather than struggle to find their roles and compete for the best way to move forward.

Put it in Writing

Document strategic plans, key relationships and other information that you know that would help in the transition. If you’re out unexpectedly, these resources can be invaluable and help prevent the successors from learning things the hard way.Planning for the eventual transition of the management of your business is key to the future success of the business. Having open, honest discussions with the individuals who will one day succeed you in the business can give your family business a greater chance of outperforming the current statistics. Anders Business Transition Planning advisors can help your family business configure a personalized plan to transition now or down the road. Contact an Anders advisor below to discuss your specific situation.

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July 2, 2020

Did You Miss the Perfect Time to Sell Your Business?

Stockholders have been on a rollercoaster for much of 2020. The market was chugging along pretty nicely, continuing its steady and calm rise we saw from 2019…then COVID-19 hit. The Dow Jones at one point lost more than 38% in less than 40 days. Followed by market uncertainty and wild swings, the average investor was left reeling. Valuations of privately held business have also been turbulent. For the second quarter of 2020, we expect to see the average profit multiple decrease for the first time in many years.  

Have I missed the opportunity to sell my business at the peak?

The answer to this question is: maybe. But should you care? Probably not. The thing many of us forget is that when you sell your company, possibly your largest asset and the biggest wealth-creating event of your lifetime, you have to do something with the money you make.

These days, that means you’ll have to turn around and invest your windfall into an asset class that is arguably somewhat bubbly in historical terms. The current stock market is unsettled. The price of residential real estate has been continuously growing in many major centers, but what will the future hold? The near-term expectations for commercial real estate are murky, with many companies realizing their workforce may not need the typical office space anymore.

How will all of these aforementioned realities affect your decision to sell or hold on to your business? Perhaps a look at recent history can shed some light on this difficult decision.

How does market timing affect the sale?

Let’s look at a hypothetical example. Two imaginary business owners are each running a company generating a pretax profit of $500,000. Rebecca sold her business during a down year, say 2015, for 3x her pretax profit. She would have walked away with $1.5 million pretax to invest in the stock market.

Now let’s imagine business owner Scott, who decides to try and time the market. Scott waited out the downturn and sold his business at the end of 2017 for 4x pretax profit, walking away with $2 million before deal costs. At first glance, Scott looks like the winner because he sold at the peak and got 4x profit instead of Rebecca’s 3x. But when we take a closer look, Rebecca would be better off today. Assuming she had invested her $1.5 million in the stock market, she would now have roughly $2.125 million based on the Dow returns for 2017 and 2018 of 13.4% and 25.0%, respectively. 

What should I focus on instead of economic timing?

Timing the sale of your business on the basis of external markets is often a zero-sum game, because unless you’re going to hide the proceeds of a sale under your mattress, you’re probably buying into the same market conditions from which you’re selling out.

A better approach is to optimize your business against the eight things acquirers look for when they buy a business, regardless of what’s happening in the economy overall. Those eight key drivers of company value are:

  • Financial Performance
  • Growth Potential
  • Switzerland Structure
  • Valuation Teeter-Totter
  • Hierarchy of Recurring Revenue
  • Monopoly Control
  • Customer Satisfaction
  • Hub and Spoke

To many business owners, these drivers, without explanation, seem confusing at best. To better understand their meaning and to find out how you score on the eight factors that drive your company’s value, we are pleased to offer access to the Value Builder questionnaire. Learn more about Anders Business Transition Planning or contact an Anders advisor to find out how to add value to your business before selling.

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March 3, 2020

How Business Owners Can Increase Company Value While Empowering Employees by Taking a Step Back

If a company finds itself in a position where customers always insist on speaking with the owner directly instead of an employee, it might be time to shift the company structure in order to improve the value of the business.

Here’s why: a business that can thrive without the owner at the center of operations is more valuable because processes can run smoothly with or without the owner. When an owner is too stuck in the weeds they become too vital to operations and employees don’t have the opportunity to learn and grow.

How to Take Steps Back

To maximize the value of a business, an owner should set a goal to quietly slip into the background and let the staff take center stage. Here are five ways to make customers less inclined to request direct communication with a company’s owner:

Re-rank

If the bio of key staff members is displayed on the company website, re-order the list so that it is alphabetical rather than hierarchical.

Re-brand

If a surname is in the company name, consider a re-brand. There’s nothing that makes a customer want to deal with the owner more than having the owner’s surname featured in the company name.

Hire a President

Giving someone the title of president conveys the message that they have real authority to solve customer problems.

Use an Email Autoresponder

Set up an automatic response when traveling or attending a strategic project and unable to answer questions immediately. This can train customers to direct questions to the person best suited to answer them quickly rather than only directing them to the owner.

Take note that continuing to answer customer emails after setting up an autoresponder could be perceived as just trying to hide behind an autoresponder, which could diminish credibility. If one is set up, it’s important to be ready to let others step in.

Play Hookey

Having the kind of business that customers visit in person can also have the owner more visible and allow clients to direct their interactions towards them. Setting up a home office allows owners to spend more time away from their location and can offer fewer distractions.

For a hard-charging A-type entrepreneur, the steps above can be complicated and feel counterintuitive. They may even have a short-term negative impact on a company’s sales. But once customers are trained to go to the team, the owner will then be able to scale up further and ultimately maximize the value of the business. The Anders Business Transition Planning Services Group can work with you on a personalized plan to help make transitioning your business easier when the time comes. Contact an Anders advisor to start the process.

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February 18, 2020

9 Warning Signs You’re a Hub-and-Spoke Business Owner

If you were to draw a picture that visually represents your role in your business, what would it look like? Are you at the top of a traditional Christmas-tree-like organizational chart, or are you stuck in the middle of your business, like a hub in a bicycle wheel?

Pitfalls of Being the Hub in Your Business

A hub-and-spoke model is only as strong as the hub. The moment the hub is overwhelmed, the entire system fails. Acquirers generally avoid hub-and-spoke managed businesses because they understand the dangers of buying a company too dependent on the owner. Below we describe nine warning signs of being a hub-and-spoke owner and some suggestions for pulling out of the middle of your business.

1. You sign all of the checks

Most business owners sign the checks, but what happens if you’re away for a couple of days and an important supplier needs to be paid? Consider giving an employee signing authority for checks up to an amount you’re comfortable with, and consider changing the mailing address on your bank statements so they are mailed to a P.O. Box, not the office. That way, you can review all signed checks and make sure the privilege isn’t being abused.

2. Your cell phone minutes are heavily weighted to employees

If your employees constantly need your assistance, it will show up in your cell phone activity because staff will be calling you to coach them through problems. Ask yourself if you’re hiring too many junior employees. Sometimes people with a couple of years of industry experience will be a lot more self-sufficient and only slightly more expensive than the greenhorns.

3. Your revenue is flat when compared to last year’s

Flat revenue from one year to the next can be a sign you are a hub in a hub-and-spoke model. Like forcing water through a hose, you have only so much capacity. No matter how efficient you are, every business dependent on its owner reaches capacity at some point. Consider narrowing your product and service line by eliminating technically complex offers that require your personal involvement, and instead focus on selling fewer things to more people.

4. Your vacations are spent working

If you spend your vacations dispatching orders or answering emails from your cell phone, it’s time to cut the tether. Start by taking one day off and seeing how your company does without you. Build systems for failure points. Work up to a point where you can take a few weeks off without affecting your business.

5. You spend more time negotiating than a union boss

If you find yourself constantly having to get involved in approving discount requests from your customers, you are a hub. Consider giving front-line, customer-facing employees a band within which they have your approval to negotiate. You may also want to tie salespeople’s bonuses to gross margin for sales they generate so you’re rewarding their contribution to profit, not just chasing skinny margin deals.

6. You close up every night

If you’re the only one who knows the close-up routine in your business, such as counting the cash, locking the doors, setting the alarm, then you are very much a hub. Write an employee manual of basic procedures for your business and give it to new employees on their first day on the job.

7. You know all of your customers by name

It’s good to have the pulse of your market, but knowing every single customer by first name can be a sign that you’re relying too heavily on your personal relationships being the glue that holds your business together. Consider replacing yourself as a rain maker by hiring a sales team, and as inefficient as it seems, have a trusted employee shadow you when you meet customers so over time your customers get used to dealing with someone else.

8. You get the tickets

Suppliers wooing you by sending you free tickets to sports events can be a sign that they see you as the key decision maker in your business for their offering. If you are the key contact for any of your suppliers, you will find yourself in the hub of your business when it comes time to negotiate terms. Consider appointing one of your trusted employees as the key contact for a major supplier and give that employee spending authority up to a limit you’re comfortable with.

9. You’re constantly Cc’ed on emails

Employees, customers and suppliers constantly cc’ing you on e-mails can be a sign that they are looking for your tacit approval or that you have not made clear when you want to be involved in their work. Start by asking your employees to stop using the cc line in an e-mail; ask them to add you to the “to” line if you really must be made aware of something – and only if they need a specific action from you.

Getting yourself out of the day to day business processes can be tricky. The Anders Business Transition Planning Services Group can work with you on a personalized plan to help make transitioning your business easier when the time comes. Contact an Anders advisor to start the process.

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November 5, 2019

4 Ways to Build Value in Your Business by Protecting Your Turf

Business owners always need to keep an eye on their competition and strategic moves they’re making. Large companies lock out their competitors by out-doing them in capital infrastructure investments, but smaller businesses must be smarter about how they defend their turf. Below we dive into four ways to build value around your business.

Differentiate

Is there a certification program, a special license or a unique service that could help differentiate your business? Being able to differentiate in the marketplace helps build your credibility and trust, which in return will build value.

Defend

Ecstatic customers act as defenders against other competitors entering your market. Make sure to be in touch with your client base. Understand why they are purchasing your products or services. Make sure your customers are happy in order to assistance in defending your turf.

Integrate

Is there a way you can get your customers to integrate your product or service into their operations? Try hosting workshops to train customers on how to use what you are selling in their everyday life. This makes your product or service more integrated and more difficult to switch in the future.

Become a Verb

Think back to the last time you looked for a recipe. You probably “Googled” it.  Part of Google’s competitive shield is that the company name has become a verb. Now every time someone refers to searching for something online, it reinforces the competitive position of a single company. Is there a way you could control the vocabulary people use to refer to your category or specialty?

Protecting your business’ turf is a virtuous cycle: differentiation leads to having control over your pricing, which allows for healthier margins, which in turn lead to greater profitability and the cash to further differentiate your offerings. The Anders Business Transition Planning Services Group can work with you on a personalized plan to help build your company value. Contact an Anders advisor to start the process.

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September 17, 2019

Powerful Ratios to Start Tracking Before You Sell Your Business

Baseball’s leadoff batters measure their “on-base percentage” – the number of times they get on base as a percentage of the number of times they get the chance to try. Businesses utilize their debt-to-equity as a leveraging ratio. Acquirers also like tracking ratios and the more ratios you can provide a potential buyer, the more comfortable they will get with the idea of buying your business. If you’re planning to sell your company one day, below is a list of ratios to start tracking in your business now.

1. Employees per square foot

By calculating the number of square feet of office space you rent and dividing it by the number of employees you have, you can judge how efficiently you have designed your space.  Commercial real estate agents use a general rule of 150–200 square feet of usable office space per employee.

2. Ratio of promoters and detractors

Bain & Company and Satmetrix developed the Net Promoter Score® methodology, which is based around asking customers a single question that is predictive of both repurchase and referral. Here’s how it works: survey your customers and ask them the question “On a scale of 0 to 10, how likely are you to recommend (insert your company name) to a friend or colleague?”  Figure out what percentage of the people surveyed give you a 9 or 10 and label that your ratio of “promoters”. Calculate your ratio of detractors by figuring out the percentage of people surveyed who gave you a 0–6 score. Then calculate your Net Promoter Score by subtracting your percentage of detractors from your percentage of promoters. The average company in the United States has a Net Promoter Score of between 10-15%.

3. Sales per square foot

By measuring your annual sales per square foot, you can get a sense of how efficiently you are translating your real estate into sales. Most industry associations have a benchmark. For example, annual sales per square foot for a respectable retailer might be $300. With real estate usually ranking just behind payroll as a business’s largest expenses, the more sales you can generate per square foot of real estate, the more profitable you are likely to be.

4. Revenue per employee

Payroll is the number-one expense for most businesses, which explains why maximizing your revenue per employee can translate quickly to the bottom line. In a 2017 report, Business Insider analyzed technology companies. Apple enjoys one of the highest revenue-per-employee ratios, at $1,859,000 per employee, followed by Facebook at $1,621,000 and Google at $1,253,000. The benchmark for this ratio can vastly change depending on the industry of your business. More traditional people-dependent companies may struggle to surpass $100,000 per employee.

5. Customers per account manager

How many customers do you ask your account managers to manage? Finding a balance can be tricky. Some bankers are forced to juggle more than 400 accounts and therefore do not know each of their customers, whereas some high-end wealth managers may have just 50 clients to stay in contact with. It’s hard to say what the right ratio is because it is so highly dependent on your industry. Slowly increase your ratio of customers per account manager until you see the first signs of deterioration, such as slowing sales or a drop in customer satisfaction. That’s when you know you have probably pushed it a little too far.

6. Prospects per visitor

What proportion of your website’s visitors “opt in” by giving you permission to e-mail them in the future? There is no such thing as a typical opt-in rate, because so much depends on the source of traffic. The key is rather than benchmarking yourself against a competitor, you benchmark against yourself by carrying out tests to beat your site’s current opt-in rate. You could reward visitors for submitting their e-mail addresses by offering them a gift they’d find valuable. Information products – such as online white papers, videos and calculators – make ideal gifts, because their cost per unit can be almost zero.

7. Prospects to customers

Similar to prospects per visitor, another metric to keep an eye on is the efficiency with which you convert prospects – people who have opted in or expressed an interest in what you sell – into customers.You should monitor the rate at which you are converting qualified prospects into customers, and then carry out tests to identify factors that improve that ratio. The trick is to establish your benchmark and tinker until you can improve it.

Acquirers have a healthy appetite for data. The more data you can give them – in the ratio format they’re used to examining – the more attractive your business will be in their eyes. Learn more about Anders Business Transition Planning Services, or contact an advisor to discuss how we can help your business become more marketable.

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August 20, 2019

How to Retain Clients When Transitioning Your Business

Have you ever received a “Dear John” letter abruptly ending a relationship? It probably felt sudden, impersonal and maybe even unexpected. Unfortunately, some business owners send the same type of cold correspondence to their clients when transitioning their company. This type of approach can affect the relationship and ultimately cost the business money.

Why the Approach Matters

I recently received a letter in the mail from my dentist, who has been my provider for over seven years. I knew he was getting up in age and was eventually going to retire, but I was still shocked by the generic letter that immediately came after my last visit. Addressed to “All My Valued Patients,” it made me truly wonder how valuable I was to his practice. Don’t get me wrong, he wasn’t getting rich off my routine cleanings, but to not tell me himself only a few days before while I was sitting in his office?

Keeping an Eye on Customer Satisfaction

The letter stated that my dentist had sold his business to another practitioner, who I don’t know and am not willing to blindly follow. Since the practice will most likely lose my business because of how the transition was handled, I started thinking about how they could have handled the situation better.

I reached out to one of my colleagues who specializes in selling and merging dental practices and his insight shocked me. He told me that a typical transaction between retiring or merging practices loses 30-40% of their patients when a transaction occurs. After doing further research, I found out that typical “rules of thumb” for dental practice valuations were 60-70% of annual sales, which falls in line with what my colleague told me. Can the sales price get better? What about a valuation of 100% of sales? How could we increase the value of the practice?

A Better Way to Communicate Your Transition

What if your business could guarantee that a vast majority of your customers will stay after a transition? Communication can help create a smooth and seamless transition in the eyes of the customer. Keeping the customer satisfied will encourage them to stay with the practice and increase the value of the business.

How can you better communicate a transition to keep your customers satisfied? First, start preparing early. Knowing that an owner is going to transition within a certain period of time, start communicating to your customers 12-18 months down the road. Make a soft introduction to either the next generation, key employees or the new acquirer at an appropriate point in time.

Consider having a transition period where you work beside the new owner, or owners, to create a new comfort level with your clients. This show customers that the level of service and care will not waiver with a change in ownership.

Taking a few small steps can add more value to your client relationships and ensure upwards of 40% of clients don’t walk out the door on day one following a transition. Contact an Anders advisor to find out how our Business Transition Planning Services Group can help your company implement approaches to retain clients and add value.

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July 30, 2019

Selling Your Business to a Financial Buyer or a Strategic Buyer

If you decide to sell your business to an outside acquirer, you’re going to have to decide between a financial and a strategic buyer—understanding the different motivations of these two buyers can be the key to getting the best price for your business.

Financial Buyers

Financial buyers are mostly considered to be investors who are interested in acquiring your future earnings stream. They are willing to invest in almost any type of business or any industry as long as the company is generating a cash flow stream that is attractive to them. Because financial buyers are usually investors and not operators, they want you and your team to stick around, so they rarely buy all of a business. Instead, they buy a chunk and ask you to hold on to a tranche of equity to keep you committed.

They will value your business based on the amount of earnings it is likely to make and how reliable that earnings stream is. The buyer will be willing to pay more for your company if you can show them a consistently high earnings stream.

But there is a limit to how much they will pay, because financial buyers are playing the buy-low, sell-high game. They do not have a strategic rationale for buying your business and they are simply trying to get a return on their investors’ money. They tend to buy small and mid-sized businesses using a combination of this investment layered on top of a pile of debt, and they want to buy your business as inexpensively as possible with the hope of flipping it five or ten years down the road.

Strategic Buyers

A strategic buyer is usually a larger company in your industry and they are valuing your business based on what it is worth in their hands. They are wanting to acquire your company to either expand horizontally or vertically, to eliminate the competition, or to acquire some intellectual property. They will try and estimate how much of their product or service they can sell if they added you into the mix. Because of their size, this can often lead to buyers who are willing and able to pay much more for your business.

Choosing the right buyer for your company depends on what you want out of the sale. Do you want to retain some control in the company? Do you completely want out and are looking for the highest price? The Anders Business Transition Planning Team can help you decide what type of buyer is best for you. Contact an Anders advisor to discuss your options.

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June 25, 2019

How More Vacation Time Can Lead to a More Valuable Business

Now is the perfect time to head out to that overdue vacation. Americans in general, and especially business owners, take less time off compared to those in many other countries. Even when we do leave for vacation, many of us are still checking emails and bringing our laptops to squeeze in some work. In addition to the health benefits of taking some time off from work, your business could also benefit.

Running on Autopilot

A recent survey by The Value Builder Score found companies that would perform well without their owner for a period of three months are 50% more likely to get an offer to be acquired when compared to more owner-dependent businesses. The better your company runs on autopilot, the more valuable it will be when you’re ready to sell.

To gauge your company’s ability to handle your absence, start by taking a vacation. Leave your computer at home and hide email notifications on your phone. Upon your return, you’ll probably discover that your employees got resourceful and found answers to a lot of the questions they would have asked you if you had been just down the hall. That’s a good thing and a sign you should start planning an even longer vacation.

You’ll also likely come back to an inbox full of issues that need your personal attention. Instead of finding answers to each problem in a frenzied attempt to clean up your inbox, slow down and look at each issue through the lens of a possible problem with your people, systems or authorizations.

Identifying and Fixing Issues

People

Start with your people and answer the following questions:

  • Why did this problem end up on my desk?
  • Who else is qualified to answer this question and why was that person not consulted?
  • If nobody else is qualified, who can be trained to answer this question in the future?

Systems

Next, look at your systems and procedures. Could the issue have been dealt with if you had a system or a set of rules in place? The best systems are hardwired and do not require human interpretation; but if you’re not able to lock down a technical fix, then at least give employees a set of rules to follow in the future.

Authorizations

You may be a bottleneck in your own company if you’re trying to control spending too much. Employees may know what to do but do not have any means of paying for the fix they know you would want. For example:

  • Putting in place a customer service rule in place that gives your front-line staff the authority to make a customer happy in any way they see fit provided it could be done for under $100
  • Allowing an employee to spend a specific amount with a specific supplier each month without coming to you first
  • Giving an employee an annual budget for an amount they can spend without seeking your approval

Given the fires that may need to be extinguished after the fact, taking a vacation may seem more of a hassle than it’s worth. But if you transform the aftermath of a vacation into systems and training that allow employees to act on their own, you’ll find the vacation is worth what you paid for it many times over: your company will increase in value as it becomes less dependent on you personally.

The Anders Business Transition Planning Team can help you get the systems in place to help you get out of the office. Contact an Anders advisor to learn more.

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