Managers and top-level executives who bowed out of corporate positions in some of the region’s large automotive companies face a cascade of financial decisions. Primarily, how will they spend a significant buy-out check?
“Some of these severance payments are five or six figures not your typical two-weeks pay for every year of service,” points out Craig Johnson, president and CEO, Franklin Bank in Southfield, Mich.
Designed to secure the future, it may be the largest lump sum these executives have ever received. The most responsible decision is to not rush into any investment or spend without a solid plan.
Here, Johnson discusses how this new-found population of business investors can plan their next career steps wisely to maximize a severance windfall.
What is the first step for individuals who are starting over with a severance check?
Put the money in the bank, take a deep breath and don’t rush into anything. Regardless of the size of a severance check, this payment is a one-shot deal. It’s a single installment meant to sustain you for some time until you convert it into a money-making opportunity. You will not compound its value unless you investigate conservative, profit-bearing opportunities that will set the stage for a new career, or at least generate revenues to cover your cost of living and then some.
Of course, this is easier said than done. The first thing you should do is meet with your banker and trusted advisers and discuss how to move forward with your limited, though generous, allowance. You may choose to use this money to go back to school and learn skills to begin a different career. You may decide to purchase a franchise operation or existing business.
What business purchase opportunities are conservative options that would secure a new long-term career?
If you believe you are suited to own a business, there are a few different routes you can take to fulfill this goal. You can launch a company or start up a new franchise. These are risky ventures, and any entrepreneur will tell you that ‘square one’ is a tough place to be if you expect a steady future.
If you want to own a business, and play it quite a bit safer, investigate existing franchises and already established independent businesses for sale. When seeking franchise opportunities, research the parent company’s track record. What type of support will the parent company provide in terms of training, marketing and other business functions? Find out what type of revenues you can expect, average sales volume and the price of franchise fees. How much of the profit will you really take home? An existing franchise location for sale is a much safer investment than starting up a brand new store. The same rules follow for independent businesses.
What will the bank expect before it will back new business investments?
First, you should surround yourself with a team to assist in the purchase process. That team should include an attorney, a CPA and a banker. A banker certainly can refer you to professionals who will assist in the business search and purchase process. This is not like real estate; you’re buying a business history with ups and downs. You want to make sure you purchase a company with a clean slate.
Your banker will expect you to collect copies of the business’ last three to four years of tax returns. You’ll need interim financial reports, information on customers, and accounts payable and receivable agings. You should conduct a thorough tax search to be sure the company is not on the IRS’ ‘wanted’ list. You can ask your CPA to investigate this. You must obtain an employee list, and learn whether there are employee or union contracts.
Is business ownership a smooth transition for a former executive?
Not always. And this is another matter we discuss with those who served in a management capacity and now want to try their hand at being the owner. It’s a different show when you own a franchise business. Your employees will not work in the same corporate structure, and your function will be vastly different than it might have been in a ‘baklava’ corporation with numerous layers of management. Are you ready to carry the burden of an entire business’ success? Not everyone is. But if you express a tireless entrepreneurial spirit you are motivated to create a career for yourself and others then buying a business might be the best investment you can make with that severance check. A proactive banker will help you during this self-evaluation by asking the tough questions.
CRAIG JOHNSON is president and CEO of Franklin Bank in Southfield, Mich. Reach him at email@example.com or (248) 386-9860.