Critical Questions That You Need To Answer If You Own A Business!

Building a business is hard work. Protecting and preserving it is even harder and overlooked by business owners.

While many owners expect family members to take over the business (69%), very few have actually made plans to make sure their wishes are accomplished (26%), even though they realize the importance of estate and succession planning as is an integrated part of that planning.[i]

A succession plan is complex, time consuming and involves attention to details along with many hard questions which need to be answered for a comprehensive and effective succession plan.  It is also the key element in maximizing the return on the investment of your business. This is the big financial payout, the sale of your business.[ii]

SOME MAJOR QUESTIONS AND ISSUES TO ASK YOURSELF!

What if a shareholder wants to sell their interests?

  • Is there a right of refusal for the other owners?
  • What are the financing arrangements?
  • What are the recourses if you fund the buyout especially if the funding is over a long period of time?
  • What is the arrangement if the business fails, how will you get your money if you financed the sale?

 Who steps in your shoes if you want out? 

Not everyone has the luxury of leaving a business when and how they want to.  Things like death, disability, and situations are uncontrollable.

  • What are your contingency plans when a trigger occurs (death, health, non-voluntary situations)?
  • Do other members of the firm have access and authorization to use funds to keep the business going if there is such an event?
  • Does your family take on personal obligations for financial notes and loans you have signed personally to fund your business operation?
  • Do you have estate documents and health care directives, should you have a disability or become incapacitated?

Taxes- and the planning for them Continue reading “Critical Questions That You Need To Answer If You Own A Business!”

The Story! The Cost of Funding Your Buy and Sell Agreement! Options!

The Story! 

The Cost of Funding Your Buy and Sell Agreement! Options!

Over many years I have experienced many business owners in total denial about the cost of funding their buy and sell agreements, thinking they can come up with the liability when the trigger of death occurs.

The four listed ways are compared below.

  1. Cash
  2. Borrow
  3. Sinking Fund
  4. Life Insurance

Let’s take the one by one.

Cash: This is assuming the company has the cash at hand, idle. Rarely is this an option. Growing companies reinvest in their company and only keep enough cash reserve as needed.

Borrow: A company just lost a valuable member of the company. Most bankers would probably want to see how the company will fair after the death of a key person and would want to know how the liability which has just been created will affect the cash flow of the company before loaning more money. There probably is a good chance that outstanding line be pulled in by the bank (probably a covenant in the loan agreement).

Sinking Fund: Mostly just theory! In 48 years, I have never seen a company try to develop a sinking fund. If the company was putting money in the sinking fun, they are losing the opportunities this money could create by investing in the business rather than on the sidelines. Not reasonable as the actual amount of money needed is available should death occur prior to the target date of accumulation. The least appropriate method.

Life Insurance: At its simplest benefits, it is immediate, tax free and the funding level is immediately known. Also, the cost is only 17 cents on a dollar rather than the much higher costs of the other three options.

Summary: While we don’t know when a death or disabilitymay occur, the company should at least be prepared for this trigger. Today the price of life insurance is low-cost. There is no reason not to purchase at least temporary life insurance (10-30 years), such as term insurance. The cost of life insurance in the example is using cash value life insurance.  Increased Sales To Fund Cost: Another measure of effectiveness of funding the buy and sell is to measure how much more in sales the company has to do to pay for the funding method.

Costs:  Funding over 15 years. 

Cash; 1,039,464 Loan: 1,306,085. Sinking Fund: 901,613 Life Insurance:  171,512

Also, what do you need to have in sales to pay for the method: 

Example, with Life Insurance Cost, @20% profit, sales would be $857,560

With Cash: There would have to be $5,197,320

 

 

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Living the Dream

What People Are Saying About Tom!

Tom’s ability to plan a strategy and its implementation accurately and quickly have contributed immensely to the success of many clients over the past several decades. Tom goes out of his way to service clients. He made sure we understand the planning process and is extremely patient. His talents are that of an educator and planner. We benefit from his pragmatic approach to our business and personal planning needs.       Carl Bonamico, Liberty Bank Commercial loans

When Tom says he will do something, he does it. He’s a very dependable person and is extremely honest. He looks at all the options possible in your overall planning. If he sees something which doesn’t fit, he tells you. James W Cowan Jr. Life Planning Consultants

Tom has all the qualities that I look for in an advisor– Integrity, knowledge, patience and his follow-through can’t be equal.       Brent Berti, Reverse Mortgage Broker

 I have worked with Tom in the insurance and estate planning business for the better part of 25 years. I have always found him to be hard-working and extremely knowledgeable in his areas of expertise. I have full confidence that when I refer clients to Tom, he will be thorough, clear, and recommend the proper products to offer solutions to their problems.    David Isenstadt, owner New England Group Insurance

Tom has guided my business and personal finances for 35 years. He has always been honest, dependable and readily available. The Shredding Source has benefited greatly from his approach and talents as a business and benefit planner. I continue to avail myself of his proficiency and expertness through my retirement… William A. Young, The Shredding Source.. A Veteran Owned Company

 Having dealt with Tom for over 20 years I can say he is unique in his hands-on approach with his clients. With the Ebb and flow of individual finances, he always presented programs that make sense for the time and circumstance. I have faith in his approach and recommend him highly. Ronald Finocchio, Owner of The Shredding Source, A Veteran Owned Company

Tom is been invaluable to me and my clients in the areas of advanced life insurance and estate and business planning. He has extensive knowledge in this field and his ideas and solutions are creative.   Tom Maercklein, Insurance broker

Tom goes out of his way to understand his customers and their unique needs. Tom can listen to his clients, understand what it is that they truly need and want, then deliver to them a great solution.   I highly recommend Tom.   Joe Perrone, Co-Owner- New England Collision

Tom’s financial education has given us a path towards a rewarding future. This was especially important when we had a financial setback. Tom worked through it with us and took many meetings and financial input to put us back on a strong footing.  His confidentiality is above reproach and he is clearly a most compassionate man with the utmost integrity. We have considered him a friend for years now.  Wayne and Ginny Klinga, Owners of Park City Valve and Fitting, Bridgeport, CT

 We have worked with Tom for number of years and he has given us professional and well thought out assistance with our retirement planning. In addition, we have owned a business for over 30 years and the eventual sale of that business was a very important part of our plan as we moved on with our lives. We had to think about employees, timing of the sale, how best to accept and invest sales proceeds and how this stressful and most complicated process would fit into our retirement strategy. Tom worked with us on this important part of our plan not only with his own advice, but also steering us to literature written by experts to guide us on our journey. We always looked forward to and felt comfortable in our meetings with Tom. His constructive advice was a key part of our retirement transition. Frank and Diana Byrne, FORMER BUSINESS OWNERS

 

Good Luck You Are Now In Business! Now What?

Chances are that the moment you started your company you felt the need to be in charge of everything (the control thing).  Tasks such as ordering stationary, trips to Staples, talking to the utility company, dictating messages and a sundry of other things. You did pretty much everything including the bookkeeping, sweeping the floors and taking out the garbage. 

 You were proud of your new business and wanted to make sure it did well from the very start and in in every aspect of your business. Even if it meant you had to work 80 hours a week to keep it going to be successful.   

 Then you started to make more money, enough to hire employees to help you grow the business.  As you moved forward so did your business commitments.    Your mindset however, is control, just like when you started the business.   A natural reaction since you started and created your business, the tendency is to protect it, this is your baby! 

THE NEEDED CHANGE IN MINDSET! 

The problem comes when you have to change your mindset as an entrepreneur. When you started your business, you had a talent and believed that your talent could make you profit and grow your business. However, as your business and commitment to the business grows, there needs to be a new way of thinking on how you should run the business.  

 For example; I have a brother who is a great mechanic.   If he were to open his business, he would be the best mechanic you could find.  His work would be impeccable, and everyone would enjoy working with him.  However, the minute my brother had to start thinking strategically about how to lessen his working hours, grow new markets, start a branding campaign, hire people to do some of his tasks, he would become very stressed and would definitely lose interest in running his business.  He is a great mechanic but didn’t think about the other parts of running a business.  All he ever wanted was a place to go paycheckand a position. Little did he realize that it would take more than being a good mechanic to run a business.   He didn’t realize that some of the things he liked to do would have to take a back seat or be delegated to someone else, so he could focus on the details that will allow him to grow his business.    

Continue reading “Good Luck You Are Now In Business! Now What?”

Insider Transfers! Ready Or Not!

Transfers to and insiders group appears to be the most   traveled paths for succession planning by business owners today, which are being successfully used by business owners.  

This is the method by default because of the lack of essential value drivers and systems developed by the business owner.  Because of the lack of transferrable value, insiders are the key market for the business owner.   However, it is possible that even though the employees might have the capital to purchase the business, they don’t have the necessary ability to run the business without the owner.   Consequently, this scenario may lead to an inside sale at a depressed value, or the owner becomes a semi-passive owner.   

Typically, The Transfer To The Insider:   

In many situations, the employee will put very little money down, because they don’t have what is needed, or is unwilling to finance a large part of the sale.    The Owner usually will take back paper and finance the sales price.  Typically, the buyer will default because there is not enough cash flow to support the operating expenses and pay the note payment.  

Even with that scenario, there are many employers who take the path of transferring their business to key employees. Even though in many cases the arrangement is ill-fated, and the business will fail.    The actuality is the transfer to insiders is the exit path most traveled by business owners. The point being is that there still needs to be planning done in advance, even if the transfer is two key groups.   

Benefit’s For The Key Group Becoming Owners:  

  1. The key group is acknowledged for helping to build the business; The owner wants the key groups to ultimately own the business, especially since they have been part of the success of the business.  
  1. Goals of the owner: The owner can see his legacy remain unbroken and his business culture continue. The business represents the owner’s value in the community, and the company’s consistent values.  
  1.  It enables the owner to plan their retirement and exit over a longer period of timeSince the process of transferring the business to the key group takes , the owner has the ability to plan their post retirement activities.  It gives the owner the chance to start delegating more responsibilities to the new ownership, testing the group’s ability to run the business. 
  1. It gives the owner a chance to share in the excess cash flow to build wealth outside the business.  This helps in transferring the business at, a lower net amount to the buying group, as the owner would have accumulated the wealth outside the business, but with business dollars.    
  1. The process of transferring ownership and control to the insider’s takes a period of time, anywhere between five and twelve years. This allows the owner to start adapting to a post business life. It allows the owner to start picking up other activities of interest. It allows the owner to contemplate his new life and start making plans well in advance. This is very important especially if the business owner has only singularly most of his business all his life.  The time gives the owner the ability to create new activities with interest, to test the waters.  
  1. Motivates employees: To stay with and grow the company if the owner has a properly planned internal transfer the owner can start this well in advance of their exit. The key employee becomes an owner through their purchases of non-voting stock. This is part of the powerful incentives for the employees to create an increased cash flow. It also motivates talented employees to see the future opportunities in the company, allowing them to stay and grow with the company.   
  1. Maintain senior control; The owner will not lose control of his company until he completely cashes out. Usually stock acquired by the employees is non-voting. Employees acquiring   the stock should be asked to sign covenants such as a not to compete, and non-solicitation agreement. This protects the owner from having the key person leave the company and take customers, trade secrets, and current employees with them.  
  1. Flexibility: A properly design transfer plan helps the owner maintain control until the owner can cash out. It gives the owner the ability to abandon the internal transfer so they can sell to an outside company, or a third-party at some point.   All ownership previously transferred would be subject to a buy and sell agreement requiring the employees to offer their ownership to you for repurchase at a predetermined price if the employment is terminated. 
  1. Business continuation at the owner’s death. By transferring ownership to insiders, it creates the succession plan should the owner die. The hope is that the key group has been trained well enough, to run the business without the owner. 

CHALLENGES AND LANDMINES!  Continue reading “Insider Transfers! Ready Or Not!”

Drop Dead Business & And Personal Planning Questions!

These are questions I believe everyone should be asking themselves when you start their planning. Not all the questions may relate to your situation, however, many of them will. It is important that you take time in evaluating your outcome in your planning as it relates to theses questions!

1. Have your wills and associated trust documents been updated in the past three years, if not, why not?

2. Do you have the following: declaration for desire of natural death, power of attorney, and health care power of attorney? If not, why not?

3. Does your testamentary documents make sure your family’s business and estate is private after your death?

4. Are your assets titled properly between you and your spouse in order to take maximum advantage of the estate tax laws?

5.  Do your testamentary documents specifically address the disposition of your family business/family assets?

6. Do your testamentary documents agree with other business arrangements such as buy and sell agreements?

7. Do you pass ownership of the family company/estate assets to your spouse in your testamentary documents as a tax avoidance measure? If so, is will that;

Make practical sense, and is that consistent with your wishes of your spouse? If the business ownership does go to your spouse, is there a potential for your children to inflate his/her estate thereby increasing their estate tax burden during his/her surviving lifetime?

8. What are your testamentary provisions for treating your employee and non-employee children fairly and equitably?

9. In your “drop dead” planning, do you have insurance proceeds includable in your taxable estate?  If so, why? 

10. For your real estate; do you use family limited partnerships or limited liability companies? If not, why not?

11. If there is more than one shareholder in your family enterprise, do you have a binding, modern buy sell agreement? If not, why not?

12. Does your agreement cover typical items such as disability, “bad boy” behavior, windfall sale, non–compete provisions, etc.?

13. Do you have a written plan for when your family members get home from your funeral to lessen the burden on them? If not, why not? In the future will your business go to family members some of whom are employed in the company and some of whom are not? If so, what provisions will you make to balance the interests of employees’ shareholders versus non-employee shareholders?

14. Your CPA, attorney, and other advisors have probably been after you for some time to address the issues of your exit, future management of the company, your estate planning, etc. What are the barriers that prevent you from tackling these tough family business and estate issues?

15. Children inherit too much in the way of assets too soon? What do you see as the downside of “affluenza”?

16. Will your children inherit the business/estate assets in equal proportions, or would one child be designated the prize, and take and receive a larger portion.  What are the pros and cons of each course of action?

17. What do you have too much of in your business?

18. What do you have too little of in your business?

19. What do you have too much of in your family?

20. What you have too little of in your family?

21. If you had a magic wand, what will be the one thing you would change about your family or business?

Getting Ready To Sell Your Business Even Before You Thought About Selling It!

Business owners who have the ability to hire, train and retain excellent employees do themselves a great favor when it comes time to sell their business. Recruited employees who sign on to the company culture, are potential purchases of the company.  They get involved in all aspects of the business when given the chance.  The ability to nurture these employees not only creates a great long-term employee, but possibly future owners of the company.   The investment in good employees has the by-product of creating a potential market for the business owner’s business. 

Over time, these owners can create   employees who become extremely loyal, and feel part of a group and the business itself.    They observe how the current owners treat the business, the employees, and learn the long-term elements needed for a successful growing business.  They become clones of the current ownership, and start to think like owners, while taking on more responsibilities.

While the owners at some point need to make the commitment to the potential employee(s) purchaser to sell the business to them, it also means the employee or employee group needs to be able to commitment to the purchase of the business.  To the purchasing party, this means committing to taking on risk and financing for the purchase of the business.  In most cases this is something they never have done before.

The commitment to sell the business to key people, or key person is a long-term process.  The owners have to make sure the key person (s), have the ability to think like employees, and the abilities to run the business with expectations of the company being profitable.  The owners will spend time training and assessing the abilities of the key group to prepare them for the business takeover There is a commitment on both sides as to arranging this type of sale.

Financing the Sale: 

A sale of the business to an outside group usually is a cash sale.  Or, a combination of cash and stock of the new owner.  (Usually when a larger company buys a smaller company).

It is here that the advisors need to make sure the selling owner maximizes his sales with tax efficient transactions.  Many business owners sell their firms only to be surprised at the after-tax results of the sale.  Keep in mind that when you sell the business, usually there is a low-cost basis, the consequence paying higher taxes on the gain, means less net profit!

If it is an asset sale, there may be a low-cost basis   of the assets being sold, consequently creating more tax exposure, and more taxes.

Take for example, an asset being sold after it has been depreciated, it may be taxed as ordinary income.  Usually the asset is owned by the corporation.  If the company is a C corporation, the sale is taxed at the corporate level, then taxed at the personal level.  The combination of a low-cost basis, C corporation tax, ordinary tax rates, and double taxation can erode gross profits to a point where the owner wonders why they sold the company for the next. 

If the owner sells their company to a publicly traded company, and takes back some of the  purchaser’s stock, there should be pause as the consequences should the stock value fall because of the transaction, and the uncertainly of the value when the selling owners wish to cash out.

It has happened more than once when selling owners, ended up with much less in their pockets after the taxes and expense of the sale were taken out!

Selling to a key group or a key person is usually a different arrangement.   Usually the employee does not have the financial ability to purchase the company, thus a loan from the small business association or bank is needed.  Sometimes, the employee comes up with money by refinancing their home or borrowing from the family.  In many cases, the selling owner usually takes back a note expecting payment from the cash flow of the business.  It’s common to have a combination of refinancing, a promissory note, and possible deferred compensation payment to the selling owner.  In any event the selling owner usually has some skin in the game as to the financing of the sale.  Because of owner financing, the ultimate payoff might be extended over a longer period of time.  Not necessarily a bad thing, as the owner can spread the tax liability over a period of time.  The owner will also have a security interest in the stock, assets, and receivables of the company, until the loan is paid off.

Continue reading “Getting Ready To Sell Your Business Even Before You Thought About Selling It!”

Business Succession Planning Is  A Necessity For Every Business! 

Business Succession planning for businesses, especially private companies, should be on the a top propriety in the planning area.  Whether the sale will be to top management, middle management, family or to outside sales, it should be an ongoing planning concern.  

A number of private established company’s do not have any such planning, and newer companies in where the owners have no family to take over have the same problem.  In both situations there is a challenge to create a succession plan.   

Business succession planning could be the hardest planning of all.  However, it is a must in planning.  It is the only way the current owners can guarantee that the wealth of the company will either be passed on and continued, or the wealth is transferred to the families through the sale of the business.  Without the succession plan, the largest potential of business wealth can be lost forever.   

The lack of a Succession planning is the reason why many stockholder owners walk the floors at 2am.  They have a true concern for the successor of the firm and the protection of the wealth of the firm.   

 Some of the questions that the owners of firms have:  

  1. What if I die or become very sick?  
  2. What if I lose my key person or key group?  
  3. What if don’t want to do this any longer?  
  4. What if there is an economic downturn and I can’t recoup?   

Other areas of concern are:  

  1. If I want to sell, when do I sell?  
  2. What is the business worth?  
  3. Does the senior management want to leave and retire, or stay active?  
  4. Can the main group of owners afford to retire without creating a cash flow crunch?  
  5. How vulnerable is the company if key people leave and take the secrets with them, or even start their own business, using the company’s business model, or share vital business secrets?  

 The questions discussed above along with many other questions, are the basis of the planning and will help the planning team of advisors guide the owners through the maze of planning traps and opportunities as they walk the path together.    Continue reading “Business Succession Planning Is  A Necessity For Every Business! “

Shift Corporate Income For Your Personal Retirement! 

 If you own a business, using a split dollar life insurance plan can help you shift business income to you on a tax effective basis, without involving other employees!

 Split dollar life insurance refers to the concept of two or more parties splitting the benefits and costs of a life insurance policy, such as the premium, death benefit and cash value.   

The most common type of split dollar life arrangement involves an employer and the employee or owners, with one part owning the policy, one or both parties’ contribution to the annual premium, but both parties having a vested interest in the policy benefits.   

Split dollar plans are inexpensive and easy to administer as an executive benefit arrangement.   

Here is how it works:  

One party establishes a cash value life insurance contract under the ownership of the key executive.   

The employer receives a “collateral assignment” against the policy, entitling the corporation  to receive the lesser of the policy cash value or the outstanding loan balance.   The loan is based on the premiums contributed by the company.   The same assignment entitles the employer to a portion of the policy death benefit, equal to the outstanding loan balance.   

 The key executive pays the taxes each year on the foregone interest on the loan from the corporation to pay the premium.   

At some point in the future, the split dollar arrangement terminates when the employer’s loan is repaid (typically from the policies cash value), leaving the executive “free and clear” ownership of the accumulated gain in the life insurance policy.   

 The executive can access the accumulated gains in the policy by borrowing against it, which will typically allow for tax-free access to the values.  The policy loan is repaid to the insurance company at the death of the executive, and any residual death benefit is paid to the executives’ named beneficiaries.  

Split dollar is an easier benefit to implement than deferred compensation, and less expensive for the employer.   

 Advantages:   

  • Easy account entries 
  • Recovery of the cost for the employer 
  • Performance objectives to trigger the funding for employer 
  • Very little if any impact on company balance sheet 
  • A “golden handcuffs” for the employer and ability to set restrictions when cash value can be accessed  

 Today’s newer types of life insurance policies enhance the benefits of a split dollar plan  Continue reading “Shift Corporate Income For Your Personal Retirement! “

Business Valuation After The 2017 Tax Cut And Jobs Act

Because of the Tax Cut and Job Acts of 2017, the marginal rates are lower.  The impact of the recent tax cut is very straight forward.   Lowering the rate, means a higher after-tax cash flow which translates into higher value for businesses.

Business owners know their business better than anyone.  That being said, you would also assume they would know the value of the businesses? Not so fast!

Knowing your business and knowing what you think it is worth in reality can be two separate issues.  If it were that simple, appraisers would not be needed, but they are, and they play very key role.  They arrive at a fair market value after taking many facts into consideration.

Valuations; “The Walk Way Number

The “country club” concept of a business owner having a number in his/her head as to what they would take, if offered, offers some interesting conversations during happy hour!

Over the years I have spoken to business owners, and periodically I have been told that the owner has a figure in their head, and if they were offered that figure for their business, they would take it!  They seem to know their business better than anyone, so it is reasonable to believe they have a handle on the value of their company.   In more cases than not, that figure would allow the owner to go and do what they want in life as it would give them the capital needed, and the can walk away from the business.

However, there are some different sides to this concept!   A more logical way of knowing the business value!

Continue reading “Business Valuation After The 2017 Tax Cut And Jobs Act”

The “What If’s”of a Business Owner’s Life!

The Four Life Changes Of A Business Owner

What is it that you think about the most as a business owner?   Chances are they are one of four things:

  • What if I don’t want to stay in business and I want to drop out?
  • What if I get sick, disabled, or die?
  • What if my key person (s) decides to leave me?
  • What if I can’t increase and improve my cash flow (life blood of the business)?

Besides running the day to day of the business, and the stress that goes with this, the four items listed above are probably the biggest stressful thoughts business owners have.   Let’s break them down.

Continue reading “The “What If’s”of a Business Owner’s Life!”

How the “Wait and See Buy And Sell” Works !

The Wait and See Buy and Sell arrangement is a combination of using a Stock Redemption and a Cross Purchase arrangement.  It affords both the company and the continuing owners the option to purchase an owner’s interest with great flexibility when a buyout situation presents itself .  Usually the company gets the first opportunity to purchase any  or all of the transferring owner’s interest.  Any balance of interest not purchased by the company, can be purchased by the continuing owners.  If the owners don’t buy the  remaining interests, the corporation must purchase them!

The “Wait and See” agreement gives flexibility to the owners in areas of:

  • Financing the purchase of interest
  • Cost basis positioning
  • Estate planning
  • Other planning areas
  • Changing the percentage of ownership

The biggest advantage however, is the ability of not having to make a decision until there is a trigger event. 

The Scenario

When a notice is received by the company of an option to purchase, whether it’s by a Notice of Intent To Transfer, right of first Referral, or notice of a business-disrupting event such as the retirement, divorce, disability, or death of an owner, the procedure for the option to purchase an Owner’s Interest in an agreement is triggered.  No matter how informally the notice may be given, it’s important to understand that the amount of time the company has to decide whether to purchase (the option period) starts to tick only after the company knows that the triggering event has occurred.  For example, if the company does not receive a formal notice that an owner has filed for bankruptcy.  Only when the company becomes aware of the bankruptcy does the buyback right get triggered, and the option period starts to run.

Company’s Option to Purchase

After the company receives notice, the company’s owners should meet with their tax advisors and each other to decide if it’s in their best interest for the company itself to buy the available interest.  The agreement will normally have a period of time in the agreement which stipulates the period of time the parties have to decide individually whether they want to purchase the available interest or not.  If the owners decide the company should buy all of the available interest, the company must exercise its option by delivery a written Notice of Intent to Purchase to the transferring owner within the designated time period.

 Notice of Intent Contents (THE NOTICE):

If the company or anyone of the continuing owners exercise their option to buy the available interest, the company sends out a collective notice to the transferring owner, or the current holder of the interest, regarding the company’s and /or continuing owner’s intent to purchase a part, or all of the available interest (called a Notice of Intent to Purchase).

Generally, the Notice is sent to the person who provided the original notice to the company of a proposed transfer, or the occurrence of any of the triggering events that give rise to a buyback.  Example:  NOTICE is sent to the interest of a deceased owner will go to the representative of the estate.

 THE NOTICE CONTENTS;

The name and address of the company and the name, title of the officer or employee who can be contacted at the company regarding the NOTICE.  A description and the amount of ownership interest to be purchased by the company/party, along with name and address of each party.  The total amount of interests to be purchased by the parties. The terms of the purchase are based on the agreement Copy of the buy and sell agreement. If the interest to be purchased is represented by certificates, such as share certificates, a request for surrender of the share certificates is made to the company.

Continue reading “How the “Wait and See Buy And Sell” Works !”

Characteristics Of An Effective Buy –Sell Agreement!

Creating a buy-sell agreement requires foresight about what could, might and will happen to the business if certain situations occur to the equity owner’s/stock holders of the company. This article looks at some of the important elements of the buy-sell agreement (BSA).

First of all, what is the purpose of the BSA?  Simply, an agreement between, interest holders, and the corporation as to what will happen to the company and interest holders should there be a disruptive and harmful occurrence in the future.  These are called triggers; death, disability, divorce, departure (voluntary and non-voluntary), bankruptcy, retirement, and others.

It is important that the agreement be entered into when parties are aligned and before triggers events occur.  It usually is a time when the relationship is aligned for the good of the interest holders and the company.  In short, they usually are of the same mindset that any of the triggering events could happen to them in the future,

This is a time where advisors should encourage interest owners to complete and sign the BSA, as it is the best time when their attitudes are in synch concerning future event happenings.

Interest owners know that when there is a trigger event, each party will have a different perspective as to outcomes for each person.   Terms and pricing transactions can become difficult or impossible to achieve if the issue was dealt with without an agreement in advance.

 Some of the characteristics required in the agreement;

  1. It should be in writing and signed by all parties. (good time to have spouses sign as to their witnessing and understanding of the agreements, although they are not signing as a party to the agreement)
  2. Trigger events should be defined and funding and price adjustment; Each event should be discussed as to what will happen as to the price, and the terms. Also, the definition of the trigger event should be in the agreement.  Example: definition of disability? What happens if a person is fired? What happens if a person decides just to leave?  What happens upon a divorce, or bankruptcy, retirement, or death?
  3. Determine the conditions that cause the triggering events.
  4. Determine the price (price per share) at the time of the triggering event.
  5. Methods of Valuation
    1. Fixed price; usually never updated with changing markets, and company condition.
    2. Formula: with all the variables of economic conditions, company conditions and market conditions, it is hard to find an accurate formula for any given company or industry.
    3. Single Annual appraisal (updated annually or bi annually); Suggest the initial pricing of the company by a single appraiser, and then update yearly or every other year.
  6. Define how the triggering event will be funded.
  7. Creating a buy-sell agreement takes future thinking by all the interest owners. There is always the “what if’s” of the future, but owners need to be aware of them and protect themselves.

The BSA is the most important document owners of a business can have.  They must have one.  Without it, there are no instructions as to what will happen, how much they will pay, and how to fund it.  There ends up being chaos, arguing, and lawsuits, not to mention the costs of fighting in the courts.

(Some great resources:  Buy-Sell Agreements for Closely Held and Family Business Owners by Z. Chris Mercer, and Buy and Sell Agreements, Paul Hood)

 

Your Business Worth

What is your business really worth?  If you don’t know this figure, don’t feel too bad, many business owners don’t know their real worth!

Why is knowing your worth important?  Think of it this way.

If you were to invest in the stock market, wouldn’t you want to know the current value of the company you are investing in, and the potential of it’s growth?

Business owners put time, money, and in most cases, most of their wealth in their business.  At some point you will want the wealth in your business.  It may because you want out of the business, you retire, you die, or a number of other triggers.

This blog is dedicated to sharing ideas about growing your business while putting you in the position of extracting your wealth…

Enjoy…

 

Tom Perrone

Lifestyle and Enterprise Business

In John Brown’s June 2019  blog , the article discusses the difference between Lifestyle and Enterprise Business, he discusses that fact that many businesses are formed to accommodate the lifestyle of the owners without giving too much thought as to the long-term effect of the business value when it is sold.

While the business is up and running, it is doing exactly what the owner wants it to do, and that is to provide a steady and profitable income to carry the lifestyle of the owner and their family.  Again, this is  great for the business owner, their families and businesses in general.  However, the article discusses the problem when the owners are forced to sell, or just want to sell and exit the business.

Business owners may think they can run their businesses as a lifestyle business and still plan for an exit of their business for the highest potential value.  This is a myth, since the strategy of exit planning involves different philosophies and strategies used to grow the business best potential value.

Most business owners don’t really know what their businesses are worth.  Because of this, they never understand why they don’t receive the perceived value upon post exit.    Also, many business owners take for granted, the perks from the business as normal and ordinary.  These perks evaporate once they exit.  A double hit to the owner of a lifestyle business model.

The article emphasizes the fact that you can’t have it both ways if you wish to exit your company at the best possible price. Business owners who are running a lifestyle business, must turn that business into a business enterprise if they expect to exit their business at the highest possible price.

A business enterprise has transferable value.  It needs to be worth something to the purchaser, for example an equity group, as lifestyle value means nothing to a private equity group compared to the business owner of a lifestyle business as they both have different philosophies of business purpose.

Turning a business into a business enterprise is basically creating a business that is worth something to people or entities beyond the owner.  Brown suggests the transforming of a lifestyle business to an enterprise business is a challenge mostly because of the owner’s emotional attachment to the business, and limited owner resources. 

It has given him and his family a nice lifestyle, freedom and pride.   “Why should he change anything?” The owner created this baby, loved it, invested in it and build it.  Consequently, it is not only a physical transition but a psychological transition. 

When you look through the eyes of an outside investor, they are looking for other aspects about the business, mostly  flaws  of the business, inefficient  areas of the business, management, potential return on investment, cash flow, potential growth and  a host of elements needed to make a future profit from the purchase and sales of the business, not lifestyle to the owner. 

Continue reading “Lifestyle and Enterprise Business”

Disadvantages Of The Buy And Sell Agreement! [i]

Certainly, having a Buy and Sell Agreement (BSA) has many advantages, many of which I have discussed in our past posts (May 2019, Advantages of Buy and Sell Agreements).  However, I would like to go over the disadvantages of a BSA.

RESTRICTIONS ON ESTATE PLANNING

BSA can restrict ownership transfers and consequently management duties. These restrictions can be applied to you also. The restrictions could limit your personal planning by limiting your options for the ownership interests during your lifetime or at death. It may prohibit you from making gifts of your ownership interest to your family. Depending on your planning, your BSA could limit your plans to leave ownership interest to your family. The BSA may require your ownership interest to be sold at your death.

RESTRICTIONS ON FINANCIAL PLANNING 

A BSA can restrict the persons to whom you could sell your ownership interest to and restrict when you can sell it.  An example would be in a situation that you need to sell your interest because you’re in a financial bind. The BSA may require you to sell to your entity or your co-owners, who may not want to buy.

Special election to the defer federal state tax of deceased owners

This could limit an estate owner from using Code Section 6166 which is a way of paying your estate tax over a period of time, giving you the option of paying over a 15-year period, five years of deferral and a ten-year payout.  A purchase from your estate could cause the loss of the right to defer the estate taxes.

A sale of Corporate interests may result in a loss of the entities corporate structure

This could limit the entities right to use its own loss carry back and carry forward losses on a significant change in ownership, which is possible without a well throughout BSA.

The cost of putting together a BSA

It takes time and money to put together a solid buy and sell agreement, Of course this is a disadvantage and it can be expensive, however, in order to have an optimal BSA, you will need to invest time and money.  You will also need a competent council to prepare the necessary documents.  This incurs costs.  Being educated in this strategy is to your advantage when designing your BSA.

A poorly drafted buy sell agreement can be costly:  By failing to carefully work out the terms of buy-sell agreement or by having mismatches between triggering events and the identity of the purchaser versus the funding source, a real mess could be created.

[i] Buy -Sell Agreements for Baby Boomer Business Owners Z. Christopher Mercer, ASA, CFA, ABAR

Alternatives To Buy And Sell Agreements – Different Documents To Put Buy Sell Agreement Language In!

  1. Governance documents– Articles of incorporation, partnership, organization, bylaws or operating agreements frequently have Buy And Sell Provisions (BSP). Is critical that you change your agreement within these documents should you update to a formal BSA, so the language is consistent.
  2. Compensation based plans: Such as consulting agreements and salary continuation plans.
  3. Entity recapitalization: It is possible to recapitalize the ownership interests of the entity which could create differences and ownership interests.
  4. Gifts of ownership interest: this could change the ownership and voting rights.
  5. Charitable gift of ownership interest. Same as #5.
  6. Private annuities: You could transfer ownership of your interest to someone else in exchange for a promise to make payments for you for the rest of your life
  7. ESOP’s: EMPLOYER STOCK OPTION PLANS.
  8. Non-qualified deferred compensation plans.
  9. Qualifying for section 6166 deferral.
  10. Division of an entity.
  11. Confidentiality and non-competition agreements; In conjunction with a buy and sell buyout , the former owner could be paid to not compete with the entity and to keep secret all confidential trade secrets, customer lists, and other private proprietary information of the entity.
  12. Installment sales: The owner simply wishes to retire and sells the stock in exchange for promissory note that is payable overtime.
  13. Sale to outsiders.
  14. Public offering.
  15. New generation opening a similar type of business: This is where senior generation winds down and a new generation may open a similar business preferable to allow younger generations to open a new look but similar to the identical business of the old. The dying on the vine concept.

*A good read would be “Buy and Sell Agreements (US Legal Series); Paul L. Hood Jr.  Also, I have included a link to article from Ed Partesi, ASA,CM&AA of UHY Advisors “Covering the bases:  “The Need for Effective Buy -Sell Agreements”. Effective Buy and Sell Agreement!

Lastly,  a very good book to read about the future of the selling your business,  “Your Exit Map”   by  John Dini;  This gives you a great insight as to the next generation of buyers and the market place for selling your business.  

 

Be An All-Star Employer and Build Future Value In Your Business!

When you go into your own business, do you have a place to go, a paycheck, and a position?  You basically have a job.   However, when entrepreneurs go into business, they look for the big payday, the selling of their business.    Would it be nice to sell your business for 10 or 20 times your annual salary?

Building a business is not easy.  If you are going to put your efforts into building a business, build a business with a great foundation.  It is easier to build value in a business with a good foundation.  Let’s assume you have systems in place and a business presence.  What is needed for real growth once you get through the systems and organization formats, is to create and develop a business culture!

By having a business culture, marketing and recruiting get easier and less expensive as people are more attracted to your company.  Long –term employees get to know the business, your customers you’re your suppliers.  They become more efficient and become the “team”.   You will attract better quality candidates to hire.  You can become more selective and create the right roles for your employees.

Go to Trader Joe’s and ask the employees how they like working there.  You will soon find out that there is little stress, a lot of fun, and the employees want to be there working side by side with each other.

When employees are happy and like their jobs, they stay, they learn, and they attract investors and future purchasers.  This culture promotes profitability and consistency, which is how you maximize your potential profitability of the company.  Consumers like consistency and the added value of having a company that is easy to work with.  I like to call this the “Amazon Factor”.  Who doesn’t like ordering from Amazon? They make it easy for many reasons.

Having this type of environment doesn’t automatically happen.  You need to invest in it to create it, however, it will pay off in the future.  They key is to start early creating the vision you have for your company long-term. Create the vision of being the “All-Star Employer”, and you will attract the best, like minded employees, and create a great business that people will want to work at.

 

Advantages Of A Buy Sell Agreement And Some Dynamics Of The Agreement!

It’s important to understand that every Buy and Sell Agreement (BSA) is different and has a separate purpose when put together and implemented. Because of the vast differences in BSA’s, using a standard form of BSA rarely accomplishes the needs and wants of the parties involved.

Each participant in the agreement has different purposes and objectives and looks at the transactions very differently. Neither party knows when the agreement will actually be needed, and what the triggering event will be. A triggering event could be death, disability, divorce, termination,  bankruptcy, and other defined events.   One thing that can is consistent in most cases is that when a triggering event happens, then each party becomes visionless to the other parties’ best interests, and only focuses on their own and best interests.

The two participants in a BSA are a seller and a buyer. They come in different forms, as individuals, trusts, or estates. Usually their purposes and objectives are very different, and there usually is a conflict between the parties.

While creating the BSA  the parties tend to be very fair before a triggering event. This is because everybody is in the same position and no one knows who will suffer the future triggering event. This is a positive viewpoint, as the parties are reasonable and objective about the possible and various scenarios. Everyone’s objectives are personal, and range from financial, tax, to personal protection for their families.  Having a designed BSA can offer the owners some satisfaction that their needs are documented and witnessed.

Objectives of BSA

  • To provide a predetermined roadmap for the business based on a triggering event which may call for the sale of a participant’s ownership interest.
  • To provide a guaranteed buyer for the owner’s business interest and to create a market for that interest.
  • If funded through life insurance or some other means, the BSA will provide liquidity for the payment of the business interest and help the estate pay for the estate taxes and other settlement costs of the deceased owner’s estate.
  • Can avoid an impasse between the parties in the event of a triggering event.
  • To protect the company and surviving shareholder from subsequent competition, should a terminated owner wish to sell to a 3rd
  • To avoid potential conflicts between the surviving owners and the deceased owners’ heirs, by creating a roadmap through the agreement at the owner’s death.
  • Can level the playing field for the estate or deceased owner’s as the agreement gives the deceased owner a say on how settlement of their interest will be to their heirs and estate. Especially, when the surviving family have little knowledge of the business entity.
  • Establishing the price and method of valuing the interest, establishing the terms of payments, and providing a method of funding for the payment of that purchase price.
  • Can create job stability for minority owners and key non-owner employees.
  • Can establish the value of the entity for tax purposes.
  • Can preclude owners from selling their interest without the consent of others thus avoiding the third-party ownership or voting percentages.
  • The agreement can restrict ownership to people who are actively engaged with the entity of full-time basis.
  • Can improve the credit worthiness of the entity.
  • Can avoid transfer violations/Licensing requirements.
  • Avoid transfers to individuals that would terminate the S corporation status.
  • Can dictate discounts for lack of marketability (minority interest discounts).
  • Can provide for voting agreements where necessary.
  • Can dictate what happens to in force life insurance policies on the terminated or surviving owners.

These are only a few of the many reasons for a buy and sell agreement, and the advantages of funding the agreement.