Author: YOUR BUSINESS WORTH

Business and Financial Planning to help business owners create business strategies to growth wealth, protect wealth, and to be a position to extract their wealth when they need it the most.

Planning For The Tax Efficient Insider Sale!

by YOUR BUSINESS WORTH, posted in Buy and Sell Agreements, Company Wealth, Inside Sale, Passive Ownership, Uncategorized, Working On Your Business

The sale of your business to an insider requires the simultaneous presence of a capable insider purchaser coupled with your intention to exit.   The reason is the “capable insider” who wishes to purchase your business is not interested in hanging around forever waiting for you to decide to sell.  Without   a solid commitment from you on the timing of your exit, prospective purchaser will ultimately become disinterested.

There is also the possibly of you having to finance part of the purchase price.    Chances are that you will be helping finance part of the sale, which represents actual years after your exit, which you are tied to the company.

Using a two-tier system for the purchase of your interest!

Under a two-tier   purchase system, a portion of your stock would be transferred to your inside buyer initially, and the balance would be transferred when the business is sold.

By using the two-tier purchasing system, there are a number of advantages:

  1. Providing stock ownership to a key employee today can provide incentives for better job performance.
  2. It can help reduce the risk that they will be attracted to a job offer from a competitor and ultimately leave you with your company secrets.
  3. Improves the likelihood of a bank financing the balance of their purchase in the future at your final exit.
  4. It gives them “skin in the game” when they contribute some of their funds to purchase some of the stock, giving them additional motivation to help the company be successful.
  5. Allows you to become a mentor to your key employee to further develop their skills under your watch, while still controlling the company.

Continue reading “Planning For The Tax Efficient Insider Sale!” →

Building Business Value Techniques!

by YOUR BUSINESS WORTH, posted in Company Wealth, Selling Your Business, Value drivers, Working On Your Business

If you permanently left your company today, would it continue with little effect on cash flow?  If so, would you consider this a transferable value? Transferable value is a driver that is critical for business growth.

A company management team is instrumental in growing cash flow and business value.  When a business has the capabilities of having little disruption with its cash flow when an owner leaves, you have a valuable transferable value.  A key component of building transferable value is Next-Level Managers. Usually they are experienced working for larger companies. They know how to grow companies and know how to attract people with experience and the skill to help run a company.   This level of management will demand more money, perhaps ownership as a condition of employment.

Next level management (NLM) and future changes!

  1. To attract NLM, it involves training and coaching for the existing management. When adding NLM it may involve replacing current managers who underperform.
  2. The decision to replace existing management is difficult and hard for many owners, as current management members have been loyal to the company. However, they may be moved to another position with the same type of responsibility.  They are good employees, but NLM do a much better job in the management position.
  3. Engage management consultants and outside resources to create more growth. NLM work well with these professionals.
  4. Owners provide leadership and motivation for management. Owners should design plans that provide strong incentives to management to remain with the company beyond the owner’s exit.
  5. Motivate employees to perform at higher levels, create a culture.
  6. Financial incentives designed to grow cash flow or business value is more likely to achieve the value or cash flow necessary to support the owners’ exit goals and value growth of the company.
  7. Top management must stay in the business when owners leave, or they don’t have a transferable value and will not achieve the goals when the owner exits. Incentive benefit plans help keep top management employees involved after the exit of the owner.
  8. The use of a “non-qualified deferred compensation plan” or NQDC Plan which involves a benefit formula and vesting schedule, highly motivates management to stay on.
  9. When you cobble the benefit formula to a performance benchmark it is possible to increase cash flow and profitability for the company.
  10. The vesting schedule in the benefit it makes it hard for the top management person to leave. They will leave too much on the table. The vesting schedule give the employer the benefit of keeping a top level management.  The employee benefits as the company can offer a richer benefit knowing the reward the employee receives is tied into the company’s profitability.
  11. The appeal of incentive plans for key employees (management) is understandable: To create transferable value, someone other than the owner must be similarly motivated to grow value and the cash flow necessary to achieve the owner’s exit goals and continue the company beyond the owner’s exit.

Operating Systems That Enhance The Transferable Value Of A Company!

Continue reading “Building Business Value Techniques!” →

LOOKING WITHIN FOR YOUR POTENTIAL SALE OF YOUR BUSINESS!

by YOUR BUSINESS WORTH, posted in Company Wealth, Selling Your Business, Working On Your Business

A major challenge for a small business owner is selling their business for the right price and to the right purchaser.  However, in most cases we find that many business owners don’t spend the needed time to do this planning.  Consequently, they jeopardize the potential sale price.

Many small businesses will not be purchased from an outside purchaser, (about 5%), but the sale could come from either family members or inside employees of the business.

A 2003 study suggested that owners felt nine out of ten family owned business leaders thought their business will continue to be run by the same family or families in the next five years. [1]

You may have considered keeping the ownership of the business in the family and may have already gifted stock or sold stock to your children.  If this is the case, your planning should be more directed to other parts of the financial life, and possibly the role as a passive owner in the business.

Continue reading “LOOKING WITHIN FOR YOUR POTENTIAL SALE OF YOUR BUSINESS!” →

The Four Life Changes Of A Business Owner!

by YOUR BUSINESS WORTH, posted in Buy and Sell Agreements, Company Wealth, Income from your business, Passive Ownership, Selling Your Business, Working On Your Business

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), or the economy crashes?  

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.

Why the typical business owner thinks about these issues, is because they know they put a lot of sweat, tears, money, time  into their business.  They have most of their wealth in the business,  and know that they have no way of extracting that wealth when these events happen!

What if I don’t’ want to do this any longer and just want to drop out? 

Think about it!  The business owner has most of their wealth and time tied into this business.  In most cases it is very difficult to just stop doing what they are doing, lock the front door and leave the responsibility, wealth and reputation behind.  They still need their wealth in the business to maintain their life style.

Business owners are human beings and sometimes they just get tired of doing what they are doing, they burn out.   Sometimes they feel they are trapped and living a life of desperation.  They are making a nice living, and seeking to make a great life  for themselves and their families.  Chances are when they started the business they were only looking for a place to go, a position, a paycheck, and with a little luck a dream. The stress of running a business can take its toll on the businessman and the family.

They need the wealth they have invested, but don’t have a way of selling the business at a reasonable price.   Can the business be sold to an outsider?  Or, is there someone inside the company who will buy the business?  If so, do they have the money?  Is there someone who would run the business while the owner keeps their hands in the business?  Or, do they liquidate it?   Many times, even if a business owner sells their business, they find that after the taxes and expenses there’s not enough capital at a guaranteed rate of return to produce the income needed to keep the business owner and their family in the lifestyle they been used to. Because of this factor, more stress is added to the business owner and their future income. Continue reading “The Four Life Changes Of A Business Owner!” →

The Small Issues Which Business Owners Need To Know About!

by YOUR BUSINESS WORTH, posted in Company Wealth, Income from your business, Selling Your Business, Working On Your Business

The Small Issues Which Business Owners Need To Know About!

When working with business owners, it is important to communicate many of the overlooked issues which may blindside them and cause disaster in their financial future.

Small issues turn into major problems bringing with them costly consequences. Many of them are obvious, and can be game changers in your future.

Whether you are an advisor or a business owner, some of the ideas I put forth will help you communicate these overlooked issues.

Estate Planning

I am sure if you asked 10 people to describe what estate planning is in one sentence, you would get 10 different answers.

At one time most advisors and business owners  would suggest that estate planning is about reducing taxes.  However, I would disagree that estate planning is just  about paying death taxes and mitigating estate costs.

To me, estate planning consists of three phases, creation, preservation, and distribution.  Each of the phases is distinct in and of themselves.

Creation is the concept of money, and accumulating.  Implementing strategies, which allow estate owners to create wealth, and avoid losing wealth by making financial mistakes.

Preservation is about protecting what you have from, inflation, lawsuits, expenses, and taxes. 

Distribution is the orderly distribution to your heirs.  It also is   a phase where the estate owner can distribute wealth to certain beneficiaries, at the least cost possible.

DORIS DAY:  THE EXAMPLE

Doris Day’s husband died in his 60’s.  He had taken care of all the financial areas of their life.    After his death, Doris Day did not know what she had, or what she owed.  The net result was she ended up owing a fortune to the IRS, in income and estate taxes.

Business owners not only have needs as business owners, but also have needs as individuals. Consequently, it’s not only the business planning that needs attention, but also a coordination of their personal situation.     In many situations, the owner’s planning is more complex because of the business ownership.

Continue reading “The Small Issues Which Business Owners Need To Know About!” →

The Complexities and Issues of Business

by YOUR BUSINESS WORTH, posted in Company Wealth, Selling Your Business, Strategies of growing business, Working On Your Business

A chief concern for many business owners is how to arrange the orderly transfer of business to the next generation of family members or key employees. By far the biggest concern is how to keep the family business and the family. It is estimated that more than 70% of family-owned businesses do not survive the transition from the founder to the second-generation.

There are essentially three levels of the business succession plan.

Management; this is day-to-day management of the business which can be left to one person, one child or a group  of children. Also, this group might not be active in the business. This group could also include key employees rather than family members

Ownership; most owners would prefer to leave their businesses to the children that are active in the business. However, not all the children might be involved. Owners would still like to treat their children fairly, but not necessarily equally. Consequently, if the business interest is not left to a group of children, some other value would be left to the non-business children. A subset of this topic is whether the business owner will need a continued economic benefit from the business after the transfer. Also, will the business owner continue to control the business after the transfer is complete.

Transfer taxes; estate taxes can erode business value.   The question would be is there enough liquidity to take on the debt and keep the business going? This is truly a challenge to high-value business especially with a estate tax being a moving target as to the exemptions and percentage of taxations.

 Level I management

It might take many years for an owner to train the successor management team so that the business can run automatically. This allows the owner to walk away from the day by day operations. To do this the owner must give up control and tasks in which they ordinarily controlled. This is easier said than done. Whether the owner creates a management team with the next generation, or a key group of employees, the owner must learn to delegate important tasks.

Continue reading “The Complexities and Issues of Business” →

Will You Go Broke Selling Your Business?

by YOUR BUSINESS WORTH, posted in Company Wealth, Income from your business, Passive Ownership

If I sell my business today, pay my taxes, brokers and professional advisors, and  “I then invest the remainder conservatively, will I still be able to enjoy my current lifestyle?” Most business owners have asked themselves this question. After building a successful business, they wonder if they will net enough cash from its sale to maintain their standard of living. Often, after calculating the potential returns of investing the sale proceeds, they realize they can make more money by holding onto the business and becoming “passive” owners.

Continue reading “Will You Go Broke Selling Your Business?” →

Transferring A Business To Insiders

by YOUR BUSINESS WORTH, posted in Buy and Sell Agreements, Selling Your Business, Working On Your Business

Selling your business is an important financial transaction that requires a well developed exit strategy. Many owners view their business as much more than an asset. They’ve poured their hearts and souls into it. Maintaining the established business culture motivates them to sell to insiders. In fact, 95% of all sale transactions involve insiders, who may include co-owners, family members, managers and key employees. The insider group that is buying the business is called a key employee group (KEG).

There are four ways to transfer a business to insiders: Continue reading “Transferring A Business To Insiders” →

What If I Want to Recruit a Key Employee?

by YOUR BUSINESS WORTH, posted in Company Wealth, Working On Your Business

The objectives of recruiting a key executive from the marketplace are to make your business more profitable, to grow the company and / or to bring talent to your business that does not currently exist. You must design incentive plans that achieve those goals.

You will always be a slave to your business unless you have capable management in place to run the business when you are not there. If you someday hope to sell your business to an outside buyer, you will need to have solid managers in place to get serious consideration from an outside buyer. As is the case with most companies, the management team could someday become your buyers. If you want to transfer your business to your children, you will need key employees in place to assist them with the transition.

In order to attract the right person to your company, you must offer them an incentive plan that rewards them for efforts that increase the value / profitability of your business.

You should pay a key employee for projects that they initiate. This could be an additional six percent or more of their base pay. When this key employee has a positive effect on the rest of the management team, pay them a bonus based upon that influence. This could be 10 – 20 percent of their base.

When hiring for key management, we find that most compensation packages combine base and incentives. Determine the incentive on the company’s growth once that employee joins you. Decide how much you are willing to pay the right employee and then back into that figure.

Continue reading “What If I Want to Recruit a Key Employee?” →

What If I Want to Take Care of Myself?

by YOUR BUSINESS WORTH, posted in Company Wealth, Executive Benefits, Tax Free Income, Working On Your Business

Business owners have experienced a well-publicized meltdown in traditional financing. Now they want to know how they can prevent themselves from being vulnerable again!

Become Your Own Bank

What if you set a goal today to accumulate money on your own? Shore up reserves for use in emergencies in your business, or for business opportunities, investments and personal retirement. You take care of your employees, your vendors and your customers. What if you think about taking care of yourself? Traditional savings vehicles are not as attractive as they were in the past. Many companies have eliminated pension plans. Those companies that haven’t are finding that, in many cases, the owner can’t put a substantial amount away for himself. Today’s business owner wants to accumulate money for the future’s “what ifs” without depending on outside financing sources.

Set up a SIP

The solution is a supplemental income plan, or SIP. If properly designed, a SIP accomplishes several things. The growth is tax-deferred. If accessed correctly, the gain is tax-free. There are no contribution rules and no required distributions. Moreover, there is a pre-retirement survivor benefit paid to the family in case of the death of the business owner, also tax-free. With the cash flow rigors of owning your business, putting money aside gets more difficult every day. Traditional methods no longer work or are no longer attractive. Safety is a greater concern now than in the past. Business owners want to control their own financial destinies without depending on credit lines, business loans and outside financing. What if, going forward, you finance your own business purchases? Every cent you pay in financing costs is lost forever. Eliminate these costs in the future and use your SIP for purchases, investments, opportunities and emergencies. The savings on financing goes back into your pocket. This is perhaps the best recession-era lesson for business owners to absorb today and to never forget in the future. Do not rely heavily on outside funding in the form of loans, vendor financing or even business credit cards.

Today’s business owner wants to accumulate money for the future’s “what ifs” without depending on outside financing sources.

Do It for You

Right now, business owners must take care of themselves because no one else is going to do this for them. Valley business owners constantly tell me they are tired of lying awake at night, staring at the bedroom ceiling and worrying about cash flow. A supplemental retirement plan is simple. It does not involve any administration or fees. There is no ERISA or IRS involvement. Where is the best place to invest as you bulk up your SIP? In the past, you had two choices. You had market-driven vehicles that we now realize can be a roller coaster ride or safe vehicles that yielded small or no returns. Here is a new option for you and your professional financial advisor to consider. Life insurance—a product that has been around for more than 200 years—may present the flexibility and growth you seek.

Continue reading “What If I Want to Take Care of Myself?” →