How The Buy-Sell Agreement Fits Within the Scope of An S Corporation!

Featured by YOUR BUSINESS WORTH, posted in Business Growth and Transition, Buy and Sell Agreements, Company Wealth, Estate Planning, evaluations, Funding your Buy and Sell, Income from your business, Inside Sale, Life Insurance Types, Selling Your Business, Tax Efficient, Tax Free Income, Valuation, Working On Your Business

Part 1

BY Thomas J. Perrone, CLU, CIC

Normally, a business makes up a substantial portion of the owners’ net worth. Many business owners do not think about what will happen to their business in the event of their death or a life changing event (trigger).

This article will focus on why a buy and sell is an important document, one of the most important you will need.

We will also discuss the buy and sell agreement in the context of an S Corporation since S Corporations are extremely popular. ¹

Consequences of not creating a buy-sell Plan.

Stress on the business’ cash flow or credit line having to purchase the decedents owner’s interest
Unqualified and instability with employees running the company

Disagreements and conflict among heirs increasing administration time and costs
Lack of a market for business which may potentially represent a significant value in the estate
Suppressed value much below fair market value to raise cash for estate needs
Termination of the business
Instability amount employees and creditors

Lack of liquidity to pay estate taxes and other administration costs
Stream of income to remaining family members from the business is lost
Valuation disagreements and IRS litigation
Nightmares of not having a Buy and Sell agreement in a S Corporation! Loss of eligibility as a S Corporation resulting in involuntary termination of the S. Corporation status
Most transfers to entities such as partnership, Corporation and most trusts are prohibited transfers

A termination of S Corporation status will cause the Corporation to be taxed as a C Corporation as of the day of termination creating income tax consequences to the shareholders.
Corporation, which is terminated, must wait five years before making a new S Corporation election, resulting in Corporation being taxed on its net profits for five years.
The surviving shareholder could face additional tax burdens on future ongoing Corporation distribution and on those made upon the sale of the Corporation

Funding the buy and sell agreement is always a challenge to companies, because it comes down to four ways of funding a triggering event

Borrowing money from the bank

Using cash flow out of the business

Life insurance death benefit

Cash

When you compare the costs of funding the buy and sell agreement, life insurance will be the least expensive by a long shot, in most cases, especially, based on a death trigger.

Other triggers, like divorce, sudden removal from the firm, voluntary and non-voluntary removal from the firm, bankruptcy, and disability are triggers where there is not a death benefit being paid, but money is needed. In these cases, a promissory note may be used in conjunction with a term payout, or installment loan payout.

However, the cash buildup of a life insurance policy could be used as a funding vehicle especially if the policy has been in force for many years.

In Part 2 we will investigate how the buy and sell agreement fits within the scope of an S Corporation.

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Creating Great Personal Wealth With Your Business Income!

Featured by YOUR BUSINESS WORTH, posted in Business Growth and Transition, Company Wealth, Estate Planning, Executive Benefits, Income from your business, Life Insurance Types, Strategies of growing business, Tax Free Income, Working On Your Business

In my planning with many companies over the years, I realize that many business owners are not using the corporate cash flow to create wealth outside of the business. Normally they are using their after-tax dollars to buy financial products to create a benefit for them personally.

Many of the business owners feel they need to put all their current dollars into the business. This is a mistake! The reason this is a mistake is the business equity can get tied up just like a home-equity can. At a time when the business owner needs his business equity the most, is usually at a time when he cannot get it out for one reason or another. Business equity is not very liquid as it is tied up in receivables, loans, inventory, and the like. By putting too much of the business owner’s wealth in the business, they are risking the loss of it in the future, or the very least, the ability for its use for some major cost.

Owning a business creates opportunities to use the corporate dollars to create personal wealth outside the business. I call these benefits executive compensation. Normally you can arrange executive compensation programs to be highly effective and efficient tax wise. The corporate dollar can do more for you than the owner could do on their own personal dollar. We have many programs where the corporation is taking a deduction and creating wealth for the owner and their family which is positioned outside of the business.

Below is a project we worked on which shows the value of the corporate cash flow. The names of been changed to protect the innocent, but the case history explains how effective using your corporation cash flow to create wealth outside of your company!

The Case Of Joey Bag Of Donuts

This is the case of Joey Bag of Donuts and his pursuit of keeping wealth outside of his business. You see, over the years working with Joey Bag of Donuts we told him that leaving too much of his wealth in the business can be problematic, especially when the time came that he needed to exit his business. He heard me tell him many times, that someday he will leave his business by either a death, disability, or retirement_, and taking the wealth with you when you need it the most, can be a problem, if you do not have the right exit strategy. _

There are many reasons wealth gets lost in a business when it is sold. It can range from bad planning to bad luck, but Joey Bag of Donuts always remembered to keep as much of his personal wealth outside of the business as possible. Therefore, he purchased his company building and put it in a separate LLC. Joey Bag of Donuts also believes in putting as much of his income into the company pension plan. Again, this plan is outside of the business.

We also taught him to have his company support whatever it can legally towards his personal lifestyle. For example, his cars, gas, some entertainment, health insurance, retirement, and other things are paid for through the company.

Joey Bag of Donuts wanted to put more money away for himself and his family’s future, but did not want to use his own funds, so why not have the company support more retirement contributions?

He already had a profit-sharing plan, and he was sharing company contributions with his employees.

We decided that a non-regulated plan was the best way to go, so we developed a plan for only him. The plan is a combination of two concepts. We call this the CEEP PLAN (CORPORATE EXECUTIVE EQUITY PLAN).

The plan is a discriminatory plan, so Joey Bag of Donuts can pick himself or anyone else he wants, unlike a profit sharing or 401k plan, which is a regulated plan.

THE PLAN: As you can see, the company made all the contributions, and took the deductions for them. Joey Bag of Donuts was the sole participant of the plan. His cost was “0” out of pocket and he ends up with almost $800,000 of cash at retirement. He also could turn the cash into a tax-free income stream. In this case it was $67,500 tax-free income. The stream of income is worth more than $1,215,000. Along with that he has a death benefit of $2,300,000 payable to his family tax-free.

THE BOTTOM LINE: Joey Bag of Donuts gets retirement income using corporate funds. All the contributions can be applied to just his account. He also has the use of the account before retirement, like a “family bank,” along with the ability to withdraw funds tax-free.[1] There would be no 10% penalty if withdrawn before 59 ½.

THE RESTRICTED PLAN: The “Restricted Plan” relates to an employee of the company that the owner wants to make a “A key person To Hold onto Forever.” This is a terrific way of giving someone a benefit with a vesting schedule, so they stay longer.

Summary: If you own a company and are not taking advantage of the CEEP program, you are missing one of the genuinely great executive benefits available to you as a business owner. The plan is flexible so you can design it to your needs.

OVERVIEW OF THE PLAN (Summary):[i] Type of Model: CEEP

EMPLOYER

Yearly Premium Payment: $25,000

Yearly Net Cost: $17,500

Total Gross Premium to Retirement: $675,000

Total Net. Premiums to Retirement: $472,500

Total Loans:

For Tax Costs: $202,500

For Interest Costs: $112,003

Net Cost of Loans: $314,503

If Loan Forgiven, Net cost: $220,152

EMPLOYEE

Annual Average Interests: $4,148.25

Loan Payoff AT Retirement:[2] $314,503

Net Cost: 0 (all funding came from Ajax Company)

AT RETIREMENT:

Rollout Amount: $94,350.83

Tax Cost on Forgiveness of loan[3]: $94,350.83

Net Cost to Mr. Joey Bag Of Donuts

ll : 0 cost out of pocket[ii]

Cash Value in policy after rollout/forgiveness: $793,4 29

Death Benefit After Rollout: $2,306,317

Tax-Free Retirement Yearly Income: $67,500

Equivalent Pretax Payout Before Taxes: $96,429

Years of Retirement Income:18

Total Retirement Income: $1,215,000

All and all, not a bad arrangement.

[1] Fund in excess of the collateralized amount.

[2] Funds are withdrawn from policy tax-free, results are “0” cost to Mr. Joey Bag Of Donuts

[3] Fund come from policy tax-free.

[i]This is only a summary of the illustration attached to this book. The illustration is a hypothetical model of how the policy would work.

[ii] This is a fully funded Employer plan. There is “0” cost out of pocket for Mr. Joey Bag Of Donuts

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This report will discuss the methods which will allow your business to use its cash flow to create wealth for you outside your business at the most tax effective way of creating wealth. Executive Compensation CEEP planning is more tax effective than a 401k, 403b, or any other pension and retirement plan.

As a business owner you have the opportunity to create an amazing amount of wealth with little tax cost. Start with the report and find out how you can create your wealth and your financial security for the future.

The Six Most Costly Financial Mistakes Business Owners Make Costing Them to Owe Huge Taxes!

Featured by YOUR BUSINESS WORTH, posted in Business Growth and Transition, Buy and Sell Agreements, Company Wealth, Estate Planning, Executive Benefits, Income from your business, Key People_Or Group, Life Insurance Types, Passive Ownership, Strategies of growing business, Tax Efficient, Tax Free Income

Many business owners are unaware of the opportunities they have in creating wealth through their business. Many owners put too much wealth in their business, where it can be tied up or hard to get out. It also prevents them from accumulating outside retirement funds.

There are several ways to create wealth through your business on a tax-efficient basis which many owners are not aware of.

I would like to share with you the six mistakes that prevent owners from creating more wealth by utilizing the business cash flow.

NOT IMPLEMENTING A CEEP: (Corporate Executive Equity Plan) for themselves. This is one of the most tax effective methods of creating personal wealth using corporate cash flow. The cost of providing this wealth creating account costs the owner about 30% of the tax cost. Example: if the company bonused $20,000 to the owner for a personal retirement plan, the tax cost would be $6,000 each year. However, under a CEEP arrangement, the cost would only be a $60 the first year, and about $1,200 the 20^th year. This is one of the most misunderstood concepts in executive compensation by attorneys, insurance professionals and CPA’S. Consequently, it might be considered under used. However, the executive compensation specialist understands how the plans work and how it can be of great value for the business owner in shifting income from the company to the personal side of the owner.
NOT TAKING ADVANTAGE OF THE SECTION 412(e)(1): which allows the owner to make a substantial number of tax-deductible contributions into a retirement plan skewed towards the higher paid owner. Example, the owner aged 50 can deposit up to $213,905 fully tax-deductible. Great for good cash flow companies.
NOT USING THE “SAFE HARBOR RETIREMENT PLAN”: where a substantial amount of the tax-deductible contributions can be allocated to the higher paid participants. Also, included in this arrangement is the “Cash Balance Plan”. These plans create greater tax-deductions for higher paid employees.
NOT TAKING ADVANTAGE OF A RESTRICTED BENEFIT PLANS (RBP): which is a discriminatory and tax-deductible plan. It can be used to provide valuable benefits to retain key people. The business owner keeps the forfeitures if the employee leaves before vested. This can lock your key group to your company.
NOT CREATING A DEFERRED COMPENSATION PLAN: This is a flexible, separate, and discretionary retirement benefit that can also become a mechanism for funding the sale of your business in the future and create retirement income. The pot is sweetened when you add a DBO (Death Benefit Only) to the planning.
NOT CREATING AND NOT FUNDING YOUR BUY AND SELL AGREEMENTS: A disability, long term illness, or death may occur long before the owner planned to exit their business, creating a path to financial disaster not only for the owner, but their family, partners, and employees. This is one of the most egregious mistakes I see business owners make. Many times, it goes unnoticed by the advisors. This is one of the reasons why I am an advocate of check-off lists, “fire drills”, and annual reviews.^[i]

Simply Put! By Utilizing These Common Benefits, Owners Can Maximize Their Fullest Potential Business Value!

To help you understand some of the ways to utilize your business cash flow to create more wealth for you and your family, I put together this FREE WHITE PAPER, CALLED “A TAX -FREE LIFESTYLE FOR BUSINESS OWNERS”, AND I would like to GIVE this FREE WHITE PAPER TO YOU.

THIS REPORT will help you understand how you can use your business to take advantage of discriminatory benefits plans for yourself, family members, and key employees. The Tax-Free Lifestyle REPORT is strictly for small business owners who want to grow their business while creating more wealth outside of their business. I designed this white paper to help business owners avoid the COMMON MISTAKES made by other business owners which forced them to work more years, save less retirement, pay more in taxes, and tied up too much wealth in their business, creating more stress, and had no free time for themselves!

You’ll also discover in the TAX-FREE REPORT:

One simple concept allowing you to retire with more wealth or retire years sooner. (This one simple financial principle is rarely ever talked about on “pop news” financial TV shows or by other so-called “financial planners”.
2 proven strategies to increase cash flow and reduce expenses if you really want to sleep at night!
3 secret ways to have your business build a tax-free wealth account for your personal and business use!
“Your Business DNA” Understanding this key allows you to double your savings and retirement investing without making a single dollar more in income or investing in more capital equipment and labor.
5 value drivers to prepare your business for a sale, even 20 years in advance!
How a simple inexpensive benefit plan can keep your key people!
How creating a Deferred Compensation plan can help finance the future sale of your business.
How having a benefit plan for you in the future can lower your cost to sell your business?
Misleading and incorrect “old wives’ tales” about creating wealth in your business.
Tax saving strategies that 9 out of 10 business owners don’t use and end up paying more taxes
Much more…

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Once you submit your email address, you will receive your report immediately! Enjoy!

Now you may be asking…Why would I spend my own money to send you this FREE WHITE PAPER? Think of it as my personal introduction… a way for you to get to know me better. Nothing more than that!

Often enough, when business owners learn the information in this guide, they decide they want to know more about what we do, and possibly do business with us so they can have our business owner expertise and in-depth knowledge of how business owners think. I know, I am one of them. I know what you think because I think about it all the time. Let’s say 24/7 to be safe! Just as you value the expertise in your business field, I believe working with a financial expert who knows what it is to run a business and knows the business world is critical to your financial health.

That’s it! Let me send you “The Tax-Free Lifestyle for Business Owners”. Do with it what you want. Maybe you’ll want to talk to us further, maybe you won’t. There is no obligation to do so.

Either way, I think you’ll find the information in this report will be immensely valuable to helping deal with the “what if’s, grow your business value, enjoy it more, and create more time for you and your family while creating an almost “stress-free” life with tremendous financial freedom in the future. Oh yes! NO TAXES EITHER! Visit www.yourbusinessworth.com to learn more!

FOR A 7 MINUTE VIDEO

^[i] Paul Hood: “Buy and Sell Agreements- the last will and testament for business owners”. Paul discusses his check off list, and his “fire drill”. I am an advocate for these systems to make sure the buy and sell agreement is a perfect of a fit to the entity and owners as possible.

Pending Tax Changes May Be Around The Corner 2022!

Featured by YOUR BUSINESS WORTH, posted in Business Growth and Transition, Company Wealth, Estate Planning, evaluations, Income from your business, Life Insurance Types, Strategies of growing business, Tax Efficient, Valuation, Working On Your Business

I am currently reviewing some of the pending tax proposals being presented. Again, these are proposals and most of them will change before enacted.

It occurred to me as I was reviewing the details of the tax proposals, how many changes I have seen over my long planning career. It made me think of how many times clients (YOU AND ME) had to update our plans at our cost. It is amazing the disregard the government has for the U.S. citizen in making this system easier to work with. I can understand why so many citizens put off planning, or just get tired of updating. Unfortunately, this is the reality of the tax system and the changing of administrations.

In 2017 we had a major income tax change which in most cases helped many citizens lower their taxes. It was easy to understand and it did what it was suppose to do, stimulated the economy along with increasing public confidence.

It also gave estate owners a path to plan to preservation their estates. The tax policy was working very well and our government tax coffers where growing.

Pending Tax Changes- Again These are only proposals!

The Green Book 2021

Sr. Van Hollen (Sensible Taxation and Equity Promotion (STEP) and other plan such as the American Families Plan, and the “For the 99.5% Act (Bernie Sauders)”

Income Tax Changes

Top income tax rates 37%-39.6% effective January 2022; > $509,300 for married, and $452,700 for single
Restrict tax deferral, “like-kind exchanges” (swaps of real estate that avoid current taxation that a sale would tigger
Capital Gains might double-(sale of stock, investment real estate, etc. ) qualified dividend with incomes over $1million taxed at ordinary rates. This could be triggered for gains after April 28, 2021

Social Security Taxes

To coordinate the net investment income and self employment taxes, so unlike current law, a company could pay the owner a reasonable salary or guananteed payment, the overage became federal taxable profits, but not defined as payroll taxes. This was assuming that the salary, and withdrawals were reasonable compensation .

The proposal is to tax pass-through business income (e.g. S Corps, limited liability companies, partnership) of high income taxpayers will be subject to either the net investment income tax or the social security taxes.

Audits from the IRS: $80 BILLION increase over 10 years for IRS for audits.

Estate and gift tax:

Bernie Sanders proposal (For the 99.5% Act) calls for a return to lower estate and gift tax exemptions as well as significant changes to the rules on GRATs and grantor trusts

Most dramatic: Biden’s plan is to make the transfers of property by Gift, and on assets owned at death (as of January 1, 2022) triggering events for capital gains taxes. The gain is measured by the date of gift or death fair market value less basis.

Exclusions: transfer at death to a US spouse.

So there are other potential changes coming down the pike and we’ll have to wait and see. Here is the bottom line:

Split Interest Gifts: Grat’s ; watch for developments

Grantor Trusts: At Grantor’s death or trust is no longer revocable

BOTTOM LINE-

If you are a business owner with wealth in your business and you have not done any planning, it may be a good time to start thinking about a certified appraisal of your business and your holdings. Also, you might want to start thinking about what your goals would be for passing your estate assets. It’s to early to tell where the wind will blow and how you will be affected by any change, but it is not too soon to think of what you wish to accomplish in your estate and business planning.

As I look some of the potential changes, Life Insurance Planning will become more significant in paying for the additional liabilities of passing your estate assets either by gift or death.

To help you with your planning, I would like to offer to you my newly published Ebook called,”Unlocking Your Business DNA”. In the book I cover strategies I have used with business owners for over 50 years with powerful strategies to create growth and profits in your business and also create an amazing amount of leisure time.

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OR,

If you with to receive a free business assessment of your business planning, take our ONE MINUTE SCORECARD SURVEY. Literally, it takes one minute to go through. Once submitted I will send you a FREE ASSESSMENT of our findings. We will be able to pin point the strong point and the points that you need to work on to create more business growth and profits.

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More to come… stay tuned.

Issues Of A Growing Company

Featured by YOUR BUSINESS WORTH, posted in Business Growth and Transition, Buy and Sell Agreements, Estate Planning, evaluations, Funding your Buy and Sell, Key People_Or Group, Life Insurance Types, Selling Your Business, Strategies of growing business, Valuation, Working On Your Business

This is a case study about a company that did not have a buy and sell agreement in place. The business has grown substantially. The owners were concerned about the growth of the company, sacrificing larger salaries to invest and grow their business.

The accountant recognized that there was a problem if there was a termination of a partner, and referred me to his clients to help educate them on estate and business planning, and also to help them design a buy and sell agreement.

Scenario:

Bill and Sam started a very successful manufacturing company. They produced the assemblies for hard drives.

They are a C corporation and have scaled tahe business from four full time workers to about 34 employees. Their client base has grown from just a few to a few dozen over the years.

One Page Issue(s) (With our team we identified these issues)

The business has never been appraised so there is a question of the value of the company and estate.
Both partners have families and larger personal liabilities than when they started.
They have invested their earnings into the business and don’t have a retirement plan.
They don’t have a binding buy and sell agreement, nor a method of funding the liability.
The owners are expecting the exemption credit to lower which will expose them to death taxes.
Neither partner has done any estate planning, other than simple wills.
Retaining the key person in the firm who has the relationship with the customers, vendors and key contacts. Because he basically runs the company, the owners take a lot of time off. They are concerned that the competition may try to recruit him. If lost, it would have a major impact on the company.

Major issues and immediate concerns:

Potential fire sale of the firm if there is not a “planned design for buyout”
Uncertainty and instability for the employees, especially the key people in the firm.
The possibility of the deceased partners family running the business with the surviving partner, leading to inexperienced leadership.
Lack of liquity to pay the taxes assessed on the value of the business and other administration costs. Without the valuation, it was a best guess estimate, jeopardizing accurate estate planning.
Business valuation disagreements, especially IRS litigation.
Lack of market for the business.
The loss of income for the family.
Lending from the banks could be cut off after the death of one of the owners. No assurances that loans would be immediately available upon an owners termination. A concern that any new loans in the future may have convenants that credit lines would be redeemed upon a partners termination unless there was a valid buy and sell agreement.
Stress on the business’ cash flow or credit line as a result of the surviving owner trying to purchase the deceased partner’s share.
The possibility of losing their key person to a competitor would be a significant loss to the firm.

One Page Solution

The most critical issues to solve now :

Complete a Buy and Sell Agreement with funding/ both life insurance and disability insurance
A Certified appraisal to be done
Create strategies to keep the key person with the company
Start the process of personal estate planning for each partner

There were other issues, but we all felt the buy and sell agreement was the most important at this point.

One Page Solutions For Buy and Sell Agreement:

Cross purchase buy and sell agreement funded with cross owned permanent life insurance
The insureds were about the same age
They were both in great health
Premiums were about equal in cost, and the corporation would bonus the premium to the owners
Since the owners willl sell in the future, having the increased stepped up in basis would save taxes, as the partners plan on selling in the future.
Also wanted the insurance company to define full disability through the contract definition.

One Page Solution FOR KEY PERSON:

A CEEP for the key person (Corporate Executive Equity Plan); For Key Person

Cash Equity for retirement
Tax free death benefit for family
Limited contribution by employee-basically paid in full by employer
Tax-free income at retirement- Will create about $200,000 tax free for 20 years at 66

There was a vesting schedule designed for the employee for 10 years. If he stayed he would have a much richer benefit than his 401k would provide

Non-compete, Non-recruiting and solicitation of employees of the firm, and Non-disclosure agreement to be executed by key person

Estate Planning:

Currently, working with the attorney on new wills, trusts, and an irrevocable trust for life insurance. There are some other things we are considering with real estate owned outside the state, such as LLC, AND inter vious trusts.

Triggers: In the agreement we established the major triggers: death, disability, termination, retirement, divorce, bankruptcy. We decided to use a disability income policy to fund that part of the plan. We also wanted to have the definition of disability decided by the insurance company.

As we move forward we are reviewing other issues yearly. Also, forming the team with the attorney, CPA, and others was instrumental in accomplishing the results.

Receive your Free Business Kit Guide. A Great guide to help you understand some of the business planning issues. CLICK HERE

Treating Your Children Equally Or Fairly!

Featured by YOUR BUSINESS WORTH, posted in Business Growth and Transition, Company Wealth, Estate Planning, evaluations, Income from your business, Inside Sale, Passive Ownership

Leaving assets Equally or Fairly!

The One Page Issue

The Issue Overview:

Parents want to leave different property to their two children. Son A is in the family business, while Son B is a teacher. They also want to update their estate plan.

Break down and fact pattern: Family owns a business worth approximately $3 million (ballpark guess by accountant, but not a certified appraisal). The account has suggested that the owner get a certified appraisal. There is a building worth $800,000 that houses the family business, and residential real estate worth about $1.5 million. Their home is valued, $500,000, and an investment worth about $600,000. Their net worth is approximately $6,400,000.^[i]

Rents and salary are where the family derives their income.

The rental income profits are being invested back in the real estate to pay down the mortgages which will be paid off in five years.

Intention of estate owners; Specifically, at the death of the surviving spouse, Son A is to receive the business and the business property. Son B is to receive the real estate and residence. The investment account balance to be split equally.

Past Planning: The parents have done very little estate planning. They have an old, “I love you will” and do not have healthcare directives in place.

One Page Issues:

Summary of Issues:

A. Upon dad’s death- the status of mom and her income.

B. The real estate other than the business building to Son B.

C. Distribution of business assets to the son A

D. Estate settlement costs and taxes.

ONE PAGE SOLUTION!

One Page Solution (s), things we suggested to consider:

Certified evaluation of the business as a watermark of value, for a variety of things.
Update wills, possibly a living trust (Qtip/bypass) and Medical Directives
Placing real estate in Irrevocable defective grantor trust with spouse as income beneficiary (Defective Grantor Trust) remove from estate and future value^[ii].
- Parents are not concerned with making gifts. (See footnotes).
- Parents are aware of a possible reduction in the exemption credit.
- There is also the issue of the loss of stepped-up cost basis in the future because of future tax law changes.
At spouse death, Son B can receive the investment property. Son B will receive the commercial building and the business.
If more cash is needed in the estate, the business could fund a life insurance policy on Mom and dad (2nd to die) to absorb taxes and transfer costs. Using the company to fund the policy via a split dollar or bonus plan. If so, the life insurance would be purchased by an irrevocable trust.

Overview

These were a a few of the strategies the family could do to improve their situation, although there are many more ways to plan their estate. Most important, this was the direction the family felt more comfortable after reviewing other possibilities. Compared to the default estate plan they had; this planning puts them in a much better position to accomplish their goals.

Bottom Line:

The spouse will have the income needed to stay in her world.
Son A received the company along with the building.
Son B is treated fairly in that he receives the real estate and income from the real estate.
It also works well if the mother passed first. The only exception would depend on the value of the stock which the father owned at his death. Currently, he owns 100% of the stock. (Once the business value is known other planning strategies could be implemented to save taxes and accomplish their financial goals as a family. Things such as using minority stock discounts, recapitalization, estate tax funding with life insurance, gift programs, along with other techniques to accomplish the personal family goals).

Take our free SCOREBOARD ONE MINUTE ASSESSMENT. AFTER YOU TAKE IT, WE WILL SEND YOU A FREE ASSESSMENT REPORT. IT WILL HELP YOU IDENTIFY WHAT AREAS IN YOUR BUSINESS GROWTH are strong and what areas you need to work in to maximize your full potential business value. CLICK TO GET

^[i] Business needs certified appraisal- current value is an estimate

^[ii] We are considering current tax laws; however, we are on the verge of a possible lowering of the exemption credit and repeal of the stepped-up basis

Reasons They Do Not Have A Transition Plan That Will Be Efficient – Part 2

May 11, 2021 by YOUR BUSINESS WORTH, posted in Business Growth and Transition, Buy and Sell Agreements, Company Wealth, evaluations, Selling Your Business, Strategies of growing business, Value drivers, Working On Your Business

Over the years, my experience with many owners I have found a major conflict with owners is the working in their business vs. working on their business. It is extremely hard for many business owners to make changes and spend the necessary time. I have a book called “Unlocking Your Business DNA”, which discusses the personal tragedy of not having the proper planning.

FOR A FREE EBOOK; REQUEST UNLOCKING YOUR BUSINESS DNA

I have heard the stories from “I will live a long life”- “I need to work and won’t retire” “No one can do this like I can”

Four possibilities of leaving your business:

Death (that includes dropping dead at your desk)

Disability

Retirement

Cannot do it any longer

By not planning, the owner may find themselves receiving much less for the business, walking away without any value, or just die working at their “bench.”

Because of this one reason, we developed the two hour a month planning process, called: THE ONE PAGE PLANNING PROGRAM.

The Owner AND Their Issues: What is important for the owner is to have a personal retirement and estate plan to define their future needs. Do they want to stay active in the business even when retired? Will they have enough money for retirement? Will they have estate tax exposure. Do they have the proper estate documents? Do they have someone to sell the business too? How much will they have to sell their business for to net the amount of assets needed to provide their financial security?

Owner Issues

Financial Security
Wealth Preservation and transferring the business with as little taxes as possible.

The Family: What is the status of the family relationships in the business? Do any of the family members depend on the business for income? Do they own stock? Are they in agreement with the proposed succession? Are their careers involved with the business?

Key Issues for family

Compensation among family members in the business?
Inheritance among family members?
Management of family business, who is involved?

The Company.

What are the assets in the business? What is the value of the assets? What is the value of the business?
Has the company been appraised in the last few years?

Is the buy and sell agreement in force-signed and dated?
Does there need to be more formality in the governance of the structure?
Has there been a systematic attempt to enhance business value drivers over the years?

What is the structure to get earnings out on a tax advantage structure?
Who will be the leader of the company, and will there be a change in ownership?

The Succession Plan

Business Situation and questions when thinking about succession.

How are you getting earnings out of the company on a tax advantaged structure?
Have you considered the leadership and owner issues to be addressed?
Each entity structure has advantages and disadvantages, and each should be looked at carefully when considering your future status as you transition?

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The Challenges Of Developing A Transition Plan For Small Business Owners- Part 1 of 2!

May 11, 2021 by YOUR BUSINESS WORTH, posted in Business Growth and Transition, Buy and Sell Agreements, Company Wealth, Inside Sale, Valuation, Working On Your Business

Many small business owners do not have a plan for the transition of their business. A survey taken a few years ago suggested that only 30% of the small business owners had a transition plan. Out of the 30%, only 50% had a plan in writing. Of those plans, there is no way of telling if they were set up correctly, outdated, or even funded, considering the changing of the business status.

Options available for business owners for the transition of their business:

A structured succession plan would enable the business owner to achieve their personal financial goals as its primary function, which would be to create a satisfactory income, and security for their future.

A second goal would be to maximize the greatest potential value for the business, which would help the owner with their financial needs in the future, such as retirement.

Another goal would be the long-term growth and the survival of the business to support family members for the future, key employees, or if the owner wishes to remain attached to the business, as a passive owner.

One of the key issues is to make sure the business owner has control of the process and has defined the timing of any transition in the future.

For example, if the owner wants to retire in five years, they must make sure they have implemented proper value drivers to maximize the company value. Some value drivers take longer than others, such as building the next level management key group. This is the group that may wish to purchase the business at some point or run it for the owner.

By not implementing this strategy early, the owner may be forced to delay the sale of the business until the strategy is developed, consequently jeopardizing their retirement plans.

If the business is to be sold outright, there needs to be other quality value drivers working for the business owner to maximize the potential sales price.

Overall, by not having a succession plan, and awareness of what value drivers need to be implemented, the owner risks not achieving the highest potential value for the business while weakening the ability to time and control their transition from the business.

Problems of not having a solid transition plan:

Family equity issues
Income and estate tax exposure

Risk not creating the culture of retaining key persons and family members
Uncertainty for people who have a stake in the company (investors, family members, long-term employee, as an example)

For small privately help businesses, a succession plan is very personal, and cannot be a template program, as every company is unique, and the owners’ situations are very different.

The key to a successful transition is having a solid plan which has an orderly process and is tax efficient.

LEARN THE FOUR WHAT IF QUESTIONS EACH BUSINESS OWNER HAS AND HOW TO AVOID THEM BY REQUESTING THE WHITE PAPER: CHAOS-THE BIG STORY; REPORT #4.

Selling Your Business To The Younger Generation!

Featured by YOUR BUSINESS WORTH, posted in Business Growth and Transition, Buy and Sell Agreements, Company Wealth, evaluations, Inside Sale, Key People_Or Group, Passive Ownership, Selling Your Business, Strategies of growing business, Valuation, Value drivers

I am old enough to remember the many small businesses in my hometown. There were all types of businesses such as, meat markets, hardware stores, small groceries stores and many specialty stores. Large shopping centers and malls were just starting to appear, as they would be the future home of many of the smaller stores along with the big chain stores.

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It was the fifties and small business was booming. There were many reasons for the business boom, but mainly it was the population of the baby boomers which gave way for opportunities to buy or start a business.

Now over 60 years later, things are changing. The boomers that started the businesses are now older and would like to retire and sell their businesses.

Baby boomers own 2.34 million small businesses and employ more than 25 million people (about the population of Texas)ⁱ. This represents about 100 million citizens when you consider family members.

Incomplete Plans

A recent surveyⁱⁱ shows that 58% of small business owners have not only failed to complete a succession plan, but many haven’t even considered a transition plan. The significance of this figure is the potential catastrophic effect on our economy as the boomers burn out, die, or become too ill to work. Other studies tell us that only 30% of business owners have a succession plan, and 50% of them are incomplete plans.

The impact of this lack of planning not only affects the consumer, but also employees, family members, partners, independent contractors, part time workers, down the line suppliers, an endless road of dependence on each business.

Even the younger generation business owners are affected by the closing of these businesses, as the younger business owners have a type of dependence on the success of the boomer’s generation of businesses. They rely on these established businesses as suppliers, mentors, etc.

Receive my free E-book; “Unlocking Your Business DNA” to learn the strategies of growing, protecting, and transitioning your business for greater value” CLICK HERE

Younger Generations

Interestingly, many younger generations are not interested in running the family business. They have seen the sacrifices their parents and other family members have made over the years; they don’t want to spend all the time necessary to run the business.

This generation, beginning with the babies of 1965 and continuing through 1984, is a big problem for Boomers, who are preparing to sell their businesses. The issues are three-fold: numbers, values and choices.

A major reason for the potential problems for baby boomers is in the pure number of them. From 1945-1964 there were many baby boomers born during that period which stemmed the growth of the economy. However, the next generation is about 23% less in population. This means there are less people in the younger generation to purchase businesses.

In the next 4-6 years, when the last of the boomers hit 65 years old, almost 5 million fewer people (23%) will be turning 45, and entering their prime business buying years. This shortage of buyers will create the worst imbalance between small business sellers and buyers in history, and it will continue for the next 20 years.ⁱⁱⁱ

Values

Boomers have a vastly different work ethic than the Generation X’s. Not that they are lazy, but their values of working, when and why, are very different. Because of these values there are many Generation Xer’s who don’t wish to have the same work schedule their parents had.

Generation Xers want to define the “work-life balance”. Their observation of life watching their parents work all the time, didn’t really make sense to them. Consequently, they want to create more of a balance in life.

Generation X’s, by and large, doesn’t equate material comfort directly with work. Their “balance” is oriented towards separating work and life. Unlike most Boomers, who live to work, the X generation only works to live. Work isn’t their identity, it’s merely the thing that allows them to pay for what they really want and their living standard.

Many Baby Boomers’ attitude was, “live to work”. Working a 50–60-hour week was part of their business. Based on data, the Xer’s don’t agree with that lifestyle and are not interested in having a business where the cost is many hours of work.

Planning for the Boomers and Their Business

Because there is a shrinking number of future purchasers, small business seller’s must take all the necessary steps to prepare their company for an ultimate sale. In most cases they will need help in preparing for the sale of their business.

There are professionals who can recommend to you how to prepare for the sale or your business, and to help you create the key strategies to implement for a greater potential value.

Past Problems

Many of the strategies needed to create value in business need time. You normally can’t wake up one day and decide to sell your business next week and expect to get the highest potential value.

However, with the right coaching, you can start working on the strategies that can increase the potential value of your company. Even if you are years away from thinking about selling your business, business owners should engage with professionals to start the process of implementing the right value drivers early, with the end game being to increase the potential greatest value of their company.

Point to be made

By kicking the “transition of your business can”, down the road, owners are putting themselves in a terrible position. Not only are they not prepared to sell, they don’t have the systems in place that create the potential highest value, but also there may be a limited number of buyers in the younger generations.

If you are a business owner interested in discussing the future of your business, we would be happy to have that discussion with you.

To aid you with the conversation, we have created an assessment tool that it easy to use. It takes about two minutes to complete, and it will give you an idea of your strong and weak points in your business planning. It’s a free tool called the “scorecard”. Once completed we will send you a free analysis report of your strong and weak points of your business planning. We will also offer a free phone conference to discuss the results with you. Once you submit your scorecard, we will send you an assessment report in approximately 72 hours (about 3 days).

Receive my free E-book; “Unlocking Your Business DNA” to learn the strategies of growing, protecting, and transitioning your business for greater value” CLICK HERE

Business Owners Essential Planning Tools! Part 2!

Featured by YOUR BUSINESS WORTH, posted in Business Growth and Transition, Buy and Sell Agreements, Company Wealth, evaluations, Executive Benefits, Funding your Buy and Sell, Income from your business, Inside Sale, Key People_Or Group, Life Insurance Types, Passive Ownership, Selling Your Business, Team, Valuation, Value drivers

Good planning can often begin with owners transferring ownership interest to family members, without giving up control of the business. This type of planning sets the stage for the future passing of the baton and can be highly effective.

The long-term plan of business transition can also focus on who can run the business operations once the senior guard leaves the business. Just because a family member has worked in the business, it does not mean they can run the business effectively.

Business Transition And Succession Planning requires many years to develop the right plan. It starts with finding the right employees to train for the job, and the right people to run the business (this includes family succession situations).

I have found that “Passive Ownership” can be a particularly good possibility for many business owners. They stay in control and slowly give away the duties over time while running the business, but at the same time slowly disengaging from the business. It gives them time to help prepare the junior successor for the job.

The procedure for “Transition Planning” is critical for a long-lasting understanding amongst the family members, both in and out of the business. Without clear communication to the family members, conflict and bad feelings may occur.

Business Succession Planning (Click to receive full report and guide; R-1)

What would happen to the business if one of the partners died?
- Who will buy your interest in the business?
- Will the company, shareholders, or the heirs keep the right to own the shares. Are the party’s mandated to buy your shares?
- Where will the capital to buy the shares come from?
- Do you want the deceased shareholders/beneficiaries to have the choice to run the business?
- What is the funding mechanism to buy the business?
- How is the life insurance structured to help fund the purchase price?
- Is the same true for a disability? If so, what is the definition of a disability to trigger the sale. Is the disability funded?
- What are the rules if a partner wants to sell to a 3^rd party?
- Is there a “put” right; to have the company buy the shares of a disputed share holder?
- What are doing concerning incentives to key employees?
- How are you supporting retirement through the company?
- What are you providing in executive compensation to the key people active owners, and officers of the business?

There are many more questions that need to be answered. The elements of your business succession plan will normally be in your business succession agreement and incorporated in the operating or stockholder’s agreement.

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Operating Agreement:

An agreement which regulates the company and manages the relationships between the members of the company.

Buy-Sell Agreement

An agreement between the business owners to buy and sell interest in the business at a specified price upon a “triggering event”, such as death, disability, divorce, voluntary withdrawal, non-voluntary withdrawal, bankruptcy, and retirement.

This document is important and serves to obtain a fair price for the stockholder and a path for a smooth transition for the parties involved.

Type of Buy and Sell agreements:

Cross purchase: This is between stockholders to buy departing stockholder’s shares
Redemption agreement: The entity (business) buys the shares
Hybrid/ a combination of above: A “wait and see buy and sell”^[1]

Provisions in the buy and sell agreement

The sale price of the departing owners’ interest and how it will be paid

Installment
Sinking fund
Cash
Life insurance^[2]

Other Methods To Transfer Property:

Although the buy and sell agreement is an effective method to transfer property, other methods, such as ESOPs, compensation plans, and pension plans have a place in funding.

There are other areas and issues in your business planning that need to be addressed at some point and redefined over time.

The valuation of your company should be done by a qualified and certified appraiser. Business owners seem to think they know the value of their business, however, in more cases than not, they are incorrect.

Having A Team Of Financial Experts Will Help You Plan Your Business And Your Estate.

My suggestion is to create a team of advisors who can meet periodically and report on the status of the business to the “team”.

I have found this to be a valuable tool as everyone gets on the same page in the planning process and understands what the owner wishes to accomplish.

Over the years I have created the team consisting of the CPA, attorney, banker, investment, insurance and other professionals who come together and review what the status of the planning is up to that point for the business owner. Normally, the team consists of the professionals who have a relationship with the business owner and are currently doing planning for them. Unfortunately, each professional has their own agenda, and rarely knows what the other professional are doing for the business owner.,

In most cases this is the first time the advisors have communicated with each other. I have always thought this was in the best interest of the business owner and was prudent to use these resources. Putting the business owners’ advisors in the same room once a year could be the best planning strategy, they can employ.

The Bottom-Line Thought

The solutions and strategies are in abundance to solve the issues. The problem is defining what the owner wants in their plan.

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^[1] A combination of the redemption and the cross purchase. Usually, the stockholder or trust owns the life insurance on the partners. Normally driven by tax issues and positioning.

^[2] Life insurance is normally the least expensive way of funding the death benefit when compared to alternatives. The life insurance can also play a role in providing funds to help stockholders purchase interest in the company.

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Category: Business Growth and Transition