Category: Buy and Sell Agreements

You Don’t Need a Business Degree from Wharton to Build an Incredibly Successful Business,  

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, Passive Ownership, retirement, Selling Your Business, Strategies of growing business, Tax Efficient, Tax Free Income, Value drivers, Working On Your Business

But you do need this…

Dear Fellow Entrepreneur, who wishes to grow their business and enjoy what they are building… 

did you ever wonder why some business owners run a successful business while others claw up a mountain to stay in business? It comes down to one STRATEGY, in my opinion.  

A Recent Survey Reveals That 86% of Small Business Owners Risk Bankruptcy or A Forced Exit by Missing This Strategy! 

Only 14% Of Business Owners Will Enjoy the Value of Their Business! i 

You and I are entrepreneurs, wired with passion to run our businesses.  I want to share with you a powerful strategy that will change how you run and grow your business. It will give you more clarity and create more simplicity in your life.  This powerful strategy is one of the major contributing factors to building value in your business.  

Have you ever noticed how some business owners keep more of the money they earn, work less, have unlimited family time, avoid getting drained by taxes, keep the best employees, and run their businesses, not the other way around? 

My clients tell me the strategy has given them clarity and has simplified their lives allowing them to enjoy more of what life offers! 

THE ISSUE and THE PROBLEM:   The mindset when you start or buy a business is to bring your product or service to market quickly to create cash flow. This is the “action planning”, and it’s all about cash flow. The problem is you stay focused on the ACTION PLANNING MODE and neglect the DETAIL PLANNING MODE altogether, creating financial chaos, and diminishing the chances of accomplishing your dreams and aspirations! 

Enter the Business Growth, Wealth, and Transition Plan (GWT PLAN) which focuses on the details of the Growth, Protection, Equity creation and Transition of your business.   The GWT PLAN is a “Designed Plan” and creates the future financial success of your business. The GWT PLAN is like Kryptonite, fighting off bad mistakes, lost opportunities and keeping you on the path of building your business’ future wealth! 

A TRUE STORY:  In 1971 my father died suddenly at age 51. His very profitable business in Hamden, CT, was sold for pennies on the dollar. My mother went from middle class to poverty level overnight. She was forced to sell the family home and move to a few different neighborhoods, giving up what she loved the most, which was cooking for the neighborhood kids.  This created great emotional turmoil in the family. 

THIS DID NOT HAVE HAPPEN, BUT IT DID.  Why?  Because my father had a “Default Plan”, NOT a “Designed Plan”.  He winged it, like so many business owners do.  Because of that, he lost his “Life’s Effort”, and his legacy, at an extreme cost to his family.  

If You Had a Financial Leak in Your Business That Was Going to Burst Your Financial Pipes, When Would You Want to Know About It?   

YOUR SCENARIO WITHOUT A GWT PLAN 

If you died or became disabled today, what will happen to your business?  Without a plan, the banker would call your credit line, the vendors would stop selling to you, your key people would be looking for new jobs along with other employees. Your family would need to get permission from the probate court to run the business without breaking the law.  

If your Key Person told you they were leaving along with five other employees, what would you do about this?  The banker will call the loan, your vendors will cease to give you credit, you may lose other employees, and you would lose income very quickly! 

What if you were in a squeeze economically, business was bad, costs were high, gross revenue is not covering expenses, what do you do? Call in Mr. Banker, and hope he has confidence in your business to solve the problem (remember Covid) and hope for credit! 

 You had enough; you want out. What’s the value of your business you want to sell?  86% of your fellow entrepreneurs are not going to sell their business, what would make you any different?  

The Same Scenario HOWEVER, You Implement Your GWT Plan! 

#1: Your banker doesn’t call your equity-line and they are satisfied with your continuation plan.  Your family has planned instructions on how to run the business, while your employees are satisfied and confident of the continued success of your business.  

 #2. Your key people stay on because you have incentives for them to stay. Also, you have protection documents that would thwart their ability to compete with your business if they left.    

#3. If you were so unlucky to hit a bad economic turndown, you have a special benefit in place to fund your cash flow without having to beg for money from the bank.  This was created through your business cash flow in advance.  It is substantial in value, and tax-effective, creating personal wealth outside of your business.  

#4. You have been systematically formulating plans over the years for the purpose of transition someday.  Because of that planning, purchasers are interested in buying your business at the highest potential value.   

If You Are Investing Money, Time, Pride, Sweat and Nerves in Your “Biggest Effort in Life” 

Why Would You Not Spend the Time to Protect It From the “What IF’S By Implementing Your GWT Plan! 

It’s Not Your Fault However! It’s the Planning Professionals Fault! 

Here is the difference between planners  and what we do and why we make a difference… 

It’s their agenda, not yours. –  

The GWT PLAN agenda is designed by you. You pick the subjects you wish to plan for. 

No respect for your brevity-take too long to plan. 

The GWT Plan uses educational tools such as short videos, so you learn on your own time and verification of what you learn via conference calls. 

They charge too much and complicate the planning making it more complex than necessary. 

 The GWT Plan charges are a fraction of the market charges for planning and is designed to be communicative and simple.  We use a patented plan called, “The One Page Solution”, which describes the issue and the solution on one page, and this is done, one issue at a time.  

They are averse to working with your other advisors. 

The GWT plan encourages your other planning team to join us, so we have all the information about your dreams and aspirations and what your team has been doing for you. We welcome all professionals to engage in your best interests.  

Many planners have never run a business or walked in your shoes. 

We have been in business for over 50 years and have never been in any other business professionally, and know what it is all about having staff, payroll, working with banks and having an array of tasks to deal with.  

They don’t spend time learning about your business and your value system, and don’t listen well. 

The GWT plan doesn’t start planning until we feel we understand what your dreams and aspirations are. By using our tools, we not only learn about what the facts are, we learn about how you feel about what you are trying to accomplish.  

Despite this…To Survive and Thrive in the Future Economy YOU NEED A GWT PLAN TO… 

Create a path to follow for success with clarity and simplicity for your business and personal life to help you enjoy your life.  

Create a business culture to help hire the right employees, develop middle management for your future transition, and free up more time for you. 

Uncover opportunities in creating wealth in your business with tax efficiency through your cash flow while protecting and growing your financial future. 

 Develop a solid transition plan to maximize the value of your business for your future financial security while creating wealth outside your business! 

Learn the secrets of developing your GWT Business Plan by requesting my FREE E-BOOK. I am offering a limited amount of copies for distribution over the next fee days! Take control of your future and go down the path the will give you CLARITY AND SIMPLICITY ALONG WITH GREAT SUCCESS!

REQUEST YOUR FREE COPY of my published book, “Unlocking Your Business DNA”, and learn the benefits of having a GWT PLAN!     ORDER NOW- distributing a limited number of E-Books.  

Click Here to get your Free DOWNLOAD E-BOOK

Someday You Will Leave Your Business By Retirement, Death, Disability Or Drop Dead At Your Desk! Do You Have A Method Of Taking Your Business Equity With You In A Tax Efficient Way?

Featured by YOUR BUSINESS WORTH, posted in Business Growth and Transition, Buy and Sell Agreements, Company Wealth, Estate Planning, evaluations, Income from your business, Selling Your Business, Strategies of growing business, Tax Efficient, Valuation, Value drivers

There are millions of small businesses in the United States, and many of them have something in common, and that is that they do not have a succession plan.  

I have heard figures like 80% or higher do not have a succession plan. Over 50% of the companies that have a succession plan, have either outdated plans, or incomplete plans.  

Why is this an over whelming problem with small business owners? Why would a business owner not want to make sure their “lifetime of effort” isn’t lost because of a lack of planning? 

SCENARIO: Someday all business owners will leave their business, either by retirement, death, disability, or just drop dead at their desks.  

 There will be a great loss in the value of the company because of this lack of planning, and consequently, the owner or the family will not receive the true potential value of the business. 

While I cannot explain why business owners do not do their planning, I can tell you some of the reasons the business owners and their family will not get the true value of their company when one of the three triggers occurs (retirement, death, and disability) They would be: 

Lack of planning -. They do not implement systems such as value drivers’ systems, next middle management, systematizing procedures, and others business building procedures. These are the elements that create the future value which a purchaser looks for when buying a business. 

The lack of planning also includes the failure to develop a middle management which could take over most of the tasks of the owner. By not creating a middle management, it leaves the owner as the indispensable person, the essential person in the firm. This is a dangerous position for the future of the company. It may be the greatest threat to the future value of the business.  Like anything else, when you lose the essential indispensable part of a machine, the machine will not work.  This is the same for the company when the owner is the “essential and indispensable” employee.  

Time- Most systems need time to develop and cultivate when building a business. Processes and systems need years to mature and create the potential value of the company. Consequently, when the owner gets near retirement with no more road left to plan, it is too late. Selling the business at the most potential value is not attainable. 

No liquidity: Many business owners put too much of their wealth in the business, such as inventory, machinery, receivables, and benefits, to name a few. They do not make the adjustment to using business cash flow to create wealth outside of the business, like pension plans, executive compensation plans, and other value building programs. Consequently, when capital is needed, it is hard to raise it, and is not readily available to the owner when needed the most.  

When business owners, decide they want to retire, and leave their business, they find themselves in a conflicted position. Because they did not take the time to plan, they have run out of time, and they will not yield the value they would have normally received if they had done planning over the years.  

The only options they may have:  

  • Sell at a reduced price 
  • Stay in the business until they find a buyer willing to buy at this price 
  • Continue in the business to fund their “retirement years” 

The bottom line is to start your planning early. My suggestion would be on the day you buy or start your business, start implementing a transition plan, as most of the transition planning requires an extended period in order to implement.  

Get your free Business Transition Commonly Asked Questions Report! Click here! 

Rushing Through the Most Important Document in Your Business!

Featured by YOUR BUSINESS WORTH, posted in Buy and Sell Agreements, Company Wealth, Estate Planning, evaluations, Funding your Buy and Sell, Life Insurance Types, Selling Your Business, Uncategorized, Valuation

In my career I have experienced several business owners rushing through the implementation stages of designing their buy and sell agreement (BSA), probably one of the most important documents they will ever need, treating the process with little thought.   As Rodney Dangerfield would say, “No respect”.  When it was completed, it was very basic, doing more harm than good. 

In some cases, maybe more than I think, the document being used by the drafting attorney was a “hand me down” from another attorney.  While the “hand me down form” may have been useful in drafting another person’s situation and making it easier for the drafting attorney to do, it was not going to maximize my client’s planning situation.

In Paul Hood’s great book, “Buy And Sell Agreements, Last Will And Testament For Your Business”, he covers the consequences of not designing the right buy and sell agreement, and how important it is to spend the time and money preparing and designing this important document, with an experienced lawyer.  [i]

Paul specifically speaks about attorneys using a “hand me down agreement”, and how it may be more harmful by having it than not. 

The “Paul Hood Fire Drill”

He uses the idea of the “fire drill”. What happens when a “trigger happens? What will be the outcome and the consequences based on how your BSA is set up (or not set up), when you play it out. Like you were the leaving owner, and then again as the remaining owner.  On a personal note, the “fire drill” advocated by Paul is something I use all the time and has been instrumental helping my clients and their attorneys in drafting the proper strategies for their situations.  I have found that this has been a great way of helping my clients design the best BSA for themselves. It has allowed them to make it real and start developing questions and ideas that they can implement in their design. It keeps them involved with the process.

The “Fire Drill” strategy has put my clients in the “power seat” of knowledge, so when they discuss their BSA with their attorney, the elements and strategies that are being used are not foreign to them. This consequently helps them design a better BSA, reducing the time needed to spend with their attorney ($$$$$).    

Keep in mind, many business owners start the process of designing the BSA when there has been no experience of consequences with an owner or co-owner leaving the company. 

Everyone is Equal at the Start!

When owners design their BSA, they are all equal in status.  People that enter into agreements want the agreement to favor them when a triggering event happens, even if the agreement has not been updated in years or there is no reference to the triggering event. 

When are clients initially design their BSA, it probably will be one of the few times that all the partners will be negotiating with each other, because when there is a triggering event, chances are they will be negotiating with someone other than their co-owner.  

The representative of the departing co-owner will have a different perspective as to what they want out of the BSA!  Whether it is the spouse, their child, their law firm, whomever, they will be negotiating from a different point of interest.

Business relationships, and friendships are put aside.  It is at this point you would hope your BSA covers all the areas of concern that need to be covered.  The bottom line is the agreement must be exact as to what will specifically happen based on the triggering event.  There is no room for errors if the document is specific.  The best time to do this is when everyone is on equal ground. 

For this reason, owners designing their BSA with their attorney should take it very seriously because they are really pre-negotiating for the people, they love the most without any certainty of which trigger will occur and which side of the trigger they will be on, leaving or a remaining co-owner.

It is extremely important that the triggering events be identified and that you will understand what will occur with each trigger event.  

Paul Hood’s “fire drill” has made it easier for my clients to understand the importance of designing a solid BSA.  By posing questions to the scenario, the BSA becomes very real to them.  

Examples of how they would play out the “fire drill”  

·       What if you’re the first co-owner to leave?

·       What if you’re the last remaining original owner? 

·       What if you end up with a co-owner you don’t want to be owners with? 

·       What happens if one of your co-owners, dies, divorces, or goes bankrupt?  

      By implementing your “fire drill”, you will start to formulate different scenarios for your own situation creating your own buy and sell design.  

This is a critical document in keeping your business going should a trigger happen to any of the co-owners.  Unfortunately, you must deal with it in advance and before there is a triggering event. 

Risks when implementing your BSA:  

·       Using an attorney who is using a fill in the blank form.

·       Not planning the scenarios before designing the plan. 

·       Not having a BSA.

·       Not signing it. 

·       No dealing with how to fund such triggers.  

There are so many elements to the buy and sell agreement that need to be covered, the planning of this document can’t be taken lightly.  However, that is not to say you can’t have a great BSA.  Having experienced professionals to help guide you through the process will pay off great benefits in designing and implementing your BSA. 

We suggest you find competent counsel who has experience in designing the buy and sell agreements and discuss your goals and objectives with them. 

Again, my best advice is pick up Paul Hoods book (“Buy and Sell Agreements, last will and testament for your businesss”.) Read and study it. 

 If you would like our free Business Succession and Transition Planning Guide, click the link and we will send you a FREE WHITE PAPER to get you started. in your planning.   YOUR FREE GUIDE

[i] E. Paul Hood is a prolific technical author. He has published a number of books on planning and is one of the leaders in estate planning and business succession planning.  

The Easy Process To Identify and To Solve The Problems!

Featured by YOUR BUSINESS WORTH, posted in Business Growth and Transition, Buy and Sell Agreements, Company Wealth, Estate Planning, evaluations, Income from your business, Inside Sale, Key People_Or Group, Passive Ownership, Selling Your Business, Strategies of growing business, Tax Efficient, Team, Valuation, Working On Your Business

The Easy Process To Identify and To Solve The Problems!

Excerpts from My book, “Unlocking Your Business DNA”

The One Page Solution!

As we start the process of fixing the problems, they need to be identified. In chapter 1, I discussed how the business owner needs to find their “Business DNA”. Again, this is about focus and asking the right questions, and giving the business owners the amount of time, they need to think it through.

I break down the issues into two categories, BUSINESS GROWTH AND TRANSITION.

Business Growth: Focuses on the business itself such as the strategies needed to grow the business, the systems, the culture, and its employees. It is all about the business future.

Transition: Focuses on the categories that relate to the owners, and the changes they need to make in their personal life because the business is growing.

I keep these categories separate because the issues concerning the business growth are different than the owners transition issues. However, as the business growth changes, it affects the transition of the owners, and vice versa.

It is very important that the business owner is committed to fixing their problems.  If they are not, the first time they have a business roadblock, they will tend to put planning on the back burner.  This is a mistake, because most of the time it does not resurface until there is a crisis.

However, in our planning we do create action plans in small steps. Having a team of advisors working together creates the ability to complete the small steps needed to accomplish our goals.

An Example:

A perfect example was when a company we were working with had plateaued in growth and wanted to create more business growth. When we went through some of the planning questions, I realized the owner had spent no time systemizing their business.

The owner had no documentation of operational systems of his business, but instead it was all in his head. He would delegate the tasks to his employees like a drill sergeant.  He never even thought of the fact that there was no continuity in his business, consequently, if something happened to him, the business would have ended.

I asked him, “could you go on vacation for three months and not check in during that time”?

He looked at me and laughed, replying, “are you kidding this place would fold in seven days.”

I replied, at least you are real, the sad part however is you do not have a business, you have a job. You have a position, a paycheck, and a place to go, but you do not have a business.

He looked at me dazed! But he knew I was right.

The Process Using “One Page Solutions”, will keep everyone on track.

To uncover the issues and problems with the business owner we go over the main subjects called “ONE PAGE SOLUTIONS.”  On any subject there are always a few directions in which the business owner can go. We discuss them and analyze what are the most important subjects the business owner needs to deal with currently. “THE ONE PAGE SOLUTIONS” ARE LISTED BELOW.

Each Subject has a few sub-topics we review with the owners. As we DISCUSS the One Page Solutions, we find the strategies which will solve the issues. Once we are done with the subject, we move on to the next One Page Solution, if any.

THE FOCUS AREAS of the “One Page Solution” ARE:

1-Sale of Business (outside)/ Evaluation Methods/Timing

2- Inside Transition (Family, Co-Owners, or Key Employee/s)

3-Passive Ownership- Owner wants to still run the business, but take long trips

4-Retirement; defining and preparing

5-Wealth Accumulation & Asset Protection (both in and out of the business)

6-Premature Death- Consequences

7- Estate Distribution- updating

8- Life Insurance Contracts and Benefits

9-Legacy Planning / Management of Legacy

10-Disability and Illness, Medicare, and Medicaid

11-Key Employee Retention- and Creating A Culture

12-Key Employee Owner’s Manual- systematically creating company manual, business coaching, marketing proceedures

13-Corporate Benefits and Retirement- cost and efficiency

14-Qualified Plans and Personal Liabilities- Executive Compensation

15-Family Relationships/Employee Relationships/Human Resource

We helped a business owner recently with the problem of not having business growth over a prolonged period of time.  The solution was to put in place strategies that would create transferable values for the future.

They included things like creating key group, documentation, standard procedure, diversification, and growth strategies.

In this case we realized this will take some time to implement. The owner was under no delusion that this will be done in one year. Most importantly the owner started the process. A few years from now he will see the outcomes in all its glory. Because we have experts in our toolbox, we shared our professional advisors with our client for coaching purposes, and education.

Besides implementing a few systems, they will also do a business appraisal every two years. Over a period, this will help them evaluate the growth of their company by implementing the systems suggested.

By doing this the company could allow for better planning in the future, and adjust the path towards financial security, and business growth.

One of the key elements to helping Business owners solve problems is to also identify the roadblocks. This eliminates the surprise factor should our implementation strategy not go as planned. In one of our planning agendas, we discuss these roadblocks and try to define the subsequent issues and challenges in the future.

What is extremely important in this process is that it makes the owner aware of any potential issues they must have to deal with in the future and stay ahead of the problem curve.

Over the years what has been extremely helpful has been the communication with the team. Again, these are the client’s advisors that may or may not have been in place before we started planning. Since we update the team regularly, we are often given new advice that has been helpful in forecasting future events in the business.

We normally would not have this knowledge if we did not have the team of advisors in communication. This is one of the biggest advantages of working with the team and having periodic reviews.

We have been successful helping business owners work on their business to get issues resolved and to focus on details. We use a One-Hour a month system for the business owner to do this.  This allows the business owner the brevity they want, but also, gives them quality time to organize the details of their business. Through our step-by-step system, we help business owner cover all the key issues that are needed to cover to run your business smoothly, take more time off, earn more money and just enjoy working and life much better.  

If you would like a FREE WHITE PAPER called “Your Business Essential” which will help you organize your business, CLICK THE LINK BELOW, download the white paper. This is a 128-page guide in business planning Your Free. When you click submit on the form, your file will immediately download.  Enjoy. 

Immediate Download  

You can purchase of “Unlocking Your Business DNA”, AT Amazon. All profits to to Wounded Warrior Foundation and other Veteran groups.

Consequences Of Not Creating A Buy and sell agreement!

Featured by YOUR BUSINESS WORTH, posted in 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, Working On Your Business

Part 2 

BY Thomas J. Perrone, CLU, CIC 

S Corporations enjoy the advantages of limited liability, transferability of ownership and professional business operation and management. The S Corporation is taxed similarly to a partnership, as it is a pass through to the shareholders.  

The C Corporation is taxed at the Corporation level first. When the C Corporation is profitable and generates taxable profits. When profits are distributed to the individual shareholder it is taxed again when dividends are received by the shareholder.  

You will find S Corporations normally when the individual rates are lower than the Corporation rates. Also, losses in the S Corporation shareholders may benefit, by deduction, the losses on their individual tax returns.  

S Corporation requirement 

  • No more than 100 shareholders- members of family are considered one shareholder 
  • Must be a domestic corporation 
  • Only individuals, a decedent’s estate, estate of individuals in bankruptcy, and certain trusts are eligible shareholders of s Corporation 
  • No shareholder can be a nonresident alien 
  • One class of stock (different voting rights are allowed) 

Basis and S Corporation 

There is only one level of taxation in the S Corporation. That is at the shareholder’s level.  

If the shareholders basis exceeds the distribution, the shareholder usually will not be taxed when they receive the distribution.  

If the S Corporation has never filed as a C Corporation and has no retained earnings or profits, distributions received by an s Corporation shareholder are not subject to income tax if the distribution does not exceed the shareholder’s basis. Consequently, the larger the basis the greater amount of distribution can be taken tax-free.  

Quick overview of Basis 

  • nontaxable distributions of previously taxed income 
  • income distributed in the same year in which it was earned 
  • losses 
  • nondeductible expenditures such as life insurance expenses 

Keep in mind that the adjustments to shareholder basis is an ongoing procedure and will vary from their initial contribution to, or investment in, the Corporation. Usually, a service corporation will have a low basis because of the low initial investment made in these types of businesses.  

Life insurance to fund the Buy and Sell Agreement 

Life Insurance can have several advantages for S Corporations in a buy-sell agreement.  

A nondeductible expenditure such as life insurance premiums decreases a shareholders’ basis in an S Corporation. The cash value policy can help offset, eliminate, this adverse situation.  

Life insurance cash value helps offset the premium charged to the capital account. The cash value offsets the premium paid so that the decrease to the capital account is offset by the cash value of the policy.  

 As an example, if the premiums are $15,000 and the cash value increases by $12,000, then only $3,000 is charged to the capital account reducing the basis of the stockholder by $3,000. As opposed to having a term insurance policy with a premium of $4,000. The permanent coverage will have less effect on the basis reduction of the stockholder than the lower term insurance premium.  

Over a longer period, there will be in increase over the premium, consequently eliminating the basis reduction. In the term insurance scenario, the reduction of cost basis will continue. In some cases where the term must be renewed, or the term has an increasing premium, the lowering of the basis can be substantial.  

Death benefit and basis 

If the life insurance is set up as a redemption basis, it is possible to plan for an increase in basis for the remaining stockholders, by using a promissory note for the deceased stockholder before settling the life insurance claim. Since the death benefit is tax free income, it will increase the basis. Example:  there are three stockholders, A dies. Instead of making the claim on the life insurance, A is bought out using a short-term promissory note. Once completed, the death claim is filed, and proceeds will come in tax free for the remaining stockholders which will increase their basis. If the death benefit were used for the decedent, there would have been a wasting of the basis since the decedent’s estate would normally receive a stepped-up cost basis.  

Stock Redemption in S Corporation 

The buy and sell agreement are between the stockholders and the Corporation. The S Corporation owns the policy on the stockholders and is the beneficiary of the policy. Death proceeds to the Corporation are tax free and increase the basis of the stockholders. A big advantage to arranging the buy and sell agreement under an S Corporation is avoiding the alternative minimum taxes and the loss of basis found in a C Corporation.  

Cross Purchase buy and sell in s Corporation  

The arrangement all owners of a business agree upon in advance to purchase proportionate shares of the decedent shareholder’s interest. Each stockholder would own life insurance on the other stockholder(s) and be the beneficiary.  

  • Life insurance premium is a nondeductible personal expense 
  • Shareholders receive the death benefit federal income tax-free 
  • The surviving stockholder uses the funds to purchase the stock, which will increase the basis of their holdings, by the amount purchased.  

Some key issues:  

Section 318 Attribution Rules  

In a C Corporation, attributions can be avoided for tax purposes by arranging the buy and sell agreement under a Cross Purchase. Since the Corporation is not redeeming the stock, and it is the stockholder, attribution and the treatment of the redemption being treated like a dividend distribution is avoided.  

In an S Corporation, if the S Corporation does not have retained earnings or profits , it will have the same tax result as if the shares were sold or exchanged, allowing the shareholder to recover their basis tax-free, with any amounts exceeding. Basis being treated as capital gains.  

 A poorly structured buy-sell agreement could result in the loss of S Corporation status, as well as the possibility of increasing the surviving shareholder’s tax burden on future distributions from, or on, the sale of the S Corporation. However, there are some great advantages of setting up a proper buy-sell agreement which can be even greater advantages than those available to C Corporations.  

FREE REPORT “Jones Business Planning and Succession Report” ASK FOR REPORT R3 

CLICK HERE 

Conclusion: 

The S corporation can be a great tool for many business owners as a corporate structure. A Buy and Sell Agreement must be carefully considered and drafted with consideration of avoiding the loss of an S Corporation Election.  

The Key To Creating Value in Your The Key To Creating Value in Your Company

Featured by YOUR BUSINESS WORTH, posted in Business Growth and Transition, Buy and Sell Agreements, Company Wealth, evaluations, Income from your business, Inside Sale, Passive Ownership, Selling Your Business, Strategies of growing business, Valuation, Value drivers, Working On Your Business

In Chapter 4 of my book, “Unlocking Your Business DNA”, I discuss your key group. I discussed the up side  and the downside of having a key group. 

First, the upside is nothing but good stuff.  Having a key person or group is one of the value drivers which add great value to your business, add profits, frees up your time, and allows you to enjoy your business life more.  Also, they can become the future purchaser of your company. 

GET YOUR BOOK

The key person or group only becomes bad when the owners don’t pay attention.  They don’t protect themselves from the possibility of being held hostage in the future.  The case study is worth reading as it happens all the time to unsuspecting owners.  

In the case discussed, I pointed out the problems, but also gave some possible solutions where everyone is happy.  

This is a key chapter to read to make sure you don’t make the mistake our client did.  

   If you wish to discuss creating a “Destiny Plan” with me, or discuss general questions about your business’ Key Business and Financial Elements, CLICK  BELOW to arrange a mutually convenient 15 minute discussion.       LET’S DISCUSS “DESTINY PLANNING”  ALSO, if you would like to email me your questions, please do;  tperrone@necgginc.comsubject:  QUESTION 

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 

  1. Borrowing money from the bank 
  1. Using cash flow out of the business 
  1. Life insurance death benefit 
  1. 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.  

FREE REPORT “Jones Business Planning and Succession Report” ASK FOR REPORT R3 

CLICK HERE 

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. 

  1. 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 20th 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. 
  2. 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.
  3. 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.   
  4. 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.  
  5. 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. 
  6. 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…

TO RECEIVE YOUR FREE   NO OBLIGATION WHITE PAPER Called: 

“The Tax-Free Lifestyle for Business Owners”

To request your free white paper 

CLICK SUBMIT:     Wealth Without Taxes Report

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. 

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)

  1. The business has never been appraised so there is a question of the value of the company and estate.  
  2. Both partners have families and larger personal liabilities than when they started. 
  3. They have invested their earnings into the business and don’t have a retirement plan.
  4. They don’t have a binding buy and sell agreement, nor a method of funding the liability. 
  5. The owners are expecting the exemption credit to lower which will expose them to death taxes.
  6. Neither partner has done any estate planning, other than simple wills. 
  7. 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: 

  1. Potential fire sale of the firm if there is not a “planned design for buyout”
  2. Uncertainty and instability for the employees, especially the key people in the firm.
  3. The possibility of the deceased partners family running the business with the surviving partner, leading to inexperienced leadership. 
  4. 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. 
  5. Business valuation disagreements, especially IRS litigation. 
  6. Lack of market for the business.
  7. The loss of income for the family.
  8. 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. 
  9. Stress on the business’ cash flow or credit line  as a result of the surviving owner trying to purchase the deceased partner’s share. 
  10. 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

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

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:  

  1. Death (that includes dropping dead at your desk) 
  1. Disability 
  1. Retirement 
  1. 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? 

FOR A FREE EBOOK; REQUEST UNLOCKING YOUR BUSINESS DNA