Category: Company Wealth

Business Succession Planning Is  A Necessity For Every Business! 

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

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

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

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

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

 Some of the questions that the owners of firms have:  

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

Other areas of concern are:  

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

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

Shift Corporate Income For Your Personal Retirement! 

by YOUR BUSINESS WORTH, posted in Company Wealth, Executive Benefits, Income from your business, Key People_Or Group, Tax Free Income, Uncategorized

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

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

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

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

Here is how it works:  

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

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

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

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

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

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

 Advantages:   

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

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

Business Valuation After The 2017 Tax Cut And Jobs Act

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

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

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

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

Valuations; “The Walk Way Number”

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

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

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

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

Questions you need to ask yourself if you are a business owner!  

by YOUR BUSINESS WORTH, posted in Buy and Sell Agreements, Company Wealth, Income from your business, Inside Sale, Selling Your Business, Uncategorized, Working On Your Business
  1. When would like to be done working in your business?
  2.  After you leave your business how much cash will you need (each year) to achieve your personal financial objectives?
  3. Who can afford to buy your company and who would you like to buy it.
  4. As you think about leaving your business, what keeps you up at night?
  5. What is the business worth?  How do you know its worth that amount?
  6. Do you have key people that handle the day-to day operations of your business which you feel is a substantial contribution and one that would be hard to find a replacement?
  7.  Would their be a great burden if they left abruptly?
  8. Do you have a strategy in place to reward those employees who you feel are helping you grow your business?
  9. Do you and your partners have a buy and sell agreement in place which is funded and up-to-date?
  10. If so, when was the last time you reviewed the agreement, and discussed the method of business valuation at a trigger event?
  11. If you could no longer run your company , what arrangement have you made to make sure that your family will benefit from your life’s work?

 

Why Would Anyone Want To Buy Your Business At The Price That You Set?

by YOUR BUSINESS WORTH, posted in Buy and Sell Agreements, Company Wealth, Income from your business, Strategies of growing business, Value drivers, Working On Your Business

The present value of the cash flow is a way of pricing out your company.  A high certainty that the company will produce steady, predictable cash flow.  Cash flow is king! Predictability only creates more value.   

 A buyer is willing to pay your price  if you have a plethora of tangible and intangible assets and systems that function like a Swiss watch.  

 A  “Swiss Watch” of a company needs to produce the consistent cash flow without you.  As an owner you want to sell your business and move on.  In many cases, a purchaser may want the owner to stay on and run the company for  a period of time.  However, if your company is able to produce a cash flow without you, it not only allows you to get your price, but allows you to get out of dodge.   

It is worth your while to put together a talented management team, that can not only keep the cash flow consistent, but has the ability to keep the cash flow machine working even if you are not there.  Your key management team may be the most important element of your business.   

 Whether buyers are strategic buyers, or financial buyers, they will be looking for value drivers.  From the beginning of your business ownership, these are the things you need to start working on.   

Partial list:   

  • Key management group 
  • Loyal client base with diversification (most of your firms revenue should come from more than 10% of the clients)  
  • Efficient production and manufacturing facilities 
  • Leading edge products or services 
  • Supplier network 
  • Intellectual property rights (patents, trademarks, trade name) 
  • Steady, predictable solid profits and cash flow 
  • Proven growth record 
  • Effective workforce in place 
  • Transferable franchise or license 
  • Key location or territory 
  • Barriers to entry for a startup 
  • Research and product development team  
  • Company name 
  • Exclusive territory  
  • Above industry average financial ratios 
  • Systematized business processes/documented so continuing success is not dependent on any particular person (including the owner) 

 

These are the areas of your business you need to develop and maximize in order to demonstrate the potential for steady predictable growth in the future.   

 Since the price you will be asking for your business is relevant to your successful retirement (to fill the retirement gap), you will want to spend the time in the areas which will increase the value of your business.  Usually, they will be Industry-Specific Business Benchmarks.   

 Knowing how your competitors are using their resources and the efficiency which they are utilizing them can give you ideas about the strategies being used, and strategies you can compare to your methods.   If you are utilizing your resources better than your competitions, you will be able to negotiate a better price for your business.  

 

 

Building Your Leadership Team And Going Deep!

by YOUR BUSINESS WORTH, posted in Company Wealth, Executive Benefits, Key People_Or Group, Passive Ownership, Value drivers, Working On Your Business

One important issue an owner can spend their time on, is getting the right people to fill the right positions in their company, while removing the wrong people from positions.

Situations are always changing and can change the dynamics of the business.  For example; the retirement of a key owner or other key employee, the unexpected loss of a key person due to death or disability can pose a significant financial hit to any company.  Planning can reduce the adverse impact.

Continuity of leadership is important.  Having a backup for the key positions would be ideal.  Sometimes you don’t have the personnel to accomplish this.  A company training program can be a valuable tool for the long-term growth of the company.  Cross training is worth the time.  Having personnel filling in for important jobs when needed is a valuable element for the business growth.

Trader Joe ‘s is a very good company and a great example of a company with interchangeable job descriptions.   Employees learn multiple jobs and task.   They rotate their jobs every few hours on the employee’s shift.  They create teams, with captains and the team helps with on the job training for the e different jobs.  Their education is ongoing.  Trader Joe’s has a bench ready to go.  This is also done with their management team.  Their candidates are always being educated to move up the line and into the position.

Board of Directors

Having an active Board of Directors can help with guidance in implementing employee growth.  This is next level management.  This is a value driver which is of importance to the growth and value of the company.  It is what a potential purchaser looks for in a company that they may be interesting in purchasing.

The board helps provide management continuity and immediate oversight in triggering events, such as divorce, death, disability, or withdrawal.  The board can be made up of key insiders and some outsiders who have insight to your business, but not necessarily in your business or industry.    Continue reading “Building Your Leadership Team And Going Deep!” →

Your Exit From Your Company!

by YOUR BUSINESS WORTH, posted in Buy and Sell Agreements, Company Wealth, Income from your business, Selling Your Business, Strategies of growing business, Uncategorized, Value drivers, Working On Your Business

I read somewhere that over the next number of years, at least one in every four small businesses will be sued or threatened with a lawsuit.  The odds are great that it will come from within the company.   

Will your death, disability, or withdrawal cause a dispute?  In many cases it can come from not having communicated the exit or transition plan for the company.    

 Your Corporate Board of Directors  

 The Board of directors in your company is crucial to the short and long-term success of the company.  The board helps in the avoidance and resolution of disputes.  The board can help direct the company’s planning, officer selection and the compensation.  The board can help in dispute avoidance, dispute resolution and overall corporate management.   

Disputes, can come from compensation agreements, benefits, health co-pays, benefits paid.  These are many other ares which a dispute can occur.  The hope is that there is a board of directors to help with the resolution.   

 When the owner dies, becomes disabled or just wants out of their business, and there is no business continuation or a buy and sell, the risk of a dispute rises.  A buy and sell agreement will establish the rules in the event a trigger that sets off a change within the business.  Remaining partners will need to know what the value of the company stock will be sold for.  The surviving family will need to know what the value of the business is and what the family expects to do with the company values.  Without a solid written plan, there are unanswered questions and confusion.  Continue reading “Your Exit From Your Company!” →

PREPARING  YOUR BUSINESS FOR A FUTURE SALE

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

In some cases, when a business owner wishes to sell their business, they may not be in the best possible position.  For example, they may be a C corporation.  Because of the double taxation of the C corporation, it does not create an effective tax environment for selling the business.   Consequently, positioning to a pass-through entity would be more advantageous.  However, that takes time to arrange.

The principal advantage of this flow-through entity structure is that dividends can be paid by the company to the owners without additional tax.  In other words, the dividends can be placed into the hand of the owner with having only incurred taxation to the owner, not to the corporation and then the owner.

Under a C corporation, when the corporation distributes dividends (distribution) to the stock holders, the corporation must pay a tax on the corporate side, then the recipient pays tax on that distribution.  Dividends are not tax deductible to a corporation, so consequently there is the double tax. Bottom line, double taxes!

When you have an S corporation or LLC the Key employees can receive its share of company dividends free of additional taxation and use the dividend proceeds dollars-for dollars to pay for their stock investments.

It is important that in the future when you consider exiting your business, you start the process of planning with the most effective tax structure for the future. The C Corporation is fine when you are not in exit mode, and there are no dividend distributions.

Timing is important as it takes time to move from a C corporation to another form of pass through structure, such as a LLC or S corp.  Early planning will be a benefit.

A change from C Corp to a pass-through company can have tax ramifications, so planning is essential in when to, or if to, make this move.

Tax on Assets:

If you sell an asset of the corporation, it is possible that there is a corporate tax on that sale.  However, if you sold an asset of an S corporation, there would not be a corporate tax.

If you are considering changing your business type, we suggest you discuss this strategy with your tax advisor. 

Creating Cash Flow In Your Business

by YOUR BUSINESS WORTH, posted in Buy and Sell Agreements, Company Wealth, Key People_Or Group, Passive Ownership, Selling Your Business, Uncategorized

Selling your business to a key employee, or a group of employees.

Assuming that all of the purchase price is to come from the key employee (s), you can help the purchase, by (a) using a stock dividend distribution, or (b) bonus of money to the employ, such as a bonus executive program.  (See Restricted bonus agreement). 

It is important that the company have consistent cash flow, (discretionary cash flow;) to use for this purpose.  (This is the cash generated by the company which is not needed to run the operations, for debt service or capitalization of the business).

Planning for the sale of the stock to insiders, and cash flow; 

It is important to have a accurate idea of the yearly cash flow.  For example, if the discretionary cash flow is $1 million a year. You might commit 10% of the company, or $100,000 a year to help pay for stock.  Continue reading “Creating Cash Flow In Your Business” →

Planning For The Tax Efficient Insider Sale!

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

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

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

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

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

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

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

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