The Right Life Insurance Policy for Your Client?

Featured by YOUR BUSINESS WORTH, posted in Buy and Sell Agreements, Company Wealth, Estate Planning, Executive Benefits, Funding your Buy and Sell, Income from your business, Inside Sale, Key People_Or Group, Passive Ownership, retirement

By Thomas J. Perrone, CLU, CIC

Before the advisors can give you their opinion, they need to know whether the problem is permanent or temporary. See, buying term insurance when the problem is permanent is like wetting the bed, eventually you will have to get up and change the sheets.

Not only does the insurance broker have to ask tough questions about the coverage, but also the other advisors that are part of the team.

Too often, advisors knee jerk to one type of plan because of the lack of information they have, or their misconceptions of coverage. In many cases, the knee jerk suggestion is the wrong one.

This video covers some important points of what is needed to make the right decision about the coverage.

Questions such as:

How long will the problem exist
Age of the insured
Is the problem permanent like tax liability or does it have a predictable ending date
Actual cost when comparing the value of cask value
Renewal rates in the future
conversions of coverage – is the coverage convertible
cash flow predictable
Is the problem a reoccurring one

ENJOY your FREE Business And Estate COMPREHENSIVE GUIDE – CLICK TO DOWNLOAD

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THREE WAYS TO GROW YOUR BUSINESS WEALTH!

March 23, 2024March 24, 2024 by YOUR BUSINESS WORTH, posted in Business Growth and Transition, Buy and Sell Agreements, Company Wealth, Estate Planning, 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, Uncategorized

Thomas J. Perrone, CLU, CIC – NEW ENGLAND CONSULTING GROUP OF GUILFORD, INC

Growing value in your business can create tremendous wealth, however, only 15-30% of the small businesses will sell, which creates the “if factor”, the unknown.

The percentage of sales is lower for the smaller owned business, more like 15%.

Building your business to its highest potential value is possible by having guidelines of what must be done as you grow the business.

To hedge the “what if’s” of selling it, you can use the cash flow of the business to create other assets such as executive compensation and qualified benefits and plans.

Many owners neglect to consider these options and end up with too much wealth in their business, causing liquidity and tax problems when they leave, die or become disabled. This presents the problem of “how do you get your wealth out of your business on a tax advantaged method” when you want to leave the business and you need it?

Building Your Business to Sell in The Future!

Here is a list of strategies that will help in growing a robust business and greatest potential value.

Develop value drivers
Create a culture- employees come to you because of it
Develop a middle management
Systematize your business
Customer diversification
Avoid being dependent on a few customers for your sales
Marketing plan- and always update it and analyze it
Focus on growth of revenue, lowing of costs
Protect yourself from litig
Make sure you protect yourself such as

Fund your Buy & sell agreements, bank loans, audit your liability insurance, protective documents, etc.

Have a strategy to sell or transition your business, such as growing the middle management, and key people to step in and run the company, or even buy it. This is a long-term process, but you must put things in order and work on strategies to get the greatest potential value from the business.

When Considering Using Your Business Cash Flow to Develop Executive Compensation and Other Benefits,

Such as:

Executive Compensation plans, where the company contributes to the plan, and you as owner pay as little as 2% in taxes on the contribution.
Salary Continuation and deferred compensation arrangements for you.
Deposit into your company’s retirement plan (like 401k, profit sharing, 403b, etc.). However, if you are a “high earning business owner”, do not load up on 401k contributions and other contributory plans as the tax consequences are severe.
Make sure your buy and sell agreements are funded and updated. Make sure they cover at least the seven major triggers (death, disability, voluntary and non-voluntary termination, divorce, bankruptcy, retirement).
Have critical illness plans set up such as medical reimbursement plans, disability, and health coverage.
Tie your major Key group to your company as they are the value of the company and contribute to the cash flow of your company, allowing you to implement these strategies.
Create vested benefit schedules to keep them with you
Have a company evaluation /appraisal periodically.
Focus your attention on growing sales, as all things point to sales revenue.

Executive Compensation Is a Fantastic Way to Extract the Value of Your Company on a Tax-favored Basis, And Not Tie It Up in Your Company, Having It Available to You When Needed.

There are but a few thoughts concerning building wealth through your business while building your business.

If you would like to receive my report on the “JFK ERA BENEFITS THAT CREATED SUBSTANTIAL WEALTH FOR BUSINESS OWNER”, CLICK THE link and it will download. This benefit was around in the 50’s, but only for the bigger companies, now it is available to the smallest of businesses, and may be one of the greatest business owner benefits available. CLICK JFK

The Importance of Beneficiary Designations!

Featured by YOUR BUSINESS WORTH, posted in Business Growth and Transition, Estate Planning

Article Sponsored by:

Thomas J. Perrone, CLU,CIC NEW ENGLAND CONSULTING GROUP OF GUILFORD, INC.

Some types of assets allow the owner of the asset to name a “beneficiary.” If the original owner later dies, ownership of the asset passes automatically to the named beneficiary.

Because beneficiary designations are easy to use, they can be a key estate planning tool.

However, significant negative tax, financial, and even personal problems can arise if the “wrong” individual or entity is named as the beneficiary.

Common Named Beneficiaries

A number of individuals, entities, or organizations are commonly named as a designated beneficiary:

●Spouse: A married individual’s spouse is perhaps the most common beneficiary

designation. Assets passing to a surviving spouse generally escape federal estate tax because of the unlimited marital deduction.¹

●Children: Children, as adults or minors,² are often named as beneficiaries. Step- children or other children adopted informally generally need to be specifically identified.

●Other family members: Brothers and sisters, aunts and uncles, and nieces and

nephews are frequently encountered beneficiaries.

●Estate: In some situations, the asset owner will name his or her estate as the

beneficiary.

●Trust: As a part of a more complex estate plan, a trust may be named as a beneficiary. The trust must exist at the time of death for the beneficiary designation to be valid.

●Charity: A charity may be a designated beneficiary, which can reduce the owner’s taxable estate.

●Corporation or partnership: Buy-sell agreements, key man insurance, stock

redemption, split-dollar arrangements, and salary continuation plans are all valid

business reasons why a corporation or partnership may be named as a beneficiary.

1 The discussion here concerns federal income and estate tax law. Under federal law, If the surviving spouse is not a U.S.citizen, special rules apply. State or local law may vary.

2 In most states, 18 is the age of “majority” when an individual is considered, for legal purposes, to be an “adult.”

The Importance of Beneficiary Designations

General Considerations in Making Beneficiary Designations

There are a number of general issues to consider when using beneficiary designations:

●Keep beneficiary designations current:Divorce, the birth of a child, the death of a beneficiary, or any number of other life changes can result in the need to update a beneficiary designation. Lack of planning can result in an ex-spouse receiving

retirement benefits intended to provide for others or for assets to inadvertently be

paid to the estate when a named beneficiary has predeceased the owner.

●Your estate or executor as the beneficiary: In these situations, the transferred assets must generally go through a costly and time-consuming court-supervised process known as “probate.” During probate the proceeds can be subject to the claims of creditors. In some situations there may be valid estate planning reasons for naming the estate as a beneficiary.

●A minor as beneficiary: In most states, a minor generally cannot legally enter into contracts or own property. If a minor is named as the beneficiary of an asset, the end result is frequently an expensive court-appointed guardianship with court supervision of the use of these funds. Once reaching his or her majority, the individual then takes control of the assets.

●Per Capita vs. Per Stirpes: A beneficiary designation form will generally use one of these two terms to specify how an asset will be distributed if a named beneficiary predeceases the asset owner. In a “Per Capita” distribution, generally, each survivor (a living beneficiary or a deceased beneficiary’s heirs) receives an equal share. In a “Per Stirpes” distribution, generally, a deceased beneficiary’s heirs divide his or her share into equal portions. Many states have modified these rules.

●Spousal rights: In some states, a surviving spouse may have the right to claim a

portion of a decedent’s estate, including part of assets that can be transferred by a beneficiary designation. In Community Property¹ states, a surviving spouse may have rights that need to be considered.

The Community Property states are Arizona, California, Idaho, Louisiana, Nevada, New Mexico, Texas, Washington, and Wisconsin. In Alaska, spouses may opt-in to a community property arrangement.

The Importance of Beneficiary Designations

●Common disaster: What provision has been made for a situation in which both the asset owner and a designated beneficiary (think of spouses who travel together) die in a common disaster? This contingency is frequently addressed in an individual’s will.

●Impact on the beneficiary: Consider how receiving an asset will impact the

beneficiary’s life:

●Is the beneficiary capable of using the inheritance as the donor might wish, or will it be wasted? Is the beneficiary capable of managing the inheritance?

●Are there income tax considerations? Assets such as deferred annuities, or

retirement plans such as IRAs or 401(k) plans, have varying distribution

requirements, depending on who inherits the assets. Will one beneficiary pay less

income tax than another?

●Does the intended beneficiary need the money?

●Are there other ways, such as via a will or trust, to transfer assets to the intended beneficiary that might ultimately benefit the beneficiary more than an outright gift?

●Conflict with other estate planning documents: In some cases, an individual will

leave contradictory instructions with regard to how his or her assets should be

distributed. For example, a will may indicate that an individual’s retirement plan

assets are to pass to a child, while the beneficiary designation form for the retirement plan shows that the ex-wife is to receive the funds. As a general rule, the instructions contained in the beneficiary designation form will take precedence over those contained in a will or trust.

Seek Professional Guidance

While beneficiary designations are easy to use, they should be considered to be only one part of an overall, coordinated estate plan. The guidance of experienced, trained estate, income tax, and other financial professionals is strongly recommended.

Download your free reports on business planning. “You don’t need a Wharton School Degree to be successful in business, but you do need this… get your free reports! Automatic download after you submit your form.

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ESTATE PLANNING The LOST FOCUS

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

By Thomas J. Perrone, CLU, CIC

Since the exemption credit increased to a substantial amount a few years ago, the term “estate planning” took on a new meaning.

At one time estate planning was considered tax planning along with other aspects of planning of your estate, depending on whether you owned a business or not. Things like income for the family, debt payments, taxe reduction, income tax planning, and of course distribution of assets. There was always an emphasis on avoiding estate and state estate taxes.

However, as the exemption credit increased to the point that most American tax payers would be exempt, the emphasis change on how estate planning was done.

However, in 2025 the sunset provision will kick in and will redefine the estate planning landscape. The provision is set to go back to the exemption credit of about $600,000. However, most professionals feel it will be higher. Anyone’s guess.

With the possibility of lower exemption, estate planning will change. I personally feel small business owners will feel the impact more than most, as their business values will increase their potential exposure to Federal and State estate taxes.

Estate planning is an essential aspect of managing a small business. It can help ensure that your business is preserved as you want it to be, and that it can continue to operate smoothly even after you pass away. Part of estate planning for business owners will be to focus on the transition of the business more than before. If the exemption is lowered, small business owners will find themselves having to deal with a large tax at their death, upon the transfer of the business. Much can be avoided by doing planning now and using the exemptions available today.

Areas that need planning are:

Drafting a will and basic estate plan.
Planning for tax efficiencies.
Sorting out issues in family-owned businesses.
Drafting a buy-sell agreement (for multi-owner businesses).
Purchasing life and disability insurance.
Creating a succession plan.
Having a discussion with affected parties.

In order to have a proper discussion about estate planning the short video below will help you understand the main concept of asset distribution. If you are a small business owner, this information may be critical to your planning structure.

Request our FREE ESTATE PLANNING GUDIE FOR BUSINESS OWNERS:

For our FREE ESTATE PLANNING GUIDE FOR BUSINESS OWNERS, submit this short form AND the Estate planning guide will download immediately.

The Guide covers many of the areas you need to understand when doing your estate plan. It is also written in language you will understand.

Download Your Free Estate Planning Guide

CLICK HERE

For a better understanding of Estate planning view this short video of how asset distributions work in different estates.

Note: I engage in a working relationship with professional advisors for their business cases.

203 530 6615

tperrone@necgginc.com

When Running Your Business Gets in The Way of Your Retirement!

Featured by YOUR BUSINESS WORTH, posted in Business Growth and Transition, Buy and Sell Agreements, Estate Planning, Income from your business, retirement, Selling Your Business, Uncategorized

Many small business owners are focused on running a business that they neglect to plan for their retirement when they retire.

In many cases they put too much wealth in their business and have a hard time getting it out when they retire.

Too much wealth is tied in most business owners business. When the time comes that they need it, it becomes difficult to turn into a liquid asset quickly.

This report will help you understand the options that small business owners have and why they need to pay attention to the details of retirement.

Download this free report on how to build your retirement plan for the future.

https://bit.ly/3ql7q7g

Now It’s Available for You!

Featured by YOUR BUSINESS WORTH, posted in Business Growth and Transition, Company Wealth, Estate Planning, Executive Benefits, Inside Sale, Key People_Or Group, Passive Ownership, Selling Your Business, Strategies of growing business

IN THE “John F. Kennedy Era”

Business Owners Created Substantial Wealth Using This Benefit!

Business owners are the most susceptible to it…

Don’t feel bad if this happens to you!

WE are susceptible to “not knowing” things WE need to know TO SECURE OUR business growth.

This is why WE need good business advisors.

However, sometimes by not knowing, you are too late to the party, and opportunities are missed.

THIS IS ONE THING YOU NEED TO KNOW!

It is called “The Corporate Equity Executive Plan”, (OR CEEP.) It is designed for highly paid business owners and executives. The plan has been around since the 60’s, and it was used by the “big guns “of the Fortune 500 type companies.

And You Don’t Want to Be Late TO THIS PARTY!

However, over the years, the plans have been redesigned for the smaller business owner, making it possible for you to take advantage of this substantial benefit plan.

Because this benefit has been used in large companies such as the S&P 500, many advisors are not aware of this “Hidden Gem of a Benefit.”

Leo had a successful business in wholesale. He gave his employees great benefits, treated them well, had a 401k, and great health benefits.

His problem was the 401k limited the amount of contribution he personally could make to the plan because of his high salary. This was a problem for Leo, because even though he made 401k contributions his percentage of final pay was much lower compared to final earnings.

Leo didn’t want to depend on selling his business for his retirement, as he had children and grandchildren who wanted to run it and Leo regarded his company as a legacy to his family.

Leo wanted his company to support his future security, however, the 401k limited this ability.

When we projected his retirement benefit percentage compared to his final pay, he was substantially lower than his lower paid employees. His employee group would retire with social security and their retirement benefit at about 65-80% of their final earnings. In Leo’s case, his percentage would be about 40% of his final earnings.

To make up the difference we introduced Leo to the CEEP plan. The plan allowed him to decide the number of deposits he wanted to make into the plan. Leo decided to put in $50,000 more a year until his retirement. This added amount, would increase his final income to around 80-90% of his final pay, adjusted for inflation and salary increases.

Because the business is funding his retirement plan, he has the benefit of having very efficient tax results. The plan allowed Leo to use the funds whenever needed, and all withdrawals were tax-free. Leo was the only participant in the plan, but he plans on adding a few family members to the plan in the future.

Considering all the withdrawals would be tax-free, unlike a qualified 401k plan, Leo was able to secure his financial security through the funding by his company! Because very little of the contribution is part of his total compensation, Leo saw a great opportunity for the company to pay for his retirement. They pay for his cars, country club, lunches, some vacations, why not his retirement?

This was a case where the CEEP allowed the highly paid owner to create wealth for themselves, but also on a tax-free basis, allowing more flexibility at retirement for him and his family.

“Create Your Own “Tax-Free Haven”

By using your company’s cash flow, you can create a tax-free retirement plan. Imagine, no taxes on your income when you retire!

Participations: You do not have to include anyone else in the plan.
Contributions: Contribute to the plan as much as you want with flexible contributions, including skipping ability.
Contribution allocation: All the contributions go to your account, and you are not forced to share contributions with anyone.
Usage of funds: You can withdraw these funds before 59 1/2 without taxes, penalty, or restriction-why not fund your inventory this way- without a banker!
Funded by your company: Like a 401k plan, your company contributes to the plan, to your account, since you are the only participant.
Deductible: The company can decide when they wish to take the deduction of the plan.
At Death: From day one there is a “self-completion clause”, if you die, a tax-free lump sum benefit is paid to your family. In most cases this is the amount of money you would have created in retirement had you lived to retirement.
No force out like RMD: At retirement you are not forced to take withdrawals from your plan, like the required minimum distribution rules under 401k’s and IRA’S.
No Tax on Inheritance: All benefits are tax-free to your family at your death.
more….

Do you remember When?

When you were a kid, did you ever lay down in freshly mowed green grass and stare up at the blue sky and watch the clouds move? You smelled the sweetness of the cut grass and just felt so relaxed? In the background, you hear a twin-engine airplane flying above. This is the moment in time when there were no issues in life, things were great and easy, and you were so relaxed…

Imagine that feeling, but now it’s at a time in life where you are ready to enjoy more time to “lay in the grass” again and feel that same feeling. Only now, you are retired, and because you made the right planning decisions, there are no issues. Financially, you are enjoying a wonderful retirement lifestyle. The reason: you eliminated income taxes! You are living the tax-free lifestyle which the CEEP plan offers.

That is what the CEEP can create for you, and I want to give you more information about it because it is

one of the best benefits ever for business owners.

This is one of those moments you don’t want to show up late for the party! If you haven’t been exposed to this type of executive benefit, do yourself a favor and download this Free White Paper that explains it all.

I encourage you to take a new path that will give you the opportunity to create greater financial wealth for your future. A path that will educate you on the great usage of business cash flow to create more financial security. The path you want to take is to request this free report, download it and spend some time learning about this fabulous benefit used by many high earning business owners and executives since the “John Fitzgerald Kennedy Era”.

To receive your FREE WHITE PAPER, SCAN THE QR CODE. COMPLETE the short form and your FREE WHITE PAPER WILL DOWNLOAD IMMEDIATELY…

Or CLICK OR TYPE IN

P.S. SPECIAL OFFER: The first 15 requests will receive a free copy of my book, “Unlocking Your Business DNA”. A BOOK filled with business strategies that will allow you to grow your business and create an ungodly amount of leisure time to enjoy what you are building.

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Estate Planning Chaos for the Business Owners

November 25, 2022 by YOUR BUSINESS WORTH, posted in Business Growth and Transition, Company Wealth, Estate Planning, Executive Benefits, Income from your business, Inside Sale, Key People_Or Group, Life Insurance Types, retirement, Selling Your Business, Strategies of growing business, Tax Efficient

Why do some Business Owners have higher costs than others when…

– They settle their estates…

– They retire…

– They transfer their business….

Let’s call the above items, “triggers”

Over the years I have had the experience of seeing the end results of the estate settlement process for many business owners. In many cases the results were not pretty because of the excess settlement costs. From my own experiences and case studies with associates, I have come to the realization that some business owners have higher estate transfer costs than other business owners. The interesting thing is the excess costs can be controlled by the estate owner.

Business owners usually have more value in their estates because of business values and settling the estate can be usually more complex. But as mentioned, in my opinion, there are controllable aspects of the costs and ways to mitigate these costs.

Estate transfers Cost: Three major reasons for higher costs!

No planning: This includes not having any plan, or not updating any earlier planning. Their estates are complex, and they need more than surface planning when their situation calls for more complex planning to carry out their goals. This takes more time and money. Without it they pay a price in estate settlement because they designed the wrong plan or have no plan at all.

No time: In many cases, there isn’t any time to make changes. It is too late! All the changes should have been made in advance. Therefore, working on their business and estates yearly is a major benefit as opposed to waiting until it’s “too late”.

Owners don’t spend enough time asking the “what if’s” of their situations. Every year many changes come out of Washington that affect business and estate planning. Being unaware of these changes makes them vulnerable to excessive estate settlement costs . In many cases the business owner loses by default.

No liquidity: Settling the estate takes money. In many cases, most of the wealth is in the business and other personal hard assets which are difficult to turn into cash within a o brief period.

§ Even if they could be liquidated, they either run the risk of losing value, or causing major tax issues . Consequently, the estate is open until the taxes are paid and dissolution of assets is completed, causing major costs. Wealth gets stuck in business and its value is at the mercy of the market and other economic factors.

§ To prevent the lack of liquidity, we suggest that business owners use the business cash flow to create executive compensation plans with tax-free death benefits, and tax-free withdrawals. By doing this they create liquidity. When an estate owner dies, there is a guarantee that a tax-free death benefit will create the liquidity needed. Funded by the company cash flow .

Succession of the Business

No planning within the business for successor management. No building of a key group or key person to learn the business as an owner. Consequently , when the time for transition is near, there aren’t many options. This affects the “most potential value” of the business. The time to start planning transition of the business is when you start your business or buy a business! The key group is also the group that starts to define the culture of the business, making it easier to attract talented employees.

No systematizing of the business- the owner has not taken the time to prepare systems. Everything is in their heads, literally. There are no written down notes, no manuals or guides to pass on the instructions to others. “In simpler terms, the boss must be around for things to get done.” This limits the future ability to sell the business. Purchasers are looking to buy a business that has growth potential. Nor do purchasers in most cases want to invest in a company that has to restructure its operations. A purchaser is not likely to invest in a company where systems are not in place, and which are not transferable.

No development of “value drivers” to create growth and culture. Consequently, there is no culture, systems, and no middle management to take on responsibilities or a group to transfer the business to as mentioned above. This is a major issue with companies. A true test is asking the business owner if they can take 30 or more days off a year. If not, I tell them they have a job, but not a business. The owner of the business has not let go of the control they have of the business. It’s the business that controls the owner.

Retirement Planning and Why the Wrong Type Causes Chaos!

The wrong type of retirement plan- although qualified plans like 401k’s or profit-sharing plans are good for rank and file. They are not always the best retirement vehicle for high income business owners for a few reasons. Qualified plans are riddled with rules that business owners don’t need in their life. Qualified plans are needed in the company to attract employees, so in many cases, they are a particularly good method of attracting employees. However, for the business owner, Executive Compensation plans are more useful. Here are why qualified plans can be a thorn in the side of the high earning business owner:

No discretion as to who gets what amount in the plan-meaning the owner doesn’t get 100% of the distributed amount.
Who is to be in the plan- The owner can’t discriminate as to who should take part in the plan
No use of money 59 1/2 without penalty- Business owners are always looking for cash to support their businesses. The inability to withdraw funds from their retirement account is problematic when funds are needed
Age 72 RMD forcing high income owners to pay more taxes- business owners usually have other assets to rely on for income. It could be passive income from rents, income from the business and income from investments.
IRS in your life – Qualified plans need to file with IRS. However, if business owners used executive compensation plans, this is something they could avoid.

Many business owners can use executive compensation programs to develop wealth outside of their businesses and get great tax efficiency. For example, using a “Corporate Equity Executive Plan” will allow the owner of a company to use the company cash flow, pay 10% of the tax they would pay under a pension plan, and create a tax-free family bank. The family bank allows the owner to use the money, tax-free, any way they wish. Also, they are not forced to take the money out when they are retired.

For more information about business planning, I am offering YOU A FREE copy of my eBook, “Unlocking Your Business DNA” FREE Business guide which will help you understand some of the planning concepts used in retirement planning, business succession and estate planning. CLICK HERE for your free download. Your book will be downloaded automatically.

If any problems with your download please email me; tperrone@necgginc.com

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!

Unknown Ways You “Shipwreck” Your Business!

Featured by YOUR BUSINESS WORTH, posted in Business Growth and Transition, Estate Planning, Strategies of growing business, Value drivers, Working On Your Business

This blog post is for the business owners who want to make sure their planning is solid and won’t shipwreck their businesses, estates, and legacy. However, because of past experiences dealing with some professionals, their planning is incomplete, and they have put their financial planning on hold. In summary, they are motivated to make sure they have good plans but are frustrated with the system of getting their planning efficiently completed.

Throughout my career I have often wondered why business owners put things off that should not be delayed, as the price of doing nothing can be very costly. Ask any attorney how many unsigned wills they have in their file cabinets and watch them roll their eyes.

I have concluded owners end up with incomplete plans because of the way some professional advisors work with the business owners ^[1].

Advisors have their own agenda and put the business owner’s aside.
Advisors don’t work together to share knowledge about the business owner to maximize the effectiveness of the planning.
They protect their territory and don’t share information.
They make planning more complicated than it needs to be.
They are not good listeners.
They tell the business owner, as opposed to asking, them what they want.
Brevity- Business owners really like to get things done. Advisors in many cases are not efficient time managers when it comes to presenting ideas to business owners.
Many advisors come to meetings without preparation and wing it.
In some cases, business owners don’t trust their advisors.
Some advisors are not open to educating themselves in other planning areas, and neglect bringing in a specialist for the purpose of protecting their planning turf. Consequently, the business owner never gets exposed to the planning that needs to be done.

Keep in mind that most business owners have many opportunities to plan, however, they are frustrated from their past experiences and give up, never getting their plans completed.

Communication with the business owner

Business owners are busy people. To get their attention requires communication skills.

Business owners are looking for someone they can trust to get these things done. Someone they can rely on, and someone who will take the time to really understand what it is that they want and need to do in their planning.

Your Ears

You have two ears and one mouth. Get it? By asking poignant questions and listening, you can learn much about the business owner. Let me show you by an example. Recently I was referred to, and helped, a business owner named Bill. Bill was frustrated that he hadn’t done particularly good planning .

Our first conversation was about estate planning. I asked him, “up to now, what has been the extent of your estate planning”? He said he had a will but did it many years ago.

I asked him if he knew who Doris Day was, and told him a story of when Doris Days’ husband died (he was her manager and took care of every detail in her life), she found herself in a huge dilemma. You see, she never bothered to know anything about her business arrangements. She avoided the business part of her life. She left it up to her husband 100%. He died in his 40’s of a heart attack. Because she did not have any knowledge of the personal estate and business estate arrangements, she ended up owing a fortune to the IRS in income and estate taxes.

Bill, “I am sure the last thing you want to happen is to have your wife end up being like Doris Day.” He agreed.

“How much do you discuss estate planning with your spouse?” Followed by the question “Do you have an estate equalization plan for your children”? Our discussion lasted over an hour, while I asked questions and took notes.

How many business owners do you know who died at the right time? In other words, they die when they start things (new loans for expansion), or in the middle of things like expanding key groups in the business, but they never seem to die after they finished something.

They never die at a good time, and because of that, they normally have chaos in their estates, causing hardship during the estate settlement phase, costing much more to settle their estates .

My question to Bill was, “Someday you will leave your business by death, disability, or retirement”. What plans have you made to take your equity of your business with you in a favorable manner”?

You see most business owners haven’t planned for this transition. When the time comes to retire, they can’t get their money out of the business, they don’t have any updated plans, and they have no time to adjust. Consequently, their “Lifetime of effort” is stuck in the business. If they tried to sell it, they wouldn’t get the true potential value from the business, because of a lack of planning. Normally they want out and end up selling at a discount. They don’t have time to create a better value because they have run out of time. They haven’t done the necessary planning to build systems in the business to increase market value.

The business poured out the gravy!

By the time they want to retire, they have been used to a nice lifestyle, supported by the business. This may include the social club, lunches, luxury vacations, entertainment, and in other areas of their life.

Because they can’t get the value they need out of the business, they are forced to stay in the business and hope it can continue being profitable, even though the business owner doesn’t have the heart to run hard any longer. In most cases, the business owner is trapped in their own creation. ^[1]

Building value in your business takes a long time to create the systems and strategies to maximize the fullest potential value. Unless the business owner takes the time to discuss this with advisors, implement value drivers and systems needed; they will never realize the greatest value of their business.

As Bill and I talked, he realized the story of his business and future needed to change.

My story is really about business owners that pour a “lifetime of effort” in their business but don’t put the necessary time and consideration in how to get their “lifetime of effort” out of the business when they or their family need it the most.

The business poured out the gravy!

As Bill and I talked, he realized the story of his business and future needed to change.

The Indispensable Owner

The problem was that nobody else knew what Bill knew. Nobody would know what to do if something happened to Bill. He was an indispensable owner and an essential employee. He knew the clients, vendors, bankers, advisors, and the key people he needed to know to run his business.

I told him that when a motor loses its “indispensable and essential part”, the motor will not run any longer. I told him when he dies, retires, becomes ill, and leaves his business, the “indispensable part” will destroy his “lifetime of effort”.

That resonated with Bill. We are now working on building a middle management and putting together an estate plan and a succession plan.

MESSAGE TO PROFESSIONALS:

When dealing with business owners keep in mind that they are focused. They don’t like complexity, and they want to completely understand everything before they make any decisions on issues. Listen to them and ask them questions.

To Business Owners

Business owners make a big mistake by not putting in the effort and being aware of the other parts of their business. They don’t need to learn it, but they need to be aware of it. By not being aware of certain parts of business planning, they end up in a financial chaos situation.

The solution is to have discussions with your advisors regularly about the different areas of your business that you are not involved in. Such as; succession planning, estate planning, keeping your key group, executive compensation plans. These are areas that need to be reviewed and considered. Without them you will “shipwreck” your family legacy or create missed opportunities.

In my practice I have set up a bi-monthly sessions to cover issues and topics for our business owners. This keeps them up to date and gives them a resource to address other issues.

^[1] If he sold his business, paid all the taxes and fees (which would reduce his net value by about 40-50%), and then took that value and invested it at 3-4% (to avoid taking risks), his return would probably be much less than the perks and income he was taking from the business. And that is what provided his lifestyle.

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^[1] Professional financial advisors (anyone who is giving financial advice to business owners)

LISTEN to my podcast and feel free to share it with others.

https://podcasts.apple.com/us/podcast/building-and-protecting-your-business-worth/id1539791693

The Costly KNEE JERK FINANCIAL SUGGESTION!

Featured by YOUR BUSINESS WORTH, posted in Business Growth and Transition, Company Wealth, Estate Planning, Executive Benefits, Income from your business, Life Insurance Types, Passive Ownership, Tax Efficient, Tax Free Income, Uncategorized

Over the years, I have been asked by business owners how they can use their company to create more tax deductions and to build retirement funds for themselves. When you put tax deductions and retirement funds in the same sentence, it suggests the vanilla response, of a pension plan of some type or a contributory retirement plan, like a profit-sharing plan, or a 401k.

However, is that what a business owner is really asking? Or, do they mean, they would like to build retirement funds through the business and assume they can get tax deductions? Or do both elements co-exist in the plan that they are thinking of? I think most advisors would suggest a 401k plan, a cash balance plan, a simple plan, or a profit-sharing plan for example.

This is what I call the costly, KNEE JERK REACTION. When asked by a business owner, about retirement plans, I have learned to slow it down and ask the business owner to clarify exactly what they are trying to accomplish, rather than rattle off a KNEE JERK response, such as a “profit sharing plan, or 401k plan”.

Questions like:

– Do you want to include everyone in the plan?

– Do you only want to favor yourself and family?

– Are you trying to give a benefit to a specific employee?

Do you want all the contributions to end up in your account, or are you willing to share with other employees? If so, how many and who?

If the employer/employee is trying to stockpile contributions to their account, they will have limitations with money purchase plans (limitations on contributions for 2022 of $58,000.) This makes it hard to deposit substantial amounts of money into the employer’s individual account, since they must include everyone.

Based on the response, this will determine how I design the plan. If he wants to spread the dollar among the group, you are talking about a qualified retirement plan. On the other hand, if they want limitations as to who can be involved, they are speaking about a non-qualified executive compensation plan.

In this model, I compared two scenarios so my client would have an idea of the difference in absolute dollars. I based the model on conservative values and returns, staying consistent with both types of plans . I am comparing a CEEP to a Hypothetical Pension plan (money purchase plan). ^[i]

As you can see in the chart below, based on the same parameters for each plan, the CEEP program created much more retirement benefits for the owner than a qualified retirement plan.

The owner participant received a much higher payout (tax-free), than the pension plan. In addition, if the owner died, from day one, the CEEP plan would pay a substantial tax-free amount to the family, while the qualified plan would only pay what was in the account which would be taxable to the beneficiary. The CEEP death benefit would be 100% tax free and would not be required to be withdrawn at death, or older ages like a pension or IRA plan would.

Once you compare a CEEP to the Pension plan, you can then see why defining exactly what the owner wants to accomplish is important as both plans offer different benefits and different tax scenarios .

KNEE JERK advice happens more than you think! And when it does, it can cost your client a lot of money, NOT to mention your reputation as an advisor.

In this case, the “Knee Jerk” suggestion to use a pension plan to solve the problem, shortchanged the business owner from having greater benefits for the future when compared to the suggested pension plan.

^[i] In this scenario, the owner could only put in $30,000 of contribution out of the $50,000. Based on a five many company and different salary ranges.

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