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

Benefit Planning Executive Bonus Arrangement1

Featured by YOUR BUSINESS WORTH, posted in Business Growth and Transition, Company Wealth, Executive Benefits, Funding your Buy and Sell, Income from your business, Life Insurance Types, retirement, Tax Efficient

An executive bonus arrangement is a method of compensating selected key employees in which the employer pays the premiums of a life insurance policy covering the employee’s life.

How the Plan Works

●Life insurance policy: The employee purchases, and is the owner of, a life insurance

policy on his or her own life. The employee retains – at all times – the right to name

the policy beneficiary and to receive the death benefit.

●Employer not a beneficiary: The employer cannot be the beneficiary, either directly or

indirectly, of the insurance policy.

●Written agreement: A written agreement provides for payment of a “bonus” in

exchange for the employee’s agreement to continue working for the employer. The

employer may also wish to pay a “double bonus” to help cover the employee’s

additional income tax liability.

●Premium Payments: The employer may make the premium payments directly to the

life insurance company, or the payments may be included in the employee’s paycheck,

with the employee paying the premiums.

●Tax treatment – employee: The employee includes in current income – and pays tax

on – the net premium paid by the employer.

●Tax treatment – employer: Subject to the “unreasonable compensation” rules, and as

long as the employer has no interest in the policy, the additional compensation is

deductible to the employer as an ordinary and necessary business expense.

Benefit to Employer	Benefit to Executive
Can reward selected key executives with varying coverage amounts.	The executive owns the policy. If he or she changes Employers, the policy is not lost.
Simple to implement, with little or no administration	Accumulated cash values can be used in emergencies, at retirement, or for personal costs investments.²
Premium costs are tax deductible.	Death benefit is generally received income-tax free.
Can be stopped without IRS approval or restrictions.	Proceeds may be used for estate settlement costs.

1 The discussion here concerns federal income tax law. State or local income tax law may vary.

2 A policy loan or withdrawal will generally reduce cash value and death benefits. If a policy lapses, or is surrendered with a

loan outstanding, the loan will be treated as taxable income in the current year, to the extent of gain in the policy. Policies considered to be Modified Endowment Contracts (MECs) are subject to special rules.

For a free report on Business Retirement Plans for Small Business Owners, click and submit. The report will be downloaded immediately. Learn how to use your cash flow to create tax-free wealth!

Click Here!

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

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

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.

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.

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

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

Part 1

BY Thomas J. Perrone, CLU, CIC

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

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

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

Consequences of not creating a buy-sell Plan.

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

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

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

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

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

Borrowing money from the bank

Using cash flow out of the business

Life insurance death benefit

Cash

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

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

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

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

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

CLICK HERE

Issues Of A Growing Company

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

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

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

Scenario:

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

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

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

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

Major issues and immediate concerns:

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

One Page Solution

The most critical issues to solve now :

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

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

One Page Solutions For Buy and Sell Agreement:

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

One Page Solution FOR KEY PERSON:

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

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

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

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

Estate Planning:

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

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

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

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Case Examples of When To Use Life Insurance and The Type To Use!

Featured by YOUR BUSINESS WORTH, posted in Estate Planning, Executive Benefits, Funding your Buy and Sell, Life Insurance Types, Tax Efficient, Tax Free Income

Part 1

Part One- Two cases using life insurance.

Over the years I have seen clients and advisors get hung up on which type of life insurance they should purchase, permanent or term insurance, making their situation much more complicated than it must be.

In this article I want to break down the different situations where life insurance is needed and what type of life insurance I would recommend. Again, this is my opinion, but it is based on several facts within the situation.

Example 1 – Young Business Owner with A Growing Business

Our client is running a business and is investing much of his discretionary dollars into the business. His wife is a nurse and makes good income. This helps him support the family while building his business.

He has two young children, a mortgage, and a business loan. They are not concerned about income replacement at his death, as his wife can work anytime and anyplace as a nurse. However, they are concerned about debt, business debt and the college costs for the kids. The capital required was $1,000,000

His earnings have been increasing consistently for the past five years, and his business has been stabilizing while growing. The income from the business is more predictable and, in a few years, he feels it will be easier to budget.

In this case I suggested he purchase a 20-year term convertible term insurance plan.

The premiums are affordable and low
the term of the insurance would be adequate

I could have suggested permanent life insurance under a split dollar or bonus plan however, I felt it would impede his ability to save money in his business and continue to expand.

Case 2-The Sole Proprietor with No Market

The problem with owning a sole proprietorship, is in many cases there is no market to sell the business. These small companies create a job for the owner, a salary, and a place to go. It affords them a good standard of living, and enjoyment in their work. The problem, however, is at their death, a long-term illness, or a cash flow crunch, or loss of key employees, they do not have a market to sell too immediately.

One of the greatest risks is dying while owning the company. The business is too small for the open market, and normally there are a handful of employees who do not have an interest in or the money to purchase the business.

This is a time that the estate in many cases needs the cash to settle estate expenses.

Competitors are more than happy to lend a helping hand by offering 10-20 cents on the dollar for the assets.

As a planner, I can help them!

I can arrange to have a buyer ready at any time to provide the spouse or estate of the owner, the going concern value of the business.

The payout would be tax free. The cost could be from 1/2% to 2% of the value put on the business.

If the cost were 1% for example, and the business was worth $250,000, the owner would pay $2,500 a year for this guarantee.

If the owner decided to sell the business to a willing buyer, the owner would receive back part or all their cost for the arranged guaranteed purchase.

The “Arrangement” at death is that the spouse/estate would receive tax-free the $250,000 purchase value! The spouse/estate could also keep the business, and sell the assets or the business (piecemeal, or the whole business).

If the owner of the business had retired and sold the business to an outsider or another family member, the arrangement would return to the owner all the deposits the business owner contributed to the “Arrangement” over the years, plus a reasonable interest rate to help them in retirement.

Not a bad plan when you consider the “Arrangement” is guaranteed if the business owner paid their 1% to the arrangement.

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Business Owners Essential Planning Tools! Part 2!

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

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

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

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

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

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

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

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

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

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Operating Agreement:

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

Buy-Sell Agreement

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

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

Type of Buy and Sell agreements:

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

Provisions in the buy and sell agreement

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

Installment
Sinking fund
Cash
Life insurance^[2]

Other Methods To Transfer Property:

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

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

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

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

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

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

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

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

The Bottom-Line Thought

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

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

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