A Great Benefit Every Business Owner Should Be Aware Of! 

Over the years in the small business arena, when retirement is mentioned, the discussion usually focuses on programs like 401k, Profit sharing, SEP’S, and Simple Plans.   

 They are all very good plans and every business should offer one of them to their employees for the purpose of having a benefit plan where employees can save for their retirements.   

 However, not every employer wants to take on the burden of funding retirement for their employees for many reasons.  The reasons range from a lack of cash flow, employee groups who would rather take the money home.   

 In situations where the employer feels they would like to use their company to create a benefit for themselves, and not the employees, they should look into an executive compensation plan called the CEEP (Corporate Executive Equity Plan).  The CEEP is a hybrid of a few types of benefit plans used for the higher paid group in companies and for the owners.   

 The term “non-qualified “, refers to a plan that normally is not used for the masses, but used for a selected group of people.  As an example:  Employer A can decide that they want to put a plan in for employee B, C but not employees D-Z.  In most cases the plan itself would not be tax-deductible as a “plan”, however, it can be tax deductible under certain conditions. 

How the CEEP works!  

Mr. Jones owner of the Big Dip Donut shop decides that he wants to allocate $25,000 a year into a retirement plan for himself and no other employees of the company.  For the most part, he can’t have a qualified retirement plan without offering it to the employees.  Even a “Simple Plan”, which is the easiest to implement would have drawbacks.    Continue reading “A Great Benefit Every Business Owner Should Be Aware Of! “

A Road Map For A Succession Planning  Essentials For Planning   Creating Your Team Of Advisors 

Who Are They 

Their Role 

Accountant 
  • Develops financial statements 
  • Provides tax advice 
  • Assists in Estate planning 
  • Assists in Business value 
Attorney 
  • Negotiates agreements 
  • Tax Advice 
  • Prepares estate documents 
  • Advises on business structure along with implementation 
Management Team 
  • Manages the ongoing operation  
  • Operational advice and expertise for new owner 
  • Enables business continuity 
Business Appraiser 
  • Estimates fair market value of Business  
  • Provides the credibility of asking price 
  • Advice on how to maximize business value 
Business Broker 
  • Finds buyer and market insight for value 
Financial Advisor 
  • Facilitates and council’s family goals and value 
  • Plans for the future of the estate and distribution 
  • May have the capacity to help fund Buy and Sell Agreements and Deferred Compensation situations 
  • Offers financial advice to all the members 
  • Helps project future financial needs 
Banker-Commercial 
  • Financing options for acquisition 
  • Access to other experts that may be needed 
  • Supports the business transition before and after the acquisition 

Exit Options: 1 

  • Transfer the business to a family member; This represents about 42% 
  • Sell to partners or your employees (directly or through ESOP); This represents about 17% 
  • Sell to a third party; 19% 
  • Partner: 10% 
  • Wind down business -3% 
  •  Don’t know -8% 

Questions To Consider 

  1. Are there one or more family members who want to take over the business?  
  2. Does the family successor have the skills to operate the business and guarantee the return on your investment?  
  3. What are the qualifications and skills someone would need to purchase your business to guarantee the successful transition?  
  4. If you transitioned to your family member, how will your employees, suppliers and customers react?  
  5. What is the most tax-efficient way to pass ownership to family members?   
  6. Will you continue to have a role in the business? 
  7. How will this succession option impact the rest of the family? 

Selling to partners or your employees 

  • Which employees or partners are best suited to purchase your business?  
  • Do they have funds or access to funds?  
  • Will you have to finance part of the sale?  
  • Do they have the management capability to run the business successfully?  
  • Can the business take on debt for this transaction long term?   
  • Where will the purchase price come from?  
  • Do the purchasers have assets as collateral?   

Third party  

  • Who are likely candidates in your industry that would be interested in your business?  
  • Do you want to sell the whole business or only part of it?  
  • Will the potential buyer have the entire financial resources to purchase the business, or would you be prepared to partially fund their acquisition?  
  • What is the most tax-effective way to sell your business?   

 

Why Use Non-Compete Agreements!

Non-compete agreements (NCA) represent a separate agreement. They could be in an employment contract, or as a separate article in a buy and sell agreement. Sometimes they are referred to as Covenants not to complete. “

This is based on the possibility that an employee can do harm to a company upon termination.  They could know sensitive information about the company’s operation, owners and employee’s personal information, special operations, and proprietary information to a competing advantage, along with so much more.

Picture a very long-term employee working side by side with the owners, for many years, and then leaving to work for the owner’s competitor.  Certainly, there can be issues.

No compete agreements (NCA), can be used to retain employees also.   It would be very difficult to change jobs within an industry or profession when the leaving employee is limited to compete in a geographic and specific industry for a period of time.  However, non-compete agreements are hard to enforce, because in many instances the agreement has overreached and is very broad in the definition of industry and geographic coverage.

Continue reading “Why Use Non-Compete Agreements!”

The Story! The Cost of Funding Your Buy and Sell Agreement! Options!

The Story! 

The Cost of Funding Your Buy and Sell Agreement! Options!

Over many years I have experienced many business owners in total denial about the cost of funding their buy and sell agreements, thinking they can come up with the liability when the trigger of death occurs.

The four listed ways are compared below.

  1. Cash
  2. Borrow
  3. Sinking Fund
  4. Life Insurance

Let’s take the one by one.

Cash: This is assuming the company has the cash at hand, idle. Rarely is this an option. Growing companies reinvest in their company and only keep enough cash reserve as needed.

Borrow: A company just lost a valuable member of the company. Most bankers would probably want to see how the company will fair after the death of a key person and would want to know how the liability which has just been created will affect the cash flow of the company before loaning more money. There probably is a good chance that outstanding line be pulled in by the bank (probably a covenant in the loan agreement).

Sinking Fund: Mostly just theory! In 48 years, I have never seen a company try to develop a sinking fund. If the company was putting money in the sinking fun, they are losing the opportunities this money could create by investing in the business rather than on the sidelines. Not reasonable as the actual amount of money needed is available should death occur prior to the target date of accumulation. The least appropriate method.

Life Insurance: At its simplest benefits, it is immediate, tax free and the funding level is immediately known. Also, the cost is only 17 cents on a dollar rather than the much higher costs of the other three options.

Summary: While we don’t know when a death or disabilitymay occur, the company should at least be prepared for this trigger. Today the price of life insurance is low-cost. There is no reason not to purchase at least temporary life insurance (10-30 years), such as term insurance. The cost of life insurance in the example is using cash value life insurance.  Increased Sales To Fund Cost: Another measure of effectiveness of funding the buy and sell is to measure how much more in sales the company has to do to pay for the funding method.

Costs:  Funding over 15 years. 

Cash; 1,039,464 Loan: 1,306,085. Sinking Fund: 901,613 Life Insurance:  171,512

Also, what do you need to have in sales to pay for the method: 

Example, with Life Insurance Cost, @20% profit, sales would be $857,560

With Cash: There would have to be $5,197,320

 

 

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Advantages Of A Buy Sell Agreement And Some Dynamics Of The Agreement!

It’s important to understand that every Buy and Sell Agreement (BSA) is different and has a separate purpose when put together and implemented. Because of the vast differences in BSA’s, using a standard form of BSA rarely accomplishes the needs and wants of the parties involved.

Each participant in the agreement has different purposes and objectives and looks at the transactions very differently. Neither party knows when the agreement will actually be needed, and what the triggering event will be. A triggering event could be death, disability, divorce, termination,  bankruptcy, and other defined events.   One thing that can is consistent in most cases is that when a triggering event happens, then each party becomes visionless to the other parties’ best interests, and only focuses on their own and best interests.

The two participants in a BSA are a seller and a buyer. They come in different forms, as individuals, trusts, or estates. Usually their purposes and objectives are very different, and there usually is a conflict between the parties.

While creating the BSA  the parties tend to be very fair before a triggering event. This is because everybody is in the same position and no one knows who will suffer the future triggering event. This is a positive viewpoint, as the parties are reasonable and objective about the possible and various scenarios. Everyone’s objectives are personal, and range from financial, tax, to personal protection for their families.  Having a designed BSA can offer the owners some satisfaction that their needs are documented and witnessed.

Objectives of BSA

  • To provide a predetermined roadmap for the business based on a triggering event which may call for the sale of a participant’s ownership interest.
  • To provide a guaranteed buyer for the owner’s business interest and to create a market for that interest.
  • If funded through life insurance or some other means, the BSA will provide liquidity for the payment of the business interest and help the estate pay for the estate taxes and other settlement costs of the deceased owner’s estate.
  • Can avoid an impasse between the parties in the event of a triggering event.
  • To protect the company and surviving shareholder from subsequent competition, should a terminated owner wish to sell to a 3rd
  • To avoid potential conflicts between the surviving owners and the deceased owners’ heirs, by creating a roadmap through the agreement at the owner’s death.
  • Can level the playing field for the estate or deceased owner’s as the agreement gives the deceased owner a say on how settlement of their interest will be to their heirs and estate. Especially, when the surviving family have little knowledge of the business entity.
  • Establishing the price and method of valuing the interest, establishing the terms of payments, and providing a method of funding for the payment of that purchase price.
  • Can create job stability for minority owners and key non-owner employees.
  • Can establish the value of the entity for tax purposes.
  • Can preclude owners from selling their interest without the consent of others thus avoiding the third-party ownership or voting percentages.
  • The agreement can restrict ownership to people who are actively engaged with the entity of full-time basis.
  • Can improve the credit worthiness of the entity.
  • Can avoid transfer violations/Licensing requirements.
  • Avoid transfers to individuals that would terminate the S corporation status.
  • Can dictate discounts for lack of marketability (minority interest discounts).
  • Can provide for voting agreements where necessary.
  • Can dictate what happens to in force life insurance policies on the terminated or surviving owners.

These are only a few of the many reasons for a buy and sell agreement, and the advantages of funding the agreement.

 

The Final Act! The Day Will Come! Part 2

In part-one of this article, I mentioned how purchasers will prefer to buy a business where everything looks good and there are no apparent problems. Smart and neat operations will attract serious buyers; however, this is only one part that is needed to achieve your selling objectives.

There should be no hidden problems or secrets which can jeopardize the purchase. Any undesirable factor not disclosed to the purchaser can lead to a non-sale, or at the very least, something they can use as a negotiating tool. The fact that a deal has fallen apart, is not only frustrating, but will cost you money, time, and distraction from your business.

An owner who unknowingly discloses secrets or situations in their business can end up becoming a deal breaker. Issues which are known need to be dealt with to have the best chance of a good sale. Since there may be issues which are unknown the best answer to this is to search for the problems in advance and take care of them. Think of this the same way you would treat the sale of your home. You would normally fix up, repaint, and clean up before you put the home on the market. You should do the same thing with your business.

Not only would you want your physical location to be clean and tidy, but this also flows over to the other parts of your business, such as accounting, financing, marketing material, department procedure manuals, and an array of other business items. Prepared written policies and procedures are a great selling point for a prospective buyer. Remember, when someone is interested in your business, it’s their team that inspects every aspect of your business in doing their due diligence. This is a micro inspection of all aspects of your business, so it will pay to make sure there isn’t a bunch of dirty secrets hanging around.

FIRST IMPRESSIONS AND PHYSICAL APPEAL
The first time a prospective buyer visits your company they make value judgements. They will observe everything from your reception area to your signage in and on the building. If the impression they get is positive, they will want to investigate your company more. You don’t want to lose their interest based on visual appeal of your business. No matter how good your business seems to do on paper, the prospective buyer may lose interest based on your first impressions.

This observation doesn’t end with just the building. Your premises, marketing literature, dress attire of you employees, uniforms, office settings, rubbish areas and a host of other areas should be updated and tidy. Continue reading “The Final Act! The Day Will Come! Part 2”

The Final Act! The Day Will Come – Part 1

Someday the day will come when you will want to exit your company, for better or worse.  Disposing of your company can be challenging! If done properly it can create great financial opportunity for you and your family, allowing for other options in life, especially during retirement.

However, if your business exit strategy is not effectively planned, the business, which has given you a comfortable living, may turn out to be worthless.  At the very least, you will be liquidating assets to take care of final debts and obligations.

Without a detailed plan you may not maximize the best potential price for your company.  Between the highest and the lowest potential value, many elements will decide which side of the ledger you will fall on.  Elements such as; a trained middle management group, systems, value drivers, culture of the company, consistent cash flow, profitability, and equity growth, are just a few elements that can  lead to an excellent or bad sale.

THE SUBJECT THAT IS RARELY MENTIONED!

Unfortunately, for most business owners, the idea of exiting their business is rarely considered until the time has come.  It most cases, the key planning elements of obtaining the best potential value of the business has been lost because there is a lack of time to implement them.    Most business owners know that in order to keep their business running profitably, like a well-oiled machine, they have to stay focused on the task at hand, always thinking the future will take care of itself as long as the business is profitable.  However, that is not necessarily the case in many situations.  Also, when owners started their business, they had a place to go, a paycheck and a position, not ever thinking about the end game until the time comes when the end game is staring them in the face. Continue reading “The Final Act! The Day Will Come – Part 1”