Category: Inside Sale

The Benefits Of Keeping Your Key Person And Key Group!

by YOUR BUSINESS WORTH, posted in Business Growth and Transition, Company Wealth, evaluations, Executive Benefits, Income from your business, Inside Sale, Key People_Or Group, Life Insurance Types, Strategies of growing business, Tax Free Income

 

Recently, I wrote an article about the “Quintessential Employee” and covered all the benefits of having a key person in your company. 

The Education of the Quintessential Employee! 

Some of the attributes of the key person are:  

  • Creates more business value by freeing owners to focus on other profitable tasks 
  • Purchasers of a business want to have middle management in place 
  • Builds reputation and culture 
  • Key people tend to impress other employees as a good example 
  • Key people, as described, are also likely future purchasers of the business, or 
  • Likely to run the business while the owner enjoys life, but still has the control and wealth 

For the full article, download The Benefits Of Keeping Your Key Person And Key Group

Enjoy the download of the full article. The link in the article will download immediately the option of receiving the report.

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Estate Planning Chaos for the Business Owners

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

The Easy Process To Identify and To Solve The Problems!

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

The Easy Process To Identify and To Solve The Problems!

Excerpts from My book, “Unlocking Your Business DNA”

The One Page Solution!

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

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

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

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

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

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

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

An Example:

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

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

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

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

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

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

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

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

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

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

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

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

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

4-Retirement; defining and preparing

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

6-Premature Death- Consequences

7- Estate Distribution- updating

8- Life Insurance Contracts and Benefits

9-Legacy Planning / Management of Legacy

10-Disability and Illness, Medicare, and Medicaid

11-Key Employee Retention- and Creating A Culture

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

13-Corporate Benefits and Retirement- cost and efficiency

14-Qualified Plans and Personal Liabilities- Executive Compensation

15-Family Relationships/Employee Relationships/Human Resource

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

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

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

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

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

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

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

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

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

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

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

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

Consequences Of Not Creating A Buy and sell agreement!

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

Part 2 

BY Thomas J. Perrone, CLU, CIC 

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

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

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

S Corporation requirement 

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

Basis and S Corporation 

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

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

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

Quick overview of Basis 

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

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

Life insurance to fund the Buy and Sell Agreement 

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

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

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

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

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

Death benefit and basis 

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

Stock Redemption in S Corporation 

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

Cross Purchase buy and sell in s Corporation  

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

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

Some key issues:  

Section 318 Attribution Rules  

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

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

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

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

CLICK HERE 

Conclusion: 

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

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

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

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

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

GET YOUR BOOK

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

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

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

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

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

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

Part 1 

BY Thomas J. Perrone, CLU, CIC 

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

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

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

Consequences of not creating a buy-sell Plan.  

  • Stress on the business’ cash flow or credit line having to purchase the decedents owner’s interest  
  • Unqualified and instability with employees running the company 
  • Disagreements and conflict among heirs increasing administration time and costs 
  • Lack of a market for business which may potentially represent a significant value in the estate 
  • Suppressed value much below fair market value to raise cash for estate needs 
  • Termination of the business 
  • Instability amount employees and creditors 
  • Lack of liquidity to pay estate taxes and other administration costs 
  • Stream of income to remaining family members from the business is lost 
  • Valuation disagreements and IRS litigation 
  • Nightmares of not having a Buy and Sell agreement in a S Corporation! Loss of eligibility as a S Corporation resulting in involuntary termination of the S. Corporation status 
  • Most transfers to entities such as partnership, Corporation and most trusts are prohibited transfers 
  • A termination of S Corporation status will cause the Corporation to be taxed as a C Corporation as of the day of termination creating income tax consequences to the shareholders.  
  • Corporation, which is terminated, must wait five years before making a new S Corporation election, resulting in Corporation being taxed on its net profits for five years.  
  • The surviving shareholder could face additional tax burdens on future ongoing Corporation distribution and on those made upon the sale of the Corporation 

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

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

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

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

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

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

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

CLICK HERE 

Treating Your Children Equally Or Fairly!

Featured by YOUR BUSINESS WORTH, posted in Business Growth and Transition, Company Wealth, Estate Planning, evaluations, Income from your business, Inside Sale, Passive Ownership

Leaving assets Equally or Fairly!

The One Page Issue

The Issue Overview:    

Parents want to leave different property to their two children. Son A is in the family business, while Son B is a teacher. They also want to update their estate plan.  

Break down and fact pattern:  Family owns a business worth approximately $3 million (ballpark guess by accountant, but not a certified appraisal).  The account has suggested that the owner get a certified appraisal.  There is a building worth $800,000 that houses the family business, and residential real estate worth about $1.5 million.  Their home is valued, $500,000, and an investment worth about $600,000.   Their net worth is approximately $6,400,000.[i]

Rents and salary are where the family derives their income.

The rental income profits are being invested back in the real estate to pay down the mortgages which will be paid off in five years.  

Intention of estate owners; Specifically, at the death of the surviving spouse, Son A is to receive the business and the business property.   Son B is to receive the real estate and residence. The investment account balance to be split equally.    

Past Planning:  The parents have done very little estate planning. They have an old, “I love you will” and do not have healthcare directives in place.  

One Page Issues:

Summary of Issues:  

A. Upon dad’s death- the status of mom and her income. 

B. The real estate other than the business building to Son B. 

C. Distribution of business assets to the son A

D. Estate settlement costs and taxes.

ONE PAGE SOLUTION!

One Page Solution (s), things we suggested to consider:

  • Certified evaluation of the business as a watermark of value, for a variety of things.
  • Update wills, possibly a living trust (Qtip/bypass) and Medical Directives
  • Placing real estate in Irrevocable defective grantor trust   with spouse as income beneficiary (Defective Grantor Trust) remove from estate and future value[ii].  
    • Parents are not concerned with making gifts. (See footnotes).
    • Parents are aware of a possible reduction in the exemption credit.
    • There is also the issue of the loss of stepped-up cost basis in the future because of future tax law changes. 
  • At spouse death, Son B can receive the investment property. Son B will receive the commercial building and the business.  
  • If more cash is needed in the estate, the business could fund a life insurance policy on Mom and dad (2nd to die) to absorb taxes and transfer costs.  Using the company to fund the policy via a split dollar or bonus plan. If so, the life insurance would be purchased by an irrevocable trust.  

Overview

These were a a few of the strategies the family could do to improve their situation, although there are many more ways to plan their estate.  Most important, this was the direction the family felt more comfortable after reviewing other possibilities.  Compared to the default estate plan they had; this planning puts them in a much better position to accomplish their goals. 

Bottom Line:  

  • The spouse will have the income needed to stay in her world. 
  • Son A received the company along with the building. 
  • Son B is treated fairly in that he receives the real estate and income from the real estate.
  • It also works well if the mother passed first.  The only exception would depend on the value of the stock which the father owned at his death.  Currently, he owns 100% of the stock.  (Once the business value is known other planning strategies could be implemented to save taxes and accomplish their financial goals as a family.  Things such as using minority stock discounts, recapitalization, estate tax funding with life insurance, gift programs, along with other techniques to accomplish the personal family goals).

Take our free SCOREBOARD ONE MINUTE ASSESSMENT. AFTER YOU TAKE IT, WE WILL SEND YOU A FREE ASSESSMENT REPORT.  IT WILL HELP YOU IDENTIFY WHAT AREAS IN YOUR BUSINESS GROWTH are strong and what areas you need to work in to maximize your full potential business value.  CLICK TO GET

[i] Business needs certified appraisal- current value is an estimate

[ii] We are considering current tax laws; however, we are on the verge of a possible lowering of the exemption credit and repeal of the stepped-up basis

The Challenges Of Developing A Transition Plan For Small Business Owners- Part 1 of 2!

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

Many small business owners do not have a plan for the transition of their business. A survey taken a few years ago suggested that only 30% of the small business owners had a transition plan. Out of the 30%, only 50% had a plan in writing. Of those plans, there is no way of telling if they were set up correctly, outdated, or even funded, considering the changing of the business status.  

 Options available for business owners for the transition of their business:  

A structured succession plan would enable the business owner to achieve their personal financial goals as its primary function, which would be to create a satisfactory income, and security for their future. 

A second goal would be to maximize the greatest potential value for the business, which would help the owner with their financial needs in the future, such as retirement.  

Another goal would be the long-term growth and the survival of the business to support family members for the future, key employees, or if the owner wishes to remain attached to the business, as a passive owner.  

One of the key issues is to make sure the business owner has control of the process and has defined the timing of any transition in the future.  

For example, if the owner wants to retire in five years, they must make sure they have implemented proper value drivers to maximize the company value.  Some value drivers take longer than others, such as building the next level management key group. This is the group that may wish to purchase the business at some point or run it for the owner.  

By not implementing this strategy early, the owner may be forced to delay the sale of the business until the strategy is developed, consequently jeopardizing their retirement plans.    

If the business is to be sold outright, there needs to be other quality value drivers working for the business owner to maximize the potential sales price.  

Overall, by not having a succession plan, and awareness of what value drivers need to be implemented, the owner risks not achieving the highest potential value for the business while weakening the ability to time and control their transition from the business.   

 Problems of not having a solid transition plan:  

  • Family equity issues 
  • Income and estate tax exposure 
  • Risk not creating the culture of retaining key persons and family members 
  • Uncertainty for people who have a stake in the company (investors, family members, long-term employee, as an example) 

For small privately help businesses, a succession plan is very personal, and cannot be a template program, as every company is unique, and the owners’ situations are very different. 

The key to a successful transition is having a solid plan which has an orderly process and is tax efficient.   

LEARN THE FOUR WHAT IF QUESTIONS EACH BUSINESS OWNER HAS AND HOW TO AVOID THEM BY REQUESTING THE WHITE PAPER:  CHAOS-THE BIG STORY; REPORT #4.  

Selling Your Business To The Younger Generation!

Featured by YOUR BUSINESS WORTH, posted in Business Growth and Transition, Buy and Sell Agreements, Company Wealth, evaluations, Inside Sale, Key People_Or Group, Passive Ownership, Selling Your Business, Strategies of growing business, Valuation, Value drivers

I am old enough to remember the many small businesses in my hometown. There were all types of businesses such as, meat markets, hardware stores, small groceries stores and many specialty stores. Large shopping centers and malls were just starting to appear, as they would be the future home of many of the smaller stores along with the big chain stores.    

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It was the fifties and small business was booming. There were many reasons for the business boom, but mainly it was the population of the baby boomers which gave way for opportunities to buy or start a business.   

Now over 60 years later, things are changing. The boomers that started the businesses are now older and would like to retire and sell their businesses.   

Baby boomers own 2.34 million small businesses and employ more than 25 million people (about the population of Texas)i. This represents about 100 million citizens when you consider family members.   

Incomplete Plans 

A recent surveyii shows that 58% of small business owners have not only failed to complete a succession plan, but many haven’t even considered a transition plan. The significance of this figure is the potential catastrophic effect on our economy as the boomers burn out, die, or become too ill to work. Other studies tell us that only 30% of business owners have a succession plan, and 50% of them are incomplete plans.  

The impact of this lack of planning not only affects the consumer, but also employees, family members, partners, independent contractors, part time workers, down the line suppliers, an endless road of dependence on each business.   

Even the younger generation business owners are affected by the closing of these businesses, as the younger business owners have a type of dependence on the success of the boomer’s generation of businesses.   They rely on these established businesses as suppliers, mentors, etc. 

Receive my free E-book;  “Unlocking Your Business DNA” to learn the strategies of growing, protecting, and transitioning your business for greater value” CLICK HERE 

Younger Generations 

Interestingly, many younger generations are not interested in running the family business. They have seen the sacrifices their parents and other family members have made over the years; they don’t want to spend all the time necessary to run the business.   

This generation, beginning with the babies of 1965 and continuing through 1984, is a big problem for Boomers, who are preparing to sell their businesses. The issues are three-fold: numbers, values and choices. 

A major reason for the potential problems for baby boomers is in the pure number of them. From 1945-1964 there were many baby boomers born during that period which stemmed the growth of the economy. However, the next generation is about 23% less in population. This means there are less people in the younger generation to purchase businesses.   

In the next 4-6 years, when the last of the boomers hit 65 years old, almost 5 million fewer people (23%) will be turning 45, and entering their prime business buying years. This shortage of buyers will create the worst imbalance between small business sellers and buyers in history, and it will continue for the next 20 years.iii 

Values 

Boomers have a vastly different work ethic than the Generation X’s. Not that they are lazy, but their values of working, when and why, are very different. Because of these values there are many Generation Xer’s who don’t wish to have the same work schedule their parents had.   

Generation Xers want to define the “work-life balance”.  Their observation of life watching their parents work all the time, didn’t really make sense to them. Consequently, they want to create more of a balance in life.    

Generation X’s, by and large, doesn’t equate material comfort directly with work. Their “balance” is oriented towards separating work and life. Unlike most Boomers, who live to work, the X generation only works to live. Work isn’t their identity, it’s merely the thing that allows them to pay for what they really want and their living standard. 

Many Baby Boomers’ attitude was, “live to work”. Working a 50–60-hour week was part of their business. Based on data, the Xer’s don’t agree with that lifestyle and are not interested in having a business where the cost is many hours of work.  

Planning for the Boomers and Their Business  

Because there is a shrinking number of future purchasers, small business seller’s must take all the necessary steps to prepare their company for an ultimate sale. In most cases they will need help in preparing for the sale of their business.  

There are professionals who can recommend to you how to prepare for the sale or your business, and to help you create the key strategies to implement for a greater potential value.  

Past Problems  

Many of the strategies needed to create value in business need time. You normally can’t wake up one day and decide to sell your business next week and expect to get the highest potential value.  

However, with the right coaching, you can start working on the strategies that can increase the potential value of your company. Even if you are years away from thinking about selling your business, business owners should engage with professionals to start the process of implementing the right value drivers early, with the end game being to increase the potential greatest value of their company.  

Point to be made  

By kicking the “transition of your business can”, down the road, owners are putting themselves in a terrible position. Not only are they not prepared to sell, they don’t have the systems in place that create the potential highest value, but also there may be a limited number of buyers in  the younger generations.  

If you are a business owner interested in discussing the future of your business, we would be happy to have that discussion with you.  

To aid you with the conversation, we have created an assessment tool that it easy to use. It takes about two minutes to complete, and it will give you an idea of your strong and weak points in your business planning. It’s a free tool called the “scorecard”.  Once completed we will send you a free analysis report of your strong and weak points of your business planning. We will also offer a free phone conference to discuss the results with you. Once you submit your scorecard, we will send you an assessment report in approximately 72 hours (about 3 days).  

Receive my free E-book;  “Unlocking Your Business DNA” to learn the strategies of growing, protecting, and transitioning your business for greater value” CLICK HERE 

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 3rd 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.