The Education of the Quintessential Employee!

June 18, 2022 by YOUR BUSINESS WORTH, posted in Business Growth and Transition, Executive Benefits, Selling Your Business

My friend of fifty-four years, George, is a very remarkable person. In a recent conversation I had with him, I realized that George defines the “quintessential employee.” Why? He makes the “quintessential employee” easy to spot. Just follow him around when he works.

As George was telling me about his history with his company, he related how the company owner came to visit him unexpectedly to thank him for his service of 29 years. When I asked him why he thought the owner appreciated him, he described for me all the things he did over that period.

Consequently, what George told me was the definition of the “model key person.” A person that every business owner wants, and needs, in their organization.

You can spot a model employee in a heartbeat because:

They are the first ones to come to work. They almost never take time off. They volunteer time when needed to cover for others. They learn more than they must and are eager to learn. They are so good at their job (s) you would think that they were the owner.

Key employees like George are valuable for the owners because, they always make life easier for the owners. Key people bring so much to the table, and are the most valuable asset in a company.

Intrinsic rewards examples in the workplace

Below are some intrinsic rewards that may affect your workforce. Fostering these activities and feelings in the work environment could help your team grow and thrive. A key person exemplifies these values.

Completing meaningful tasks
- Letting employees be selective
- Gaining a sense of competence
- Making noticeable progress
- Feeling inspired to be more responsible
- Being an important part of an organization or team
- Feeling accomplished
- § Proficiency in knowledge or a skill
- Feeling pride

I have frequently suggested to many business owners that they groom talented people in their firms who have the take charge values and attitudes which parallel the owner’s. They normally get it, want it, and can do it.

A key thing an owner can do is to surround themselves with like-minded and value driven employees and build from there. The key person has the values of the owner, and the key person influences other workers over time. They set the example of the company’s culture and the value of the owner and the company .

Two Questions:

How do you find such a person?
1. How do you keep them?

Finding is the hard part, keeping is the easy part.

Finding the right person really comes down to the culture which the company portrays to the public. Like Costco or Trader Joe’s, who have the reputation of a wonderful place to work. They continually enhance their reputation of wonderful places to work. By having a well-known culture, companies attract like-minded individuals. Also, having the sense of value, the company can immediately filter applicants who apply for a position. Knowing the company values, is a built-in filter and a screening tool for the company when hiring. Question: “Can this person develop into a key person”? And “Does this person have the values that represent this company?”

Small family businesses can build that type of culture by hiring based on value, creating good compensation, benefits, giving respect to workers, positioning them in the right seat, (also taking them out of the seat if it does not fit, and putting them in another seat the is more appropriate), respect for the workers, along with other factors.

Retaining employees can be accomplished through benefits, time off, respect, vested benefits, ownership interests, and several other ways.

The importance of developing and keeping key people cannot be overlooked.

Creates more business value
- 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 purchasers of the business, or
- Likely to run the business while the owner enjoys life, but still has the control and wealth

My suggestion to many small business owners over the years has been to find ways to build a key group as quickly as they can and to build the group around the values which the owners have.

If you have an interest in learning other ways of keeping your key people, this video will be of value.

Case Study #3. Corporate Executive Equity Plan (CEEP )

For A Free White Paper called, “Wealth Without Taxes”. Click

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.

Immediate Download

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.

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

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.

Receive your Free Business Kit Guide. A Great guide to help you understand some of the business planning issues. CLICK HERE

Reasons They Do Not Have A Transition Plan That Will Be Efficient – Part 2

May 11, 2021 by YOUR BUSINESS WORTH, posted in Business Growth and Transition, Buy and Sell Agreements, Company Wealth, evaluations, Selling Your Business, Strategies of growing business, Value drivers, Working On Your Business

Over the years, my experience with many owners I have found a major conflict with owners is the working in their business vs. working on their business. It is extremely hard for many business owners to make changes and spend the necessary time. I have a book called “Unlocking Your Business DNA”, which discusses the personal tragedy of not having the proper planning.

FOR A FREE EBOOK; REQUEST UNLOCKING YOUR BUSINESS DNA

I have heard the stories from “I will live a long life”- “I need to work and won’t retire” “No one can do this like I can”

Four possibilities of leaving your business:

Death (that includes dropping dead at your desk)

Disability

Retirement

Cannot do it any longer

By not planning, the owner may find themselves receiving much less for the business, walking away without any value, or just die working at their “bench.”

Because of this one reason, we developed the two hour a month planning process, called: THE ONE PAGE PLANNING PROGRAM.

The Owner AND Their Issues: What is important for the owner is to have a personal retirement and estate plan to define their future needs. Do they want to stay active in the business even when retired? Will they have enough money for retirement? Will they have estate tax exposure. Do they have the proper estate documents? Do they have someone to sell the business too? How much will they have to sell their business for to net the amount of assets needed to provide their financial security?

Owner Issues

Financial Security
Wealth Preservation and transferring the business with as little taxes as possible.

The Family: What is the status of the family relationships in the business? Do any of the family members depend on the business for income? Do they own stock? Are they in agreement with the proposed succession? Are their careers involved with the business?

Key Issues for family

Compensation among family members in the business?
Inheritance among family members?
Management of family business, who is involved?

The Company.

What are the assets in the business? What is the value of the assets? What is the value of the business?
Has the company been appraised in the last few years?

Is the buy and sell agreement in force-signed and dated?
Does there need to be more formality in the governance of the structure?
Has there been a systematic attempt to enhance business value drivers over the years?

What is the structure to get earnings out on a tax advantage structure?
Who will be the leader of the company, and will there be a change in ownership?

The Succession Plan

Business Situation and questions when thinking about succession.

How are you getting earnings out of the company on a tax advantaged structure?
Have you considered the leadership and owner issues to be addressed?
Each entity structure has advantages and disadvantages, and each should be looked at carefully when considering your future status as you transition?

FOR A FREE EBOOK; REQUEST UNLOCKING YOUR BUSINESS DNA

10 Questions Every Business Owner Should Know Know!

April 22, 2021April 22, 2021 by YOUR BUSINESS WORTH, posted in Buy and Sell Agreements, Company Wealth, Estate Planning, Executive Benefits, Key People_Or Group, Life Insurance Types, Passive Ownership, Selling Your Business

What strategies are you using to make sure you will grow your business to the maximum value it can grow to.

What are you doing to make sure you have a key group, culture, and a method to keep them with you for the future?

What makes you think you are taking advantage of all the benefits available to use in your company that would help, you, your company, and your family on a tax-effective basis.

How will you extract the greatest potential value of your business upon your death, disability, or retirement (the three major reasons you will have to leave your business)?

What ideas and strategies have your accountants and attorneys given you in the last three years that has made a significant difference in your growth of the business?

If you died tonight, who would own your business? And are you sure that is true?

Make makes you sure that your key people will not leave you? And if they do, what makes you think that they will not go to your competitor, start their own business, and/or reveal your business secrets the competition.

What makes you believe your key people would not steal your employees, and clients, if they decided to set up shop across the street from you?

When was the last time “all your advisors” sat in the same room for the morning and talked about your goals, and what is the best advice they could give you to create more growth and better business?

How would your spouse know what all the passwords needed to open your computer accounts, would she know where the key to the front door of your office is, if you died last night?

For A Free Business Kit click the link below:

https://www.allclients.com/Form2.aspx?Key=49D7A9612BCD8971E08D1B3293625EBA

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.

FREE OFFER: 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

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 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.

CLICK TO Request our Full White Paper and Business Guide Free request (R-1)

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.

CLICK TO Request our Full White Paper and Business Guide Free (CODE R-1)

^[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.

Recent Posts

Category: Selling Your Business