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

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:  

  1. Death (that includes dropping dead at your desk) 
  1. Disability 
  1. Retirement 
  1. 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 

Selling Your Business To The Younger Generation!

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 

Common techniques and situations where life insurance is required!

When you apply for life insurance with a trust, how is it set up? What are some of the ramifications? 

Basically, a life insurance policy is purchased by the trust and is owned by the trust.  The Grantor pays the premium in the form of gifts to the trust.  By doing so, the life insurance is not part of the estate, the benefits are tax-free, and if done correctly, premiums are considered present interest gifts in most cases.  The combination of the trust (Irrevocable Insurance Trust), and the Life Insurance maximizes and leverages the amount of property which can pass to the estate!   

  • The Trust needs a Tax ID (EIN) from the IRS since this is a tax paying entity 
  • A non-interest-bearing checking account in the name of the trust is needed to deposit cash into to cover the premium payment.  
  • The Grantor makes gifts to beneficiaries of the trusts. Gifts are deposited into the checking account. Gifts are normally within the annual exemption limit. 

Life Insurance and Business Succession Planning 

  • Equalization when leaving a business to family members when some of the members will receive the business while others will not.  Life Insurance can be the equalizer for the other children not receiving business interests.  
  • For businesses that are heavy in real estate, the life insurance can guarantee liquidity to cover maintenance expenses and lost cash flow. 
  • Life Insurance is a component of most buy and sell agreements to ensure the surviving partner has liquidity to buy out the interest of the deceased family member. 

To receive our FREE Estate Planning Guide for Business owners, BUSINESS OWNERS ESSENTIAL R-6:  CLICK HERE FOR THE DOWNLOADON the drop-down menu pick R-6 Business Owners Essentials. 

Types of Insurance:  Whole life, 2nd to die. What are the benefits of each?  

  • Second-to-die/survivorship life insurance can be in the form of a whole life or Universal life insurance policy.   It covers two lives and is paid at the survivor’s death.  It is normally when the capital requirements are needed at the death of the survivor.  Based on the mortality of two lives, it provides a discount for the insurance.  However, after the 1st insured dies, the premiums are normally needed, so a consideration would be the cash flow after a death of either one of the insureds.  However, if the capital requirement will be at the 2nd death, this type of policy is less expensive than buying two policies.   
  • Whole Life Insurance and Universal life are designed to stay in force for the insured’s lifetime. Whole life has guarantees, while Univeral life is albeit more flexible. It has the potential to cost more to keep in force for the whole of life.  However, universal life does offer guaranteed death benefit plans. Whole life and Universal Life can be used when the capital is needed for the lifetime of the insured.  
  • Term insurance is designed to last for a specific period before it expires.  Although term insurance is the least expensive initially, with outlay, it can become the most expensive over time.   However, it is a great plan to own when you have defined the capital exposure needed for a specific period and no longer. An example would be a bank loan for a brief period, a potential exposure or need not lasting for more than 20 years.   

Is life insurance death benefit tax free  Most of the time if arranged correctly.  However, there are a few exceptions when life insurance is not taxfree.   

  • Paid directly to the designated beneficiary (trust or individual) it will be paid tax free.   
  • The unholy triangle:  owner –dad; Dad gifts the policy ownership to daughter.  Daughter names her daughter as beneficiary.  At dad’s death there is a gift from Daughter (owner) to her daughter as the named beneficiary.  
  • Transfer for value:  This is when a policy is sold to another person as owner and paid to a non-exempt class, the policy will be taxable on the proceeds in excess of what the policy was sold for.  
  • Owner A, sells, his policy to his brother-in-law. At A’s death, the proceeds will be taxable in excess of what the brother-in-law paid towards the policy.  
  • However, if the brother-in-law was a Corportation (office of), a partner, a partnership, there would be no income taxes.  
  • Or anyone whose basis is determined by reference to the original transferor’s basis.  
  • The insured (or insured’s spouse or ex-spouse if incident to a divorce under Sec 1041) 

Avoiding the three-year look-back period when existing insurance is transferred to a trust.  

  • If the policy is already owned the insured can gift the policy to the trust, making a lifetime gift to the trust, the trust can then buy the policy for the interpolated reserve value of the policy  
  • Set up the trust before the purchase of the life insurance. Have the trust buy the policy, the trust would be the original owner and beneficiary.  

Download Our  FREE Business and Estate Planning Guide for Business OwnersBUSINESS OWNERS ESSENTIAL R-6:   

CLICK HERE FOR THE DOWNLOADON the drop-down menu pick R-6 Business Owners Essentials. 

What changes can be made to an irrevocable trust when the estate planning has changed?  

  • Decanting the trust varies from state to state. Decanting techniques can pass the assets into a new trust and take advantage of enhancements that may have appeared in the trust code since the original trust was created.  
  • Establishing a new trust for the life insurance:  The funding must be valued at the value of the old trust (namely the interpolated reserve value). It requires an exchange of assets. The trustees would also sign a contract of sale when the life insurance is transferred.  Certain procedures need to be in order.  

These are a few of the areas professional planners should be aware of when working on the estate of their clients.  These are some of the more complicated planning techniques, which come up often and are critical to making sure advisors are aware of the potential tax traps.   

I have found it best to work with the “team” of the client’s advisors so there is less of a chance to make mistakes when planning the estate of the business owner.   

To receive our FREE Estate Planning Guide for Business owners, BUSINESS OWNERS ESSENTIAL R-6:  CLICK HERE FOR THE DOWNLOADON the drop-down menu pick R-6 Business Owners Essentials. 

Ode To Mr. Business Owner!

Dear Business Owner,  

We’ve never met, but I know some things about you.   

I know because I have met and served many business owners like you in my 50 years.   

Here’s what I know about you:  

You have a successful business, but it comes with a significant investment of your time, time that you want to start taking back for outside interests.   

You pay the IRS a large amount every year.  

You wear all the hats; therefore, you are the value of your business.  You know that it would be worthless without you.   

You desire time to mentor someone, or better yet, a group of people to run your business so you don’t burnout. Your problem is, there is no time to do this because you are so busy.   

You feel trapped within the four walls of your business.  

You dread having the quarterly conversations with all of the people that you pay to do the work for you.  Accountants, Bookkeeper, Financial Advisors, Attorneys etc. In fact, these “professionals” probably have never met.   

If you died tomorrow no one would have a clue what to do.   

You have no escape plan.  

You think there is no other way.   

Hi, I am Tom Perrone and I want to virtually shake your hand, give you a pat on the back, and tell you “I Get It”.   

You, like many business owners that I have worked with over the last 50 years think that there is no other way than the same old song and dance that has always been done.   

No one listens to you, the one that makes all the plates spin and it upsets you.   

You are up at night pacing the floors wondering how this machine that you created has overtaken your life.   

That wasn’t your goal when you started, in fact, you have no idea how you got here.  

You need an escape plan.   

Like I said, “I get it”. 

I’ve put together a team to help business owners like you enjoy more time doing what you love outside the business while the machine runs itself.   

I’m passionate about teaching intelligent business owners like you how to get all you can out of your business before it takes all it can from you.   

You run your business…Your business shouldn’t run you.  

As a way of saying thanks for taking the time to read this,    

I’ve included a copy of my book:  

Unlocking Your Business’ DNA”- Cracking the code to a better business, bigger profits and more time on the beach!  

Click reply and let’s learn more about each other.  

Your escape plan awaits…  

Talk soon,   

Tom.   

Three Key Value Drivers  and Why Do They Matter? 

Value drivers are the elements of a business (systems and procedures), which create business value.   This post will cover  Next Level Management (NLM).  In part 2, I will cover  diversified client base  and  operational systems.  

Although there are nine transferrable value drivers, I am going to concentrate of three of them. Although all the value drivers are important, the three I will discuss are considered key drivers.  

The three value drivers are key in creating appeal to prospective purchasers of the business. They are important drivers, and at the very least, drivers’ businesses must have in order to grow.   

When a new business owner asks me when they should be thinking  about their future exit of their business, my answer always is, “the day theystarted their business is the time to start planning for an exit.”     

As you will see, the value drivers in most cases  need time to develop.  As we go through the three of them, you will see that they are strategies that can be implemented at once, but in many cases, need time to develop.    

Next Level Management (NLM):  Successful businesses with value, require business owners to delegate responsibilities to the management team.  NLM is particularly important because without a good management team, it would be hard to implement the other value drivers which are needed to create the maximum business potential value.i    

Finding and developing a  NLM  team is a challenge for many business owners. However, once the NLM is created, they usually become the team responsible to make the difference between where the business is now, and where the business would like to be.   The NLM is the key to  implementing the value drivers and the operation of them.   

Roadblocks for Business Owners in Developing Their Next Level Management

Many owners believe only they can keep and control the company’s success, since they built the business from infancy.   They  struggle  giving up even small types of control. The thought of not being involved in some of the daily business decisions, scares the daylights out of them, nor do they like the loss of control.    

Lack of installing the value drivers over time.   

 They spend their time working in the business as opposed to working on the business.   I call it their “Business DNA.”    Change is scary and thinking that someone else would be running the business is not consistent with their  fundamental  beliefs.  The possibility of someone else making decisions, which could build or ruin their business is too much for them to imagine.   

Fear of change.    Even if a business owner is not thinking in terms of an exit plan, they do like to think of creating business value. Once they are educated as to how value drivers affect the future value of their company, they become more open to  creating the value drivers, and making the changes.    

Misconception of owners:   Benefits derived to the business owners by installing value drivers is the result of the “full potential value of the business.”   The business grows as the business owner does less work, since the work has been handed off to the NLM.     However, owners have the common concern that installing value drivers will take too much of their time.  With proper planning, implementing the value drivers will create a more stable business, create better performance and scalability.   It is important that the owner understand the concept of developing the NLM team, so that team can create, implement, and manage  the value drivers, as opposed to the owner.     

It is possible for the owner to create the NLM where the owners have some control, and still can play a key role in the company.  Their leading role would be to delegate more responsibilities to the NLM, while focusing on other business responsibilities.    

 Many owners continue to do tasks they despise, just to keep a perceived control.  In many cases, the owner needs to take small steps in giving up control before they can start to feel more comfortable.  This is understandable since these are the things, they did to grow their business from day one of the business.     

The owner will see more growth in their company by implementing the value drivers, which will create more options for them when a future transition is a being considered.   

In my book, “Unlocking Your  Business  DNA,” I  discuss the problems business owners have working on their business as opposed to time spent working in it.  One of the factors missing is the value of creating value drivers for their business growth.   Once they realize value drivers create increasing company value, they get on board for future changes.  

 Through our discussions with business owners, we need to express to them that most future buyers will not want to buy the owner.   They want systems, management, and growth ability.       

Many owners think that they need to be involved with all the problems and issues of their company, thinking they have all the answers and the solutions.   Although this makes the owner feel in control and gives them  self-worth, it does absolutely nothing for the future value of the company, and in some cases may decrease the value.   

Success In Business Is Not Without Challenges!

DEFINITION OF BUSINESS GROWTH AND TRANSITION 

I often refer to my business planning as “Business Growth and Transition,” because I consider the business and the owner, as two separate and distinctive entities.  

For example, when the business is growing, the owner of the business needs to grow with the business and envision needed growth. As a business owner, he/she needs to continue to learn, ask more questions, depend on their instincts, experiment, be willing to fail, along with many other experiences to create the changes neededWithout the business owners’ creativity and involvement, the business will stop growing.  

Likewise, when planning for the business entity, we also plan for the owner personal needs. The business success creates personal challenges for the business owner, such as succession, estate taxes, family distribution, protection of the assets, and a host of financial and personal planning areas.  

STAGES OF A BUSINESS 

The business has two distinct stages it goes through which are critical; I define them as survival period and growth period 

Survival period is just what it means! Staying alive! This is where owner learns how to maneuver through the maze of “business savvy” strategies. “What doesn’t kill you, will make you stronger.” 

The survival period of business consists of: 

  • Excessive amount of time, sweat, and patience, luck, and much more.  
  • Bottom line:   Survive staying in business.  
  • Cash flow, Capital improvements, Inventory, client development create many challenges. 

The Growth Mode: 

 Not to simplify, but this is where the action is. It is up, up, and awayWhat needs to be done during this stage:  

  • Creates the opportunity for the future value of the business.  
  • To expand in all areas of the business. 
  • Inventing yourself and the company if needed, this includes building value drivers and transferable values. 
  • To become creative, reinventing of products, customers, process. 
  • To reinvent your markets and your clients. 
  • To build a customer base with loyalty, creating culture, and next level management. 
  • Much More… 

The expansion in Growth, (NOT ONLY) in markets and products, but also employees and the culture of the business. This is extremely important for the future of the business value, with the focus on growing your business value and to create transferrable value for the future. Owners need to start the process of giving up some of the control to middle management. This also means creating strategies which allow the owners to walk away and allow the business to run effectively and efficiently normally. This is my “Can you Take three months off” question, without an impact on your business profits?   

Disadvantages of Growth/ and letting Go 

You are giving up control to your management team! You are giving up things you controlled from the very infancy of the business. This is good because a future purchaser wants to buy your business as a running entity. They want a business that can run, and without YOU!  

When you start to delegate to others, things can happen. Your key people will learn how to run your business, and start thinking like an employer. They will develop greater relationships with your customers, advisors, and vendors. They will start to create profits for you, ease your time in the business, and allow you to enjoy more free time, however, there could be a price to pay!  

Tough Questions to Ask 

  1. What if your key people got to know your business so well, and they wanted to buy it from you, what would you do 
  1. What if you did not want to sell it to them at the time they want to buy? Will they walkWill they stay? Will the relationship change?  
  1. Will they go to a competitor 
  1. Will they take your customers and employees with them 

If this happened, what are you doing to protect yourself 

Consider this:  I recently had a client who went through this nightmare. The key people (2 key employees), left and started their own business. They also took other employees and customers with them.  

Unfortunately, the protection which we outlined to the owner three years prior was never implemented, and they are paying the price for it now.  

We told them to make sure they had programs in place to protect themselves from the business growth and success. 

Things Such As:   

  • Key person documents:  such as non-compete, non-disclosure and non-solicitation of customer and employee agreements.  
  • Benefits with Vesting:  We also suggested that they put in a vested benefit package for them and stagger the time where they would only have a partial vesting immediately  (we have found this to be a valuable motive to stay).  

Lesson to be learnedIf it happened to them, it could happen to you. Your key people will take over your business, which is good because as it creates transferrable value for the future. However, you must protect yourself from your business success.  

Without A Conclusive Direction, We Know This Case Will Go Bad for The Family!

Re:  Limited Information Case!

Current fact-pattern (albeit scarce)

This was a case which a professional advisor brought to us. We did not engage this client because there was a lack of facts collected. However, we did want to demonstrate to the advisor, that there were options his client could consider if there were more accurate facts.[1]  As a professional advisor you must obtain many accurate facts of the current situations.  This was a case which had great potential; however, the client was not willing to put the work needed to find solutions.  

Dad is planning on leaving family business to son A, with son B to inherit other assets.  Dad is hell-bent on leaving business at death to get the stepped-up basis. Which is fine if you know all the facts, but he didn’t know all the facts, nor did his advisor council him on them.  

There is no certified appraisal of the business, worth $10,000,000(owner suggested). Spouse would inherit other property (rental real estate and residence along with stock portfolio about $5,000,000). There are no mortgages on the commercial real estate or the residence. 

  1. There is no certified appraisal of the business. 
  2. No estimate of real estate value. 
  3. Dad’s health is questionable. 
  4. No life insurance or corporate benefits other than health insurance.
  5. Estate documents are very old- 25 years old. 
  6. Accountant was not proactive in the planning.
  7. Advisor did some investing for the estate owner.

MODELING:  Until we had more facts about the client’s situation we are limited in our models. However, there are some hypotheticals as options.  As mentioned, the options available need more facts before for these can be considerations. 

  1. Do a current certified appraisal. The cost to litigate in Federal Tax Court compared to a certified appraisal is dramatic. 
  2. Recapitalization of company, creating non-voting stock to create a minority discount, and to use the gift tax exemption to gift this stock to his son maximized before 2026 the gift tax exemption and estate exemption ends.  
  3. Family trust for income purposes for the spouse with son B as beneficiary.  (stepped up basis, and unified credit available)
  4. If exemption credit were less at dad’s death after 2026, use marital deduction and continue gifting program.  
  5. There is also the possibility that Dad could gift limited shares to Son A and then also sell the other shares to Son A with a SCIN[2]. Self-Cancelling Installment note based on his health this could be a consideration.
  6. If company was a pass-through company, spouse could enjoy income from the company after dad’s death without employment.   
  7. Suggested using the company to create tax-effective benefits for the family members, such as a Cash Balance AccountExecutive Compensation such as Deferred Compensation.  
  8. Family could set up an irrevocable trust funding it with a second to die life insurance policy and gift the premiums to the trust.   The tax-free life insurance death benefits could clear up any liabilities, taxes, or level more of the estate value to the sons. 

Keep in mind, this is a hypothetical model, and there are many more directions which we could go.  It is extremely important that the professional advisor get as much information they can from the clients, and their other advisors, so there is a correct representation of the current situation.   In this way, you can build the models needed to satisfy the clients financial wishes.  


[1] DISCLAIMER:  we did not engage this client. Lack of facts.

[2] This is a method of transferring property when the mortality of the owner is questionable because of health issures. There is a premium that must be paid on the sale.  If the owner lives longer than mortality, the family will end up paying more.  However, if death occurred less than mortality, the note would be cancelled.  (owner must not be terminal ill when they enter this transaction.) 

Case Study#5 Using Corporate Dollars To Keep Wealth Out Of The Business But In Your Pocket

This is the case of Joey Bag of Donuts and his pursuit of keeping wealth outside of his business.  You see, over the years working with Joey Bag of Donuts we told him that leaving too much of his wealth in the business can be problematic, especially when the time came when he needed to exit his business.  He heard me tell him many times, that someday he will leave his business by either a death, disability, or retirement, and taking the wealth with you when you need it the most, can be a problem, if you don’t have the right exit strategy.

There are many reasons wealth gets lost in a business when it is sold.  It can range from bad planning to bad luck, but Joey Bag of Donuts always remembered to keep as much of his personal wealth outside of the business as possible.  By the way this is why he purchased his company building and put it in a separate LLC.  Joey Bag of Donuts also believes in putting as much of his income to the company pension plan, again, outside of the business.

We also taught him to have his company support whatever it can legally towards his personal lifestyle.  For example, his cars, gas, some entertainment, health insurance, retirement, and other things are paid for through company.

Joey Bag of Donuts wanted to put more money away for himself and his family’s future, but didn’t want to use his own funds, so why not have the company support more retirement contributions?

We already had a profit-sharing plan, and he was sharing company contributions with his employees.

We decided that a non-regulated plan was the best way to go, so we developed a plan for only him.  The plan is a combination of two concepts.  We call this the CEEP PLAN (CORPORATE EXECUTIVE EQUITY PLAN).

The plan is a discriminatory plan, so Joey Bag of Donuts can pick himself or anyone else he wants, unlike a profit sharing or 401k plan, which is a regulated plan.

THE PLAN:  As you can see, the company made all the contributions, and took the deductions for them.  Joey Bag of Donuts was the sole participant of the plan. His cost was “0” out of pocket and he ends up with almost $800,000 of cash at retirement.  He also could turn the cash into a tax-free income stream.  In this case it was $67,500 tax-free income. The stream of income is worth more than $1,215,000.  Along with that he has a death benefit of $2,300,000 payable to his family tax-free.

THE BOTTOM LINE:  Joey Bag of Donuts gets retirement income using corporate funds.  All the contributions can be applied to just his account.  He also has the use of the account before retirement, like a  “family bank”, along with the ability to withdraw funds tax-free.[1]  There would be no 10% penalty if withdrawn before 59 ½.  Continue reading “Case Study#5 Using Corporate Dollars To Keep Wealth Out Of The Business But In Your Pocket”

THE SECRETS OF BUILDING A GREAT ORGANIZATION

I recently read a book called,” The Secrets Of Building A Great Organization”, by Bruce Clinton owner of BusinessWise, L.L.C., a business consulting and coaching firm based in Connecticut.

I found the book to be very interesting because, not only does it provide a road map of management for newer managers, but it re-educates older experienced managers in the most up to date strategies.

Bruce is the first person to mention that there are no magic formulas in being a good manager, however, with the basic strategies that he covers, a good manager, through their own talents, can become a great manager using the strategies Bruce discusses.

Many of the strategies are ones that Bruce uses in his practice as a business coach, and strategies developed while he ran different businesses.

For anyone who is a business owner or running a business, I would suggest this read.  In the book it is mentioned that most business owners don’t consider themselves good managers or they feel they don’t know enough about managing.

Any business owner who does $1-$150 million in annual sales, has 8-200 employees, is family owned and may be facing growth or succession issues, should read this book.

What I really enjoyed about the book is the small details that Bruce covers which are needed to build a successful business.  These are details which are not normally discussed in detail.  The book covers the importance of them.  These are the small details that make all the difference in the world of a business’ success, and Bruce covers them extremely well.  For example:

  • Overcoming communication breakdowns
  • Dealing with levels of incompetence
  • Fitting family members into the business
  • Retaining good employees
  • Building a workable succession plan

Continue reading “THE SECRETS OF BUILDING A GREAT ORGANIZATION”

What Status Is The Stock After A Triggering Event?

Chris Mercer author of “Buy-Sell Agreements for Baby Boomers Business Owners” addresses a very good question.  Who owns the stock after the trigger event?  After a trigger event, does the affected shareholders retain the rights, risks and privileges of the ownership, things like, voting, distribution, access to financial information, etc., or are their shares converted to another status, such as (example), the “pending sales of stock” status?

If the shares are converted into the new class or status, do they have the right to receive dividends, or interest while in that pending status, if so, who should be receiving it?

The agreement can also have a clause where the stock that is waiting to be purchased would convert to a “non-voting “status prior to being purchased.

There are many times a stockholder has signed personally for a corporate debt.  The stockholder may desire to have the remaining stockholders make an effort to get the departing stockholder off the note, as they have ceased to be a stockholder.

The questions that Chris puts forth are legitimate issues and should be dealt with when business owners and their council set out to design a buy and sell agreement for the company.

Thank you, Chris Mercer, for bringing these topics to the forefront.

Over the years, many of the buy and sell agreements which I have reviewed over the years, do not address or mention these particular situations, and could create a void should the situation arise.

Check Chris Mercers publications.  He puts out very good information that is useful to practitioners.