Be An All-Star Employer and Build Future Value In Your Business!

When you go into your own business, do you have a place to go, a paycheck, and a position?  You basically have a job.   However, when entrepreneurs go into business, they look for the big payday, the selling of their business.    Would it be nice to sell your business for 10 or 20 times your annual salary?

Building a business is not easy.  If you are going to put your efforts into building a business, build a business with a great foundation.  It is easier to build value in a business with a good foundation.  Let’s assume you have systems in place and a business presence.  What is needed for real growth once you get through the systems and organization formats, is to create and develop a business culture!

By having a business culture, marketing and recruiting get easier and less expensive as people are more attracted to your company.  Long –term employees get to know the business, your customers you’re your suppliers.  They become more efficient and become the “team”.   You will attract better quality candidates to hire.  You can become more selective and create the right roles for your employees.

Go to Trader Joe’s and ask the employees how they like working there.  You will soon find out that there is little stress, a lot of fun, and the employees want to be there working side by side with each other.

When employees are happy and like their jobs, they stay, they learn, and they attract investors and future purchasers.  This culture promotes profitability and consistency, which is how you maximize your potential profitability of the company.  Consumers like consistency and the added value of having a company that is easy to work with.  I like to call this the “Amazon Factor”.  Who doesn’t like ordering from Amazon? They make it easy for many reasons.

Having this type of environment doesn’t automatically happen.  You need to invest in it to create it, however, it will pay off in the future.  They key is to start early creating the vision you have for your company long-term. Create the vision of being the “All-Star Employer”, and you will attract the best, like minded employees, and create a great business that people will want to work at.

 

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

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

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

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

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

Objectives of BSA

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

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

 

The Final Act! The Day Will Come – Part 1

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

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

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

THE SUBJECT THAT IS RARELY MENTIONED!

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

Good Luck You Are Now In Business! Now What?

Chances are that the moment you started your company you felt the need to be in charge of everything (the control thing).  Tasks such as ordering stationary, trips to Staples, talking to the utility company, dictating messages and a sundry of other things. You did pretty much everything including the bookkeeping, sweeping the floors and taking out the garbage. 

 You were proud of your new business and wanted to make sure it did well from the very start and in in every aspect of your business. Even if it meant you had to work 80 hours a week to keep it going to be successful.   

 Then you started to make more money, enough to hire employees to help you grow the business.  As you moved forward so did your business commitments.    Your mindset however, is control, just like when you started the business.   A natural reaction since you started and created your business, the tendency is to protect it, this is your baby! 

THE NEEDED CHANGE IN MINDSET! 

The problem comes when you have to change your mindset as an entrepreneur. When you started your business, you had a talent and believed that your talent could make you profit and grow your business. However, as your business and commitment to the business grows, there needs to be a new way of thinking on how you should run the business.  

 For example; I have a brother who is a great mechanic.   If he were to open his business, he would be the best mechanic you could find.  His work would be impeccable, and everyone would enjoy working with him.  However, the minute my brother had to start thinking strategically about how to lessen his working hours, grow new markets, start a branding campaign, hire people to do some of his tasks, he would become very stressed and would definitely lose interest in running his business.  He is a great mechanic but didn’t think about the other parts of running a business.  All he ever wanted was a place to go paycheckand a position. Little did he realize that it would take more than being a good mechanic to run a business.   He didn’t realize that some of the things he liked to do would have to take a back seat or be delegated to someone else, so he could focus on the details that will allow him to grow his business.    

Continue reading “Good Luck You Are Now In Business! Now What?”

Why You Must Concern Yourself With The Exit Of Your Business The Day You Start It!  

There are two areas small business owners have a concern in:  

  • When the business has no apparent successor to take over.
  • Where the business owner has young children to succeed him, but they are too young to include in the planning at this point. This is a void period should the owner want to leave, become sick or die.   

Succession and Exit planning can be the most difficult planning a business owner can accomplish. However, it is the most necessary planning a company can undertake to protect the value of its shareholders and their families over the long term.  Succession planning concerns are often what keeps them up at night, giving them an uneasy feeling of a task not completed, the loose ends!

Succession planning is the natural outgrowth of strategic planning. In reviewing operational and financial goals, the need to ask a series of hard questions such as;   Continue reading “Why You Must Concern Yourself With The Exit Of Your Business The Day You Start It!  “

Drop Dead Business & And Personal Planning Questions!

These are questions I believe everyone should be asking themselves when you start their planning. Not all the questions may relate to your situation, however, many of them will. It is important that you take time in evaluating your outcome in your planning as it relates to theses questions!

1. Have your wills and associated trust documents been updated in the past three years, if not, why not?

2. Do you have the following: declaration for desire of natural death, power of attorney, and health care power of attorney? If not, why not?

3. Does your testamentary documents make sure your family’s business and estate is private after your death?

4. Are your assets titled properly between you and your spouse in order to take maximum advantage of the estate tax laws?

5.  Do your testamentary documents specifically address the disposition of your family business/family assets?

6. Do your testamentary documents agree with other business arrangements such as buy and sell agreements?

7. Do you pass ownership of the family company/estate assets to your spouse in your testamentary documents as a tax avoidance measure? If so, is will that;

Make practical sense, and is that consistent with your wishes of your spouse? If the business ownership does go to your spouse, is there a potential for your children to inflate his/her estate thereby increasing their estate tax burden during his/her surviving lifetime?

8. What are your testamentary provisions for treating your employee and non-employee children fairly and equitably?

9. In your “drop dead” planning, do you have insurance proceeds includable in your taxable estate?  If so, why? 

10. For your real estate; do you use family limited partnerships or limited liability companies? If not, why not?

11. If there is more than one shareholder in your family enterprise, do you have a binding, modern buy sell agreement? If not, why not?

12. Does your agreement cover typical items such as disability, “bad boy” behavior, windfall sale, non–compete provisions, etc.?

13. Do you have a written plan for when your family members get home from your funeral to lessen the burden on them? If not, why not? In the future will your business go to family members some of whom are employed in the company and some of whom are not? If so, what provisions will you make to balance the interests of employees’ shareholders versus non-employee shareholders?

14. Your CPA, attorney, and other advisors have probably been after you for some time to address the issues of your exit, future management of the company, your estate planning, etc. What are the barriers that prevent you from tackling these tough family business and estate issues?

15. Children inherit too much in the way of assets too soon? What do you see as the downside of “affluenza”?

16. Will your children inherit the business/estate assets in equal proportions, or would one child be designated the prize, and take and receive a larger portion.  What are the pros and cons of each course of action?

17. What do you have too much of in your business?

18. What do you have too little of in your business?

19. What do you have too much of in your family?

20. What you have too little of in your family?

21. If you had a magic wand, what will be the one thing you would change about your family or business?

Getting Ready To Sell Your Business Even Before You Thought About Selling It!

Business owners who have the ability to hire, train and retain excellent employees do themselves a great favor when it comes time to sell their business. Recruited employees who sign on to the company culture, are potential purchases of the company.  They get involved in all aspects of the business when given the chance.  The ability to nurture these employees not only creates a great long-term employee, but possibly future owners of the company.   The investment in good employees has the by-product of creating a potential market for the business owner’s business. 

Over time, these owners can create   employees who become extremely loyal, and feel part of a group and the business itself.    They observe how the current owners treat the business, the employees, and learn the long-term elements needed for a successful growing business.  They become clones of the current ownership, and start to think like owners, while taking on more responsibilities.

While the owners at some point need to make the commitment to the potential employee(s) purchaser to sell the business to them, it also means the employee or employee group needs to be able to commitment to the purchase of the business.  To the purchasing party, this means committing to taking on risk and financing for the purchase of the business.  In most cases this is something they never have done before.

The commitment to sell the business to key people, or key person is a long-term process.  The owners have to make sure the key person (s), have the ability to think like employees, and the abilities to run the business with expectations of the company being profitable.  The owners will spend time training and assessing the abilities of the key group to prepare them for the business takeover There is a commitment on both sides as to arranging this type of sale.

Financing the Sale: 

A sale of the business to an outside group usually is a cash sale.  Or, a combination of cash and stock of the new owner.  (Usually when a larger company buys a smaller company).

It is here that the advisors need to make sure the selling owner maximizes his sales with tax efficient transactions.  Many business owners sell their firms only to be surprised at the after-tax results of the sale.  Keep in mind that when you sell the business, usually there is a low-cost basis, the consequence paying higher taxes on the gain, means less net profit!

If it is an asset sale, there may be a low-cost basis   of the assets being sold, consequently creating more tax exposure, and more taxes.

Take for example, an asset being sold after it has been depreciated, it may be taxed as ordinary income.  Usually the asset is owned by the corporation.  If the company is a C corporation, the sale is taxed at the corporate level, then taxed at the personal level.  The combination of a low-cost basis, C corporation tax, ordinary tax rates, and double taxation can erode gross profits to a point where the owner wonders why they sold the company for the next. 

If the owner sells their company to a publicly traded company, and takes back some of the  purchaser’s stock, there should be pause as the consequences should the stock value fall because of the transaction, and the uncertainly of the value when the selling owners wish to cash out.

It has happened more than once when selling owners, ended up with much less in their pockets after the taxes and expense of the sale were taken out!

Selling to a key group or a key person is usually a different arrangement.   Usually the employee does not have the financial ability to purchase the company, thus a loan from the small business association or bank is needed.  Sometimes, the employee comes up with money by refinancing their home or borrowing from the family.  In many cases, the selling owner usually takes back a note expecting payment from the cash flow of the business.  It’s common to have a combination of refinancing, a promissory note, and possible deferred compensation payment to the selling owner.  In any event the selling owner usually has some skin in the game as to the financing of the sale.  Because of owner financing, the ultimate payoff might be extended over a longer period of time.  Not necessarily a bad thing, as the owner can spread the tax liability over a period of time.  The owner will also have a security interest in the stock, assets, and receivables of the company, until the loan is paid off.

Continue reading “Getting Ready To Sell Your Business Even Before You Thought About Selling It!”