Critical Questions That You Need To Answer If You Own A Business!

Building a business is hard work. Protecting and preserving it is even harder and overlooked by business owners.

While many owners expect family members to take over the business (69%), very few have actually made plans to make sure their wishes are accomplished (26%), even though they realize the importance of estate and succession planning as is an integrated part of that planning.[i]

A succession plan is complex, time consuming and involves attention to details along with many hard questions which need to be answered for a comprehensive and effective succession plan.  It is also the key element in maximizing the return on the investment of your business. This is the big financial payout, the sale of your business.[ii]

SOME MAJOR QUESTIONS AND ISSUES TO ASK YOURSELF!

What if a shareholder wants to sell their interests?

  • Is there a right of refusal for the other owners?
  • What are the financing arrangements?
  • What are the recourses if you fund the buyout especially if the funding is over a long period of time?
  • What is the arrangement if the business fails, how will you get your money if you financed the sale?

 Who steps in your shoes if you want out? 

Not everyone has the luxury of leaving a business when and how they want to.  Things like death, disability, and situations are uncontrollable.

  • What are your contingency plans when a trigger occurs (death, health, non-voluntary situations)?
  • Do other members of the firm have access and authorization to use funds to keep the business going if there is such an event?
  • Does your family take on personal obligations for financial notes and loans you have signed personally to fund your business operation?
  • Do you have estate documents and health care directives, should you have a disability or become incapacitated?

Taxes- and the planning for them Continue reading “Critical Questions That You Need To Answer If You Own A Business!”

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

The Story! 

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

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

The four listed ways are compared below.

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

Let’s take the one by one.

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

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

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

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

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

Costs:  Funding over 15 years. 

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

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

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

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

 

 

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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.

 

Living the Dream

What People Are Saying About Tom!

Tom’s ability to plan a strategy and its implementation accurately and quickly have contributed immensely to the success of many clients over the past several decades. Tom goes out of his way to service clients. He made sure we understand the planning process and is extremely patient. His talents are that of an educator and planner. We benefit from his pragmatic approach to our business and personal planning needs.       Carl Bonamico, Liberty Bank Commercial loans

When Tom says he will do something, he does it. He’s a very dependable person and is extremely honest. He looks at all the options possible in your overall planning. If he sees something which doesn’t fit, he tells you. James W Cowan Jr. Life Planning Consultants

Tom has all the qualities that I look for in an advisor– Integrity, knowledge, patience and his follow-through can’t be equal.       Brent Berti, Reverse Mortgage Broker

 I have worked with Tom in the insurance and estate planning business for the better part of 25 years. I have always found him to be hard-working and extremely knowledgeable in his areas of expertise. I have full confidence that when I refer clients to Tom, he will be thorough, clear, and recommend the proper products to offer solutions to their problems.    David Isenstadt, owner New England Group Insurance

Tom has guided my business and personal finances for 35 years. He has always been honest, dependable and readily available. The Shredding Source has benefited greatly from his approach and talents as a business and benefit planner. I continue to avail myself of his proficiency and expertness through my retirement… William A. Young, The Shredding Source.. A Veteran Owned Company

 Having dealt with Tom for over 20 years I can say he is unique in his hands-on approach with his clients. With the Ebb and flow of individual finances, he always presented programs that make sense for the time and circumstance. I have faith in his approach and recommend him highly. Ronald Finocchio, Owner of The Shredding Source, A Veteran Owned Company

Tom is been invaluable to me and my clients in the areas of advanced life insurance and estate and business planning. He has extensive knowledge in this field and his ideas and solutions are creative.   Tom Maercklein, Insurance broker

Tom goes out of his way to understand his customers and their unique needs. Tom can listen to his clients, understand what it is that they truly need and want, then deliver to them a great solution.   I highly recommend Tom.   Joe Perrone, Co-Owner- New England Collision

Tom’s financial education has given us a path towards a rewarding future. This was especially important when we had a financial setback. Tom worked through it with us and took many meetings and financial input to put us back on a strong footing.  His confidentiality is above reproach and he is clearly a most compassionate man with the utmost integrity. We have considered him a friend for years now.  Wayne and Ginny Klinga, Owners of Park City Valve and Fitting, Bridgeport, CT

 We have worked with Tom for number of years and he has given us professional and well thought out assistance with our retirement planning. In addition, we have owned a business for over 30 years and the eventual sale of that business was a very important part of our plan as we moved on with our lives. We had to think about employees, timing of the sale, how best to accept and invest sales proceeds and how this stressful and most complicated process would fit into our retirement strategy. Tom worked with us on this important part of our plan not only with his own advice, but also steering us to literature written by experts to guide us on our journey. We always looked forward to and felt comfortable in our meetings with Tom. His constructive advice was a key part of our retirement transition. Frank and Diana Byrne, FORMER BUSINESS OWNERS

 

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?”

Insider Transfers! Ready Or Not!

Transfers to and insiders group appears to be the most   traveled paths for succession planning by business owners today, which are being successfully used by business owners.  

This is the method by default because of the lack of essential value drivers and systems developed by the business owner.  Because of the lack of transferrable value, insiders are the key market for the business owner.   However, it is possible that even though the employees might have the capital to purchase the business, they don’t have the necessary ability to run the business without the owner.   Consequently, this scenario may lead to an inside sale at a depressed value, or the owner becomes a semi-passive owner.   

Typically, The Transfer To The Insider:   

In many situations, the employee will put very little money down, because they don’t have what is needed, or is unwilling to finance a large part of the sale.    The Owner usually will take back paper and finance the sales price.  Typically, the buyer will default because there is not enough cash flow to support the operating expenses and pay the note payment.  

Even with that scenario, there are many employers who take the path of transferring their business to key employees. Even though in many cases the arrangement is ill-fated, and the business will fail.    The actuality is the transfer to insiders is the exit path most traveled by business owners. The point being is that there still needs to be planning done in advance, even if the transfer is two key groups.   

Benefit’s For The Key Group Becoming Owners:  

  1. The key group is acknowledged for helping to build the business; The owner wants the key groups to ultimately own the business, especially since they have been part of the success of the business.  
  1. Goals of the owner: The owner can see his legacy remain unbroken and his business culture continue. The business represents the owner’s value in the community, and the company’s consistent values.  
  1.  It enables the owner to plan their retirement and exit over a longer period of timeSince the process of transferring the business to the key group takes , the owner has the ability to plan their post retirement activities.  It gives the owner the chance to start delegating more responsibilities to the new ownership, testing the group’s ability to run the business. 
  1. It gives the owner a chance to share in the excess cash flow to build wealth outside the business.  This helps in transferring the business at, a lower net amount to the buying group, as the owner would have accumulated the wealth outside the business, but with business dollars.    
  1. The process of transferring ownership and control to the insider’s takes a period of time, anywhere between five and twelve years. This allows the owner to start adapting to a post business life. It allows the owner to start picking up other activities of interest. It allows the owner to contemplate his new life and start making plans well in advance. This is very important especially if the business owner has only singularly most of his business all his life.  The time gives the owner the ability to create new activities with interest, to test the waters.  
  1. Motivates employees: To stay with and grow the company if the owner has a properly planned internal transfer the owner can start this well in advance of their exit. The key employee becomes an owner through their purchases of non-voting stock. This is part of the powerful incentives for the employees to create an increased cash flow. It also motivates talented employees to see the future opportunities in the company, allowing them to stay and grow with the company.   
  1. Maintain senior control; The owner will not lose control of his company until he completely cashes out. Usually stock acquired by the employees is non-voting. Employees acquiring   the stock should be asked to sign covenants such as a not to compete, and non-solicitation agreement. This protects the owner from having the key person leave the company and take customers, trade secrets, and current employees with them.  
  1. Flexibility: A properly design transfer plan helps the owner maintain control until the owner can cash out. It gives the owner the ability to abandon the internal transfer so they can sell to an outside company, or a third-party at some point.   All ownership previously transferred would be subject to a buy and sell agreement requiring the employees to offer their ownership to you for repurchase at a predetermined price if the employment is terminated. 
  1. Business continuation at the owner’s death. By transferring ownership to insiders, it creates the succession plan should the owner die. The hope is that the key group has been trained well enough, to run the business without the owner. 

CHALLENGES AND LANDMINES!  Continue reading “Insider Transfers! Ready Or Not!”