Someday You Will Leave Your Business By Retirement, Death, Disability Or Drop Dead At Your Desk! Do You Have A Method Of Taking Your Business Equity With You In A Tax Efficient Way?

Featured by YOUR BUSINESS WORTH, posted in Business Growth and Transition, Buy and Sell Agreements, Company Wealth, Estate Planning, evaluations, Income from your business, Selling Your Business, Strategies of growing business, Tax Efficient, Valuation, Value drivers

There are millions of small businesses in the United States, and many of them have something in common, and that is that they do not have a succession plan.

I have heard figures like 80% or higher do not have a succession plan. Over 50% of the companies that have a succession plan, have either outdated plans, or incomplete plans.

Why is this an over whelming problem with small business owners? Why would a business owner not want to make sure their “lifetime of effort” isn’t lost because of a lack of planning?

SCENARIO: Someday all business owners will leave their business, either by retirement, death, disability, or just drop dead at their desks.

There will be a great loss in the value of the company because of this lack of planning, and consequently, the owner or the family will not receive the true potential value of the business.

While I cannot explain why business owners do not do their planning, I can tell you some of the reasons the business owners and their family will not get the true value of their company when one of the three triggers occurs (retirement, death, and disability) They would be:

Lack of planning -. They do not implement systems such as value drivers’ systems, next middle management, systematizing procedures, and others business building procedures. These are the elements that create the future value which a purchaser looks for when buying a business.

The lack of planning also includes the failure to develop a middle management which could take over most of the tasks of the owner. By not creating a middle management, it leaves the owner as the indispensable person, the essential person in the firm. This is a dangerous position for the future of the company. It may be the greatest threat to the future value of the business. Like anything else, when you lose the essential indispensable part of a machine, the machine will not work. This is the same for the company when the owner is the “essential and indispensable” employee.

Time- Most systems need time to develop and cultivate when building a business. Processes and systems need years to mature and create the potential value of the company. Consequently, when the owner gets near retirement with no more road left to plan, it is too late. Selling the business at the most potential value is not attainable.

No liquidity: Many business owners put too much of their wealth in the business, such as inventory, machinery, receivables, and benefits, to name a few. They do not make the adjustment to using business cash flow to create wealth outside of the business, like pension plans, executive compensation plans, and other value building programs. Consequently, when capital is needed, it is hard to raise it, and is not readily available to the owner when needed the most.

When business owners, decide they want to retire, and leave their business, they find themselves in a conflicted position. Because they did not take the time to plan, they have run out of time, and they will not yield the value they would have normally received if they had done planning over the years.

The only options they may have:

Sell at a reduced price

Stay in the business until they find a buyer willing to buy at this price
Continue in the business to fund their “retirement years”

The bottom line is to start your planning early. My suggestion would be on the day you buy or start your business, start implementing a transition plan, as most of the transition planning requires an extended period in order to implement.

Get your free Business Transition Commonly Asked Questions Report! Click here!

Awareness to succeed!

July 29, 2022 by YOUR BUSINESS WORTH, posted in Selling Your Business, Strategies of growing business, Team, Uncategorized, Valuation, Value drivers, Working On Your Business

This is the video and the narrative to post

This video is a 19-minute quick course which I put together in order .to share with you the biggest mistakes business owners make.

I call this the “Awareness to Succeed,” course.

Owners spend most of their time on their product and services, and employee relations. This takes up much of their time.

However, because of these time-consuming tasks, they are unaware of the other areas of business that should be understood and focused on by them, or at least have an awareness of.

By not having some type of awareness in these areas, they run the risk of being side swiped by some fiscal impact that may have a major effect on their finances, both business wise and personally.

This quick course will make you aware of some of the major areas you need to understand better.

As an owner, you may not have the time to learn all that you need to know about these areas. You will learn that they are especially important and assign a professional consultant to keep you informed of your status and future developments in these areas.

There are many changes coming out of Washington weekly that affect your business. You need a system to stay up on many of the changes. This course is designed to help you understand critical information. Take the 19 minutes to learn more about, Growth, Protection, Equity, and Transition in your business.

Once you complete this course, request a FREE download of my book “Unlocking Your Business DNA,” and subscribe to “Building and Protecting Your Business Worth Podcast.” These are two great areas for learning.

Request The Book: https://www.allclients.com/Form2.aspx?Key=DEC5C5C207C9803747A0458C9EB2D7C6

Subscribe to our podcast.

https://podcasts.apple.com/us/podcast/building-and-protecting-your-business-worth/id1539791693

Rushing Through the Most Important Document in Your Business!

Featured by YOUR BUSINESS WORTH, posted in Buy and Sell Agreements, Company Wealth, Estate Planning, evaluations, Funding your Buy and Sell, Life Insurance Types, Selling Your Business, Uncategorized, Valuation

In my career I have experienced several business owners rushing through the implementation stages of designing their buy and sell agreement (BSA), probably one of the most important documents they will ever need, treating the process with little thought. As Rodney Dangerfield would say, “No respect”. When it was completed, it was very basic, doing more harm than good.

In some cases, maybe more than I think, the document being used by the drafting attorney was a “hand me down” from another attorney. While the “hand me down form” may have been useful in drafting another person’s situation and making it easier for the drafting attorney to do, it was not going to maximize my client’s planning situation.

In Paul Hood’s great book, “Buy And Sell Agreements, Last Will And Testament For Your Business”, he covers the consequences of not designing the right buy and sell agreement, and how important it is to spend the time and money preparing and designing this important document, with an experienced lawyer. ^[i]

Paul specifically speaks about attorneys using a “hand me down agreement”, and how it may be more harmful by having it than not.

The “Paul Hood Fire Drill”

He uses the idea of the “fire drill”. What happens when a “trigger happens? What will be the outcome and the consequences based on how your BSA is set up (or not set up), when you play it out. Like you were the leaving owner, and then again as the remaining owner. On a personal note, the “fire drill” advocated by Paul is something I use all the time and has been instrumental helping my clients and their attorneys in drafting the proper strategies for their situations. I have found that this has been a great way of helping my clients design the best BSA for themselves. It has allowed them to make it real and start developing questions and ideas that they can implement in their design. It keeps them involved with the process.

The “Fire Drill” strategy has put my clients in the “power seat” of knowledge, so when they discuss their BSA with their attorney, the elements and strategies that are being used are not foreign to them. This consequently helps them design a better BSA, reducing the time needed to spend with their attorney ($$$$$).

Keep in mind, many business owners start the process of designing the BSA when there has been no experience of consequences with an owner or co-owner leaving the company.

Everyone is Equal at the Start!

When owners design their BSA, they are all equal in status. People that enter into agreements want the agreement to favor them when a triggering event happens, even if the agreement has not been updated in years or there is no reference to the triggering event.

When are clients initially design their BSA, it probably will be one of the few times that all the partners will be negotiating with each other, because when there is a triggering event, chances are they will be negotiating with someone other than their co-owner.

The representative of the departing co-owner will have a different perspective as to what they want out of the BSA! Whether it is the spouse, their child, their law firm, whomever, they will be negotiating from a different point of interest.

Business relationships, and friendships are put aside. It is at this point you would hope your BSA covers all the areas of concern that need to be covered. The bottom line is the agreement must be exact as to what will specifically happen based on the triggering event. There is no room for errors if the document is specific. The best time to do this is when everyone is on equal ground.

For this reason, owners designing their BSA with their attorney should take it very seriously because they are really pre-negotiating for the people, they love the most without any certainty of which trigger will occur and which side of the trigger they will be on, leaving or a remaining co-owner.

It is extremely important that the triggering events be identified and that you will understand what will occur with each trigger event.

Paul Hood’s “fire drill” has made it easier for my clients to understand the importance of designing a solid BSA. By posing questions to the scenario, the BSA becomes very real to them.

Examples of how they would play out the “fire drill”

· What if you’re the first co-owner to leave?

· What if you’re the last remaining original owner?

· What if you end up with a co-owner you don’t want to be owners with?

· What happens if one of your co-owners, dies, divorces, or goes bankrupt?

By implementing your “fire drill”, you will start to formulate different scenarios for your own situation creating your own buy and sell design.

This is a critical document in keeping your business going should a trigger happen to any of the co-owners. Unfortunately, you must deal with it in advance and before there is a triggering event.

Risks when implementing your BSA:

· Using an attorney who is using a fill in the blank form.

· Not planning the scenarios before designing the plan.

· Not having a BSA.

· Not signing it.

· No dealing with how to fund such triggers.

There are so many elements to the buy and sell agreement that need to be covered, the planning of this document can’t be taken lightly. However, that is not to say you can’t have a great BSA. Having experienced professionals to help guide you through the process will pay off great benefits in designing and implementing your BSA.

We suggest you find competent counsel who has experience in designing the buy and sell agreements and discuss your goals and objectives with them.

Again, my best advice is pick up Paul Hoods book (“Buy and Sell Agreements, last will and testament for your businesss”.) Read and study it.

If you would like our free Business Succession and Transition Planning Guide, click the link and we will send you a FREE WHITE PAPER to get you started. in your planning. YOUR FREE GUIDE

^[i] E. Paul Hood is a prolific technical author. He has published a number of books on planning and is one of the leaders in estate planning and business succession planning.

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.

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

Pending Tax Changes May Be Around The Corner 2022!

Featured by YOUR BUSINESS WORTH, posted in Business Growth and Transition, Company Wealth, Estate Planning, evaluations, Income from your business, Life Insurance Types, Strategies of growing business, Tax Efficient, Valuation, Working On Your Business

I am currently reviewing some of the pending tax proposals being presented. Again, these are proposals and most of them will change before enacted.

It occurred to me as I was reviewing the details of the tax proposals, how many changes I have seen over my long planning career. It made me think of how many times clients (YOU AND ME) had to update our plans at our cost. It is amazing the disregard the government has for the U.S. citizen in making this system easier to work with. I can understand why so many citizens put off planning, or just get tired of updating. Unfortunately, this is the reality of the tax system and the changing of administrations.

In 2017 we had a major income tax change which in most cases helped many citizens lower their taxes. It was easy to understand and it did what it was suppose to do, stimulated the economy along with increasing public confidence.

It also gave estate owners a path to plan to preservation their estates. The tax policy was working very well and our government tax coffers where growing.

Pending Tax Changes- Again These are only proposals!

The Green Book 2021

Sr. Van Hollen (Sensible Taxation and Equity Promotion (STEP) and other plan such as the American Families Plan, and the “For the 99.5% Act (Bernie Sauders)”

Income Tax Changes

Top income tax rates 37%-39.6% effective January 2022; > $509,300 for married, and $452,700 for single
Restrict tax deferral, “like-kind exchanges” (swaps of real estate that avoid current taxation that a sale would tigger
Capital Gains might double-(sale of stock, investment real estate, etc. ) qualified dividend with incomes over $1million taxed at ordinary rates. This could be triggered for gains after April 28, 2021

Social Security Taxes

To coordinate the net investment income and self employment taxes, so unlike current law, a company could pay the owner a reasonable salary or guananteed payment, the overage became federal taxable profits, but not defined as payroll taxes. This was assuming that the salary, and withdrawals were reasonable compensation .

The proposal is to tax pass-through business income (e.g. S Corps, limited liability companies, partnership) of high income taxpayers will be subject to either the net investment income tax or the social security taxes.

Audits from the IRS: $80 BILLION increase over 10 years for IRS for audits.

Estate and gift tax:

Bernie Sanders proposal (For the 99.5% Act) calls for a return to lower estate and gift tax exemptions as well as significant changes to the rules on GRATs and grantor trusts

Most dramatic: Biden’s plan is to make the transfers of property by Gift, and on assets owned at death (as of January 1, 2022) triggering events for capital gains taxes. The gain is measured by the date of gift or death fair market value less basis.

Exclusions: transfer at death to a US spouse.

So there are other potential changes coming down the pike and we’ll have to wait and see. Here is the bottom line:

Split Interest Gifts: Grat’s ; watch for developments

Grantor Trusts: At Grantor’s death or trust is no longer revocable

BOTTOM LINE-

If you are a business owner with wealth in your business and you have not done any planning, it may be a good time to start thinking about a certified appraisal of your business and your holdings. Also, you might want to start thinking about what your goals would be for passing your estate assets. It’s to early to tell where the wind will blow and how you will be affected by any change, but it is not too soon to think of what you wish to accomplish in your estate and business planning.

As I look some of the potential changes, Life Insurance Planning will become more significant in paying for the additional liabilities of passing your estate assets either by gift or death.

To help you with your planning, I would like to offer to you my newly published Ebook called,”Unlocking Your Business DNA”. In the book I cover strategies I have used with business owners for over 50 years with powerful strategies to create growth and profits in your business and also create an amazing amount of leisure time.

To get the book, CLICK AND SUBMIT

OR,

If you with to receive a free business assessment of your business planning, take our ONE MINUTE SCORECARD SURVEY. Literally, it takes one minute to go through. Once submitted I will send you a FREE ASSESSMENT of our findings. We will be able to pin point the strong point and the points that you need to work on to create more business growth and profits.

CLICK HERE FOR THE ONE-MINUTE SCORECARD

More to come… stay tuned.

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

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

May 11, 2021 by YOUR BUSINESS WORTH, posted in Business Growth and Transition, Buy and Sell Agreements, Company Wealth, Inside Sale, Valuation, Working On Your Business

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

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

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

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

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

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

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

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

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

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

Problems of not having a solid transition plan:

Family equity issues
Income and estate tax exposure

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

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

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

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

Selling Your Business To The Younger Generation!

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

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

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

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Category: Valuation