Why Use Non-Compete Agreements!

Non-compete agreements (NCA) represent a separate agreement. They could be in an employment contract, or as a separate article in a buy and sell agreement. Sometimes they are referred to as Covenants not to complete. “

This is based on the possibility that an employee can do harm to a company upon termination.  They could know sensitive information about the company’s operation, owners and employee’s personal information, special operations, and proprietary information to a competing advantage, along with so much more.

Picture a very long-term employee working side by side with the owners, for many years, and then leaving to work for the owner’s competitor.  Certainly, there can be issues.

No compete agreements (NCA), can be used to retain employees also.   It would be very difficult to change jobs within an industry or profession when the leaving employee is limited to compete in a geographic and specific industry for a period of time.  However, non-compete agreements are hard to enforce, because in many instances the agreement has overreached and is very broad in the definition of industry and geographic coverage.

Continue reading “Why Use Non-Compete Agreements!”

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.

The Major Reason Why Business Owners Don’t Plan For Maximizing Their Business’ Financial Potential Is Now Eliminated!

Many business owners spend the majority of their time running their businesses and inadvertently end up neglecting some of the more important aspects of their business. This is the time where all the details of the success of your business are planned. We call this “working ON your business”.

Business owners can be vulnerable to financial mistakes because of many factors.

One of the key details of a business owner is what happens to their business in the following scenarios:

  1. What happens if I die?
  2. What happens if I become ill, or have a long-term disability?
  3. What happens if I lost my key person, or my key group of employees?
  4. What happens if I can’t control cash flow, or just don’t want to run the business any longer?

Unfortunately, many business owners don’t spend the time working on their business for many reasons.  Many owners think it’s expensive, complicated and very time consuming.

The truth is that by not working on their business, should any of the above scenarios occur, the consequences would be much more expensive, time consuming and potentially devastating.

In our planning practice, we estimate the average time to create a business and estate financial plans for a business owner, is five to ten hours, not including time with attorneys and accountants who are a part of the team.

How does our process work?

Our system is built around planning with the least amount of time needed for the business owner’s time.  To do this we use technology in communication such as phone conferences, video conferences, and audio and video productions to explain our client’s situation.  This allows the business owner to eliminate using work hours for this project.  We can do this technologically with clarity and brevity.  Our plan is focused on brevity for the business owner.

Our Process: 

  1. Viewpoint Meeting: Define what are some of the areas of concern using our Viewpoint System.  This is a 30 minutes conversation.  Our business owners need about ten minutes to prepare using this aid.
  2. “The Selection Meeting”. Once we define the areas of concern, we dig deeper with a 45-minute Selection Meeting. This is where we discuss all of the possible areas where the client may have problems and concerns.
  3. “The Planning Stage” is the longest meeting. This is about 1½ hours.  Prior to the meeting, we send our client material which they can review and prepare on their own time.  This takes them about 20-30 minutes to complete.
  4. The Discovery Meeting is about one hour where we bring together our findings based on their personal situation and discuss which issues and direction of implementation the client may wish to go. Again, our client receives the information to review prior to our Discovery Meeting[i].
  5. Implementation Session: This is where we start implementation needed to solve the issues.  This is the time when all of the client’s advisors work together to get the planning completed.  For example, our findings are discussed with the professional team and look for their advice and suggestions.    Also, this process brings everyone on the team up to date on the business owners’ situation.  This process breeds new ideas and strategies (earlier in the process, I would have been in touch with these advisors between the Discovery and Implementation Meeting). This may be the first time the client has had all of their advisors working together and sharing knowledge about the business owner! 
  6. Semi-Annual or Annual Review:  This is where we move on to the next area of concern; One concern at a time (in some cases, there may be overlapping of concerns and they can be bundled in the planning).  If there are no additional concerns, we review what has been implemented. This is an automatic process, so we are always adjusting as the business situation changes.

For business owners who realize that they need work  on their business, our process can maximize their business’ potential profit, organize them in a timely fashion, and fine-tune them in the future, so they can maximize their “business potential value” when they exit from their business.

[i] We plan for this time, but do not limit this session to a time schedule.

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!”

Disadvantages Of The Buy And Sell Agreement! [i]

Certainly, having a Buy and Sell Agreement (BSA) has many advantages, many of which I have discussed in our past posts (May 2019, Advantages of Buy and Sell Agreements).  However, I would like to go over the disadvantages of a BSA.

RESTRICTIONS ON ESTATE PLANNING

BSA can restrict ownership transfers and consequently management duties. These restrictions can be applied to you also. The restrictions could limit your personal planning by limiting your options for the ownership interests during your lifetime or at death. It may prohibit you from making gifts of your ownership interest to your family. Depending on your planning, your BSA could limit your plans to leave ownership interest to your family. The BSA may require your ownership interest to be sold at your death.

RESTRICTIONS ON FINANCIAL PLANNING 

A BSA can restrict the persons to whom you could sell your ownership interest to and restrict when you can sell it.  An example would be in a situation that you need to sell your interest because you’re in a financial bind. The BSA may require you to sell to your entity or your co-owners, who may not want to buy.

Special election to the defer federal state tax of deceased owners

This could limit an estate owner from using Code Section 6166 which is a way of paying your estate tax over a period of time, giving you the option of paying over a 15-year period, five years of deferral and a ten-year payout.  A purchase from your estate could cause the loss of the right to defer the estate taxes.

A sale of Corporate interests may result in a loss of the entities corporate structure

This could limit the entities right to use its own loss carry back and carry forward losses on a significant change in ownership, which is possible without a well throughout BSA.

The cost of putting together a BSA

It takes time and money to put together a solid buy and sell agreement, Of course this is a disadvantage and it can be expensive, however, in order to have an optimal BSA, you will need to invest time and money.  You will also need a competent council to prepare the necessary documents.  This incurs costs.  Being educated in this strategy is to your advantage when designing your BSA.

A poorly drafted buy sell agreement can be costly:  By failing to carefully work out the terms of buy-sell agreement or by having mismatches between triggering events and the identity of the purchaser versus the funding source, a real mess could be created.

[i] Buy -Sell Agreements for Baby Boomer Business Owners Z. Christopher Mercer, ASA, CFA, ABAR

Alternatives To Buy And Sell Agreements – Different Documents To Put Buy Sell Agreement Language In!

  1. Governance documents– Articles of incorporation, partnership, organization, bylaws or operating agreements frequently have Buy And Sell Provisions (BSP). Is critical that you change your agreement within these documents should you update to a formal BSA, so the language is consistent.
  2. Compensation based plans: Such as consulting agreements and salary continuation plans.
  3. Entity recapitalization: It is possible to recapitalize the ownership interests of the entity which could create differences and ownership interests.
  4. Gifts of ownership interest: this could change the ownership and voting rights.
  5. Charitable gift of ownership interest. Same as #5.
  6. Private annuities: You could transfer ownership of your interest to someone else in exchange for a promise to make payments for you for the rest of your life
  7. ESOP’s: EMPLOYER STOCK OPTION PLANS.
  8. Non-qualified deferred compensation plans.
  9. Qualifying for section 6166 deferral.
  10. Division of an entity.
  11. Confidentiality and non-competition agreements; In conjunction with a buy and sell buyout , the former owner could be paid to not compete with the entity and to keep secret all confidential trade secrets, customer lists, and other private proprietary information of the entity.
  12. Installment sales: The owner simply wishes to retire and sells the stock in exchange for promissory note that is payable overtime.
  13. Sale to outsiders.
  14. Public offering.
  15. New generation opening a similar type of business: This is where senior generation winds down and a new generation may open a similar business preferable to allow younger generations to open a new look but similar to the identical business of the old. The dying on the vine concept.

*A good read would be “Buy and Sell Agreements (US Legal Series); Paul L. Hood Jr.  Also, I have included a link to article from Ed Partesi, ASA,CM&AA of UHY Advisors “Covering the bases:  “The Need for Effective Buy -Sell Agreements”. Effective Buy and Sell Agreement!

Lastly,  a very good book to read about the future of the selling your business,  “Your Exit Map”   by  John Dini;  This gives you a great insight as to the next generation of buyers and the market place for selling your business.  

 

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.