Working On Your Business – Page 2

Consequences Of Not Creating A Buy and sell agreement!

Featured by YOUR BUSINESS WORTH, posted in 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, Working On Your Business

Part 2

BY Thomas J. Perrone, CLU, CIC

S Corporations enjoy the advantages of limited liability, transferability of ownership and professional business operation and management. The S Corporation is taxed similarly to a partnership, as it is a pass through to the shareholders.

The C Corporation is taxed at the Corporation level first. When the C Corporation is profitable and generates taxable profits. When profits are distributed to the individual shareholder it is taxed again when dividends are received by the shareholder.

You will find S Corporations normally when the individual rates are lower than the Corporation rates. Also, losses in the S Corporation shareholders may benefit, by deduction, the losses on their individual tax returns.

S Corporation requirement

No more than 100 shareholders- members of family are considered one shareholder
Must be a domestic corporation

Only individuals, a decedent’s estate, estate of individuals in bankruptcy, and certain trusts are eligible shareholders of s Corporation
No shareholder can be a nonresident alien
One class of stock (different voting rights are allowed)

Basis and S Corporation

There is only one level of taxation in the S Corporation. That is at the shareholder’s level.

If the shareholders basis exceeds the distribution, the shareholder usually will not be taxed when they receive the distribution.

If the S Corporation has never filed as a C Corporation and has no retained earnings or profits, distributions received by an s Corporation shareholder are not subject to income tax if the distribution does not exceed the shareholder’s basis. Consequently, the larger the basis the greater amount of distribution can be taken tax-free.

Quick overview of Basis

nontaxable distributions of previously taxed income
income distributed in the same year in which it was earned
losses
nondeductible expenditures such as life insurance expenses

Keep in mind that the adjustments to shareholder basis is an ongoing procedure and will vary from their initial contribution to, or investment in, the Corporation. Usually, a service corporation will have a low basis because of the low initial investment made in these types of businesses.

Life insurance to fund the Buy and Sell Agreement

Life Insurance can have several advantages for S Corporations in a buy-sell agreement.

A nondeductible expenditure such as life insurance premiums decreases a shareholders’ basis in an S Corporation. The cash value policy can help offset, eliminate, this adverse situation.

Life insurance cash value helps offset the premium charged to the capital account. The cash value offsets the premium paid so that the decrease to the capital account is offset by the cash value of the policy.

As an example, if the premiums are $15,000 and the cash value increases by $12,000, then only $3,000 is charged to the capital account reducing the basis of the stockholder by $3,000. As opposed to having a term insurance policy with a premium of $4,000. The permanent coverage will have less effect on the basis reduction of the stockholder than the lower term insurance premium.

Over a longer period, there will be in increase over the premium, consequently eliminating the basis reduction. In the term insurance scenario, the reduction of cost basis will continue. In some cases where the term must be renewed, or the term has an increasing premium, the lowering of the basis can be substantial.

Death benefit and basis

If the life insurance is set up as a redemption basis, it is possible to plan for an increase in basis for the remaining stockholders, by using a promissory note for the deceased stockholder before settling the life insurance claim. Since the death benefit is tax free income, it will increase the basis. Example: there are three stockholders, A dies. Instead of making the claim on the life insurance, A is bought out using a short-term promissory note. Once completed, the death claim is filed, and proceeds will come in tax free for the remaining stockholders which will increase their basis. If the death benefit were used for the decedent, there would have been a wasting of the basis since the decedent’s estate would normally receive a stepped-up cost basis.

Stock Redemption in S Corporation

The buy and sell agreement are between the stockholders and the Corporation. The S Corporation owns the policy on the stockholders and is the beneficiary of the policy. Death proceeds to the Corporation are tax free and increase the basis of the stockholders. A big advantage to arranging the buy and sell agreement under an S Corporation is avoiding the alternative minimum taxes and the loss of basis found in a C Corporation.

Cross Purchase buy and sell in s Corporation

The arrangement all owners of a business agree upon in advance to purchase proportionate shares of the decedent shareholder’s interest. Each stockholder would own life insurance on the other stockholder(s) and be the beneficiary.

Life insurance premium is a nondeductible personal expense
Shareholders receive the death benefit federal income tax-free

The surviving stockholder uses the funds to purchase the stock, which will increase the basis of their holdings, by the amount purchased.

Some key issues:

Section 318 Attribution Rules

In a C Corporation, attributions can be avoided for tax purposes by arranging the buy and sell agreement under a Cross Purchase. Since the Corporation is not redeeming the stock, and it is the stockholder, attribution and the treatment of the redemption being treated like a dividend distribution is avoided.

In an S Corporation, if the S Corporation does not have retained earnings or profits , it will have the same tax result as if the shares were sold or exchanged, allowing the shareholder to recover their basis tax-free, with any amounts exceeding. Basis being treated as capital gains.

A poorly structured buy-sell agreement could result in the loss of S Corporation status, as well as the possibility of increasing the surviving shareholder’s tax burden on future distributions from, or on, the sale of the S Corporation. However, there are some great advantages of setting up a proper buy-sell agreement which can be even greater advantages than those available to C Corporations.

FREE REPORT “Jones Business Planning and Succession Report” ASK FOR REPORT R3

CLICK HERE

Conclusion:

The S corporation can be a great tool for many business owners as a corporate structure. A Buy and Sell Agreement must be carefully considered and drafted with consideration of avoiding the loss of an S Corporation Election.

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

Creating Great Personal Wealth With Your Business Income!

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

In my planning with many companies over the years, I realize that many business owners are not using the corporate cash flow to create wealth outside of the business. Normally they are using their after-tax dollars to buy financial products to create a benefit for them personally.

Many of the business owners feel they need to put all their current dollars into the business. This is a mistake! The reason this is a mistake is the business equity can get tied up just like a home-equity can. At a time when the business owner needs his business equity the most, is usually at a time when he cannot get it out for one reason or another. Business equity is not very liquid as it is tied up in receivables, loans, inventory, and the like. By putting too much of the business owner’s wealth in the business, they are risking the loss of it in the future, or the very least, the ability for its use for some major cost.

Owning a business creates opportunities to use the corporate dollars to create personal wealth outside the business. I call these benefits executive compensation. Normally you can arrange executive compensation programs to be highly effective and efficient tax wise. The corporate dollar can do more for you than the owner could do on their own personal dollar. We have many programs where the corporation is taking a deduction and creating wealth for the owner and their family which is positioned outside of the business.

Below is a project we worked on which shows the value of the corporate cash flow. The names of been changed to protect the innocent, but the case history explains how effective using your corporation cash flow to create wealth outside of your company!

The Case Of Joey Bag Of Donuts

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

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

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

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

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

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

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

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

THE BOTTOM LINE: Joey Bag of Donuts gets retirement income using corporate funds. All the contributions can be applied to just his account. He also has the use of the account before retirement, like a “family bank,” along with the ability to withdraw funds tax-free.[1] There would be no 10% penalty if withdrawn before 59 ½.

THE RESTRICTED PLAN: The “Restricted Plan” relates to an employee of the company that the owner wants to make a “A key person To Hold onto Forever.” This is a terrific way of giving someone a benefit with a vesting schedule, so they stay longer.

Summary: If you own a company and are not taking advantage of the CEEP program, you are missing one of the genuinely great executive benefits available to you as a business owner. The plan is flexible so you can design it to your needs.

OVERVIEW OF THE PLAN (Summary):[i] Type of Model: CEEP

EMPLOYER

Yearly Premium Payment: $25,000

Yearly Net Cost: $17,500

Total Gross Premium to Retirement: $675,000

Total Net. Premiums to Retirement: $472,500

Total Loans:

For Tax Costs: $202,500

For Interest Costs: $112,003

Net Cost of Loans: $314,503

If Loan Forgiven, Net cost: $220,152

EMPLOYEE

Annual Average Interests: $4,148.25

Loan Payoff AT Retirement:[2] $314,503

Net Cost: 0 (all funding came from Ajax Company)

AT RETIREMENT:

Rollout Amount: $94,350.83

Tax Cost on Forgiveness of loan[3]: $94,350.83

Net Cost to Mr. Joey Bag Of Donuts

ll : 0 cost out of pocket[ii]

Cash Value in policy after rollout/forgiveness: $793,4 29

Death Benefit After Rollout: $2,306,317

Tax-Free Retirement Yearly Income: $67,500

Equivalent Pretax Payout Before Taxes: $96,429

Years of Retirement Income:18

Total Retirement Income: $1,215,000

All and all, not a bad arrangement.

[1] Fund in excess of the collateralized amount.

[2] Funds are withdrawn from policy tax-free, results are “0” cost to Mr. Joey Bag Of Donuts

[3] Fund come from policy tax-free.

[i]This is only a summary of the illustration attached to this book. The illustration is a hypothetical model of how the policy would work.

[ii] This is a fully funded Employer plan. There is “0” cost out of pocket for Mr. Joey Bag Of Donuts

For a free repot on creating Wealth Without Taxes, CLICK HERE! REQUEST R2 REPORT
This report will discuss the methods which will allow your business to use its cash flow to create wealth for you outside your business at the most tax effective way of creating wealth. Executive Compensation CEEP planning is more tax effective than a 401k, 403b, or any other pension and retirement plan.

As a business owner you have the opportunity to create an amazing amount of wealth with little tax cost. Start with the report and find out how you can create your wealth and your financial security for the future.

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

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

May 11, 2021 by YOUR BUSINESS WORTH, posted in Business Growth and Transition, Buy and Sell Agreements, Company Wealth, evaluations, Selling Your Business, Strategies of growing business, Value drivers, Working On Your Business

Over the years, my experience with many owners I have found a major conflict with owners is the working in their business vs. working on their business. It is extremely hard for many business owners to make changes and spend the necessary time. I have a book called “Unlocking Your Business DNA”, which discusses the personal tragedy of not having the proper planning.

FOR A FREE EBOOK; REQUEST UNLOCKING YOUR BUSINESS DNA

I have heard the stories from “I will live a long life”- “I need to work and won’t retire” “No one can do this like I can”

Four possibilities of leaving your business:

Death (that includes dropping dead at your desk)

Disability

Retirement

Cannot do it any longer

By not planning, the owner may find themselves receiving much less for the business, walking away without any value, or just die working at their “bench.”

Because of this one reason, we developed the two hour a month planning process, called: THE ONE PAGE PLANNING PROGRAM.

The Owner AND Their Issues: What is important for the owner is to have a personal retirement and estate plan to define their future needs. Do they want to stay active in the business even when retired? Will they have enough money for retirement? Will they have estate tax exposure. Do they have the proper estate documents? Do they have someone to sell the business too? How much will they have to sell their business for to net the amount of assets needed to provide their financial security?

Owner Issues

Financial Security
Wealth Preservation and transferring the business with as little taxes as possible.

The Family: What is the status of the family relationships in the business? Do any of the family members depend on the business for income? Do they own stock? Are they in agreement with the proposed succession? Are their careers involved with the business?

Key Issues for family

Compensation among family members in the business?
Inheritance among family members?
Management of family business, who is involved?

The Company.

What are the assets in the business? What is the value of the assets? What is the value of the business?
Has the company been appraised in the last few years?

Is the buy and sell agreement in force-signed and dated?
Does there need to be more formality in the governance of the structure?
Has there been a systematic attempt to enhance business value drivers over the years?

What is the structure to get earnings out on a tax advantage structure?
Who will be the leader of the company, and will there be a change in ownership?

The Succession Plan

Business Situation and questions when thinking about succession.

How are you getting earnings out of the company on a tax advantaged structure?
Have you considered the leadership and owner issues to be addressed?
Each entity structure has advantages and disadvantages, and each should be looked at carefully when considering your future status as you transition?

FOR A FREE EBOOK; REQUEST UNLOCKING YOUR BUSINESS DNA

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.

Ode To Mr. Business Owner!

Featured by YOUR BUSINESS WORTH, posted in Business Growth and Transition, Company Wealth, Key People_Or Group, Passive Ownership, Strategies of growing business, Team, Value drivers, Working On Your Business

Dear Business Owner,

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

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

Here’s what I know about you:

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

You pay the IRS a large amount every year.

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

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

You feel trapped within the four walls of your business.

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

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

You have no escape plan.

You think there is no other way. 

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

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

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

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

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

You need an escape plan. 

Like I said, “I get it”.

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

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

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

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

I’ve included a copy of my book:

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

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

Your escape plan awaits…

Talk soon, 

Tom. 

Compensation of Business Owners! The Good And The Bad!

Featured by YOUR BUSINESS WORTH, posted in Company Wealth, evaluations, Executive Benefits, Income from your business, Selling Your Business, Tax Efficient, Uncategorized, Valuation, Working On Your Business

Owners of small private companies normally receive income as a salary, rather than dividends, and capital gain on the sale of their stock. They also receive other compensatory benefits. In many cases, the business owners can receive rental income from property and assets leased to the company and owned personally (either outright or in trust) by the business owner.

Because of the tax structure of the company, business owners often find it more tax effective to pay the compensation, rent, royalties from their company to the owner, at the high end of the scale, rather than the low side (common in C Corps).

A Detriment to The Owner When There Is an Exit

Receiving this higher scaled income and rental, may have some advantages for tax purposes, and the creation of wealth.

Having the tax advantages for the business owner, may be a detriment to the selling price during exit planning. This is because the rents and compensation paid to the owner on the higher side lowers the net income of the business.

When rental and salary compensation are paid on the elevated level, they affect the net income/or net operating cash flow, which creates a downward impact on the selling price!

At the Time of Exit Transition

The owner must justify the payout of rental income, compensation, royalties, and other compensatory income. They need to justify the overpayment of this compensation. In a way, the owner must back track the justification of paying the enhanced payouts in the stated areas of compensation. This may put the owner in a position of receiving nondeductible “constructive dividends” paid by the company, resulting in a retroactive tax liability.

Minority shareholders of the company could complain that the enhanced payments to the owner’s transgression of overpayments is a breach of a fiduciary duty owned to them. Since the over self-generous payouts to themself, there is an effect on the stock value. Consequently, minority stockholders are going to be affected by depressed value. This concerns stock bonus to minority stockholders and key persons.

One of the solutions to this issue is to start to shift part of the enhanced payouts to more of a mid-level range of the fair market value. This will allow you to enhance the net income/net operating income for the company.

Along with enhancing the net income and net operating income for the company the shifting of revenue to middle-management, will build a stronger management team.

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Category: Working On Your Business