Succession Planning
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What would happen if to your Company if you got hit by a bus today, would your Company continue to operation as usual, or would those operations cease? Would your customers be lost? Is there someone who can replace you as business the owner?
Did you know that CEOs appointed from inside of the business tend to outperform outsider appointments? Is there a family member(s) poised to assume the CEO's position? A succession plan is vital to a Company's continued success. There are several ways to install a Company succession plan: 1) Have two people in mind that could assume CEO responsibilities. 2) Develop a buy-sell agreement if one isn't already in place; hire a knowledgeable attorney. 3) Update the buy-sell agreement's valuation on an annual bases so the buyout value is not a surprise. 4) Communicate, communicate, and lastly communicate with the remaining Company management regarding the succession plan. |
We are asked many times if an industry multiple will be sufficient to value a business, as many brokers utilize this method of value. If your business is not unique, has little to no goodwill, and can be reproduced easily, a multiple might be right for your business. The businesses we value often are family owned and have a strong customer base and reputation. Many times we have seen Sellers leave money on the table, as the value was based only on multiples.
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Business and Estate Planning
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Its your Business, why not protect it?
You have spend years perfecting your business, and you want to pass that hard work on ensuring the future success long after you're gone. Do you know what will happen to your business after you pass on? Are you aware of the heavy taxation on the transfer of ownership at one time? How can you be sure the next owner of your company will be just as hard working as you are? How can you successfully pass the business on, enjoy retirement, and be confident in the abilities of your company without you? With so many questions, and unknowns, its really important to plan ahead for the maximum benefits. As with most business owners, much of his or her wealth is tied up in the business. We experience this, similar to many other hard working companies, trying to make the most from their resources. While returning earned income back into the business helps finance growth, it can cause severe liquidity problems for your estate when you die. After paying probate and estate taxes, your estate and surviving family also may encounter liabilities that become payable upon your death. Plus, if you have yet to build a succession plan, the new business operator may experience decreased business earnings. Strategic business-oriented planning can help reduce estate taxes and make the best use of resources available. The most common business estate-planning tools? • A Buy-Sell agreements (see above) • Section 303 Stock Redemptions (see below) • Section 6166 Estate Tax Deferrals (see below) • Qualified Family-Owned Business Exclusion (see below) • Business Life Insurance (on your own) Section 303 Stock Redemption
Congress passed Section 303 of the Internal Revenue Code. Allowing a shareholder's estate or heir to sell the closely held corporation enough stock to pay federal and state death taxes, costs of estate administration, and funeral expenses without treating the transaction as a dividend to the redeeming shareholder. Section 6166 Estate Tax Deferrals Section 6166 is an extension of time for payment of estate tax where estate consists largely of interest in closely held business. The 5-year deferral,10-year installment payment plan is used. The value of an interest in a closely held business which is included in determining the gross estate of a decedent who was (at the date of his death) a citizen or resident of the United States exceeds 35 percent of the adjusted gross estate, the executor may elect to pay part or all of the tax imposed by section 2001 in 2 or more (but not exceeding 10) equal installments. Qualified Family-Owned Business Exclusions For purposes of the tax imposed by section 2001, in the case of an estate of a decedent to which this section applies, the value of the taxable estate shall be determined by deducting from the value of the gross estate the adjusted value of the qualified family-owned business interests of the decedent which are described in subsection (b)(2). More here. |
What is Estate Planning?
Believe it or not, you have an estate. In fact, nearly everyone does. Your estate is comprised of everything you own; your car, home, other real estate, checking and savings accounts, investments, life insurance, furniture, personal possessions. No matter how large or how modest, everyone has an estate and something in common, you can’t take it with you when you die. When that happens, and it is a “when” and not an “if”, you probably want to control how those things are given to the people or organizations you care most about. To ensure your wishes are carried out, you need to provide instructions stating whom you want to receive something of yours, what you want them to receive, and when they are to receive it. You will, of course, want this to happen with the least amount paid in taxes, legal fees, and court costs. Good estate planning is much more than that, it should:
If you don’t plan at all, your state has a default plan laid out for you, but you probably won't like it..
At disability: If your name is on the title of your assets and you can’t conduct business due to mental or physical incapacity, only a court appointee can sign for you. The court, not your family, will control how your assets are used to care for you through a conservatorship or guardianship (depending on the term used in your state). It can become expensive and time consuming, it is open to the public, and it can be difficult to end even if you recover. At your death: If you die without an intentional estate plan, your assets will be distributed according to the probate laws in your state. In many states, if you are married and have children, your spouse and children will each receive a share. If you have minor children, the court will control their inheritance. If both parents die (i.e., in a car accident), the court will appoint a guardian. From: What is Estate Planning? EstatePlanning.com |
Buy/Sell or Buyout Agreement
A buyout agreement, a business will, or more commonly known as a buy-sell agreement, is a legally binding agreement put into place set to help manage the business if a co-owner dies, is forced to leave the business, or is no longer operating within the business for whatever reason. You may think that the business owners and partners will always get along; however, this is not always the case. Over time business relationships can dwindle, accusations of theft can arise, more than just accusations may be found (embezzlement, fraud, etc.), the goals of the business may change, business partners could begin feuding, future divorce will affect the business, of course there are many unique situations which can affect the overall operations of your business. Its best to plan ahead, this way IF these items arise, they can be easily dealt with and put to rest before the business has to take a back seat to personal issues. We HAVE seen this before, we have seen courts so involved with these disruptions that they order businesses to SHUT DOWN and liquidate. Yes, it happens, but it doesn't have to be this way.
Of course planning for these interruptions is never an easy task. However, if the business owners and partners are committed to the operations of your business, then they will assist with the succession planning efforts, despite the difficulties that may arise.
Life events happen to all of us, why wouldn't we plan for them? Everyday we hear about people dealing with difficulties, struggles, divorce, arguments, death, and retirement. Without planning for these situations, your business can be majorly impacted in a negative way. Also, these types of circumstances come with more than just difficulty, human emotions are always added into play during these situations. Emotions will always get in the way of effectively planning for the future during these life events; your best time to plan ahead is now, when things are still clear in your mind (and others' minds), the business is operating successfully, and judgement will not be clouded by emotions.
Reasons you should start planning now:
Who will be affected, and why plan?
1) Business Owner(s) - A buy-sell agreement will lay out the integrates needs and capabilities of the business with the owners' personal plans, the business and estate plans, especially with regards to the major assets (and the liquidity of those assets), and most importantly a vision as to the future control and ownership to said business. You need to think, who will be taking over your business? Family? Friend? Long time employee? Do they have the same goals for your business as you do? How are you going to retire?
2) Key Management - You know you need these key players to be in the game at all times, these employees are essential to the success of your business. You do not want them in the dark during times of difficulty. Having a buy-sell agreement in place, will ensure that the businesses' main vision will not be interrupted during stressful life events. Prior agreed upon business plans can eliminate uncertainty for these employees, keeping them focused on the operations of the business knowing things will work out in the end, rather than searching for a new position with a company who seems more stable at the time.
3) Business Shareholders - Your buy-sell agreement can be set up to help your business strategically minimize the taxes it may incur, preserving your shareholders' wealth. The buy-sell agreement will also establish the terms for valuation of the business, and its stock during various life events (such as during times of an owner or partner dealing with divorce, death, estate gifting, strategic taxing, and more). What happens if the president of the company goes through divorce, can his or her soon to be ex-spouse come after half of his or her interest within the business? If so, will the company buy those shares back, and at what price? Can the soon to be ex-spouse sell them off to your competition?
4) Related Family - A buy-sell agreement can lay everything out for the related family working outside and within the business. During stressful life events, where human emotions can turn simple uncertainties into major unknowns, this "guide" will help the business continue to succeed, and all parties on board will know where they stand at any given time.
What should you include in the agreement?
Most commonly a buy-sell agreement will include legally binding guidelines on:
1) Who is allowed to purchase a partner's or shareholder's share of the business? Does this include the general public? Or perhaps only other business shareholders will be given this opportunity? Maybe there is a mix of the two? Many companies include a right to refusal, meaning they have the opportunity first to match a third party offer to purchase the stock in question before it is transferred. Usually a buy-sell agreement will control who can own stock, and when it can be transferred (sometimes how much can be given in a certain period of time).
2) What events will trigger a buyout? If a shareholder retires, passes on, or can no longer operate the business for whatever reason, a buyout should be triggered. This protects the assets of the business in case of any unexpected personal emergencies. Are there other life events that can trigger a buyout? Events you should consider within your 'buyout trigger' might include: the business owner transferring his or her ownership voluntarily, or involuntarily (divorce, bankruptcy, legal purposes, credit repossession, etc.), the death, disability, or lose in some other way of a Business Owner, or other key shareholder, termination of Business Owner, and irreversible gridlock among shareholders. Here is your chance to lay out the "rules of the game" concerning the "game" your company is playing.
3) What price should be paid for a partner's or shareholder's shares/ownership? Are voting shares more valuable than not voting shares? How are you valuing the amount of shares being purchased, are you accounting for majority amounts? A method to lay out how a valuation should be conducted, should be in the part of your buy-sell agreement. This is always the weakest component in buy-sell agreements, but it is also the most important. Otherwise, feuding sides will come up with their own valuation methods, which will most likely NOT be similar, ending the disagreeing parties in court.
**If you are interested in creating your own buy-sell agreement OR you would like us to review your current buy/sell agreement FOR FREE, please contact us today, we are happy to help!!
Of course planning for these interruptions is never an easy task. However, if the business owners and partners are committed to the operations of your business, then they will assist with the succession planning efforts, despite the difficulties that may arise.
Life events happen to all of us, why wouldn't we plan for them? Everyday we hear about people dealing with difficulties, struggles, divorce, arguments, death, and retirement. Without planning for these situations, your business can be majorly impacted in a negative way. Also, these types of circumstances come with more than just difficulty, human emotions are always added into play during these situations. Emotions will always get in the way of effectively planning for the future during these life events; your best time to plan ahead is now, when things are still clear in your mind (and others' minds), the business is operating successfully, and judgement will not be clouded by emotions.
Reasons you should start planning now:
Who will be affected, and why plan?
1) Business Owner(s) - A buy-sell agreement will lay out the integrates needs and capabilities of the business with the owners' personal plans, the business and estate plans, especially with regards to the major assets (and the liquidity of those assets), and most importantly a vision as to the future control and ownership to said business. You need to think, who will be taking over your business? Family? Friend? Long time employee? Do they have the same goals for your business as you do? How are you going to retire?
2) Key Management - You know you need these key players to be in the game at all times, these employees are essential to the success of your business. You do not want them in the dark during times of difficulty. Having a buy-sell agreement in place, will ensure that the businesses' main vision will not be interrupted during stressful life events. Prior agreed upon business plans can eliminate uncertainty for these employees, keeping them focused on the operations of the business knowing things will work out in the end, rather than searching for a new position with a company who seems more stable at the time.
3) Business Shareholders - Your buy-sell agreement can be set up to help your business strategically minimize the taxes it may incur, preserving your shareholders' wealth. The buy-sell agreement will also establish the terms for valuation of the business, and its stock during various life events (such as during times of an owner or partner dealing with divorce, death, estate gifting, strategic taxing, and more). What happens if the president of the company goes through divorce, can his or her soon to be ex-spouse come after half of his or her interest within the business? If so, will the company buy those shares back, and at what price? Can the soon to be ex-spouse sell them off to your competition?
4) Related Family - A buy-sell agreement can lay everything out for the related family working outside and within the business. During stressful life events, where human emotions can turn simple uncertainties into major unknowns, this "guide" will help the business continue to succeed, and all parties on board will know where they stand at any given time.
What should you include in the agreement?
Most commonly a buy-sell agreement will include legally binding guidelines on:
1) Who is allowed to purchase a partner's or shareholder's share of the business? Does this include the general public? Or perhaps only other business shareholders will be given this opportunity? Maybe there is a mix of the two? Many companies include a right to refusal, meaning they have the opportunity first to match a third party offer to purchase the stock in question before it is transferred. Usually a buy-sell agreement will control who can own stock, and when it can be transferred (sometimes how much can be given in a certain period of time).
2) What events will trigger a buyout? If a shareholder retires, passes on, or can no longer operate the business for whatever reason, a buyout should be triggered. This protects the assets of the business in case of any unexpected personal emergencies. Are there other life events that can trigger a buyout? Events you should consider within your 'buyout trigger' might include: the business owner transferring his or her ownership voluntarily, or involuntarily (divorce, bankruptcy, legal purposes, credit repossession, etc.), the death, disability, or lose in some other way of a Business Owner, or other key shareholder, termination of Business Owner, and irreversible gridlock among shareholders. Here is your chance to lay out the "rules of the game" concerning the "game" your company is playing.
3) What price should be paid for a partner's or shareholder's shares/ownership? Are voting shares more valuable than not voting shares? How are you valuing the amount of shares being purchased, are you accounting for majority amounts? A method to lay out how a valuation should be conducted, should be in the part of your buy-sell agreement. This is always the weakest component in buy-sell agreements, but it is also the most important. Otherwise, feuding sides will come up with their own valuation methods, which will most likely NOT be similar, ending the disagreeing parties in court.
**If you are interested in creating your own buy-sell agreement OR you would like us to review your current buy/sell agreement FOR FREE, please contact us today, we are happy to help!!
Incorporation IssuesWhat is your business classified as? Are you aware of the consequences of each type of business incorporation? Each type of business incorporation will be filed differently in terms of taxes, and while we will not be going into detail here, we want our clientele to be informed. One of the biggest issues we see today is the transition of C-type corporations to S-type corporations. While there are numerous benefits within this transformation, we seem to run into one major issue here...
The BIG tax implications are to assets received by an S corporation in either: a conversion of an existing C corporation within said period, or a transaction in which the assets received were determined by reference to the basis of such assets in the (previously classified) C corporation. The BIG tax is a corporate-level tax, taxed at the highest corporate rate, that applies when the S corporation disposes (sells/gifts/etc) of such 'assets' within the recognition period. The amount of tax is based upon the difference between the fair market value (did you have a business valuation conducted at this time?) and the basis of such assets at the time of the transfer. Without a justification as to the Fair Market Value you recorded at the time of conversion - you could face tax penalties, additional back taxes, and additional interest expenses pertaining to those fees/penalties. If you sell, or gift your business within the IRS's recognition period, you are liable to pay the taxes on the built-in gains (BIG) for said period, since you initially changed your business incorporation type. (This falls on YOU, not the business or the new owners.) Built-in gains (BIG) tax will not be recognized after X amount of tax years since the new incorporation depending on the year you changed the incorporation. • Previous to 2009, the recognition period has been 10 years • In 2009, and 2010 the recognition period was 7 years • In 2011 the recognition period was 5 years • In 2012 or 2013 the recognition was also 5 years • In 2014 the recognition period reverted back to 10 years • As of 2015 the recognition period remains at 10 years More on the recognition period? (PDF From KPMG's website.) |
Insurance Policies
What kind of insurance protection does your business have? Based on our experiences, and past client cases we highly recommend the following in terms of insurance protection:
We do not sell business insurance, or any insurance for that matter. You should speak with your insurer directly relating to the above matters. We (Teal Consulting Group,LLC), in no way represent or provide business insurance, and business insurance related services. SInce we're on the subject, we do not file business tax returns, or any type of tax returns.. Should in no way the information on this website trump the information you receive from your personal (or business) insurance (or tax) professional. |
Consider a Business Valuation Today!If you're planning to sell your business, an accurate valuation completed by a certified professional will ensure that all the hard work you've put into it will be taken into account and included in the sale price. Business valuations are also essential when seeking investment capital, taking on a partner, planning for the future, or selling shares.
While many business owners have an idea of what their business is worth, that idea can quickly wither in the face of challenges from the IRS or other sources. A business value without any solid backing as to where this said value comes from, is more than just a mathematical equation. Therefore, getting an accurate business valuation is crucial. Here at Teal Consulting Group we enjoy assisting our clients with their Business Valuations. When possible, we get to sit down and discuss the day-to-day operations at each and every business, we look forward to tours and walk-throughs of facilities, and we ask in depth questions to really understand each individual we help. We believe that a Business Valuation is a mixture of science and art, and we have yet to find two valuations that are exactly the same! Let us help you, contact us today for more information! |
