Business/Exit Planning

Wednesday, July 06, 2011

Certified Exit Planner

I am proud to announce the successful completion of my certification as a Certified Exit Planner.  Through the Business Enterprise Institute, I learned and trained to become a Certified Exit Planner (“CExP”).  Business Enterprise Institute is a membership-based organization that focuses on helping business advisors assist their business-owners clients with planning for the single, most important financial event of their lives- the transition and exit out of their business.  The CExP program is a 100+ hour program covers all area of exit planning: the five critical elements of a successful exit plan, understanding and identifying owner objectives, quantifying business and personal financial resources, maximizing and protecting business value, ownership transfers to third parties, ownership transfers to insiders (children, key employees, ESOPs), business continuity (stay bonus plans, buy/sell agreements), family business planning, and deferred compensation.     

Jason Salinardi

BridgeBuilder

Thought for the Week

"A budge tells us what we can't afford,

but it doesn't keep us from buying it."

~William Feather

Tuesday, April 26, 2011

Tax Exclusive Nature of Gifts

I’ve recently written about the unique opportunity Boomers now have to transfer significant amounts of wealth to the next generation.  Due to the recent changes in the gift tax laws, a $5M exemption, gifting is a very real and valuable tool to use. Click here for further discussion on the new gift tax laws.

If my goal is to maximize the monetary transfer to my child, gifting presents the best opportunity.  Let me explain.  Let’s assume for the moment that I have a taxable estate (and the gift tax is currently 35%).  If I want to gift my child $1, I will pay a gift tax of $0.35.  However, if I wait to try to transfer that same $1 at my death, my estate first has to pay the estate tax of $0.35. This means that only $0.65 will get transferred to my child.

Said another way…the gift tax imposed on the donor is calculated based on the value of the gift passing to the donee (after the imposition of gift tax).  The estate tax, on the other hand, is calculated based on the total value of the taxable estate, regardless of the net amount passing to the beneficiaries of the estate.

Again, the result is being able to maximize the transfer because the tax is paid after the gift.

BridgeBuilder - Plans for Life

Garrett Griffin

Monday, April 18, 2011

Use of the Applicable Federal Rate (AFR) in Exit Planning

Over the last few weeks, I have discussed the factors that have made transferring business interests to Insiders very attractive right now.  Many times when we plan with clients, we structure the transfer of business interests as part gift – part sale.  Typically in doing so, the sale part is seller financed.  Therefore, and especially when transferring to a child, we would like to use the lowest interest rate we can.  That rate is the Applicable Federal Rate (“AFR”).

What Does Applicable Federal Rate - AFR Mean?
Generally, this means the interest rate published by the U.S. Treasury to calculate imputed interest charges.  In essence, it is the lowest interest rate that can be charged before the loan would be considered a below-market loan.  If the loan is a below-market loan, there may be additional gift tax consequences.

The federal "short-term rate" isdetermined from a one-month average of the market yields from marketable obligations of the United States with maturities of 3 years or less. The "mid-term rate" is determined from obligations with maturities of more than 3 years but not more than 9 years, and the "long-term rate" is determined from obligations with maturities of more than 9 years.

Currently, the long-term rate for April 2011 is 4.25%.  This is a relatively low interest rate and when combined with the discounting and current gift tax regime, it makes for a powerful way to transfer significant business assets while minimizing the tax liability.

I’ve included the recent AFR rates below:

BridgeBuilder - Plans for Life

Garrett Griffin

Wednesday, April 13, 2011

Transferring a Business to Children or Employees

How do you successfully transfer your business to a child, key employee or co-owner? The most successful method is to follow a recipe that mixes, in equal measure, three key ingredients:

• One part: the ability, experience and dedication of the prospective new owners;
• One part: a company with strong, consistent cash flow and little debt; and
• One part: a transaction designed to prevent income taxes from eroding the cash flow available to you, the seller.

It should be obvious that a business cannot be successfully transferred unless the new ownership is capable. Furthermore, we cannot expect the transfer to be successful if the business itself lacks the ability to provide an ongoing stream of income with which to pay for the business acquisition. What may not be so obvious; however, is the corrosive effect of income taxation upon the transfer of a business to "insiders" — children, key employees or co-owners. Let's look at two key facts associated with transferring business to an insider.

First, your children or key employees may not have cash to buy you out. Therefore, any sale may take many years to complete — a potentially risky prospect. Further, all of the cash used to purchase your ownership may come from one source: the future cash flow of the business after you have
left it.

Second, without planning, the cash flow can be taxed twice. It is this double tax, (sometimes totaling more than 50 percent) that can spell disaster for many internal transfers. Through effective tax planning, however, much of this tax burden can be legally avoided.

How might you design your sale to lower taxes and maximize the opportunity for success?

1. You should have a plan that yields you a greater after-tax amount for the sale of your company. Since the cash flow of the company may increase, the key is to provide Uncle Sam a smaller slice of the available cash flow.
2. Use an experienced advisory team who understands the importance of tax sensitivity to both seller and buyer in order to make more money available to you.
3. In addition, you and your advisors should use a modest, but defensible valuation for the company. Because a lower value is used for the purchase price, the size of the tax bite is correspondingly reduced. The difference between what you will receive from the sale of your business, at a lower price, and what you want to be paid to you after you leave the business is "made good" through a number of different techniques to extract cash from the company after you leave it.

Thought for the Week

"A corporation's primary goal is to make money.  Government's

primary role is to take a big chunk of that money and give it to others."

~ Larry Ellison

Monday, April 11, 2011

Exit Planning for Baby Boomers

Last week, I identified 3 factors that would allow Baby Boomer business owners contemplating exit planning (succession planning) an opportunity to transfer a great deal of wealth (in the form of business interests) to a child, key employee or co-owner (aka “Insider”).

Those factors were:

1. Tax Relief Act of 2010
2. Presence of Valuation Discounts
3. Relatively Low Interest Rates (Applicable Federal Rate “AFR”)

Today, I want to highlight the presence of valuation discounts and discuss their uses and benefits.  When preparing a business for transfer to an Insider, a business owner must first determine the value of the business.  The lower a business value, the more value that can be transferred…especially when using the $5 million gift tax exemption that I spoke of last week.

When determining the value of a company (and looking for the minimum value) there are two main valuation discounts that a certified business appraiser may use. The two discounts applied most often include minority/non-controlling interest and lack of marketability. Generally, the minority interest discount corresponds to the degree of control or influence inherent in the transferred interest, whereas the lack of marketability discount corresponds to the transferred interest's degree of liquidity. The two are interrelated because a minority interest tends to be harder to sell and is therefore less marketable. 

To show the power of valuation discounts while using the gift tax exemption mentioned above, take the following:

A husband and wife want to transfer their business to a child using their combined $10 million gift tax exemption.  Using a valuation discount of 35% for lack of control and lack of marketability, they are able to transfer a business worth $15,000,000 to the child gift tax free.  Further, all future appreciation to the business will not be taxed to the husband and wife.

Next time, I’ll explain how the Applicable Federal Rate can be used in minimizing taxes while maximizing wealth transfer.

BridgeBuilder

Garrett Griffin

Saturday, April 02, 2011

3 Reasons that the Stars have Aligned for Boomer Exit Planning

Baby Boomer business owners contemplating exit planning (succession planning) and wanting to transfer their business to a child, key employee or co-owner (aka “Insider”) have reason to believe that the stars have aligned to accomplish their goals.

BridgeBuilder – Plans for Life, a Kansas City exit planning and succession planning practice that represents privately and family-owned businesses throughout Kansas and Missouri has identified 3 key current factors that make transferring a closely-held business to an Insider very favorable.  Those are:

1. Tax Relief Act of 2010
2. Presence of Valuation Discounts
3. Relatively Low Interest Rates (Applicable Federal Rate “AFR”)

Today, I want to highlight that families now have a window of opportunity to transfer a significant ownership interest in their businesses to the next generation with minimal or even no tax.  The Tax Relief Act of 2010 passed by Congress late last year, increased the gift-tax exemption from $1 million to $5 million for individuals and from $2 million to $10 million for couples in 2011 and 2012.  For further detail, see Jason’s discussion on Congress Gives Its Biggest Gift Ever.

Essentially, this increased gift-tax exemption allows owners of closely-held businesses the ability to transfer substantial business assets to Insiders, in many cases with no tax.  This temporary tax law coupled with relatively low interest rates and the ability of families to use valuation discounts, presents many unique planning opportunities.  Next time, I’ll explain the use of valuation discounts and how they can maximize tax free transfers.

BridgeBuilder

Garrett Griffin

Saturday, March 26, 2011

What is My Business Worth?

BridgeBuilder – Plans for Life, is a Kansas City exit planning and succession planning practice that represents privately and family-owned businesses throughout Kansas and Missouri. BridgeBuilder's SuccessPlan^PLUS follows a seven step process to assist business owners determine how to exit their businesses.  Last week Jason talked about the first step.  Today, we’ll examine step two. 

For many owners, the answer to one question determines their eagerness and ability to leave their companies: "How much is my business worth?" This question is indeed critical and answering it is the second step of your seven-step Exit Plan.

Take Ron Nee, the owner of Landscaping Supply Company, as a hypothetical example.

Ron was ready — and had been for several years — to sell his company but he felt it was worth little more than its net asset value — his industry's rule of thumb when valuing his type of company. While that value was not inconsiderable ($2 million), Ron wanted more. So, he continued to work in the business well past the point where he found it to be either fulfilling or energizing. In doing so, Ron committed a serious but common ownership mistake: working after the fun and challenge are gone on the mistaken assumption that the company can't be transferred for sufficient value.

Because Ron failed to get a proper and professional business valuation, he also failed to realize that his business could have been sold for significantly more money than his industry's "rule of thumb." And these failures were cumulative, for, in the end, he failed to exit his business when he wanted and for as much money as he wanted and needed.

How can you help to avoid Ron Nee's predicament?

• Understand first that there are different types of valuations, performed by different types of valuation advisors, for different reasons.
• Appreciate that different appraisers charge vastly different amounts for a valuation; and
• Realize that the questions you need to ask now are what type of valuation do you need and who should perform it? The answers depend on how ready you are to leave your business.

If you are ready to exit the business now, (meaning last Friday) you need more than just a thumbnail sketch of value. You need a thorough valuation which includes a marketability component: Can your company be sold today at its appraised value?

An experienced appraiser active in today's merger and acquisition marketplace can give you an accurate answer to that question.

An accurate answer can tell you if your business is as ready to be sold as you are ready to leave it.

In Ron Nee's case he hired a certified valuation analyst whose thorough valuation included what the business would be worth in today's mergers and acquisitions market.

Expect to pay $5000 to $15,000 depending on the complexity of the valuation and whom you select to value the company.

On the other hand, if you and your business are several years away from ownership transition, a full-blown valuation may well be unnecessary. Instead you need a value approximation or range of value — a "ballpark estimate" of what your business is worth today. Think of an annual valuation as a test of whether the business is on track and of the distance to the station.

Depending on the size of your business and the need for certainty, your CPA can provide this type of valuation approximation for a modest fee.

Had Ron Nee started with a "ballpark" valuation, he would have discovered his business was likely worth significantly more than he thought. He could then have paid a professional valuation expert to determine the value and marketability of his company which would have opened the door for him to sell his business at that time.

"Ballpark" valuations, thorough valuation and marketability appraisals all have their place. Don't skimp on paying for an accurate valuation, but don't get one before you need it.

Why is a valuation necessary in this early stage of your Exit Planning? Simply because you and your financial and tax advisors must be able to determine if your financial objective can be met by a sale or other transfer of your company, to whom and when. Only a current business valuation can supply this vital information. Remember that the recent collapse of the mergers and acquisitions marketplace teaches us the valuable lesson that it takes both a strong company and a strong market to maximize business value.

Bottom Line: If you can realize your financial and other objectives today based on the current value and marketability of your business in today's market, why delay your exit?

 Click here to learn more about our upcoming Exit Planning workshops.

Garrett Griffin

BridgeBuilder

Wednesday, March 23, 2011

Importance of Setting Exit Objectives

BridgeBuilder's SuccessPlan^Plus follows a seven step process to assist business owners determine how to exit their businesses.  The first and most indispensable of The Seven Exit Planning Steps™, owners will form their goals and objectives. But what should an owner’s objectives be and why is it so vital to fix them before taking the next Step?  Let's take a look at a hypothetical:

I recently met with Ben, the owner of a 45-employee plastic extrusion company. He had long thought of transferring his business to a son and a key employee but had done little to prepare for that transfer. After years of procrastination, at age 58, he was finally ready to retire.

"Ben, it's helpful that you've decided on two of the critical Exit Objectives all business owners must face and answer. You've determined how much longer you want to work in the business. It seems you want to leave sooner rather than later. And second, you have decided to whom you wish to transfer the business, in your case your son and a key employee. But you still need to determine a third, critical, Exit Objective, how much money do you want or need when you leave the business? And, does that money need to be in cash or would you accept a promissory note?"

Like many owners, Ben had two choices. First, he could retire now and sell the company for cash — but not to his son and key employee. They had no cash and no bank would lend an amount even close to the amount of money necessary to close the deal. If Ben wanted to sell now and achieve financial goals, he would have to sell to an outside third party with sufficient cash. His alternative was to sell the company to his son and key employee — knowing he would have to wait six to ten years to receive the entire purchase price.

Ben's situation illustrates why setting consistent and achievable objectives early in the Exit Planning process is so critical.

The three principal objectives common to nearly all business owners (and the questions that must be answered in setting these objectives) are:

1. Leaving the business on your timetable. How much longer do you want to remain active in the business?
2. Leaving the business financially stable. Think of financial stability as a stream of after-tax income, adjusted for inflation. How much income will you need for the rest of your life after you leave the business? Do you want to be cashed out when you leave the business or are you willing to receive the purchase price over many years?
3. Transferring the business to a particular person. To whom do you want to transfer the business? To a child? Key employee? Co-owner? Or perhaps to an outside party who can pay top dollar for the company?

If you don't answer these questions and thereby set your basic Exit Objectives, you may end up like Ben. He was left without a means to exit his business in style because he wanted to transfer the business to a key employee and he wanted cash. Your failure to set consistent and achievable objectives can leave you without the means to exit your business as well. If you prefer to "leave your business in style" you must formulate specific, consistent, attainable goals and objectives. Your Exit Objectives are the foundation for all subsequent planning.

Know, however, that many owners may not reach their objectives. Why? Because they may not have a plan to achieve them. They may be too hurried, too focused on their businesses, and they may not know how to go about planning. Many owners understandably lack Exit Planning experience — they may not even know where to start. We suggest you begin your Exit Planning process by working with experienced advisors.

Click here to learn more about our upcoming Exit Planning workshops.

Jason Salinardi

BridgeBuilder

Thought for the Week

"If you don't know where you are going,

you might wind up someplace else"

~ Yogi Berra

Friday, March 18, 2011

Why Exit Planning?

BridgeBuilder – Plans for Life, is a Kansas City exit planning and succession planning practice that represents privately and family-owned businesses throughout Kansas and Missouri. The attorneys with BridgeBuilder know that proper knowledge and preparation of Exit Planning can possibly mean millions of dollars to you when you ultimately leave your company.

Are you like many business owners?

• A majority of closely held and family owned businesses will change hands within the next five years; but
• Many Business Owners may not have taken active steps to transition out of ownership.

Again, if you are like many of our readers, the reasons for failing to plan may be:

• You may have simply been too busy working in your business to be working on it — at least until now.
• You may be unsure of how to begin Exit Planning, who to use or even where to begin. Those uncertainties can be addressed today.

Your education about the Exit Planning process begins now. Start Exit Planning today and you can help to avoid the sad (but too common) fate of the hypothetical business owners of JR Construction.

Years ago, I met with James and Richard Kline, two owners of a thriving construction company. What I assumed would be a business planning meeting, turned out to be a "We're getting out of business, how do we do it?" meeting. As successful as they were, they were tired of the government regulations, changing tax codes and day-to-day grind of running a multi-million dollar company.

A sale to a third party was not an option because James and Richard were not willing to stay on after a sale — and they had failed to develop a strong management team, which any savvy purchaser would require as a condition of purchasing the company. Transferring ownership to a group of key employees was also out of the question. None had been groomed to take on this type of responsibility and nothing had been done to fund this type of buy-out.

Both owners were too young to have business active children so their only option was to liquidate.

James and Richard's highly profitable company had little worth beyond the value of its tangible assets. After the sale of those assets, dozens of the employees lost jobs, the business disappeared, and James and Richard left millions of dollars on the table.

How can you help to avoid James and Richard's fate? By engaging in an Exit Planning process that you control. An Exit Planning process begins by asking yourself the questions that follow. Your Exit Plan will begin to be created as you answer each of the following questions affirmatively:

1. Do you know your retirement goals and what it will take — in cash — to reach them?
2. Do you know how much your business is worth today, in cash?
3. Do you know the best way to increase the income stream generated by your ownership interest?
4. Do you know how to sell your business to a third party and possibly lower your taxes?
5. Do you know how to transfer your business to family members, co-owners, or employees while lowering taxes and potentially enjoying financial gain?
6. Do you have a continuity plan for your business if the unexpected happens to you?
7. Do you have a plan to help secure finances for your family if the unexpected happens to you?

These questions are almost misleadingly simple to ask, but to answer them affirmatively requires thought and action on your part.

Creating and implementing your Exit Plan may be the most important business and financial event of your life.

Click here to learn more about our upcoming Exit Planning workshops.

Garrett

Sunday, March 06, 2011

BridgeBuilder to Present at How to Transition or Sell Your Business

BridgeBuilder has partnered with Allied Business Group and the Kansas Small Business Development Center to hold a series of educational workshops for business owners, attorneys, accountants and financial advisors entitled “How to Transition or Sell Your Business”. Attendees will learn about: determining a company’s value, maximizing and protecting its value, finding an outside buyer and transferring ownership to the next generation or key employees while minimizing taxes.

BridgeBuilder has also joined Business Enterprise Institute, Inc. (“BEI”), the premier provider of Exit Planning education and information to business owner advisors. Utilizing the BEI Seven Step Exit Planning Process™, BridgeBuilder has developed SuccessionPlan^PLUS, an innovative solution used to assist closely-held and family-owned businesses in planning for the single, most critically important financial event of their lives – the transition and exit out of their business.

Leaving in style means leaving your business to the successor you choose, for the price you want at a time you pick. An Exit Plan makes all of this possible.

• Do you find yourself thinking about getting out of your business?
• Are you wondering how to groom a successor?
• Is passing your company on to your children becoming increasingly unlikely?
• Are you getting tired of fighting the alligators and want a different challenge?
• Does the whole succession idea seem overwhelming?

If you can answer yes to any of these questions, it is time for you to create an Exit Plan. If you don't know how to get started, you are not alone. Few, if any, business owners know how to leave their businesses in style.

To learn more about the workshop and how to get started, visit How to Transition or Sell Your Business.

… or discover the 8 available exit planning routes at www.BridgeBuilderKDA.com/exitroutes.

Garrett Griffin

Monday, October 04, 2010

BridgeBuilder Introduces SuccessionPlan PLUS

Many of our clients and small business owners that we interact with are always wondering how to plan for succession or exiting their business.  We continue to evolve and expand our services to meet the demands of our business, estate and tax planning clients.  We are proud to introduce SuccessionPlan PLUS.

BridgeBuilder has developed SuccessionPlan PLUS, an innovative planning process used to assist family business owners in evaluating and accomplishing their succession planning goals.

You can begin today!  If you would like further information as to how this process works, please click on the following link for our process guide.

SuccessionPlan PLUS

If you are ready to begin the Discovery process, please contact us to schedule your free Introductory Visit.

BridgeBuilder - Plans for Life