State Death Taxes and Exit Planning

We continually communicate to clients and prospective clients that as a business owner “you cannot do exit planning without doing estate planning, and you cannot do estate planning without doing exit planning.” Meaning that, as you plan your estate preservation and transfer in life and death, your business certainly needs to be under consideration, and if you are in the midst of creating your business exit strategy, you will quickly find that you will need to create or review your estate plan.

One of the many reasons to regularly review your estate plan is to be clear on death taxes (estate, gift, inheritance), and how your estate could be impacted. The current good news is that most small business owners don’t need to be concerned about federal estate taxes. For 2020, your estate would need to be worth $11.5 million or more ($23 million or more for a married couple) to be affected by federal estate taxes. For this reason among others, not a few owners choose to neglect estate planning, while there are other important factors to consider (i.e., asset protection; medical directives; lifetime transfers, etc.).

One such additional factor is the potential estate tax bill assessed by the state you reside in. For example, in Maryland, the estate tax exemption is less than half ($5 million for 2020) than the federal exemption, and the tax rate assessed can be up to 16%. Massachusetts has the lowest threshold of any state in 2020 of $1 million. The point is, you really need to understand, not just how you could be impacted on a federal level but also your state death tax structure. If you’re unclear, contact your estate planning attorney for a plan review.

Following is a link to a related Kiplinger article dated November 2019 (note: some states listed may have made changes in 2020) on the “18 States With Scary Death Taxes”.

Again, if you are at all unclear on your situation and how you could be impacted, contact your estate planning/tax advisor.

Please contact us for assistance in building sellable business value or planning your eventual exit. You could also check out our virtual planning solutions at exitreadiness.com.

Know The Value Of Your Business

The business is often the largest asset in a small business owner’s overall investment portfolio. And, as a result, they typically see the future value of the business as playing a key role in retirement or whatever they decide to do next after the business. A critical and foundational element to designing and creating an effective exit plan would be what we refer to as an “accurate financial gap analysis”. Simply put, this is a calculation subtracting the value of all current assets (including the business) from the amount needed for financial security or post-exit goals. If there is a significant “financial gap”, then it will usually need to be filled by increasing the value of the largest asset, the business.

The “fair market value” of a business is the amount agreed upon by a willing buyer and a willing seller, neither of which is under any compulsion to buy or sell, with both parties having knowledge of the relevant facts. And, so as a business owner, you may have the thought or question as to why even bother trying to value the business until a buyer comes along. Why not just wait and see what they offer? The following are some quick responses to that understandable question:

• In planning for the future and how much you will need, you need to know the value of current assets to perform the calculation. The point here is to obtain the best estimate based on financial analysis of the business and current market conditions for a meaningful gap analysis.

• If in performing a financial gap analysis, you learn that there is indeed a gap to be made up by increasing the value of the business, it will be important for you to know the real value now and what you will need to do in order to maximize sellable value to attain your goals.

• If you receive an offer at the deal table and have not obtained a prior estimate of value from a valuation specialist, you will not be in your strongest position for negotiations. As a result, you may experience doubts during the negotiation, and regrets if the deal actually goes through.

These are just a few reasons to know the value of your business. There are others. We like to say, “Don’t wait until you feel pressure to begin planning”. If you wait until you’re ready to exit to obtain an objective analysis of the value of your business and perform an accurate financial gap analysis, you may find that you’re nowhere near ready to leave.

Don’t wait until you feel pressure to leave your business to begin planning. Get started today in completing our 15-minute exit readiness assessment, and receive a 12-page report with scores in 4 key planning areas. We do not ask for confidential information.

The Most Common Reasons To Grow Through Acquisition

Jim has done all he can to grow his business organically, however, growth in both sales and profit have come to a screeching halt. He remains confident, based on research, in his market, and he has taken countless steps to reduce costs to improve the bottom line. So, with his goals for growth and increasing business value being greater than what he’s currently realizing, Jim is now wondering if external growth through acquisition makes the most sense.

David Braun, in his book Successful Acquisitions, A Proven Plan for Strategic Growth, suggests that Jim, and any owner considering growth through acquisition, should consider the following “ten most common reasons to acquire”.

1. Increase top-line revenue.

2. Expand in a declining market.

3. Reverse slippage in market share.

4. Follow your customers.

5. Leverage technologies.

6. Consolidate.

7. Stabilize financials.

8. Expand your customer base.

9. Add talent.

10. Get defensive.

We highly recommend David’s book for anyone considering acquisition as an external growth strategy, and please contact us if we can be of assistance with your organic growth or decision as to which growth path you should choose.

Invest 15 minutes and take our FREE Exit Readiness Survey HERE. We do not request any confidential information.

301-859-0860 | email@ennislp.com

What Is A "Stay Bonus" And How Is It Helpful?

Simply put, a Stay Bonus is an amount of money paid to “key” and/or “important” employees to prevent them from leaving when an owner either voluntarily (i.e, sale to third-party) or involuntarily (death or disability) exits the business.

Lifetime Stay Bonus example: An owner is approached with an attractive offer by a potential Private Equity buyer. The selling owner is excited about the offer and wants to move ahead with the proposed deal. As the buyer’s due diligence process is implemented, the key employees, who have not been incented to remain during transition periods, are all getting “nervous” regarding the uncertainty of their future with the business. One actually leaves and the others are “looking around”. If the selling owner had implemented a Stay Bonus prior to a potential sale it could alleviate this potential deal-killer.

Stay Bonus Upon Death example: In a meeting with a client and her estate planning attorney, the attorney was recounting the story of a business owner who recently passed away and how his passing impacted the family and business. Of course it was emotionally agonizing for the owner’s spouse and family, but what compounded the pain of the situation was there nothing in place to keep key employees in place to continue to run the business. Hence, key employees left and so did customers and the value of the business (which the owner’s wife was depending on) decreased significantly. A bonus that had been planned and structured to retain key employees during this time would have saved the family, the employees, and the customers from much pain and uncertainty.

Key considerations:

• Plans designed for a short period of time must provide a meaningful payout in a short period of time if the business is sold.

• Keeping key employees is almost always necessary for the business to be sold at a maximum sale price.

• The benefit should be greater when the business is actually sold while more affordable when a potential sale went through due diligence but did not sell.

• Key employees are often asked to do even more during transition periods than what their regular job description calls for.

• As all cash sales to third-parties are the exception, owners are often exposed to post-sale financial risk that can be increased with departing or unmotivated key employees.

Invest 15 minutes and get our FREE Exit Readiness Assessment HERE. We do not ask for confidential information.

Goalposts, Goals and Your Business Exit

In this week’s episode of our ExitReadiness® PODCAST, we interviewed negotiation expert Randy Kutz of Scotwork USA on “key ingredients of a successful negotiation”, with an owner’s sale of their business in view. One of Randy’s main points had to do with “goals and goalposts”, and how an owner’s goalposts can continually move during a sale transaction if they don’t have strong convictions about their goals and objectives heading into the negotiation process. This uncertainty can easily result, and often does, in either seller’s remorse or a deal not getting done.

We have found in working with owners, that when giving any thought to their inevitable exit, they will often have a time frame for leaving the business (i.e., 5 years) and “their number”, or sale price in mind, but even these objectives haven’t been thoroughly tested and evaluated. Goals such as tax minimization, a plan for life after the business, care for key or important employees, sustaining the culture they’ve worked hard to create, family harmony, leaving on their own terms and conditions, may have received a head nod along the way, but frequently get little to no planning attention ahead of a potential transaction.

As a business owner, there is never a more critical event or time to be clear about what you want than when you exit your business. A reason being, there is a tremendous amount at stake…all that you’ve built…all that stakeholders have come to depend on…and all of your financial and values-based goals are at stake when you transition out of the business. And, you could at any time find yourself suddenly facing an offer from a potential buyer so it’s advisable to begin gaining clarity well in advance so that you can indeed move forward with conviction. If you’re not clear on what you want and need financially, what you value in regard to the future of your business in the hands of a new owner, or what you will do post-business to replace the significance and impact you’ve experienced as a successful owner, the likelihood of you experiencing regrets is quite high.

It is essential to “crunch all of the right numbers'“ in any transaction, and it is also critical to do the hard and often neglected “soft skills” work of establishing firmly your goalposts for a successful and satisfying business transition. Contact us at email@ennislp.com or 301-859-0860 for assistance.

Access the ExitReadiness® PODCAST with Randy Kutz HERE.

Invest 15 minutes and get a FREE Exit Readiness Assessment HERE.

What Exit Route Should You Choose?

There are not many absolutes in owning a business, but there is one thing that is absolutely certain….all business owners will stop being business owners at some point…100%. Along with death or permanent disability, the following are routes for leaving your business:

1. Sale to one or more key employees.

2. Sale to one or more co-owners.

3. Sale or transfer to children or family members.

4. Sale to an Employee Stock Ownership Plan (ESOP)

5. Sale to a third party (full or partial).

6. Become an absentee owner.

7. Engage in an IPO.

8. Liquidate for asset value and close the doors.

As you would expect, there are advantages and disadvantages to each of these exit routes, and other than liquidation, each can require much planning and time to execute in a way that will accomplish all of your values-based as well as financial goals. Certain exit routes will lend toward a higher financial payout, while others afford more control for values-based goals like sustaining culture and care for employees.

We believe that it’s imperative for business owners to understand all available exit routes and the particular characteristics of each, and how they align or misalign with their goals for the future.

Begin increasing your knowledge today with our Exit Routes eBook. You can download it for FREE on our ExitReadiness® site under PRODUCTS.

An Often Neglected Means Of Protecting Business Value

One of the compelling and common characteristics of successful owners is their optimism.  Their “glass is always half full” attitude results in the risk-taking, perseverance, and innovation it takes to build and grow a successful business.  And, like it is with any personal strength, this strength of optimism can quickly become a weakness when there is a need to plan for the gloomy business contingencies of death and disability.  What happens to the business due to either of these less than optimistic events is probably the last thing an owner wants to think about. 

And, perhaps some business owners don’t care if the business fails as a result of one of these events.  Though, our experience has been that most owners do very much care about what happens to the business and all its stakeholders.  We’ve also observed, however, that the planning needed is often deficient.  And, one area that is most often overlooked is an owner’s potential permanent disability.

Whereas it’s fairly common for a business owner to have a level of life insurance protection (although often outdated in need of review) to benefit their business as well as their family, in the event of death, it’s not nearly as common to see the risk of permanent disability addressed adequately, if at all. 

And, becoming disabled for more than three months are greater than the chances of dying at every age: 

• Over one in four 20-year-olds will become disabled before reaching age 67. (1)

• Age 30 - the chances of disability are approximately 2.3 times greater than death

• Age 40 - the chances of disability are about twice that of death

• Age 50 - disability is 50 percent more likely than death (2)

• Not only does the risk of disability rise as we get older, but the severity of any disability that is incurred also tends to increase with age (3)

Your permanent disability (or death) and incapacity would most likely have the same impact on your business as the loss of any key employee.  All that you bring to the table in making the business a success, your experience, talents, knowledge, relationships would all be tough to replace.  And, there could be additional challenges such as the loss of concerned stakeholders, weakening financial strength of the business, bank financing re-examined, bonding capabilities interrupted, potential non-renewal of personally guaranteed leases, etc., etc. as a result of you not being able to work in the business.

The bottom line is this, that the value of your business could decrease significantly in the event of your premature permanent disability and incapacity.  All stakeholders would be impacted, and perhaps your family as well if financially dependent upon the continued success of the business.  Make sure you’ve thoroughly thought through this risk with your insurance professional.  Too often it’s neglected entirely.  You can also contact us for any assistance needed.

Invest 15 Minutes and take our FREE Exit Readiness Assessment.  We do not request any confidential information.

Endnotes:

(1)     The Facts about Social Security’s Disability Program, Social Security Administration Publication No. 05-10570, January 2018.

(2)     1985 Commissioners’ Disability Individual Table A and 1980 Commissioners’ Standard Ordinary Mortality Table.

(3)     Americans with Disabilities: 2010, U.S. Census Bureau, Current Population Reports, July 2012.

"I'm Not Ready to Sell My Business and Retire..."

In my past life, when working in the financial services/wealth management industry, we helped individuals and families create financial plans for their goals such as college education or retirement.  It was very unusual to have a conversation with a client or prospective client who did not already understand that the sooner they began planning the better chance they would have in achieving their goals. They seemed to "get it" that planning, building, and saving for their goal(s) would take time and they could not simply begin planning when suddenly they were ready to send the kids to school or retire from their job.  For example, when encouraging someone to get started saving for retirement as soon as possible, we did not often hear, "I'm not ready to retire yet."

Interestingly, it is not unusual to have a business owner respond to inquiries about their exit and legacy with, "I'm not ready to sell my business", or, "I'm not ready to leave my business and retire".  The inference being, that planning isn't needed until they are actually ready to leave the business (Or, maybe we simply did a poor job describing what we do...as we do not sell businesses).  As this conversation continues, it becomes clear this owner is assuming they will be able to sell their business when they want and for the money they want, and that any planning involved really only amounts to some legal stuff regarding the sales transaction.  These are very faulty assumptions.

For most small business owners, the future business value will play a key role in their retirement planning, financial security for their family, and their desired legacy.  Like an investment portfolio of stocks, bonds, and mutual funds, there are specific things that can be done to maximize value and minimize risk but each takes time (often years) and financial resources that need to be budgeted and planned for.  But because a small privately-held business is typically not as liquid as financial assets in an investment portfolio, long-term planning can be even more imperative. Particularly, if your desire is to sell to insiders or children.

Is your business the largest asset in your investment portfolio?  Do you know what you will need your business to be worth in the future, what it's really worth now, and a plan to increase its value?  Do you have a long-term planning perspective on what might possibly be the largest and most impactful financial transaction of your life?

Don't wait until you're "ready to retire" to begin planning your business exit or you won't be ready.  Instead, have the same long-term perspective in planning your exit as you do in making contributions to your 401k/retirement plans.  

Invest 15 minutes and take our FREE Exit Readiness Assessment. We do not request any confidential information.

The Importance of Estate Planning for Business Owners

It is not uncommon for the business to be the largest asset in a business owner's estate, while also being the primary source of income for their family.  As estate planning is essentially taking control of how property is managed during life and distributed and transferred at death, a business owner cannot do exit planning without estate planning, or estate planning without exit planning.  Exit goals, such as transferring a business to children, always impact an owner's family and estate.

An example of where an owner's estate and exit plans intersect would be in the area of business continuity.  Sarah, a widow of five years, owned a large women's apparel retail store.  She started the business twenty-five years ago and remained as sole owner as the business continued to grow and realize success.  Sarah's daughter Sue graduated from college three years ago with a degree in design, and both she and Sarah had a vision for Sue eventually taking over the business. Sarah's son Jack, and another daughter April, have no involvement in the business.  

Tragically, Sarah passed away suddenly a year ago causing great distress to her children.  The fact that she passed without having finalized her estate plan resulted in even more hardship for her family.  It was one of those things that she knew she needed to do, but just never could "get around to it" due to the day-to-day trials of running a thriving business.  She had a will but it hadn't been reviewed in over fifteen years.  

The consequences of not having designed and coordinated an estate and exit plan, Sue did not end up owning the business as both she and her Mom desired, the business was sold at a deep discount due to uncertainty among employees and customers, other assets also had to be sold to pay high taxes and estate settlement costs, and there was resulting tension between the siblings due to a disorderly distribution of assets.  This is a shortlist of the potential consequences of the deficient and disjointed estate and exit planning for a business owner.  

Like our fictional character Sarah, most business owners lead busy and full lives.  They can understand that estate and exit planning are important, but it can be difficult to plan the time to make it happen as it represents even more work.  So, it can be very easy to procrastinate.  

The focus of an impactful estate plan is not simply death but also the arrangement of assets (ownership and utilization) in ways that will help estate holders achieve financial goals in a tax-efficient manner during life while providing for survivors’ needs and the disposition of property at death. A successfully implemented estate plan can:

• Minimize estate taxes and estate settlement costs

• Ensure that cash is available to pay estate taxes and costs

• Provide for an orderly transfer of assets that meets the estate owner’s objectives and intentions

• Preserve assets during life

• Protect business and ensure its successful transfer or sale

• Provide peace of mind and family harmony

A well-thought-out and executed estate plan, as part of a comprehensive exit plan, will be instrumental in ensuring that the right person takes over a business when the current owner dies. Other issues that would be addressed in a comprehensive estate plan would include the appropriate business valuation, equitable estate distribution among children, a properly drafted buy-sell agreement, tax, and philanthropic planning.

As a business owner, it is wise to regularly review your estate plan to ensure that it represents your current desires and goals for your personal and business asset distribution. Please contact us if we can be of service to you in the review of your estate plan.

Invest 12-15 minutes in the FREE ExitMap® Assessment and get a 12-page report scoring you in four key exit planning areas: Finance, Planning, Revenue/Profit, and Operations.

Using Cybersecurity to Improve Your Company’s Valuation

Thanks to increasing reliance on computers, data, social media, programs, and networks, businesses all over the world are at a greater risk of a cyberattack or data breach. Companies have to fend off malware, DDoS, and phishing attacks at unprecedented levels. Cyberattacks have become so common that the cost of managing cybersecurity risks has become more of an investment than an expense. Consequently, one of the hidden costs of a cyberattack is how it affects the value of your company.

Cybercriminals, like water, find the path of least resistance. Investing in cybersecurity best practices, including a layered security strategy will reduce the risk of an attack. Stepping up your cybersecurity game will, in turn, enhance your market position and add tremendous value to your business. From a valuation perspective, strong cybersecurity means less risk for potential buyers and future investors. Cybersecurity diligence is particularly important for business executives who are looking to sell or are on the verge of selling.

Add Value to Your Company with Better Cybersecurity

Cybersecurity has become a necessity for every business out there, whether they offer products or services. Cybersecurity is rapidly becoming a trend in company valuations. All the factors that go into the value of the company including data operations, assets, customer records, intellectual property, employee information, marketing tactics, etc. are all vulnerable to cyberattacks. Demonstrating cybersecurity strength and integrity contributes to a company’s value.

As you can see, improving your company’s cybersecurity stature will fetch you a better price when it’s time to sell. Here are a few ways to secure your business and improve its value.

Risk Assessment

Cybersecurity risk is the likelihood of reputational or financial loss from a cyberattack or a data breach. A cybersecurity risk assessment is essential to a company’s risk management strategy and data protection efforts. Assessing risks and vulnerabilities can help you understand, manage, control, and mitigate cyber threats across your business.

Network Encryption

Data theft, tampering, technical failure, eavesdropping, etc. have all become commonplace in data networks. Securing network transmitted data against cyberattacks and data breaches is imperative for businesses. Only encryption can make sure that your company data is protected while in transit across data networks and links.

Network encryption makes data unreadable by anyone who is not explicitly allowed to access the information. A VPN is one of the most effective encryption tools. It creates a secure tunnel between your devices and the Internet, protecting your data from snooping. A VPN can also be downloaded in simple steps.

Layered Defence Strategy

In today’s dynamic digital environment, having a cybersecurity defense strategy can help businesses strengthen their resilience to cyberthreats. This strategy employs a series of layered defensive mechanisms including antimalware and network security controls such as a firewall to protect your online presence.

An emerging trend in the business world is the use of cybersecurity in company valuation. Organizations must strive to improve their cybersecurity position and increase their value. But with the cyber threat landscape evolving at a faster rate than companies can keep up, this is easier said than done. Risk assessment, network encryption, and adopting a layered cybersecurity strategy are some of the steps business leaders can take to improve digital security and add value to their companies.

Chris Jones is the resident tech expert and managing director of #TurnOnVPN. #TurnOnVPN is an activist group whose mission is to promote free and unimpeded internet for all. We take part in numerous online events to advocate for a safe, secure, and censor-free Internet. Learn more at www.turnonvpn.org/blog/.

Invest 15 minutes and take our FREE Exit Readiness Assessment.

5 Ways To Get Your Business To Run Without You

Some owners focus on growing their profits, while others are obsessed with sales goals. Have you ever considered making it your primary goal to set up your business so that it can thrive and grow without you?

A business not dependent on its owner is the ultimate asset to own. It allows you complete control over your time so that you can choose the projects you get involved in and the vacations you take. When it comes to getting out, a business independent of its owner is worth a lot more than an owner-dependent company.

Here are five ways to set up your business so that it can succeed without you.

1. Give Them A Stake In The Outcome 

Jack Stack, the author of The Great Game of Business and A Stake In The Outcome wrote the book on creating an ownership culture inside your company: you are transparent about your financial results and you allow employees to participate in your financial success. This results in employees who act like owners when you’re not around.

2. Get Them To Walk In Your Shoes

If you’re not quite comfortable opening up the books to your employees, consider a simple management technique where you respond to every question your staff bring you with the same answer, “If you owned the company, what would you do?” By forcing your employees to walk in your shoes, you get them thinking about their question as you would and it builds the habit of starting to think like an owner. Pretty soon, employees are able to solve their own problems.

3. Vet Your Offerings

Identify the products and services which require your personal involvement in either making, delivering or selling them. Make a list of everything you sell and score each on a scale of 0 to 10 on how easy they are to teach an employee to handle. Assign a 10 to offerings that are easy to teach employees and give a lower score to anything that requires your personal attention. Commit to stopping to sell the lowest scoring product or service on your list. Repeat this exercise every quarter.

4. Create Automatic Customers

Are you the company’s best salesperson? If so, you’ll need to fire yourself as your company’s rainmaker in order to get it to run without you. One way to do this is to create a recurring revenue business model where customers buy from you automatically. Consider creating a service contract with your customers that offers to fulfill one of their ongoing needs on a regular basis.

5. Write An Instruction Manual For Your Business

Finally, make sure your company comes with instructions included. Write an employee manual or what MBA-types called Standard Operating Procedures (SOPs). These are a set of rules employees can follow for repetitive tasks in your company. This will ensure employees have a rulebook they can follow when you’re not around, and, when an employee leaves, you can quickly swap them out with a replacement to take on duties of the job.

You-proofing your business has enormous benefits. It will allow you to create a company and have a life. Your business will be free to scale up because it is no longer dependent on you, its bottleneck. Best of all, it will be worth a lot more to a buyer whenever you are ready to sell.

Take our Free ExitMap Readiness Assessment.  You could also visit exitreadiness.com for Online Learning and Education.

Successful Business Owners Have Great Impact

In our work, we are constantly aware of the incredible influence and good that result from the efforts of a successful business owner and their business.  Just a few of the good works include:

• Quality services and products.

• Empowerment of others.

• Creativity and innovation.

• Wealth and value creation.

• Peace, flourishing, and prosperity for communities.

• Charity and philanthropy.

And then there are common characteristics and principles often demonstrated by high-impact business owners in building a successful business:

• Integrity.

• Responsibility.

• Excellence.

• Diligence.

• Service to others.

• Building and leaving a legacy.

Successful business owners who embody such characteristics have a huge impact on many "stakeholders" when they responsibly and diligently build and sustain a successful business.  Impact on their family, employees, customers, suppliers, economy, and community.

As a business owner, will you have as great an impact when you leave the business as you have in building it?  Will your legacy as a business owner, and family legacy, be your desired legacy?  Are you being as responsible and diligent in planning your exit as you have been in building your business?  Will there be flourishing and peace for your many stakeholders as you leave?  

All of the tremendous good produced by you and your business are at stake when (and how) you leave your business.  The more time you have or take to plan for this most significant and impactful event, the greater potential for success and attainment of your goals and desires.  

Design and implement a plan to have a great (or greater) impact when you leave as you have in building the business.  

Contact us today for an exploratory conversation about your impact when exiting.

email@ennislp.com | 301-859-0860

You could also get started with our FREE Exit Readiness Assessment.

Focus On Net Proceeds And Not Just Sale Price When Selling Your Business

John was excited as “today is the day!” Twenty-five years ago this month he had started his home remodeling business with a truck and a tool belt, and today at 3pm he was going to the deal table to sell his business to a much larger remodeling company. It would be a strategic purchase for the buyer who was willing to pay a premium with a goal of expansion in the region. With the check received today, John knew he could now do everything he and Kim had thought about doing for years — travel, more time with the family and for hobby’s and other interests they both enjoyed.

The amount received actually exceeded John’s “number”, and hence, he and Kim spontaneously pulled together a celebration dinner with family and a few close friends at their favorite restaurant. John had done a great job through the years building a “sellable business” focusing on a strong management team, strong financial performance, a plan for growth, up-to-date systems and processes and other value drivers which and now he was reaping the rewards. There was indeed much to celebrate!

Fast forward, six months later: John has come to realize that his number needed to be quite a bit larger than what he had originally calculated. In whatever way he had performed his calculations, he failed to consider to the extent needed, or at all, the following important factors in the equation:

• Of the $10 million in proceeds, he was going to net approximately $6 million after these charges/expenses:

  • Transaction and professional fees.

  • An asset sale was negotiated and there was income tax on some asset depreciation recapture.

  • $1 million in business debt needed to be repaid.

  • Capital gains and affordable care act taxes.

  • Miscellaneous expenses including “stay bonuses” for two key employees.

John was in a small percentage of small business owners who have built a sellable business and actually sold it for their “number”. For that, he is to be commended and congratulated. At the same time, John was now experiencing much regret and was actually concerned about his financial ability to do everything he and Kim had planned on. What could have John done differently when planning for this most significant event? Worked with his exit, financial, transaction, and tax advisors well in advance of the sale in calculating the real number… net sale proceeds…and whether or not he and Kim could do all they wanted with that number.

If you need help contact us at 301-859-0860 or email@ennislp.com. Invest 12-15 minutes in the FREE ExitMap® Assessment and get a 12-page report scoring you in four key exit planning areas: Finance, Planning, Revenue/Profit, and Operations.

Business Valuations and Buy-Sell Agreements

Buy‐Sell agreements, in some situations, can create as many questions, problems, and conflicts as they seek to address.  A primary benefit of having this agreement is to avoid having to make decisions that could lead to disagreements at an inopportune time.  Unanswered questions, outdated agreement language that no longer represents the goals of the owner(s), an agreement that it is not comprehensive, too simplistic or was poorly implemented can render the buy‐sell agreement ineffective and more problematic than helpful.

One of the most important elements of a relevant Buy-Sell Agreement is the issue of assigning value to the business at a “trigger event” (i.e., death, disability, lifetime transfer, divorce, bankruptcy, etc.). Following are some of the questions pertaining to business valuation that business owners should answer with assistance from their Advisor Team in creating their agreement:

• The type of valuation that will be required — Will you choose book value, fair value, fair market value, investment value, historical value, agreed-upon value?

• The method to be used in calculating value — Will you use a formula-based method, a formal valuation conducted by valuation specialist, or a fixed-price?

• The timing of the valuation — Will you value the business on the date of a trigger event, as of the last valuation, each year with a formal valuation, or at some other point?

• The entire business or partial ownership interest — Should the entire business be valued or a partial ownership interest when there are multiple owners? Should discounts (i.e, minority, lack of control, lack of marketability) be applied?

• Valuation perspective — From what perspective will the business be valued…a hypothetical buyer, the majority owner’s perspective, other perspective?

• The method of funding the Buy-Sell Agreement — Owner buy-outs can be funded in various ways including insurance proceeds, debt proceeds, and cash flow of the business. Should the chosen funding method be considered in the business valuation?

Too often Buy-Sell Agreements are written without these questions and others being adequately addressed with the assistance of experienced advisors (valuation specialist, business attorney, CPA, exit planning advisor) and result in poor execution and relational conflict requiring extensive investments of time and finances.

In addition, your Buy-Sell Agreement should be drafted in light of your financial and estate plans which requires a coordination and collaboration of corporate and personal advisors. For example, your financial planning “number” you need for financial security at a trigger event should be coordinated with possible estate planning goals of tax minimization and transfer of your business interest to family members. NOTE: The role of an Exit Planner could be likened to that of a Project Manager or General Contractor, coordinating the planning efforts of experts in the design and implementation of an owner’s plan. And, this might be a plan for Business Continuity which includes the drafting of a Buy-Sell Agreement and/or a Comprehensive Exit Plan.

Contact us today for a comprehensive review of your Buy-Sell Agreement and a copy of our Business Continuity Instructions.

Invest 12-15 minutes in the FREE ExitMap® Assessment and get a 12-page report scoring you in four key exit planning areas: Finance, Planning, Revenue/Profit, and Operations.

email@ennislp.com | 301-859-0860

Marketing Through Crisis Moments

People are in quarantine, businesses are shut down or in partial operation, demand is down and sales are not flowing like it used to. So what do many businesses do? They cut back. Cut back operations, hours, employees, marketing and anything else considered non-essential.

One of the things that many businesses cut back on that they should not is marketing. It may seem counterintuitive in the face of economic uncertainty but history shows that those that continue to market even during the depression reap huge rewards in the future, if not during the present as well.

And you don’t have to spend a lot of money if any to do so. But you will definitely need to spend time.

What Is Marketing?

First of all you need to understand that marketing is about building and strengthening relationships between you and your customers. And that takes time. Like any other relationship, the more you put into it the more you get out of it.

Benefits of Marketing During a Recession

According to McGraw-Hill Research’s look at the 1985 recession, companies that either maintained or increased their ad budgets during that time experienced a 256 percent increase in sales versus companies that cut their ad budgets.

These companies also took up market share left vacant by businesses that weren’t continuing to market.

This type of scenario happens during every recession or economic downturn.

How Can You Grow When People Aren’t Buying?

Three reasons:

1. Customers are still buying...somewhere - Unless the industry is totally shut down people are still buying. Maybe not as much as before but they’re still buying somewhere. Even in this unique time very few industries are in total shutdown.

2. Stand up above the crowd- Success in marketing comes when you can cut through the noise and be recognized by your customers. Many of your competitors are scaling back their marketing so there is less noise in the marketplace. Even if you don’t scale back your marketing efforts, you will stand up above the rest simply by default.

3. Reap big later - If you happen to be in an industry that is totally shut down then you’ll reap the reward when lockdown lifts due to pent up demand. So the gold rush of customers will go to the brands customers remember.

Marketing Cost Go Down, ROI Goes Up

Lastly, as everyone else is scaling back their marketing effort the cost of marketing goes down.

How? It’s simple supply and demand. When demand for advertising goes down and supply stays the same, so do the costs.

The cost of Facebook ads for starters has gone down 40%!

So, you’ll get more for your advertising dollars and get better results because you’re competing against less in your industry. Higher ROI.

Lastly

I hope and pray you take these illustrations and principles to heart. As I mentioned earlier, you don’t have to spend money in marketing if you don’t have it. Just pick up the phone, send an email or text.

Let your customers know you care.

This isn’t the first nor will it be the last crisis we deal with as business owners. But it’s how you deal with it in the moment will determine how you come out of it in the future.

God bless and be safe!

Author: Robert Fukui is the president of i61, inc. He and his wife Kay Lee run a business consulting firm specializing in assisting privately held, family run companies with their growth strategies. Before running his own company, Robert accumulated over 25 years experience in marketing/sales with several Fortune 100 companies. https://www.powercouplesbydesign.com/

Invest 12-15 minutes in the FREE ExitMap® Assessment and get a 12-page report scoring you in four key exit planning areas: Finance, Planning, Revenue/Profit, and Operations.

Planning For Exit During A Crisis

Prior to the crisis, there were owners planning to exit their business. There will be owners who plan their exit after the crisis, and owners who are now wondering when and if they will ever be able to leave. The following are accounts of three owners whose businesses have been impacted negatively by CV-19.

Jim has been planning for the last three years to sell his business in five years to a third party and move south. He knows how much money he will need for life after the business and what his financial gap is. His financial gap has grown significantly in the last month as his business would be valued by a buyer for much less if he’s able to sell. Now he’s not sure when his goals of fishing and golfing in Florida will be realized.

Susan, who has been in business for 20 years, has been thinking she’d initiate her plan for leaving next year when she reaches age 60. To this point, she’s done nothing to assess personal or business readiness for exit and has no real objective idea as to what her business is worth. Susan also really doesn’t know what exit route would be best as she has key employees who have expressed interest in eventual ownership, but she’s also thought about selling to a third party.

Until now, exiting her business wasn’t at all on Sarah’s mind. She’s well past the 5-year hurdle with ten years in business and is highly prosperous and profitable. Prior to launch Sarah had a successful corporate career that she finds herself missing more and more each day. It’s a lot different going to sleep each night owning the risk of a business, and with this crisis, she’s not sure how much longer she’s willing to do that. Thoughts of exiting are new to Sarah but frequent.

Each of these business owners has “exit on their mind” while working around the clock to manage and lead through a crisis with a goal of lasting. Following are a few baseline exit planning steps Jim, Susan, and Sarah can take now, in the midst of the chaos. And, at least one of these actions is needed for planning to make it through the crisis.

• Project cash flow for the next 12 months. Strong cash flow is a key ingredient for planning a successful exit. You can access spreadsheets for free at https://ennislp.com/corona-virus-resources. Effective cash flow management will also be critical for making it through to the other side of CV-19.

• Request an updated Financial Needs Analysis from your Financial Advisor calculating how much money you will need post-exit and whether or not you have a financial gap.

  • You will need an objective Estimate of Business Value for the Financial Needs Analysis to be meaningful. We could help with that if needed.

  • You may find that the results of your analysis demands a change in your departure date, your goals, and/or your planned exit route.

• Review your plan for the unexpected events of death or disability or Business Continuity. These times are difficult for you as an owner but would be even more challenging for those left behind if you were suddenly unavailable to work in the business.

• Begin to assess personal and business readiness for your exit. Invest 15 minutes and complete this free exit readiness questionnaire which will score you in areas of Finance, Operations, Planning, and Revenue/Profit. You will NOT be asked to submit any confidential financial information.

Please contact us if we can be of help in any of these steps. You can also access online resources at https://exitreadiness.com

Invest 12-15 minutes in the FREE ExitMap® Assessment and get a 12-page report scoring you in four key exit planning areas: Finance, Planning, Revenue/Profit, and Operations.

COVID-19 Relief: Overview of the New CARES Act

The Coronavirus Aid, Relief, and Economic Security (CARES) Act was signed into law on March 27, 2020. In addition to giving people access to health care treatments, the new law will provide roughly $2 trillion in much-needed financial relief to individuals, businesses, not-for-profit organizations, and state and local governments during the coronavirus (COVID-19) pandemic. Here are some of the key financial relief provisions.

Advance Rebate Payments

The CARES Act provides one-time direct “rebate” payments to individuals and families. These payments are considered advances for a new federal income tax credit that’s subject to phaseout thresholds based on adjusted gross income (AGI). The following table summarizes credit amounts and phaseout thresholds:

Credits for Individuals and Families:

Filing Status - Single = $1,200 Rebate w/ Start of AGI-Based Phaseout Threshold = $75,000

Filing Status - Head of Household = $1,200 Rebate w/ Start of AGI-Based Phaseout Threshold = $112,500

Filing Status - Married Filing Jointly = $1,200 Rebate w/ Start of AGI-Based Phaseout Threshold = $150,000

Families will receive an additional $500 credit — subject to the same phaseout thresholds — for each qualifying child under 17. The credits are phased out by $5 for every $100 of AGI above the thresholds. For example, the credit for a married couple with no children would be completely phased out when AGI reaches $198,000. The credit for a head of household with one child is completely phased out when AGI reaches $146,500.

Many individuals won’t need to do anything to receive the advance credit payment. If you previously signed up to have your federal income tax refunds deposited into a bank account, your advance credit payment will come to you that way. The allowable credit amount will be based on your 2019 federal income tax return or your 2018 return if you’ve not yet filed for 2019. Adjustments can be made when you file your 2020 return. You can claim any credit underpayment at that time, but the IRS won’t claw back any overpayment. The credit is fully refundable for individuals and families with low or zero federal income tax liabilities. In fact, you need not have any taxable income to collect the credit.

There are still some details about the payments that are unknown at this time. We will keep you updated as information comes out.

Modifications of TCJA Provisions

The CARES Act rolls back several revenue-generating provisions of the Tax Cuts and Jobs Act (TCJA). This will help free up cash for some individuals and businesses during the COVID-19 crisis.

The new law temporarily scales back TCJA deduction limitations on:

·         Net operating losses (NOLs)

·         Business tax losses sustained by individuals,

·         Business interest expense, and

·         Itemized charitable deductions by individuals and charitable deductions for corporations.

The new law also accelerates the recovery of credits for prior-year corporate alternative minimum tax (AMT) liability.

To encourage charitable giving, individuals who claim the standard deduction (rather than itemizing) can claim an above-the-line deduction of up to $300 for cash contributions to charities for tax years beginning after December 31, 2019.

The CARES Act also fixes a TCJA drafting error for real estate qualified improvement property (QIP). Congress originally intended to permanently install a 15-year depreciation period for QIP, making it eligible for first-year bonus depreciation in tax years after the TCJA took effect. Unfortunately, due to a drafting glitch, QIP wasn’t added to the list of property with a 15-year depreciation period — instead, it was left subject to a 39-year depreciation period (as under prior law). The CARES Act retroactively corrects this mistake and allows you to choose between first-year bonus depreciation for QIP expenditures or 15-year depreciation.

QIP refers to any improvement to an interior portion of a nonresidential building if the improvement is placed in service after the building was first placed in service. But it doesn’t include any improvement for which the expenditure is attributable to:

·         Enlargement of the building,

·         Any elevator or escalator, or

·         The internal structural framework of the building.

Contact your tax professional for more details and to evaluate whether you should file an amended return to take advantage of the new availability of bonus depreciation or 15-year depreciation for QIP expenditures in prior years.

Employee Retention Credit

The CARES Act creates a new payroll tax credit for employers that pay wages when:

·         Their operations are partially or fully suspended because of the COVID-19 pandemic, or

·         Their gross receipts decline by 50% or more compared to the same quarter in the prior year.

Eligible employers may claim a 50% refundable payroll tax credit on wages (including health insurance benefits) of up to $10,000 that are paid or incurred from March 13, 2020, through December 31, 2020.

For employers who had an average number of full-time employees in 2019 of 100 or fewer, all employee wages are eligible, regardless of whether the employee is furloughed. For employers who had a larger average number of full-time employees in 2019, only the wages of employees who are furloughed or face reduced hours as a result of their employers’ closure or reduced gross receipts are eligible for the credit.

Other rules and restrictions apply. Contact your tax advisor for more information.

So Much More

The financial relief package under the CARES Act also includes provisions to:

·         Significantly expand unemployment benefits for workers,

·         Allow IRA owners and qualified retirement plan participants who are adversely affected by the COVID-19 pandemic to withdraw in 2020 up to $100,000 and then recontribute the withdrawn amount within three years with no federal income tax consequences (same as with a withdrawal and a subsequent tax-free rollover),

·         Waive required minimum distributions (RMDs) from IRAs and retirement plans that would otherwise have to be taken in 2020 to avoid an expensive penalty,

·         Allow for a recipient employee, tax-free treatment for up to $5,250 of employer payments made on the employee’s student loans, for payments between now and year end,

·         Allow employers to defer their portion of payments of Social Security payroll taxes through the end of 2020 (with similar relief provided to self-employed individuals), and

·         Delay implementation of the current expected credit loss (CECL) standard for large public banks until the earlier of the end of the COVID-19 crisis or December 31, 2020.

The CARES Act also expands access to capital for businesses adversely impacted by the COVID-19 crisis. Many of the loan programs will be administered by the Small Business Administration (SBA) and the Federal Reserve. Some loans will be subject to a special oversight board to ensure adherence to the rules — including a ban on stock buybacks — set forth under the new law.

Need Help?

The COVID-19 pandemic has affected every household and business in some way. If you or your business have suffered financial losses, at least some relief may be on the way. Contact Walter Deyhle, CPA at GRF CPAs & Advisors to discuss resources that may be available to help you weather this unprecedented storm.

LEADERSHIP DURING A CRISIS: Leadership, Engagement and Culture

How do we lead employees in times such as these? Even without a global pandemic, leading employees can be a challenge that requires much time and energy. But now, in addition to trying to lead well, you are trying to keep your business afloat in a way that you have never had to do in the past. No doubt these are difficult times to be a business owner. The following are a few tips to strengthen your Leadership, Employee Engagement, and Culture in the midst of this crisis.  

Golf Bag Leadership

The first area of focus is Leadership. Invest a few minutes right now and assess your current leadership “style.” You may at times be democratic or a delegator, a pace-setter, or any other number of styles, but more than likely you have a “go-to” style. The recommendation is to move away from a singular style or “golf club” during this time of crisis and instead think of your leadership as a “golf bag” carrying different leadership styles for various situations.

In the great game of golf, you want to select the right club once you have assessed the lay of the ball, the distance, and various other factors. The same should be true for our leadership styles. For most of us, the lay of the ball has shifted — our environment has changed dramatically in the midst of this crisis. You need to now feel empowered to “select a different club” or style than you normally would because everything happening is unprecedented. That might mean you are a lot more directive and commanding in your leadership style for the sake of saving the company. Communicate this shift in your leadership style to your people. It certainly will not be like this forever, but this is how we will survive today. As a leader, you have the freedom to change that style in order to combat the present circumstances.

Your Employees’ Connection With You Drives Their Engagement

The second focus area is Employee Engagement. In the best of times, when employees are engaged, research shows that it leads to higher profitability, productivity, customer satisfaction, and lower turnover. An engaged employee gives their discretionary effort and goes well above and beyond what is required of them. That’s important during normal times—now, it is essential. As a leader, you have been pouring into employees, paying their salaries, and showing up for them. Now is not the time to abandon those duties. Your employees are on the same boat that you are on. You must step out onto the deck and continue to engage with them as you’re all fighting for the same thing; you all want your ship to stay afloat. This is crucial because we know that 47% of an employee’s connectedness to their work is directly correlated to the connectedness they feel to their leader. Therefore, in whatever bandwidth you have, you must make an effort to continue to connect and engage with your employees.

Culture Is Forged In Times Like These

The last area of focus is Culture. Organizations with strong cultures consistently outperform organizations with weaker cultures.  Culture is simply the values, beliefs, and experiences that a group of people demonstrate and enjoy collectively. In these unprecedented times, our values and beliefs are being tested, and new experiences are being created. Most importantly, your people’s beliefs about you as a leader and your company are being solidified.  As leaders, it is crucial that we step up right now and demonstrate intentionality in shaping those experiences. This will be a defining moment in the history of our country and your company. Your people are judging you and your response to it.  It is essential to respond well.

Summary

·       Feel free to lead differently. These are different times.

·       Engage with your employees. They need you and you need them.

·       Be intentional about your company culture. We will get past this and when we do, your employees will remember how you responded.

I wish you all the best. If there is some way I can help you avoid damaging your human capital as we get through this very difficult season of business, please call me and I’ll be happy to share openly with you.

Alan Kemper, DBA

678.346.1186

Alan@LEADWorkforce.com

Would Your Business Need To Continue Without You?

“It’s time to get the boat in the water!” is what Joyce has heard Jim say around this time for about 30 years now. Jim & Joyce and their five kids have many wonderful memories boating and fishing on the lake through the years. Now that the kids are all older, and there is a growing number of “grand-babies”, Jim and Joyce have been checking out larger homes on the lake with a vision of many more years of even bigger family gatherings.

Jim loves everything about the times at the lake, and is much looking forward to when he will have freedom from the business to “make it up there more often.” He’s says that “my goal is to pull back in five years so that I can spend more time with Joyce and the family” (Note: but he really hasn’t put a plan in place to ensure that happens). During the summer, Joyce is there most of the time, with the kids and their kids coming and going, but Jim is still greatly needed at the business and only makes it up occasionally.

As a successful business owner, Jim has been able to provide numerous lifestyle privileges for his family that they’ve all come to appreciate and expect. His income from the business has grown through the years to become more than enough to accommodate the way of life the family has become accustomed to. If Jim has any regret, it’s that he’s placed “most of his eggs in one basket.” In other words, most of his net worth is tied up in his business. And, more and more, in his solitary moments, he can feel concerned and anxious about what would happen if he could no longer work in the business. It would be unimaginable at this point for Jim and Joyce (and their kids) not to have these long summers at the lake as well as all the other life luxuries they’ve come to know and love.

Jim lacks freedom because his business cannot run without him. Too many customers still want to deal directly with him, he still needs to make too many of the day-to-day decisions, and if Jim’s not there “the place simply doesn’t run well.” Jim has at least two significant strategic planning issues he’s yet to address (he actually does more planning around getting the lake house open and the boat in the water):

1. If he’s going to “pull back in five years”, things need to change starting with his role. He needs to assess his current list of responsibilities and then who to delegate to. He may need to further develop current members of the “management team”, or he may need to get new next level managers on the bus. The goal is that the business becomes less dependent on Jim.

2. And with even more urgency, Jim needs to review his plan for the unexpected…his plan for business continuity…considering questions such as these with the appropriate advisors:

   • How much $$$ would Joyce need to continue our current lifestyle (with kids and grandkids) if I were to die or become incapacitated unexpectedly?

   • Where would these $$$ come from? Would the business be sellable? If so, for how much considering I’m no longer working in it? Would it be enough (net of taxes) to produce our same standard of living for Joyce? If not, how do I fill the gap…insurance?

   • What would Joyce want to do with the business? She doesn’t want to own the business without me, and none of the kids want to work in the business…what would happen and how would it happen?

   • What would keep employees on board if I’m not there? They will need to think of their futures, and if I’m not there will they see any kind of future for my business? Would the business need additional cash to incent them to stay and to operate effectively until a sale can happen?

These are among the many questions Jim needs to be considering in planning for his financial, values-based, and legacy goals as a business owner. After completing the needed analysis, Jim learned that his business “would need to continue without him” in order for Joyce and his family to be provided for in the ways he desired. But now, he’s got a plan in place to work toward the business growing less dependent on him, while at the same time being assured that in the short-term, if the unexpected happens, Joyce would still realize their life and family goals without the business having to continue.

What about you? Have you adequately addressed the all-important question of “Would your business need to continue without you?” To help you get started, please contact us for a FREE copy of our ExitReadiness® Business Continuity Instructions.

Invest 12-15 minutes in the FREE ExitMap® Assessment and get a 12-page report scoring you in four key exit planning areas: Finance, Planning, Revenue/Profit, and Operations.

Survive and Advance

In 1983, the NC State Wolfpack, coached by Jim Valvano, “survived and advanced” during March Madness by winning nine must-win games in a row (seven of which they were losing in the final minute) and having one of the most exciting runs to victory any team has ever experienced. On their unlikely journey, they had to beat Michael Jordan and three-time National Player of the Year Ralph Sampson. And then, this team that barely made it into the tournament now had to go up against “Phi Slama Jama”….the No. 1 team in the nation…Houston. A team loaded with talent including NBA Top 50 all-time players Hakeem Olajuwon and Clyde Drexler. Throughout this journey, their leader “Coach Jimmy V” consistently and passionately stated his mantra, “Survive and Advance!”. They indeed did survive and advance, as NC State, one of the biggest underdogs ever, went onto win the game that is considered by many to be the best college basketball game in history.

As a business owner in the midst of the Covid-19 crisis, you need to lead in both surviving and advancing. The normal course of life for you as an owner includes the ongoing challenges of increasing sales and growth of revenue and profitability, staffing decisions, cash flow and debt management, risk management, just to name a few. In the midst of this crisis, these routine challenges become even more intensified and worrisome as you do all you can to simply “survive”. And, the key to your survival will be a vigilant approach to cash flow and debt management. To assist you with staying on top of that crucial survival task we have created a Cash Flow Management Spreadsheet that you can access for free on our homepage along with a video tutorial.

This crisis will end at some point (hopefully soon), and life as your business has known it may need to change its mission, purpose, products, and product delivery. Some businesses simply will not be able to do “business as usual” going forward as the behaviors, desires, and needs of your customers may have changed as a result of the crisis. The owners who understand that possibility and begin to plan now will have the best chance of surviving, and also “advancing” and thriving in the future.

Any thought of “strategic planning” for the future currently can result in even more sleepless nights —“If we don’t do everything to survive today, there may not be a tomorrow!!!”. And certainly, there is truth in that. For some businesses, simply surviving will be enough when competitors are not able to make it through. However, a visionary leader will not leave that possibility to “chance” and will take the initiative to plan now and be more in control of future outcomes. There is a need for a “Level 5” (Jim Collins - Good to Great) leadership that can lead through the daily burdens while simultaneously planning for the future and the overall good of the organization. You would be wise to act now in adjusting, where needed, your strategy for the future.

This “strategy renovation” does not need to be a long and complex process. Following are areas that you could address with a measured investment of time while continuing to stay on top of crisis management:

• Forecast Future Products. Same? Add? Remove?

• Team. Who will be the key people needed to survive and thrive in the future?

• Markets. What customer segments will we market to in the future? Same? Different?

• Competitors. Who will be our competitors? Same? Different?

• SWOT Analysis. Strengths, Weaknesses, Opportunities, Threats.

• Goals. What should be our 3 big strategic goals coming out of the crisis?

• Financial Forecast. What do we project for sales, expenses, and profit over the next few years?

As Jimmy V and his squad survived, they also advanced. If you need any assistance in renovating your strategy for either survival or future advancement, please contact us at either 301-859-0860 or email@ennislp.com. We want to help you survive and advance.

Invest 12-15 minutes in the FREE ExitMap® Assessment and get a 12-page report scoring you in four key exit planning areas: Finance, Planning, Revenue/Profit, and Operations.