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Member of Russell Bedford International, a global network of independent professional service firms.
“It’s not fair.” When your children are toddlers, this statement hits you like nails on a chalkboard. But when you hear it from your grown children, it can quickly turn from an annoyance to serious family drama. As a family business, attempting to keep children’s compensation fair can be a minefield. Following a few simple compensation-planning strategies helps you maintain peaceful family dynamics while strengthening your business at the same time.
As a family business owner, you are pleased when you walk by a marketing team meeting and see your son suggesting ideas for the new website. You have built a strong, successful business, and you are proud to be able to pass it down to your children someday. Inside this article you will learn seven key ways your business will benefit from including the next generation of business owners in accounting meetings and practices.
As a business owner, you are immersed in your business. You wake up thinking about strategies for growth. Ideas for new products hit you while you are out walking the dog. Solutions to operations issues come to mind while you are falling asleep at night. You spend much of your time and energy building your company into a strong and successful business. But do you spend enough time thinking about how you are going to walk away from it? Are you asking yourself: what is an exit plan?
Exit planning can feel overwhelming, even for the most prepared business owner. The company is a large part of your identity and your legacy, which can make the transition to retirement or a new adventure a challenging proposition. For many, that makes exit planning a difficult process to begin. However, a well-planned exit strategy is essential for a smooth transition to new ownership, for ensuring your future financial goals are met, and for sustaining your business and your legacy.
First, evaluate you. Your first step in starting to create an exit plan is to begin a process to determine your goals and objectives. Beyond maximizing sale price and preparing the business for sale, imagine what you want your life to be like after you choose to leave your business. Leave on your terms. A strong exit strategy starts with a complete understanding of the financial state and structure of the business and the owner, as well as minimizing the tax implications from a sale. You and your advisors will work through a process to determine how much money you want to set aside so you can continue living the lifestyle you choose, keeping in mind that none of us know how long our lifespans will be. It can be hard to imagine how you will spend your time when your days are not filled running your business, but taking the time to imagine that life allows you to plan for and fund the life you want to live.
Next, evaluate your business. You’ll need to fully evaluate your company’s activity, structure, assets, business drivers, ongoing operating activities, market position and personnel. A business valuation gives you an understanding of the base point, including the company’s relationship to the industry, customers and employees. Understanding your company’s value drivers and cost matrix gives you the strategic tools to forecast and modify future operating expectations. Your most trusted advisors provide expertise in examining various areas of your business and identifying the company’s key requirements for growth. Include your accountant, valuator, attorney, insurance agent and your investment advisor. With your advisors, determine whether or not the company’s value will meet the needs and goals you have identified.
The next step of the exit planning process is to mold the business to the optimal position for sale or transfer by mitigating or correcting any issues identified during the valuation process that might lower the value of the business. Imagine yourself as a potential buyer. What risks do you see? Which parts of the company attract you and which would make you turn away? With your advisors, create a plan to maximize the value of the business and to mitigate risk prior to exit timing.
Next time you are out walking the dog and are inspired with a new product idea, take it one step further. How will that new idea impact my exit plan? Would it make the company more valuable to a potential buyer? A solid exit strategy and plan with the help of your trusted advisors gives you peace of mind. You have confidence that your beneficiaries are prepared in the event of a tragedy, that you are optimizing your position, and that you are on the right path to achieving your goals for your company, your future and your legacy.
If you’re still asking yourself, “what is an exit plan?” Contact Cray Kaiser today. We can help you get one started.
Are you considering a merger or acquisition as the best solution for your business’ growth or exit plan? As shared in last month’s blog post When Mergers and Acquisitions Make Sense, mergers and acquisitions (M&A) can provide a more efficient, cost-effective way to grow a company, whether it’s by adding people, processes, or products. M&A can also be the perfect way to secure the financial goals you have for yourself and your family as you exit the company you built.
Being proactive and creating a simple M&A strategy sets you up to use your time wisely and to secure a financially-beneficial deal. It is wise to review these top six mistakes business owners make when considering a merger or acquisition and how to prevent them as you create your own strategy:
You hear it all the time: “mergers and acquisitions.” However, there are few true mergers. Merging two companies almost always results in one company acquiring the other. Why? It all boils down to the fact that there can only be one true leader, one chief.
Consider this an acquisition, not a merger. Are you being acquired or are you acquiring? Who will be the leader? Addressing this in the beginning avoids tension down the line.
If you do not have a strong grasp of M&A goals, you may move forward with a deal that does not help you achieve your goals or, worse yet, moves you further from your desired results.
Your very first step in the process is identifying your goals. Determining when mergers and acquisitions make sense can help you along this process.
Not spending enough time identifying targets that help you achieve growth or exit-plan goals means wasting both time and money on negotiating with the wrong potential partners.
Before you find yourself responding to interested parties, identify who you believe would be the best match for your company.
Which roles will be duplicated? What will happen to the people in those jobs now? Which company’s process will be used for which tasks? Not answering these questions before they’re asked puts your company into a state of turmoil, creating unhappy team members and risking losing the exact talent you are attempting to acquire.
Plan for changes in people and process. Be transparent with all involved. Communicate plans to reduce tension and create internal support.
It is easy to get drawn in by a strong connection with people you would love to do business with. Pressure to find a solution to growth or exit planning issues can make a deal look more attractive than it truly is.
Involve objective advisors from the start to guide you with an unbiased, impartial perspective.
Having unrealistic expectations about the time involved in the M&A process can frustrate you and the other people involved and create rushed decisions. Both parties involved will be interrupted with the challenges and responsibilities of running their businesses. As time goes on, expectations and projections can change, requiring everyone to maintain flexibility throughout the process.
Stay grounded and realistic in your expectations around the pace of the process. Lean on your advisors to take some of the work load.
The M&A process is an adventure, one that can end with a new entity that helps all involved meet goals or with one or all parties regretting their choices. To have a successful M&A process, be proactive rather than reactive. Understand when mergers and acquisitions make sense. Prevent the six common M&A mistakes. And involve objective advisors from the start.
If you’re considering a merger or acquisition, contact Cray Kaiser today. We can help you review your options.
Growing companies often choose to create a board of directors or an advisory board to bring in outside influence and perspective. While the two kinds of boards have similar responsibilities, differences in how the boards are managed influence which type of board should be used. Most companies bringing in outside advisors for the first time start with an advisory board because it is less formal and less constricting.
Starting your own business is no easy task. There is lots of risk involved and the resulting stress can become overwhelming to handle while navigating hundreds of business decisions a day. If you add a spouse into the ownership arrangement, things only become more complex. Here’s what you should know before starting a business with your spouse.
We don’t mean to paint a bleak picture – but what would happen to your company in the event of your own disability or death? No one likes to think about these things, but it’s extremely important to have a succession plan of who, what, why, when, how just in case. If you want your business to survive in your absence, don’t let it suffer from a lack of planning like 30% of small businesses do.
Estate tax planning looks much different than it did in the past. In prior years, estate planning often focused on minimizing taxpayer’s estates as exemptions were low and federal estate tax rates were as high as 77%. Today, the top marginal federal estate rate is 40%. The American Taxpayer Relief Act of 2012 (ATRA) made permanent the generous $5,000,000 federal transfer tax exemption, which is indexed yearly for inflation. This means an individual can die with $5,430,000 in assets and owe no federal estate tax. ATRA also made “portability” permanent. Portability permits a married couple to fully utilize both a taxpayer and a spouse’s combined exemption ($10,860,000 in 2015) by letting the surviving spouse claim any unused portion of the deceased spouse’s exemption as long as an estate tax return is filed. With these permanent changes, the Tax Policy Center projects that only .14% of adult deaths will result in federal estate tax.
At the same time, federal income tax rates are at higher levels – top rates are 39.6% for ordinary income items, 20% for capital gain items, plus the potential of an additional net investment income tax of 3.8%. Given the changing tax environment, one must now carefully consider the estate and income tax rate differentials when putting together an estate plan.
An important concept to understand when discussing estate and income tax planning is the “step-up” in basis. When a person dies their heirs receive a step-up in the tax basis of most inherited assets. The new tax basis is equal to the fair market value of the assets held by the decedent at the date of death. For example, if the decedent owned 1,000 shares of stock that they purchased for $10,000 in 1983 but was worth $100,000 when they died in 2015, the basis to the heirs is stepped up to $100,000. (Note that the decedent would also be subject to estate tax on the $100,000, if applicable). When the heirs sell the stock a few months later they will likely recognize little gain or loss, as compared to the $90,000 gain the decedent would have realized if they sold the stock right before they died. If the decedent were to have given the stock to the heir before he died, the heir would have to take on the basis of the donor, resulting in a $90,000 gain to the heir.
Planning for achieving the maximum step-up in basis of family assets at death has become more important than ever especially considering that most estates will not be subject to estate tax. It would make sense to hold onto highly appreciated assets, such as stock and fully depreciated real estate investments in order to obtain the basis step-up. An important item to note – step-up does NOT apply to many retirement accounts, such as IRA’s and 401(k)’s.
State estate tax considerations are just as important. For example, Illinois has an income tax rate of 3.75%. The estate tax rate is 8-16%; however, there is a lower estate tax exemption than the federal exemption – $4,000,000. Therefore, individuals with assets more than $4,000,000 and less than $5,430,000 will be subject to Illinois estate tax yet not to federal estate tax. As the estate tax rate will be less than the combined federal and state income tax rate in such a case, it would make sense for Illinois decedents in this asset range to maximize the value of their estates and minimize their income tax.
For married couples who will be comfortably below the $10,860,000 combined estate exemption amount, it would be wise to revisit existing trust agreements. Assets in a typical bypass trust (a staple in estate planning pre-ATRA) will not get a step-up in basis at the death of the second spouse. However, if you live in Illinois a bypass trust may make sense since Illinois does not honor portability. In addition, unless trust income is always distributed, the tax on the trust can be dramatic, as trusts reach the highest tax rate at $12,300 of income. While trusts may offer creditor protection and can offer protection in the event of a divorce of an heir, these benefits should be weighed with the potential tax consequences.
With the large federal estate tax exemption, the permanence of portability and the increase in income tax rates all brought about by ATRA, it is important to revisit your estate plan in light of income tax considerations. If you would like to discuss your estate plan, or have any questions on the information presented, please contact our office.
One of the greatest perks of owning a small business is flexibility. You can set your own hours and salary. You can plot the firm’s trajectory without consulting your boss, upper management, or even corporate policy. But that same flexibility may become a curse if handled unwisely. A small business owner without discipline and a well-thought-out strategy may fall into serious financial trouble. Employees in larger firms often rely on the human resources department to establish pay scales, retirement plans, and health insurance policies. In a small company, all those choices – and many more – fall to the owner, including decisions about personal compensation.
While there’s not a one-size-fits-all formula for determining how much to pay yourself as a business owner, here are three factors to consider:
Personal expenses. Tracking your business and personal expenses separately makes it easier to track the firm’s cash flow, and lets you know how much salary you can realistically draw without hurting profitability.
Start with your household budget, then determine how much you’re willing to draw from personal savings to keep your household afloat as the company grows. For a start-up company, owner compensation may be minimal. Beware, however, of going too long without paying yourself a reasonable salary. Be sure to document that you’re in business to make a profit; otherwise the IRS may view your perpetually unprofitable business as a hobby – a sham enterprise aimed at avoiding taxes.
The market. If you were working for someone else, what would they pay for your skills and knowledge? Start by answering that question; then discuss salary levels with small business groups and colleagues in your geographic area and industry. Check out the Department of Labor and Small Business Administration websites. In the early stages of your business, you probably won’t draw a salary that’s commensurate with the higher range of salaries, but at least you’ll learn what’s reasonable.
Affordability. Review and continually update your firm’s cash flow projections to determine the salary level you can reasonably sustain while keeping the business profitable. As the company grows, that level can be adjusted upward.
If you’re not sure how to set your salary, please contact Cray Kaiser today. We’re here to help!
