Redlands CA Estate Planning

Business Succession in the Form of an ESOP

Known as employee stock-ownership plans, or ESOPs, the move is being embraced by smaller firms, especially those struggling to find buyers during the weak economy.

    Businesses are formed in many ways, and we have come to know those varying abbreviations (S-Corp, C-Corp, LLC, LLP, LP, LTD, and so on and so forth) that represent each varying business.  But when it comes to passing on your business, there is another acronym to consider: the ESOP.

    So, what is an ESOP, what can it do, and is it right for your business?

    ESOPs, or Employee Stock Ownership Plans, are a tricky breed. Essentially, an ESOP is a tool recently highlighted by Congress and featured by The Wall Street Journal in an article titled “Founders Cash Out, but Do Workers Gain?” Planning to exit a business is all about doing one of two things; either restructuring the business or selling it outright. With an ESOP you accomplish both goals and build the company around the very employees that compose the company in the first place.

    Rather than going out and hunting for a buyer, the employees become vested in the stock ownership of their own company. In turn, the ownership stake simultaneously becomes a retirement asset while the ownership of the founder is bought out.

    Now, if you are already familiar with this approach, it may be worth reading the original article since there are certain limitations affecting the employees-turned-owners. The article gives examples of how an ESOP can work a win-win for all concerned under the right circumstances. These examples include Bob’s Red Mill, for example, or, from a different industry, Manson Construction Co.

    ESOPS have been a powerful tool in an otherwise soft market for business transfers. Accordingly, ESOPS are worth a good look, and then even a second look, as a unique and proven business succession strategy.

Reference: The Wall Street Journal (April 17, 2013) “Founders Cash Out, but Do Workers Gain?”

Business Succession -- It’s Never Too Early to Plan Your Exit

There are myriad ways to begin the exit process from your business without giving up management control.  [Here] are some ideas to structure for an eventual departure, without having to hand over the keys to the business right now.

    Business succession planning is an inevitable process, one of which needs to be addressed well before you are ready to “clock out” for good. And since it took time to build your business the right way, it will also take proper time and planning to leave it on your own terms. Luckily, you can start planning your exit in such a way that allows you to retain management control during the process.

    So, how do you structure the business so that you can start succession while still sitting on the throne? A recent Forbes article titled “How To Retain Control, Even As You Exit” provides some practical advice.

    At the most basic level, you may want to adjust the structure of the business itself. Is it an LLC? If yes, then retain control by making it a “manager-managed” LLC and retain the management position. Is it a corporation? If yes, then there are more options. For instance, you could issue various types of stock, either in different classes (voting vs. non-voting), or even offer restricted stock that becomes vested only upon certain conditions. The corporate structure also offers other powerful tools like Employee Stock Ownership Purchase (ESOP) arrangements.

    Your approach and the timing of your exit will depend on other factors, not the least of which hinges on your successors. When will they be ready to assume more control? Even more important, when will you be ready to begin relinquishing control?

    More often than not, you can structure an exit so both control and financial gain slowly adjust to everyone’s benefit, but you have to start with a plan.

Reference: Forbes (April 10, 2013) “How To Retain Control, Even As You Exit”

Four Generation Family Business Endangered by Family Dispute

The silent party to all the fighting is, of course, Luray Caverns. It is not just a U.S. Natural Landmark. It is also a business, and businesses can suffer when their owners are at war with each other.

    Family businesses have a tough time passing from generation to generation.  Some will make the transition …and some won’t.  Even some of the most sound businesses and families alike will face succession challenges, so you can imagine that family businesses involving quarrels between family members have slim chances of survival.

    For one of those all-too-possible horror stories of succession and family business gone awry, consider the case of the Luray Caverns and the Graves family. The Washington Post recently recounted the story in an article titled “The rift — a family dynasty fights over the future of Luray Caverns.”

    The business of the Graves family was really an empire of various tourist businesses surrounding the Luray Caverns – the largest privately held cave system and tourism hotspot since the late 1800s. The family business apparently had been on a downward slope for some time. To make matters worse, this four generation family business has been in and out of litigation for the last ten years. In the end, not only has this discord threatened the family fortune and the business that built it, but the entire town associated with the family and the business.

    More than a sad tale, this case is an object lesson for other family businesses and the original article is worth reading.

Reference: The Washington Post (March 14, 2013) “The rift — a family dynasty fights over the future of Luray Caverns”

Tips for Leaving Your Business

Most exit plans seem to deal  with some combination of these three basic techniques. And, the lines that differentiate them can be fuzzy.

    Owning and running a business is tough stuff, and at times you feel the weight of the world on your shoulders. But leaving your business can be just as challenging, considering you generally only have one shot to get it right.

    If you think about it, just about every exit plan can come down to three tools. A recent Forbes article titled “Three Ways to Exit Your Business” examined these tools: sale, capital transfer, and gifting.

    While there are many ways to mix-n-match these tools depending on your unique circumstances, the biggest failure is to put your head in the sand. Is it any wonder two-thirds of all business fail to make it from the founders to the next owners, and only half again make it from that second hand off to the third level owner?

    The key teaching point is to engage the professional services of your accountant, financial advisor and attorney sooner rather than later. Like a good coach, make sure your “team” knows the end result you want to accomplish in your business transfer.

    Be sure to read the original Forbes article as part of your preparation.

Reference: Forbes (March 19, 2013) “Three Ways to Exit Your Business”

Tax Pointers for Business Transfers within the Family

Dad wants to eventually sell the family business to his daughter. She has the smarts, drive and desire, and he doesn’t want to work forever. Not only does he want the business to be a success for her; but  part of his retirement income will be dependent on her making the payments for the business.

    Your business is more than just a job; it’s a very personal asset and the means of providing for your family, your employees and yourself. So it’s no surprise that passing down the family business is one of the most difficult experiences you’ll encounter along the way.

    The good news is that there are plenty of tools for exiting the family business, with varying degrees of complexity. Sometimes, however, a simple buy-sell arrangement is the right tool for the task.

    This was the subject of a recent article in Forbes titled “Exiting The Family Business: Tax Tips And Techniques,” which included some important tax and planning pointers. At its most basic level, the simple efficiency of a buy-sell arrangement is easy to understand and appreciate. Commonly, the owner (and parent, likely) is going to need retirement income to retire. However, the family business was their only source of income and their greatest asset. As a result, selling the business within the family allows the successor generation to assume control in a way that guarantees the financial well-being of the retiring parent and the entire family.

    This transfer can be accomplished with an outright sale-purchase. On the other hand, a buy-sell agreement can work the sale-purchase over time in installments. Consequently, the founder may even gift some portions away and sell others. A key point, whether gifting or selling, is having an accurate valuation of the business. If the value is too low, then the “sale” price looks more like a “gift.” Problem: if the value is deemed too low, then this catches the interest of the IRS. This never is a good thing.

    A sale of anything carries with it tax implications. When it comes to selling (or gifting) a business, you will want to connect all of the dots. The original Forbes article discusses many of those dots and offers practical tax moves to stay out of trouble.

    While there are significant limitations to the buy-sell and there are other alternatives to evaluate, it is one means to kill two birds with one stone by providing retirement income to the seller.

Reference: Forbes (March 6, 2013) “Exiting The Family Business: Tax Tips And Techniques”

Consider a Holding Company for Your Business Succession Plans

NO family wants to build a business only to see it disappear when family members get tired of running it. But let’s face it, what that business really represents is a large majority of the family’s wealth.

    Business succession plans take a great deal of thought, as there are several ways to plan for transferring a family business. How do you know which plan is right for you? Let’s explore some important considerations.

    Businesses exist on paper. Lots of it.

    Stationary letterhead, marketing materials, and the accounting books are the papers that may come to mind first. Nevertheless, don’t forget the all-too-often ignored “company books!” They provide the foundation and the structure of the business itself.

    Considering the form and structure of the business can be vitally important when planning to give the business to the next generation. In addition, you should be mindful of its current operations and even the value of the business.

    None other than The New York Times took up this issue in a recent article titled “Modern Safeguards for a Family-Owned Business.” The article offers an excellent introduction to the time-honored idea of a holding company. In short, a family can own a company by owning the company that owns that very company. Did you follow that?

    Said another way, while professional management can take care of the day-to-day operations of the business, the owning family can come together to exercise control over the higher entity – the holding company.

    If you’re no stranger to corporate structuring, then this is a familiar idea. Regardless, you never may have considered its application in terms of your own business and the family ownership.

    For many, this kind of structuring can be a first step in an overall succession plan for the business without finalizing the precise terms of the succession. Be sure to consult with competent legal counsel, as this is not a do-it-yourself project.

Reference: The New York Times (February 15, 2013) “Modern Safeguards for a Family-Owned Business”

Knowing the Value of Your Business

With the day-to-day demands of running their businesses, most owners put off getting a valuation until a sale is imminent. But some are starting to treat the act of valuing their business as an integral part of running it.

    Has anyone asked you what your business is worth? Have you pondered that question yourself? As a business owner, you should not only know what your business is worth to you, but also what your business is worth to a potential buyer. In other words, you should know the value of your greatest asset and boldest venture, both personally and on the open market. There may come a day when you need to sell or pass down the business, and knowing the numbers today will help you make better business decisions in the future. 

    Valuations are difficult for business owners because there are so many variables to the process. That said, the ability of a business owner to fully understand their business from the outside – as the owner of an asset or as a prospector on the market – rather than from within the immediacy of running the business, is fundamentally important to managing the business well today and in the future. According to The New York Times, business owners are increasingly coming to terms with these issues. Their recent article, “Do You Know What Your Business Is Worth? You Should,” suggests that while most business owners put off getting a valuation until a sale is imminent, many are starting to treat the act of valuing their business as an integral part of running it. For example, valuations -- whether performed by your accountant on an annual basis or with the assistance of sophisticated software tools -- can help business owners pinpoint management practices that may be undermining business value. Isolating those variables, and acting on them, can drive your valuation higher.

    Being that it is “tax time,” take advantage of the opportunity to crunch numbers with your tax advisor and start getting a handle on the true value of your business. You never know what tomorrow will bring!

Reference: The New York Times (January 30, 2013) “Do You Know What Your Business Is Worth? You Should”

Succession Planning – A Business Must

The conversation around successions can be [sensitive], because it brings up all the same issues one faces when starting a business — only this time, you’re forced to imagine it without yourself in the picture.

    When it comes to business, succession is perhaps the most fundamental concept and object of planning. So, even though we realize that all beginnings will inevitably have an end, why is it so hard to talk about?

    If business succession is on your mind, then you will want to read a recent Forbes article titled “How to Succeed At Succession.” Before you read the original article, remember this – the questions are as important (if not more so) than the answers.

    So, what kinds of questions should you be asking yourself? Here are a few to ponder:  Do you want the business to live on past you? Who ought to lead it? What is the business in the context of your own estate or the estates of your partners? Do you have an exit strategy in the event of retirement, disability or death?

    Make sure you consult legal counsel with all parties involved in your business. In order to have peace of mind about “the end” of your business, you must take appropriate planning steps in “the beginning.”

Reference: Forbes (January 15, 2013) “How to Succeed At Succession”

Should You Mix Business with Friendship?

Have you considered co-founding a new business with a family member or friend? If so, you’re in good company –Fox Business reporter Susan Shreter reports that about half of today’s startups are co-founded among friends, family members or spouses.

    Going into business with a friend or family member? It certainly makes sense that one would want to pursue their most ambitious goals with people they trust. But is doing so good or bad for the relationship you have with your co-founder?

    When working with friends, expectations of loyalty and understanding are higher than is common among everyday work colleagues. And when friends let us down, resentments can linger and cause a deep divide in both work relationship and personal relationships.

    Here are five ways startup misunderstandings can spiral out of control and potentially end friendships, according to Fox Business.

#1: Unmet Expectations. The typical startup business will take a lot more time and money to become profitable than anyone ever expects.

#2: Work Style Conflicts. Even though friends get along great when hanging out at the bar, this compatibility may not resonate in the office environment.

#3: Business Strategy Disagreements. New startup partners tend to be well aligned to the grander goals of an organization, but rarely have worked through the nitty gritty details of how to achieve these goals.

#4: Spending Conflicts. One of the most common areas of disagreement is spending authority and budget priorities.

#5: No Way Out. What happens when one partner wants to sell out, quit or reduce involvement in the business?

    A recent Forbes article, titled “Co-Founding With a Friend - - Without Decimating a Friendship,” shares a few words of wisdom from successful businesses founded by friends. One startup says “when making decisions, we make the conscious decision to not be disrespectful because at the end of the day, we want to stay friends.” Another startup recognizes the importance of keeping work and personal lives separate.

    In order to avoid any misunderstandings that could potentially end the business or the friendship, it is important to discuss all issues that might interfere with productive business building.

 References: Fox Business (June 13, 2011) “Why Co-Founding a Business Can Decimate Friendships”

 Forbes (December 12, 2012) “Co-Founding With a Friend – Without Decimating a Friendship”

Small Business Owner Quandary

The weak economy has been tough for small-business owners across the board … but for entrepreneurs in their 60s and 70s, the consequences have been particularly vexing.

    The current recession has been tough on just about everyone, but few have felt such dire consequences greater than small business owners. This especially is the case when they are on the verge of retirement.

    The Wall Street Journal considered this topic in a recent article aptly titled “'The Economy Stole My Retirement.'”

    If you are a small business owner on the one hand – a role that requires flexibility and ingenuity – and a baby-boomer on the other, then this recession has been more than a case of terrible timing. No, it’s thrust you into “business purgatory.” Do you find yourself with one foot in management and the other foot (or maybe just that big toe) in the golden sands of retirement?

    A baby boomer who is a small business owner faces a very tough call right now. Should he or she sell for the best offer today, which is generally the low-ball offer, or hold out for some future value which more accurately reflects what the business is truly worth? A tough call, indeed.

    For the owners of small businesses and the heads of family businesses, make no mistake about the difficulty of your position. It’s impossible to foretell the future, but since you already know what is most valuable to you (your family and your business), take the time to carefully weigh your options and seek appropriate professional counsel.

    This is not the time to make emotional decisions.

Reference: The Wall Street Journal (September 12, 2012) “'The Economy Stole My Retirement'”