Archive for the ‘General’ Category

Tips to increase the value of your business

May 14th, 2012 admin

Most business owners come to a time in their life when they think about selling. Some have very specific plans, such as when they reach a certain age, or when their business reaches a certain level of profitability. Others think about selling, but really have not formulated anything specific.

Whatever category you fall into, it is a good idea to make your business valuable to buyers. That’s because building value takes time, and the best time to do it is now so that you will be ready when you are actively exiting your business. Also, many of the things mentioned below are just good business practices, and well worth developing for now and the future.

Obviously, having a history of profitability and a clean balance sheet are essential in getting a good price for your business, but there are some other non-financial items that you might think about as well.

Diversity
Look at your customer base. Does one large customer account for 50% or more of your sales? If so, attracting a buyer willing to pay a good price is going to be more difficult. The concern is that after the deal is done, that customer might be lost. A buyer does not know what relationships you have with your current customers, so that buyer has no idea if he/she can maintain it.

There are certain exceptions of course, but many small customers are almost always advantageous to a few large ones.

Employees
Many companies live up to the ‘our employees are our most valuable asset’ slogan. After all, attracting and retaining good employees is a key ingredient to success even in these economic times of high employment. But be aware that a potential buyer might be a little apprehensive toward a business that relies too heavily on one or two key people.

Beware of “The Fiefdom Syndrome.” Some managers hoard knowledge in an attempt to give themselves job security. A buyer is buying a business, and while management expertise is important, portability of that expertise is a key factor for someone looking to buy your business.

With employees, as with customers, all your eggs should not be in one basket. If you have one key employee, who if not retained would cause the business to suffer greatly, you really should consider some way of reducing that risk.

Recurring sales and revenues
Not all sales are created equal. Someone looking to buy a software development company will be much more interested in service contract revenue than new license sales. Contract revenue is a sure thing. Even if your business revenue is not typically driven by contracts, you might consider generating more contract revenue by selling service and/or warranty contracts. This might create a liability, but the security of contractual revenue will make your business much less risky, and much more appealing to a potential buyer.

A Unique Core Differentiator (UDF)
This is a fancy way of saying you need to stand out from the crowd. Someone looking to buy as business is probably looking at several prospects. And in this economy, it has become a buyer’s market. So what sets you apart? For some businesses it might be as simple as product packaging. For other businesses, it is good old fashioned reputation. And for some, it might be a unique website or blog that gets a lot of traffic.

And speaking of websites, a dull template design will work against you if you are striving to develop a UDF. In this day and age, your website might be the first contact your business has with potential buyers. Why not show them you are not run of the mill?

Borrowing Potential
I am surprised by how many small businesses operate debt free. There is something to be said about not owing anything to a financial institution, but you should maintain a good relationship with your bank, and your bank should be eager to lend you money if you need it. Note that it is usually in the bank’s best interest to retain the relationship with the new owners, so an ability to borrow money can often easily be transferred from seller to buyer.

But even if third party financing is not part of the equation, a potential to borrow easily means your business is less risky.

Bottom line, it’s not always about the bottom line. You can probably calculate discounted cash flows and times earnings to ballpark a selling price, but if you want to get the true value from your business, try focusing on things that do not necessarily show up in the financial statements and analysis.

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Alternatives to 401K retirement plans

May 12th, 2012 admin

By: Steve A Porter, CPA, CMA

If you have looked at retirement plans for you and your employees, it’s a sure bet that you are familiar with 401K plans. Chances are you already have one. Since they were introduced in the 80’s, there has been a literal explosion of these type plans.

Although they are very popular, they are heavily regulated by the DOL, and sometimes the rules as mandated by the government do not allow you the flexibility you want in rewarding your top performers. The problem usually arises when the plan becomes ‘top heavy’, ie: highly compensated employees receive a greater share of benefit than allowed by the regulations.

Fortunately there are other options available, and one of the most common involves ‘carving out’ highly compensated employees and allowing them to participate in a ‘non-qualified’ style plan.

Other Options: Non-Qualified Plans

A non-qualified plan can replace the existing plan, or exist alongside it. Employees can participate in both plans if the employer allows it. In reviewing what’s out there for these type plans, I found they have increased in popularity in recent years, and they also are very varied and come in many forms. Note that the general recommendation (not necessarily a requirement) is that 15% of the employees be in this plan. It is not meant to be a general retirement fund for all employees. It is a special plan for management and/or upper-tier executives.

The two broad categories are Supplemental Executive Retirement Plans (SERPS) and Non Qualified Deferred Compensation (NQDC).

SERPS are usually in the form of defined benefit plans where the employer foots the bill for a retirement/life insurance payout. NQDCs are contribution plans where employees defer a portion of their salary, and employers provide matching contributions.

Top Hat Plans is the common term for these NQDC style plans. They are very popular because they can be designed and set up to look and feel like (to the participant, at least) a 401K plan. However, there are no testing requirements, no non-discrimination rules, no fiduciary responsibility on administrators, no annual filing, no audits, and they are very flexible as far as pre-funding and payouts are concerned. Also, there are no limits on contributions. Most employers do set limits, but the limit is determined by the employer, not the government.

The structure of the plan is very different from a 401K plan, however. The plan is “unfunded.” This term is misleading because it does not mean the plan has no funds, only that the participant has no specific claim to the fund assets other than that of a general creditor. The assets in the funds are essentially arrangements made by the employer to finance the payout. There is no requirement for this financing (pre-funding), but that lack of financial security adds significant risk to participants. Administrative fees are very high if you do not provide financing for the payout.

Essentially, the participant has a legally binding contract with the employer that he/she will be paid “X” amount of money on a certain date depending on certain events. The payout can be tied to contributions made by employer and employee and/or fund earnings. You can even have a vesting schedule as long as the employee understands he/she does not own anything other than promise by the employer backed up by a contractual obligation. Note that this contract is not administered or regulated by the DOL as in the case of a 401K plan. It is simply a standard contractual obligation bound by standard contract law.

The assets of the fund are owned by the employer. As such, they are vulnerable if the company files bankruptcy. Also, any earnings on the funds are taxable to the company. That’s why most companies use Company Owned Life Insurance (COLIs) as the pre-funding asset. Of course mutual funds and similar investments can be used.

To give employees a little more security, most of these plans use a “Rabbi Trust.” which acts to set aside the fund assets in a special type of trust. These trusts offer no protection from involuntary liquidations such as bankruptcy, however. Also, Rabbi Trusts are required if participants make pre-tax deferrals.

Probably the biggest negative aspect of these type funds is that the employer does not get a tax deduction for contributions to the fund since the company retains ownership and control of the contributions. These tax savings over the years are VERY significant. Forfeiting that tax deduction is costly, however, you do get to deduct employer contributions it when they become taxable to the employee, usually through payout.

These type funds do provide a very good tax shelter for participants, however. And a C-Corp actually has a small advantage over pass though entities since any earnings on the plan are not passed directly to the owner.

If you are interested in these style plans, I would recommend getting proposals from several companies. The big players like Principal or Fidelity can help you learn about these type plans, and offer you quotes and advice on getting set up.

Although these plans have very relaxed rules and are very flexible, they are complicated financial arrangements, and there are several “gotchas” if not done correctly.

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Selling Your Business – A Tool To Reduce Capital Gains Taxes

August 8th, 2011 admin

Editor’s Note: The IRS and Treasury Department have enacted regulations that  severely limit the effectiveness and use of private annuity trusts as an income  and estate planning strategy. The regulation covers all private annuity  trusts created after October 18, 2006. All trusts created before this date are  grandfathered and will continue to receive the tax benefits of the  trust.

The biggest change is the elimination of the deferral of  capital gains taxes on all future private annuities. Without that feature,  many individuals will be forced to look at other strategies to determine what  would be best for their situations. Therefore, before you implement any strategy  discussed in this article, be sure to consult a legal and tax professional.

“I would rather expire at my desk than to sell my business and pay Uncle Sam one dime in taxes.” How many owners that have paid their fair share of taxes for twenty years of building their business feel this way? The tax bite is the single biggest factor in an owner’s reluctance to sell his/her company.

I have previously written articles discussing various aspects of transaction structures to minimize taxes. As a result, I am often contacted by a panicked seller that is a week from closing his business sale as he looks in disbelief at his accountant’s spreadsheet detailing the tax burden of his impending sale. (more…)

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Buying a Business – Checking the Lease

December 14th, 2009 admin

Despite stringent disclosure rules which aim to even things up between the supposedly rapacious seller and the innocent purchaser, it’s very easy for a buyer of a small family business to be caught by buying a dud. (more…)

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