A Strategic Management of Tax Liability

Strategic Management of Tax Liability “A Way Out”

“If I sell my business, am I going to get killed with taxes?" “It would be better to let my kids inherit my assets at stepped up value when I pass away.”      Sound too familiar? Most people don’t realize estate taxes are almost 50% above varying exemptions, and that non-spousal “step-up” values are set to cap at $5,000,000 in the year 2012! There is a smart, functional, and legal way to address these issues. The answer may lay with a powerful tax tool called the Deferred Sales Trust.  If you own a business or real estate with a large amount of gain and are not selling your property because of capital gain taxes, or can’t find suitable, qualified property exchanges, then you may want to consider a Deferred Sales Trust™ (DST). The DST can be used with any kind of entity, e.g., LLCs, S or C election corporations, as well as individuals who own real estate, rental properties, vacation homes, commercial properties, hotels, land, industrial complexes, retail developments, and raw land, to name a few.  If invested properly, the money in the trust could potentially grow at a greater rate than that of inflation and even the distribution rate and ensures the necessary liquidity to pay back the note due to the Seller/Taxpayer. (The interest rate in the note to you is dictated by the IRS to be a competitive rate, i.e., 6% to 10%.) While we have primarily focused on Capital Gains Tax, the amount of gain due to straight line depreciation is also deferred with a DST.  The DST Trained and Approved Trustee may invest in REIT’s, bonds, annuities, securities or other “prudent investments” that are suitable to help assure the Trustee’s performance in repaying the Seller/Taxpayer pursuant to the held installment sales note. The DST Trained and Approved Trustee’s reinvestment of the proceeds may result in more or less risk depending on the nature of where the proceeds are reinvested.  My husband John and I personally used the Deferred Sales Trust to defer tax gains on an income property we sold after 13 years of owning it. We put $400k in the trust and have been averaging an interest rate of 8%.  If you would like to know more please call John Young, Vice President of Sunbelt, and he will make sure you get contact information for a trained trustee.  Joan Young Broker

Please contact John Young for more information on the Deferred Sales Trust. John Young, Vice President Sunbelt Business Brokers Office: 408-436-1900 Mobile: 408-464-5888 Website: www.mydstplan.com/sunbelt john@sunbeltbayarea.net

Tips to Manage a Successful Sales Team

Want to boost your business? It's time to set your salespeople free.
As economic times become more uncertain, companies are increasingly seeking to boost their sales operations to try to capture more market share. But properly running a successful sales department requires a special touch and technique.
Great salespeople also tend to be into solving problems and driving for results. They're positive in their attitude, powerful and authoritative.
The traits that make them so great at sales also can lead to traits that present difficulties for managers. They can be impulsive, demanding and unrealistic in their expectations. They may lack attention to detail and are often disorganized.
If you are more methodical, analytical or process oriented, you may get easily frustrated running a sales department. But those who are good at running a sales department learn how to manage around these issues.
There are certain styles of management that I've often found are a good fit for sales departments. Here are four tips for managing successful sales pros.

• Avoid rulemaking. Great salespeople generally want freedom. They want autonomy. Compliance doesn't work for these people. The better you're able to remove the obstacles and set them up to produce those results, the more successful they will be -- and you will be. Don't ever tell them what they can't do, because they will simply focus their creativity on finding ways to overcome your rules.
   
• Become a coach. That means asking, not telling your high performers what to do. Ask them to put themselves in your shoes over a particular issue, and discuss a variety of possible options. Let them own the solution to whatever obstacle is at hand.
   
• Let them do what they do best. In order to motivate and lead salespeople effectively, you want to think about what's important to them and what drives them. If you have employees who are not great at details and writing proposals but they're great at selling, then let them sell. Find someone else to compensate in some way to support them on the detail.
   
• Give them pats on the back. You need to recognize them. Especially with top-performing salespeople, money isn't often the main driver. It's really about being respected. It's achieving and getting those results.

If you adapt your management style to meet their needs, and understand the behaviors needed to do it, you'll have a lot fewer headaches. And your salespeople will thrive.

Top 6 Management Mistakes Entrepreneurs Make

The business plan is the easy part. Managing and leading a team? That's where the learning curve gets very steep.

Leaders are made, not born... which makes it tough when you start a company and have little to no management experience. (I spent years working my way through a variety of management positions and still made nearly every mistake possible.)

For many entrepreneurs the “business plan” stuff is the easy part; managing employees and leading a team involves a very steep learning curve.

Instead of waiting learning from your mistakes, take the easier route and learn from a few of my biggest leadership mistakes:

Too many positives equal a negative. Say you’re discussing the reasoning behind a new project. There are tons of positives, and your employees should be excited, but for some reason they seem wary. Why? Employees instinctively look for the downside because there is always a downside—and downsides always flow downhill. Share the negatives too. Freely describe the downsides. Show you understand that every project, every initiative, and every new process involves an upside and a downside. Sharing the positives is fun; sharing potential negatives is essential. While it isn’t easy to show doubt, your employees will respect you for it.

Results come and go but feelings are forever. Make decisions based on data, but lead based on feelings and emotions. Criticize an employee in a group setting and eventually he’ll appear to get over it... but inside he never will. When you make a decision, spend more time considering how employees will think and feel than you do evaluating whether the decision makes objective sense. You can easily recover from a mistake made based on faulty data or inaccurate projections. You’ll never recover from damage to an employee’s self esteem.

The flow of ideas is easy to turn off. For example, your best employees will typically generate the best ideas. (That is one of the reason they are great employees.) When an employee has a great idea, it’s natural to give her the responsibility for putting that idea into practice. Unfortunately your best employees are also great because they are extremely productive. The last thing they may need is responsibility for yet another initiative. Pile on too much and if only out of self defense some will stop making suggestions. Give other employees a chance to shine instead; all they may need to become great is an opportunity.

No presentation ever changed the world. Formal education conditions us to assume great information comes from presentations. (Listening to lectures while watching PowerPoint slides must be the best way to learn, right?) In business there’s an inverse relationship between the length of a presentation and its value: The longer the presentation the less valuable the ideas and information. The best ideas can be captured in one or two sentences. Plus, most of the time your employees have those ideas. Listen to your employees and turn their ideas into action. The only presentations you really need are ones used to recognize your employees’ great ideas.

Data is accurate, but sometimes your employees are right. Some decisions should be based on more than analysis, logic, and reasoning. Ideas and decisions are eventually carried out by people, and every employee has a different set of skills, emotions, motivations, and agendas. Leadership decisions should certainly be driven by data, but great leadership decisions can be messy and at times counter-intuitive. If your employees don’t agree with you, ask why. Don’t simply defend your position—find out what they know and why they feel the way they do. No one knows everything, and the only way we learn is when we shut up and listen.

How to Narrow Your Target Market

Companies that try to be all things to all customers are sure to fail. Here's a business guide on how to focus on your target market.

Huge, profitable companies like Walmart and Amazon didn't start as the all-encompassing retailers we know today. Each debuted with a very specific focus that helped them find and nurture a strong customer base. Walmart originally catered to shoppers in rural areas where there was a dearth of options for low-cost goods; Amazon famously limited itself to just books for years before expanding into selling everything from DVDs to motorcycle gear.

The process of finding a target market and narrowing your company's focus to appeal to it directly often trips up new businesses, who find it difficult to turn down business opportunities when they arise. But trying to be all things to all people is a sure way to fail in the marketplace.

The Dangers of Being Unfocused

Whatever market you're in, you've likely got a lot of competition and static standing between you and the consumer. Narrowing your focus to one specific demographic or slice of the marketplace gives potential customers a reason to notice you in the rest of the fray.

If you don't know specifically which customers you are speaking to, you are actually speaking to no one.

The big danger is that without a target market, it's like standing in a park shouting in the wind. When you have a target market, its like standing in a park and talking to a specific group of people.

That means you can't be afraid to exclude certain types of consumer from your marketing or to target your advertising at small groups. Some customers will feel left out, but those are the sacrifices necessary for a successful business.

Become an Expert in one Area

One way to hone in on a specific sector is to become an established resource in one area. Starbucks, for example, is able to charge premium prices for its coffee even though it also sells pastries, tea, and accessories, because it has positioned the company as an authority on good coffee.

If you're an expert in your field, people will pay the price tag on whatever product and service you offer

You can build up credibility by offering information for free through your company's website or blog: things like tips, industry information, or niche data that will help consumers think of you as a reliable expert in that area, she says.

Your credibility comes with giving away information. If this is the value I'm getting for free, what will I get if I pay for it?

Dig Deeper: Do the Market Research

Experts give several methods for whittling down the vast expanse of the market to find your ideal target.

Some business owners find their niche first by focusing on the areas in which they already have a strong interest, or by looking at markets that already know about you and your services. Then, look for areas of the marketplace where a gaping need exists that you can fill with your company's services.

Tweak your Marketing

As simple as it sounds, the name of your company is crucial when narrowing your market.

You may have to change your branding strategy or marketing efforts to clarify your mission. Once you find your target, you'll definitely want to alter your advertising efforts to go after the places and media you use to generate new business.

It's not just an advertisement that you do. It actually has to become part of everything you do.

Your marketing needs to highlight the specialization, which improves credibility. You've got to be perceived as the best at something.

Then, once you've identified that base, use it to improve the business through things like social media and interactive marketing to find out more about what the customers are looking for.

How Do I Build A Valuable Company?

My entrepreneurial journey has seen me start and exit a number of companies. I want to share three of my best tips for building a valuable – sellable – company.

Tip No. 1: Make it all about a number of clients, not one client

It's common for a business to be dominated by one or two important customers. It happens pretty naturally. You do a good job for one customer, and they buy again. You keep satisfying them, and they stop looking for other suppliers and start to bring more and more of their orders to you in hopes you can handle the increase in business while maintaining your amazing service.

Given their importance, you're probably also servicing this giant customer personally, which makes them even more profitable because you do not need to hire sales or service staff to support the account. This, of course, makes both the account and your business very profitable—which makes it harder to walk away. It's a cash cow.

Pretty soon, you have a codependency that can undermine the value of your company—and make it virtually impossible to sell. For example, an acquaintance of mine owns a business that supplies a product to the home improvement chain Lowe's. In some months, Lowe's makes up more than half of his revenue, which is why, when the U.S. housing market crashed and Lowe's slashed the size of its orders and slowed down its payment cycle, my friend's business teetered on the brink of insolvency.

Desperate for cash, my friend tried to sell his company to both strategic and private-equity investors, all of whom offered him pennies on the dollar (when compared to the value of similar businesses) because of his reliance on just one customer.

To build a valuable company—one you can sell if you choose—you need to winnow down your reliance on any one buyer. My suggestion is to strive to ensure no one customer represents more than 15 percent of your revenue.

Tip No. 2: Increase your customer base

We survive the early years of our business by listening to our customers and responding to their requests. The problem is, when all you're doing is reacting to customers, you end up offering way too many things—customizing too much—because everyone wants a slight twist on your offering.

If you offer an ever-expanding list of things, your staff will never get really good at making or selling anything. The broader your product or service line, the more your business will be reliant on you—the person with the most knowledge in your field—rather than your employees. If the business is too reliant on you personally, it will be hard to sell.

To pull yourself out of this quagmire, you have to sell less stuff to more people. That may seem like counterintuitive advice, but some of the fastest-growing, most valuable companies in the world do it.

Take Apple for example. Apple is really good at selling a few core products (iMac, MacBook, iPhone, iPod, and iPad) that offer the same basic user interface. As a result, the company can train its Apple Store employees on one basic operating system and a few core products.

By contrast, walk into a Best Buy, with thousands of technology products running hundreds of different operating systems. If you're actually able to find someone to help you, you'll be lucky if they can read the specifications on the back of the box, let alone actually know anything about the product.

Focusing on selling less stuff to more people will allow your business to scale up beyond you, which in turn will allow you to grow through the ceiling that holds back many owner-dependent businesses. Ultimately, you'll have a company you can sell.

Tip No. 3: People want to work with you because you are the BEST at what you do.

Quick—how do you explain your business in a social situation? Do you define yourself by your industry? For example, "I own a printing company." Or do you describe what makes your business unique? For example, "We've developed a process for printing annual reports that reduces the turnaround time to three days."

The problem with describing yourself as a part of an industry is that most industries are commoditized. You're sentencing yourself to a life of low margins and groveling for work. When there is nothing unique about your business, the customer has no choice but to rely on price as the only decision-making criterion.

And before you claim "customer service" as what makes you unique, remember that people don't buy wishy-washy claims as a point of differentiation. After all, service is in the eye of the beholder, and until your prospect makes the decision to become a customer, intangible claims about how well you treat your customers ("offering great customer service since 1977," "specializing in great customer service") will not sway them.

Instead of describing your business in terms of the industry you're in, accompanied by some vague description of your service, describe in concrete terms what makes your business different. For example, under Tony Hsieh, Zappos became a successful company (Amazon acquired it in 2009) not because it's a retailer of shoes but because it offers a two-way free-shipping policy.

One-way free shipping is standard for a lot of e-tailers, but Zappos offers to ship your shoes free and then if you don't like them not only refund your money but also pay to pick them up. "Great customer service" is a wishy-washy claim. "Free returns" makes Zappos special and is a big part of what sets it apart. A shoe retailer is a boring commoditized business with low margins and very little hope of being acquired. A company that allows people to return shoes if they don't like them, all from the comfort of their own home, is unique and a big part of the formula that allowed Zappos to scale up into a sellable business.

Stop describing the industry you're in and start describing what makes you irresistible.

How to Get Involved with Your Employees Work Without Micromanaging People

One of the more vexing problems most small business owners face every day is how to get involved in the work of their people without doing the work themselves or micromanaging those doing it.

You can resolve this when you think of every activity not as one step — doing — but three distinct steps: prepare to act, act, and then reflect on the outcome and what can be learned from it.

Start by expecting your people to use Prep-Do-Review themselves in their work. Not only will it make them more effective, but it will provide a way for you to become involved in their work as appropriate for the person and the situation.

This is the way it works:

Prep: Start by previewing people's plans with them and suggesting changes, if necessary. You do this by asking crucial questions. What are you going to do? Why — for what purpose? How will you do it? How can you use this to make progress on our goals and plans? Who should be involved or kept informed? How can this be used to help you learn and get better? What if your assumptions are wrong or the unexpected happens? This is how you move your group's purpose, plans, and work forward, how you coach and develop others, how you delegate more confidently, how you assure yourself that someone is well prepared and ready to act on her own.

Do: Based on what you learned in the Prep stage, you can decide whether and how to be involved in the doing of the activity. Working with a novice, you may want to perform the activity yourself while the person observes. Next, you may want to monitor periodically as the person does the activity and then give them feedback afterward. Thereafter, you probably don't need to be present at all — the Prep and Review stages are where you'll be involved.

Review: Great managers make post-action review a regular practice for themselves and their people. You can make it the focus of a one-on-one after an activity has been completed. Or it can be part of periodic meetings with each of your people or a standard procedure you go through in the updates your people provide at staff meetings. Be sure to model what you expect when you describe something you did — Here's what we learned. Next time we'll do it this way.

Remember to do a review regardless of the outcome of an action — failure or success. We are much more likely to reflect on our failures. Too often, we don't take time to learn from our accomplishments and never really understand the keys to our success and what lessons we can take forward.

Most of your managerial interactions with people will occur in the Prep and Review stages. Only with someone inexperienced or in situations of high stakes and high risk will you, or should you, be involved in the actual performance of a task.

Used this way consistently and consciously, Prep-Do-Review becomes a powerful management tool that will improve how you manage your people. By giving you ways to be involved without directly intruding as your people do their work, it will make your interactions with them richer, improve outcomes, help people learn, and make you a better delegator.

If you operate this way as a boss consistently, you'll find certain core management tasks become easier and more systematic. It will let you delegate more intelligently, based on both a person's skill and experience level and on the situation. It will help you coach people more effectively; indeed, it will help you turn many tasks into learning experiences. And it will let you use your time more effectively by helping you determine when you do and don't need to be involved.

With very experienced people, and especially with routine tasks, you needn't be involved in either Prep or Do, but as a boss you never completely let go of the Review stage. You may not review outcomes after every task, but ongoing performance review is something you'll never give up entirely.

If you think about it, Prep-Do-Review is the fundamental cycle of activities by which effective bosses manage — through a perpetual loop of prep-do-review-prep-do-review. By using it to become more mindful and deliberate in all you do, it will help you convert mundane workaday activities into management activities. It will help you make progress through the daily work. And it's the way you guide your people, produce results, and help them learn without inserting yourself unnecessarily into what they do. It's not the solution to every management challenge, but it's a powerful approach and the closest thing to a management secret that we know.

How Do I Get an Accurate Business Valuation?

If you're planning to sell your business, an accurate valuation will ensure that all the hard work you've put into it will be taken into account and included in the price. Business valuations are also important when seeking investment capital, taking on a partner, or selling shares.

While many business owners have an idea of what their business is worth, that idea can quickly wither in the face of challenges from the IRS or other sources. Therefore, getting an accurate business valuation is crucial.

There is more than one type of valuation. For example, there's no point in evaluating a services business based on the value of its physical assets. Other methods to consider include intangibles such as goodwill, which can be difficult to assess. And value may also vary with context and subjectivity — a business may be worth different amounts to different people, depending on their preferences and needs.

This means that if you want a meaningful valuation, you will need to discuss your business circumstances with a business valuation expert. You may find that the valuer needs to use a number of different methods and then come up with a final amount that gives weight to each figure that emerged from each method. Good interpretation and judgment will be needed to come up with a final figure that accurately reflects the value of your business.

Value factors

A number of different factors need to be taken into account to ensure that a valuation is accurate and useful. Some of these factors include:

• The nature and history of the business
• General economic outlook, including industries that affect your business
• Your business's book value, financial condition, and earning capacity
• Your business's dividend history and paying capacity
• Investor risk inherent to your industry
• The maturity of the business and its industry
• The value of the business in the absence of the current owner
• Stock sales
• Stock of comparable public corporations

A valuation expert will also review and analyze recent financial history, financial projections, buy-sell agreements, executive compensation, organizational charts, quality of employees, management depth, major customers and competitors, and the viability of the business without the current ownership.

Methods of Valuation

The crudest valuation method is known as the "multiples" method, which operates by rules of thumb. For example, legal firms are commonly valued at 40 to 100 percent of their annual fees, while landscape businesses are estimated at 1.5 times their discretionary earnings, plus the value of their capital assets. However, multiples only give a rough, industry-wide ballpark figure for business value, not an exact value.

More accurate methods include the "balance sheet" approach, which basically subtracts business liabilities from assets. The "adjusted book value" method is similar, but uses current market value rather than purchase price or depreciated value.

Retail and manufacturing businesses are often assessed according to asset value, assuming those assets are significant. Service companies are often valued using the "capitalization of income" method, which places a heavy emphasis on intangible assets. It's also possible to calculate the value of a private company by making a comparison with an equivalent public company and making appropriate adjustments. Business value can also be estimated by anticipating cash flow over a three- to five-year period, and adjusting that into current dollar amounts.

Capital Gains Tax, the New Administration and You!

Sellers should be considering taking advantage of the low capital gains treatment on the sale of their company since the standard top on long-term gains rate is 15%, but it is set to rise to 20% in 2011. Then we need to consider that the Democratic administration is expected to raise the capital gains rate to 30% within the next four years. This will not only have a great impact on investors in stocks, real estate, but also businesses being sold. This is particularly important for a business owner who is contemplating an exit strategy within the next three years, weighing whether it makes more sense to grow the business and pay an extra 15% in capital gains tax down the road or sell it sooner for a little less but keeping more of the profit.

These business owners also should be aware that where will be a glut of available businesses on the market and a downward price pressure in the next few years due to the fact that there will be more sellers than buyers.

If you have been considering an exit strategy now is the time to be getting your company ready so that your are prepared when the timing is right for you.