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

Prevention is better than cure

To grow a valuable business – one you can sell – you need to set up your company so that it is no longer reliant on you. Of course, this can be easier said than done, especially when, like a PR consultant or plumber, what you are selling is your expertise.

To scale up a knowledge-based business, you first have to figure out how to impart your knowledge to your employees, so that they can deliver the goods. However it can be difficult to condense years of school and on-the-job learning into a few weeks of employee training. The more specialized your knowledge, the harder it is to hand off work to juniors.

The key to scaling up a service business can often be found by offering the service that prevents customers from having to call you in the first place. You have to shift from selling the cure to selling the prevention.Fixing what is broken is typically a hard task to teach; however, preventing things from breaking in the first place can be easier to train others to do.For example, it takes years for a dentist to acquire the education and experience to successfully complete a root canal, but it’s relatively easy to train a hygienist to perform a regularly scheduled cleaning.

It’s almost effortless for a real estate manager to hire someone to clean the eaves trough once a month, but repairing the flooded basement caused by the clogged gutters can be quite complex. For a master car mechanic, overhauling an engine that has seized up takes years of training, but preventing the problem by regularly changing a customer’s oil is something a high school student can be taught to do.

For an IT services company, restoring a customer’s network after a virus has invaded often takes the know-how of the boss, but preventing the virus by installing and monitoring the latest software patches is something a junior can easily be trained to do.

When you’re selling your expertise, it can be tough to hire a team to do the work for you. As ironic as it sounds, sometimes the key to getting out of doing the work is to offer a preventive service, which not only maintains your business income, but also eliminates the need for someone to call you in the first place.

Visit our website for more information. On there, you will find a sea of information on Exit Strategies, business valuations and more. If your curious to know what the value of your business is, contact me at jyoung@sunbeltbayarea.net or give us a call at (408) 436-1900.

Capital Gains Taxes Changing - 0% for 2011

The idea of paying no taxes on your capital gains is an appealing one for most small business owners and investors.

And based on current tax law, it's very possible for many. For taxpayers who are in the 10% or 15% tax brackets for ordinary income, the maximum tax they'd owe on stocks and mutual funds sold for a gain would be 0%.

The zero tax rate is especially appealing now, since many small business owners who might not have expected to qualify just might.

Originally, the 0% maximum capital gains rate was supposed to expire in 2010. However, the 0% rate was extended to last through the tax year 2011.

This is only one of MANY changes to taxes for 2011. I will be facilitating a webinar on May 17^th discussing this and many other “game changers” for business owners. Our guest speaker will be Monty Walker, CPA, CBB, BCB – a renowned tax expert specializing in small businesses.

Reserve your seat: https://cc.readytalk.com/cc/schedule/display.do?udc=gp8lq3q51ukg

Day 2: Understanding EBITDA: Seek Outside Opinions

You can tinker with the formula all you like. But how will you know what calculations are safe to assume and which aren't? How do you put a price tag on your company's competitive advantage, list of customers, and your brand as a whole?

There are endless variables and measurements that factor into your company's worth. One way to gauge interest is to approach potential buyers in your industry.

There are a number of other resources you can use to estimate the value of your company. Business Valuation Resources, for instance, provides you with comparative and historical information within your industry. Experts agree, though, that EBITDA does depict an accurate comparison across markets because of the exclusion of interest and taxes that vary by sector. Making the right changes – cutting unprofitable costs, expanding sales, or reaching new markets – can have a significant effect on EBITDA as a measure of your performance.

At this point a simple question remains: which year's EBITDA are we talking about, the current, past, projected, or a combination? Buyers, of course, will be pushing for a lower valuation and might look at an average of EBITDA over, say, three years as the base number. To get the highest valuation, you'll want to bolster gains in the present and future. To do so, be sure to exceed your business plan and monthly goals, create a solid sales stream into next year, and get clients on-board with long-term contracts. Don't exaggerate too wildy, though: sophisticated buyers will always cut through the grease.

2011 Business Brokerage Market Expanding

Based on my own observations from more than two decades in the field of business brokerage and mergers and acquisitions, many small businesses that survived the economic downtown are now seeing renewed strength in their top-line revenues, and solid or growing bottom-lines. In fact, the bottom-line cash flow for a number of businesses appears to be healthier than the top-line sales.

While this doesn't mean all companies are back to pre-recession performance levels, entrepreneurs are likely to see new options for their business next year, thanks to an expected increase in bank loans and a larger pool of potential buyers.

Here are my four predictions for this year that could affect the sale of your company.

No. 1: Large Pool of Potential Buyers
There is expected to be no shortage of business buyers in 2011. That's because there are a growing number of unemployed (or soon to be) middle- to senior-level executives who are likely to decide that buying a business is a feasible alternative to looking for a job.

While potentially more capital-intensive, these buyers realize that purchasing an existing business with revenues, clients, trained employees and cash flows could allow them the best possibility to sustain their lifestyle in the ab-sence of concrete employment options. However, these individuals would be wise to keep their options open (employment search, start a business, or buy an existing business) in case the right deal doesn't materialize.

No. 2: Bank Lending on the Rise
Based on current and anticipated behavior, banks are expected to come back to the lending market for small-business acquisitions. From a business broker perspective, it's been quite some time since bankers called to source deals. The good news is that they have started calling again.

While many of these deals are smaller in size, this still bodes well for 2011. Businesses with adequate cash flow will ultimately see more overall activity in terms of bank lending this year.

No. 3: Increase in Business Valuations
Valuations are likely to increase for businesses with solid fundamentals. This may sound counter-intuitive, given current market conditions, but it's basic supply and demand. There are an inordinate number of prospective (and qualified) buyers in the marketplace chasing a small number of healthy businesses. It's not uncommon for good companies to attract a large number of buyers, which results in an auction-type atmosphere where buyers bid up prices and terms.

This dynamic will not face a major change this year. Business owners who are emotionally and financially ready to sell will be the benefactors of this lopsided market.

No. 4: Baby Boomers Will Start Selling
Back in 2007, one in every two baby boomers -- who control almost 8 million small businesses in the U.S., according to BIGresearch -- was expected to begin selling their businesses. This trend was on track until the recession hit. However, these boomers will retire soon and could revisit a sale.

When that happens, there will be a sharp increase of businesses on the market. The supply and demand dynamics will shift heavily in favor of buyers. At that point, sellers will need to be exceptional in order to secure a good price for their business.

Regardless of how 2011 plays out, one prediction will certainly hold true -- businesses that take the proper steps to prepare for a potential sale will have a much better chance of achieving a successful exit than those who don't.

Structuring an Earn-out: Ensure Good Chances for Success (and Avoid Disaster)

You already know the importance of laying out simple, clear-cut standards that must be met for an earn-out to pay-out. There are some additional questions both parties should consider before signing on the dotted line.

Will the acquired party have enough autonomy?

"Earn-outs tend to work well when the seller is going to continue to run pretty much as before," Geis says. To that end, a seller should get in writing the seller's commitment to leave operations largely unchanged. If certain redundancies or back-office functions are to be folded into the acquiring company, that's fine. You simply want to make sure that every part of the acquired company that can be run independently is run independently.

Is the purpose of the earn-out financial or strategic?

An earn-out can be made for purely financial reasons, or a buyer can be making a bet on the owner's ability to expand the business. You will want to know which motivation is at play—and whether it is likely to change after the deal is closed. If the acquirer keeps a respectful distance and seems to be giving you autonomy, that is a good sign.

Who is the umpire? How will progress against an earn-out's goals be evaluated?

Consider both who will be evaluating the entrepreneur's performance under new ownership, and when evaluations will take place. Is it simply at the end of the period set in the contract, or will progress be tracked quarterly? Will the earn-out be allocated piecemeal or in one lump-sum? There's no right answer, but these questions should be addressed early on in your negotiations.

What will happen in the event outside factors drastically change the outcome?

Factors in neither party's control can harm the buyer's and entrepreneur's ability to maximize the rewards pledged in an earn-out. What if your industry tanks? What if a natural disaster hits? What if your biggest client was Lehman Brothers or Bear Stearns? Make sure to create contingency plans to address the most unlikely of scenarios – especially if you're entering into a long-term earn-out deal.

Time to Leave But Don't Want to Let Go? Reinvest in Your Company.

You can have your cake and eat it too.

I was working with a client who had done an amazing job building his company but was toying with moving on. He had grown it to earn five times what it was making when he acquired it and added new products and loyal clients. No one customer made up more than 5% of the revenue, and the company had 50% repeat business. Sweet situation. Why sell?

The seller was bored and wanted a new challenge but knew if he kept the company a few more years, he could double it.

Solution--the seller decided to re-invest 20% of his proceeds from the sale back into the "new" company. The acquiring company had deeper pockets to build it to a much larger firm and had skill sets that would allow that growth to happen.

The seller now would be able to build another venture to hold his interest while he continues to increase equity in the business he built. This also, of course, gave the acquiring company comfort knowing the seller had enough confidence in the firm and the industry to put his money where his mouth is.