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

How to Brainstorm a Great Business Name

Naming a business is by far the hardest task for startups when it comes to branding. It’s permanent, or at least feels that way. Somehow renaming a company seems like a much bigger deal than a logo redesign, although neither should be undertaken lightly.

Naming a company is also high stakes. A name is the primary calling card of a business, and shows up places that even a logo doesn’t. In casual conversation, for instance. It's also highly emotional. Think about people’s gut reactions to baby names. Everyone has a different association or interpretation (“That name picked its nose in third grade!”). And don’t even get me started on finding an available URL without resorting to some wacky misspelling.

When it comes to brainstorming company names, often quantity matters more than quality -- at least at the start of the process. Here are a few guidelines for generating a whole lot of quantity. Once you have at least a handful of solid contenders, you can decide on the quality.

1. Gather the right people and materials.
Get a good group in the room -- five to eight is about the right number. It’s helpful to have a mix of team members and outsiders. Invite copywriters or even just friends who are really good with language. You should have some way to display all the names being generated in real time. For example, go old school with huge pieces of paper stuck to the wall and magic markers. You will also need blank pieces of paper and pens for everyone involved.

2. Loosen up.
Start with a few word-association exercises to get everyone’s minds working and generate stimuli for the next step. Typically, we’ll choose two to three topics related to the business idea. So let’s say you’re launching a business that facilitates mobile payment. You might do one word association around the idea of “payment,” and one around the idea of “on the go.”

Everyone in the room is encouraged to shout out any words that come to mind from these concepts. So for payment you’d get answers like: bank, money, dollar, exchange, change, cash register, merchant and others. Someone should be capturing these words in a way that’s visible to everyone, and you continue until you’ve filled a large page, and then move on to the next. Ideally at the end of this exercise, you’ll have a few large sheets filled with words on the wall.

3. Start generating.
With a blank piece of paper in front of them, everyone now has to individually come up with 10 names in 10 minutes. This is an incredibly short amount of time to come up with 10 names, and that’s on purpose. It’s so people can’t get bogged down trying to come up with the perfect name, and instead just start getting names on paper. No one has time to overthink or be self-conscious. (There are no bad ideas.) If it’s helpful, they can use the words from the first exercise as inspiration.

4. Generate some more.
Next, everyone passes their sheet of paper to the person to the left, and each person has to come up with five more names in seven minutes that build upon the names in front of them. This provides each person with concrete stimuli for inspiration and allows them to expand creatively on the thinking of their neighbor.

5. Share and build.
Papers get passed one more time to the left. Now each person, with 15 new names in front of them, circles their five favorites and shares with the group. As everyone is sharing, names should get visibly captured and people should be encouraged to build upon these names as they’re read aloud.

At this point, you will have tons of names on the wall, and even more written down on sheets of paper. Many will be terrible, though often gems do emerge. But this doesn’t mean you’re done. It's helpful to have everyone vote for their top three favorites, and then end the meeting.

In the next few weeks, sort through every name (including those that weren't read out loud). Type your favorites on individual sheets of paper. (It can be hard to evaluate names on an Excel spreadsheet of hundreds.) Check whether the URL is available, even though this process can be excruciating.

At that point, sift through the names again. Set short deadlines -- perhaps one name per day -- for team members to generate five more names each and add them to the list.

Then make a short list. Sit with it. Remember that there’s no such thing as the “perfect” name that tells your entire story and that everyone will fall in love with on first sight, especially in the absence of a brand experience. You just need a good, solid name that is own-able, pronounce-able, spell-able, and doesn’t have any obvious negative connotations. Branding can take care of the rest.

Seven Tips for Coping with Customer Questions

Do you sometimes think your customers are clueless based on the questions they ask? If so, you are not alone.

A new survey from IT-employment agency Robert Half Technology reveals chief information officers get asked some pretty bizarre questions – and many of them clearly fall outside the realm of an IT staff's job description. Among the IT help-desk requests the surveyed CIOs got:

• Can I turn on the coffeepot with my computer?
• How do I start the Internet?
• Can you come over and plug in this cord for me?
• How do I pirate software?
• Can you recommend a good dry cleaner?

Funny – and yet not. But the range of crazy questions demonstrates how important it is to train customer-service employees to be ready for anything.
Here are seven tips for excellent customer service that any business can use:
Listen. Sometimes, customers just need to know someone at the company is interested in their problem, notes John Tschohl, co-author of Achieving Excellence Through Customer Service.
Apologize. Don't engage in fault-finding or laying blame, but do let the customer know you are sorry they had a problem, says Tschohl.
Take them seriously. Customers' questions may seem ridiculous, but they're important to that customer. Try not to laugh.
Stay calm. Customers may be irate, frustrated, or just irritating. But don't get down on their level, ever. Just staying calm can make customers feel you care and have the ability to help them.
Suggest solutions. Help-desk workers should have the power to resolve more than 95 percent of customer issues without having to pass the customer on to another person. Allow line workers to give out free coupons, accept returns, give refunds, and take other needed remedies without having to consult anyone. Then they can offer customers a range of options for resolving their problem, and get the job done, Tschohl says.
Be available. These days, smart customer service means setting up a help desk on Facebook, Twitter, or wherever else your customers hang out online.
Acknowledge your limits. If you're asked a crazy question like the one above, simply say that you're sorry their request isn't within the scope of what your company provides. You can't be everything to everyone.

Advertising Overload: Are You Guilty?

New research on how just many marketing messages it takes to completely turn off a customer.

Mae West said that too much of a good thing can be wonderful. Obviously Ms. West was never on the receiving end of the avalanche of marketing messages consumers now receive. And now recent research from Upstream and YouGov show just how bad an impression a deluge can make.
According to the 2012 Digital Advertising Attitudes Report, a study of adults 18 and over in the U.S. and U.K., a big percentage of people would stop using a product or service if they received too much advertising for it: 27 percent of those in the U.K. and 20 percent of the U.S. respondents.
It's a "major backlash," according to the study, that badly dovetails with the finding that nearly two-thirds of online consumers in both the U.S. and U.K. already feel that they are targeted by "excessive digital advertising and promotions."
In other words, people increasingly feel stalked and when they feel stalked they want to run in the other direction. That will likely only get worse as mobile marketing to cell phones and tablets begins to gear up. Roughly two-thirds of the people surveyed said they would dislike getting ads on their mobile devices.
The problems of perceived over-targeting doesn't stop with the 20 to 25 percent that say they would stop using a product or service, as you can see in this table:

Two-thirds of consumers say at the very least they would unsubscribe from a brand's promotions if the company delivered too many of them. About 28 percent of people in the U.S. and 37 percent in the U.K. would begin to respond negatively to further marketing from the company in question. One in 10 would take to protesting on social media sites.
This is just an extension of a similar problem in social media marketing. It's not difficult to understand. How often have you become frustrated with email newsletters, promotional tweets, daily deal alerts, and the mountain of marketing messages you receive in a day?
Each company wants to deliver its unique sale pitch and value proposition and with enough frequency that they won't be forgotten. But it's the corporate equivalent of the loudmouth at the cocktail party who won't stop talking. Eventually, people try to avoid eye contact, look for others to speak with, and otherwise do their best to avoid an annoying boor.
There are steps to take. In the U.S., 55 percent of consumers didn't want more than one message a month, although those between the ages of 18 and 24 were open to contact as frequently as once a week. When asked what would make them more likely to respond, 26 percent said marketing tailored to personal interests and 21 percent said that the material would have to be contextually relevant to what they were doing. At the same time, don't depend too heavily on those insights, because consumers could also react badly if they sense whiffs of cyber stalking.
The key is to communicate in moderation—enough to stay in touch, but not so much that your brand becomes the pariah in their inbox. At parties or in business, good taste goes a long way.

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.

Mistakes to Avoid before Selling your Business

Are you planning to sell your business in the next few years? Here are eight mistakes to avoid before calling it quits:

Mistake 1: Being boring

While it is true buyers like predictability, they also like growth. Set aside a small slice of money for experimenting on new things (product ideas, etc.). The BBC, for example, has a “gambling fund,” which it uses to fund experimental programs that fail the typical new program development testing cycle. It was through the gambling fund that the blockbuster t.v. show “The Office” received funding.

Mistake 2: Selling your product, not your business

A buyer will need to see that your company has a way of winning customers without you. Hire salespeople or invest in marketing so that your business is less reliant on you as a rainmaker. Start thinking of your business as your most important “product” and invest your sales energy in meeting with people who might buy your business, not your product.

Mistake 3: Staying married

Eighty-four-year-old Hugh Hefner told The New York Times last year, “If I sold it (Playboy Enterprises), my life would be over.” If you’re too emotionally connected to your business, it will be difficult to get the price you deserve and will leave you feeling as though you’ve lost a family member after the sale. Instead, slowly start cultivating interests (e.g., travel, another business idea, charity, etc.) outside of work to ease the transition.

Mistake 4: Using retirement income as the basis of your number

Succession planners will tell you to figure out how much income you want in retirement and make that the basis for calculating how much money you need to get from selling your business. The reality is, your business is worth what someone will pay for it and has nothing to do with how much you need to retire. You’ll likely be bored after selling your company, so after taking some time to decompress, travel and play, you’ll probably find yourself starting something new anyway.

Mistake 5: Not including survivor clauses in your contracts

Acquirers like to see that you have locked customers into long-term agreements, but if your customer contracts do not have a “survivor clause” to ensure they remain enforceable after a change in ownership of your company, they may be moot. Talk to a lawyer to make sure an acquirer will get the benefit of the contracts you’ve got with customers after you’re gone.

Mistake 6: Sharing equity with key employees

It’s tempting to use equity or options to retain employees you want to keep through the negotiation and sale of your company. However, you can achieve the same result with a simple “stay bonus,” which you offer key employees who remain with your company for a period of time after the sale. A stay bonus is a lot simpler to implement, doesn’t muddy your company’s capital structure and may end up costing you less in the long run.

Mistake 7: Leaving your team rudderless

A lot of big-personality founders set the tone for their business through their personal charisma, but if you want to sell your business, you need to make sure your company has a set of values independent of you. David Ogilvy handed out Russian dolls to his managers as a reminder of the perils of hiring successive layers of smaller and smaller people. Ogilvy sold his shares in his agency and retired to a castle in France, where he ultimately passed away, but the dolls live on in the hallways of Ogilvy offices as a reminder to managers to always hire people smarter than they are. Find a way to remind employees of your values when you’re not around.

Mistake 8: Not having a BATNA

Professional negotiators suggest having a best alternative to a negotiated agreement (BATNA) — that is, a plan B in case negotiations to sell your business stall. For example, if you’re planning to sell your business to a strategic buyer, also have a financial buyer keen to make an offer or a management team with the means to buy your business over time. That way, you’ll have more leverage when negotiations get dicey.

Have you ever sold a business? If so, what you would you do differently next time?

Should I Hire A Business Advisor to Sell My Business?

As a business broker, our first contact with business owners is often when they decide that they want to sell their business. Sometimes this is great, but sometimes it doesn’t allow the business owner to meet their expectations.

For business owners who are not familiar with business brokers, we are often seen - not as professionals who help them navigate a long and challenging road - but as a ‘salesperson’ just looking for the listing. This makes it difficult for some business owners to understand both the value of having an opinion of value, and in appreciating that the right time to get this (for the first time) may well be years before they need/want to sell.

At Sunbelt Business Brokers, we charge our clients to prepare a Most Probable Selling Price (MPSP) Report which is a broker’s opinion of value. Once a client reviews the MPSP they have a clear understanding of the range of value of their business as well as understanding the areas that contribute to the value of the company. This will also identify areas to change or improve to have your business ready to sell.

Imagine that you have owned your business for many years. It has provided you and your family with a lifestyle that you have enjoyed, but you are getting ready to retire. Remember, from the cash flow of the business buyers have to be able to support themselves, pay their debt servicing costs and expect to get a return on their invested capital. You, on the other hand, not only want to ‘get a great price’, but also to keep as much of it as possible. If taxes eat your selling price, then the great price wasn’t so great.

In many cases you need to prepare yourself and your business for this transition.

• Your Sunbelt MPSP provides an opinion of value AND reviews your operations for elements that may need to be changed prior to sale;

• Your accountant, with their knowledge of your business (and a copy of the MPSP!) may assist you with tax planning and recommend deal structures;

• Your financial advisor, may assist you with tax planning and disposition options;

• Your lawyer may assist you with deal structure, sale documentation, and sometimes help create tax- efficient entities.

Shifting your company from ‘operating to run’ to ‘operating to sell’ can take one or two, or more years to prepare for as you whip that business into a condition that can maximize both the selling price and your ability to retain those proceeds. Having a Most Probable Selling Price Report done - and in turn - updated as you move closer to your proposed exit time, can be a great tool to allow you and your advisors to prepare for this significant transition. Not allowing yourself the time or avoiding an ‘expense’ can both come back to haunt you. The snapshot that a Most Probable Selling Price Report provides can be one of the best investments you will ever make. Ask your local Sunbelt Business Broker About preparing your business for sale.

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How Buyers Put a Price on Your Business

If you're looking to sell your business, you probably have a number in mind. Here's why it might differ from what an acquirer is willing to pay.

A funny thing happened when I was first approached by someone who wanted to buy my printing company: I forgot everything I knew about sales.

Instead of listening to the customer and understanding his or her needs, I went into negotiations with potential buyers focused on my needs. I wanted to get a certain multiple for my business but failed to put myself in the shoes of a buyer to figure out what he or she would be willing to pay.

It was a rookie mistake on my part. Any first-year salesperson knows the first step in selling is figuring out what the customer needs. I should have asked about buyers’ goals in wanting to acquire us. In particular, I should have tried to understand what kind of return they were looking for on their investment in an acquisition.

The price buyers are willing to pay for your business depends on a lot of factors, but one of the most important is the return they expect to get and the risk associated with achieving that return.

Assuming your revenue is flat or growing modestly, the higher the return on investment the buyers are looking to achieve, the lower the multiple they will be willing to pay for your business.

At the risk of oversimplifying a complex equation, if the buyers are looking for a 22 percent return on their investment in your company, then they will derive the multiple they are willing to pay as follows:

100 ÷ 22 = 4.5 times EBITDA

Provided you’re not the next Google and you don’t have the cure for cancer, the buyers would be willing to pay around 4.5 times EBITDA to buy your business.

If, however, their expectations for a return are higher, let’s say 30 percent, they will be willing to pay less for your business:

100 ÷ 30 = 3.3 times EBITDA

So what drives up buyers’ expectations for return on investment while at the same time driving down the price they are willing to pay for your business? In a word, risk. The riskier your business looks to buyers, the higher their expectation for a return will be.

Likewise, with your own investments, you are willing to settle for a lower return when you buy relatively safe assets, like a government bond. But when you buy that risky small-cap fund, you expect a higher rate of return in exchange for putting your capital in harm’s way.

So how do you de-risk your business in the eyes of an acquirer?

• Client risk—do you rely on just one or two key clients for most of your business?
• Supplier risk—will you be in trouble if one of your suppliers goes under?
• Depth of management—what happens if a key employee disappears?
• Contracts—do you have legal agreements in place, or do you rely on handshakes?

Ask yourself these questions to judge how risky your revenue stream is. Investors want to know that things won't fall apart if something unexpected happens. Show them safety in your pattern of earnings, and you can expect a higher offer.

When you sit down with people interested in buying your business, try to find out what their expectations for return on investment are. That will tell you a lot about what their offer will look like and how risky they view your business. From there, you can do the math and anticipate their offer price and decide whether or not you want to keep talking.

When and why should I pay for a broker’s opinion of value?

As a business broker, our first contact with business owners is often when they decide that they want to sell their business. Sometimes this is great, but sometimes it doesn’t allow the business owner to meet their expectations.

For business owners who are not familiar with business brokers, we are often seen - not as professionals who help them navigate a long and challenging road - but as a ‘salesperson’ just looking for the listing. This makes it difficult for some business owners to understand both the value of having an opinion of value, and in appreciating that the right time to get this (for the first time) may well be years before they need/want to sell.

At Sunbelt Business Brokers, we charge our clients to prepare a Most Probable Selling Price (MPSP) Report which is a broker’s opinion of value. Once a client reviews the MPSP they have a clear understanding of the range of value of their business as well as understanding the areas that contribute to the value of the company. This will also identify areas to change or improve to have your business ready to sell.

Imagine that you have owned your business for many years. It has provided you and your family with a lifestyle that you have enjoyed, but you are getting ready to retire. Remember, from the cash flow of the business buyers have to be able to support themselves, pay their debt servicing costs and expect to get a return on their invested capital. You, on the other hand, not only want to ‘get a great price’, but also to keep as much of it as possible. If taxes eat your selling price, then the great price wasn’t so great. In many cases you need to prepare yourself and your business for this transition.

• Your Sunbelt MPSP provides an opinion of value AND reviews your operations for elements that may need to be changed prior to sale;

• Your accountant, with their knowledge of your business (and a copy of the MPSP!) may assist you with tax planning and recommend deal structures;

• Your financial advisor may assist you with tax planning and disposition options;

• Your lawyer may assist you with deal structure, sale documentation, and sometimes help create tax-efficient entities.

Shifting your company from ‘operating to run’ to ‘operating to sell’ can take one or two, or more years to prepare for as you whip that business into a condition that can maximize both the selling price and your ability to retain those proceeds. Having a Most Probable Selling Price Report done - and in turn - updated as you move closer to your proposed exit time, can be a great tool to allow you and your advisors to prepare for this significant transition. Not allowing yourself the time or avoiding an ‘expense’ can both come back to haunt you. The snapshot that a Most Probable Selling Price Report provides can be one of the best investments you will ever make.

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What if I've only been in business a short time, barely breaking even and want to sell?

We are receiving many calls from companies that have been in business for fewer than two years, and they would like help selling their companies. One of the first questions we ask is, “Is your business profitable?” The response is typically, ”We are breaking even.” or "We are getting there."

Not only is it difficult to find a buyer for a company that has a history of fewer than three years, but by not being profitable or not having at least $100,000 adjusted net makes it close to impossible. The owners of these young struggling companies typically also want to recoop their entire investment including working capital.

Think about it. If a buyer could get into a business that is making $100,000, and they are asking $265,000 versus one that is asking $265,000 and breaking even, which one would you choose?

It is too soon for that business owner to expect to be able to recuperate their investment. Our advice is to either raise more capital so that you can grow the company to a place where it is saleable or possibly bring on a partner who can do what the owner is obviously not doing well. If the owner decides to close their doors, they will still be on the hook for the property lease and any equipment leases that have been signed.

There is help out there. The Service Corp of Retired Executives (SCORE) or the Small Business Development Center (SBDC) offer free advice to business owners. They have offices in most major metro areas.

Be careful before jumping into business. It is safer to invest in an existing business with a history, customers, employees and cash flow versus starting from scratch. If there is nothing available on the market that interest you...WAIT. Be patient for the right one that will utilize your skills, interest and that will be able to help you reach your goals for your next career.