Why You Need to Know the Value of Your Business Today

In today’s economy, no one wants to spend money on something they don’t need today. So why do you need an estimate of your company’s value when you don’t expect to leave for several or many years?

You don’t — if you fall into one of two groups:

  • Owners who are sure that their business exits are more than 10 years away.
  • Owners who are certain that the value of their companies is miniscule compared to what they will need upon sale or transfer.

Most owners, however, look to the value of their businesses as the chief source of liquidity for their post-exit lives. We intend to leave as soon as it is feasible rather than when we are completely burned out. Therefore, most of us need to know the value of our companies now so we can be smart about creating greater business value in as short a time as possible.

Knowing the value of your business today is critical whether you plan to leave your business tomorrow, or in five years because:

  1. An estimate of value establishes your starting line and distance to the finish.
    An estimate of value tells you where your unique race to your exit begins. Your job, whether your company is worth $500,000 or $50M, is to fill the gap between today’s value (the starting line) and the value you need when you exit (the finish line). Based on today’s value, your race to the finish may be shorter, longer, or perhaps much longer, than you expect. Once you know how far you and your business need to travel, you can begin to create timelines and implement actions to foster growth in business value.
  2. An estimate of value tests your exit objectives.
    An estimate of value helps you to determine if your exit objectives are achievable. Let’s assume that you decide that your finish line (financial objective) is to receive $7,000,000 (after taxes) from the transfer of your business interest. You also want to complete your race in three years (timing objective). An estimate of value will tell you if the distance between today’s value and the finish line is too great to reach in three years. If a growth rate is unrealistic for your business, you must either extend your time line or lower your financial expectations.
  3. An estimate of value provides important tax information.
    First, an estimate of value gives you a basis for analyzing the tax consequences of Exit Path alternatives. Once you choose your path, the value estimate provides a basis for your tax-minimization efforts. Taxes can take a significant chunk out of a business sale price so the value of your company (what a buyer pays for it) must usually exceed the amount of money you need to fund your post-exit life. The size of that excess depends on how you and your advisors design your exit, and exit design in turn begins with knowing starting value and the distance to your finish line.
  4. An estimate of value gives owners a litmus test.
    When owners know how much value they need to create to meet their objectives, it helps them determine where they need to concentrate their time and effort. Instead of growing value for the heck of it, dedication to a goal enables many owners to exit sooner with the same amount of after-tax cash than owners who do little or no planning. Exit plan success all begins with a starting value.
  5. An estimate of value provides an objective basis for incentive plans.
    As you design incentive plans for key employees (such as Stock Purchase, Stock Bonus and Non-Qualified Deferred Compensation Plans) to motivate them to increase the value of your company (so you can successfully exit) you must base these plans on an objective estimate of value. You and your employees need a current value (or starting line) that you all can confidently rely on.

This is Not a Full-Blown Valuation!

I know you are thinking, “How much is this going to cost me?” But I’m only suggesting that you need an estimate of value to establish a benchmark, not the opinion of value which precedes your transfer of ownership, years from now.

Estimate of Value

An estimate of value:

  • Costs about half as much as a standard valuation opinion,
  • Is the basis for the (later and) complete valuation, but
  • Lacks the supporting information contained in a written opinion of value, and
  • Is used for planning only. It cannot be relied upon for tax or other purposes.

Failure to Value

On some level, we all recognize that we will leave our businesses some day. While you may not yet have a vision for the second half of your life, you do understand that the exit from your company is likely to be the largest financial transaction of your life. Does it make sense to go into that transaction and into the second part of your life without an objective understanding of your company’s value?

An estimate of value can save precious time as you build value and achieve the exit of your dreams.

If you would like a copy of our White Paper that explains the hows and whys of valuation in more detail, please contact me.

Subsequent issues of The Exit Planning Review™ provide balanced and advertising-free information about all aspects of Exit Planning. We have newsletter articles and detailed White Papers related to this and other Exit Planning topics. If you have any questions or want additional Exit Planning information, please contact us.

Article presented by Katie Horton, Integrated Wealth Counsel, katie@integratedwealth.com, a Member of Business Enterprise Institute’s International Network of Exit Planning Professionals™.  © 2012 Business Enterprise Institute, Inc.

First Things First: Prioritize Your Objectives

“You’ve got to be very careful if you don’t know where you’re going, because you might not get there.” — Yogi Berra

It is not always easy to interpret Yogi. In this case, perhaps he is advising you to figure out just where you are headed in your business. As you near the time when you will leave behind the daily worries and stresses of business ownership, have you defined your successful exit? Do you know where “there” is, much less how to get there? Unless you set and prioritize your exit goals or objectives, you may have too many, or they might conflict, but in either case you may not make much headway.

The clearest example of a failure to set objectives may be Bill Wilson (not his real name), a business owner who recently told us that he wanted:

  • To leave his business within three years, but he was ready to leave today;
  • Financial security, defined as a seamless continuation of his current lifestyle; and
  • To transfer the business to his key employees.

A quick review of Bill’s personal financial statement, however, revealed that most of the income required to maintain his lifestyle would have to come from the business. Unfortunately, his business wasn’t large enough to attract a cash buyer. And, since Bill had done no Exit Planning, his employees had no funds with which to purchase his ownership interest. A long term installment note seemed to be the only answer — a risk Bill was unwilling to take.

Contrast this unpalatable solution with Bill’s objectives — objectives which could have been achieved had he taken the time (well before he wanted to leave the business) to establish and to prioritize his Exit Objectives.

If, for example, an owner’s need for financial security prevails, selling a business to a third party for cash may be the best and quickest exit path.

If, however, attracting a qualified third party is unlikely, an owner may need more time to devise and to implement a transfer to an insider (child or employee) that provides the owner adequate cash.

On the other hand, if an owner’s desire to transfer the business to a specific person or group trumps his or her need for financial security, and his/her deadline for departure draws near, financial security in the form of “up-front” cash must take a backseat.

As you can see, owners must consider—simultaneously—the three primary exit goals (listed below). Ask yourself which is your most important exit objective and rank your answers from 1 (most important) to 3 (least important).

  • Financial security:
    1    2    3
  • Transferring the business to the person of my choice (may include key employees, co-owner or child):
    1    2    3
  • Leaving the business when I want (could be immediately or never):
    1    2    3

Prioritizing your objectives will help you choose your overall path. For example, if you want out—soon and with cash—but your business cannot be sold today, do you wait until market conditions improve or sell now to your employees? While prioritizing your objectives is not easy, doing so gives you a framework to decision making.

We suggest that you print this issue of The Exit Planning Review™ so you can complete the rankings above and share this information with members of your Advisor Team. We encourage you to contact us as you work through these decisions. With fresh eyes and experience with other owners we can help you to balance these competing objectives.

Subsequent issues of The Exit Planning Review™ provide balanced and advertising-free information about all aspects of Exit Planning. We have newsletter articles and detailed White Papers related to this and other Exit Planning topics. If you have any questions or want additional Exit Planning information, please contact us.

Article presented by Katie Horton, Integrated Wealth Counsel, katie@integratedwealth.com, a Member of Business Enterprise Institute’s International Network of Exit Planning Professionals™.  © 2012 Business Enterprise Institute, Inc.

Indecision: The WRONG Decision

“I haven’t decided what I ultimately want to do with my business, or when I want to exit, or how much money I’ll need, or whom to sell to, so how can I plan my exit? Besides, I don’t want to exit right now.” If you’ve said this, or thought it, you are not alone. Many business owners are either overwhelmed with the thought of exiting or are so busy fighting daily business fires that they think they cannot plan their exits.

Know that in your indecision, you are making a decision. As Winston Churchill observed, “I never worry about action, but only about inaction.” When you take a passive attitude toward the irrefutable fact that you will–one way or another–leave your business, you are deciding to settle for a least profitable exit for yourself and for your family.

If you are an owner who isn’t sure about what you want, or when you want to leave, why is it so important to decide to act today? Why can’t you wait?

  • Preparing and transferring a company for top dollar takes time—on average about 5 years. Most of those years will be spent preparing the business for the transfer. If you decide to sell to employees or children (two groups who rarely have any money), they’ll need that time to earn the money to pay you for your interest.
  • More time often equals greater reductions in risk. Time can be used to design and implement income tax-saving strategies, build value, strengthen your management team, begin a gradual transfer of ownership (not control) to key employees or children. If you wait too long, you probably won’t have time to implement these strategies and you’ll likely end up transferring your business on less-than-ideal terms.
  • The market does not operate on your schedule and may not be paying peak prices when you are ready to sell to an outside party. Witness the state of the M&A market in 2008 and 2009: activity is almost non-existent in many business sectors and down in almost all.

If leaving a company you’ve worked so hard to build and having little or nothing to show for it, is unacceptable to you, let’s look at a few of your options.

Wait for a buyer. According to Deloitte’s Entrepreneurship UK: 2008 survey, 35 percent of business owners said they will wait for a third-party offer for their businesses. Owners in this group believe that one day a buyer will contact them, negotiate a sale, and that will be that. Well, this is a decision of sorts—but one that flies in the face of reality. While few businesses are being sold today, there will likely be a significant number of Baby Boomer business owners vying with you to sell their businesses when the M&A market recovers.

In a competitive buyer’s market, only the best-prepared businesses sell for top dollar. And the owners of those well-prepared businesses will be those who made the decision to act to prepare their company years ahead of the actual sale.

Liquidate. Liquidation is a common exit path for owners of companies whose cash flow is flat and has little probability of improving—absent the design and execution of a business/exit plan. If you find yourself in this group, we recommend that you meet with your tax and other advisors to do the planning necessary to create the most tax-efficient liquidation possible.

Decide to exit and plan accordingly. Start today and take the following steps:

  1. Fix a departure date.
  2. Determine your financial needs.
  3. Decide whom you want to succeed you.
  4. Have your business valued to see if: a) should you sell today; and/or b) it has the value necessary to meet your financial and other exit objectives.

Based on your objectives and the realities of your business, use a skilled Exit Planning Professional to forge a plan with accountability/decision deadlines.

Deciding to do something now to create the best possible exit path is not difficult. The failure to act, however, can potentially be fatal to a successful exit. The success of your business exit is simply too important to you (your family and your employees) to leave to chance. Why wait? Why decide not to decide?

Subsequent issues of The Exit Planning Review™ provide unbiased and advertising-free information about all aspects of Exit Planning. We have newsletter articles and detailed White Papers related to this and other Exit Planning topics. If you have any questions or want additional Exit Planning information, please contact us.

Article presented by Katie Horton, Integrated Wealth Counsel, katie@integratedwealth.com, a Member of Business Enterprise Institute’s International Network of Exit Planning Professionals™.  © 2012 Business Enterprise Institute, Inc.

Getting Started in the Exit Planning Process

Nora Chapman’s story was typical of most business owners who have made the tough decision to leave their companies. At age 54, she was confident in finding a meaningful second act and was ready to leave her 25-employee advertising business. Nora was thinking of selling to one or two of her key employees and when we met her, her first question was: “Is this the right exit choice?”

Many of you find yourself in the same predicament. You are able to envision your life beyond business ownership, but you don’t have a clear picture of how best to “leave your business in style.” So what do you and the Nora Chapmans of the world do? Here is what we told Nora.

First, understand that leaving your company is a process. Realizing that life after your business exit can be as fulfilling as your life as a successful owner is simply the first step. The next step is to figure out a way to approach your exit in a methodical, logical, rational manner. Most owners do not put enough thought and planning into their exits because they don’t know how to begin, that there’s a proven process available to them, or exactly what issues to consider and analyze.

If that describes your situation, you are not alone. Most owners, and their advisors for that matter, don’t know that there is a planning and an implementation process that is methodical, rational and can be tailored to your unique exit goals. It is The Seven-Step Exit Planning Process™.

This Process begins with setting your exit objectives and understanding the value of your business. Based upon what you want and what you have, you can then examine and choose a proper path for you: be it a sale to a third party, a transfer to children, a sale to an ESOP, a sale to a co-owner, or an orderly liquidation. As part of this Process, you also must consider what would happen to the business and to your family in the event your death or disability precedes your planned exit.

Simply knowing the process and proceeding down the Exit Planning path, however, is insufficient. According to the Small Business Administration (SBA) most business owners who begin the planning process fail because they fail to plan. To succeed, you need a written plan that:

  • Identifies your exit, financial and other objectives that must be considered; and
  • Documents how you are going to achieve those objectives.

Along with this written plan you must have a checklist that:

  • Assigns responsibility for each task to be completed throughout the Exit Planning process;
  • Sets dates for each task to be completed; and
  • Designates the person responsible for completing each task.

How do you begin? 

“Let us, therefore, decide upon the goal and upon the way and not fail to find some experienced guide who has explored the region towards which we are advancing; for the conditions of this journey are different from those most travel.” — Seneca, “On the Happy Life” (AD 58)

As skilled and as successful as most business owners are, they cannot, working alone, create and execute their Exit Plans. Rarely have owners made a career of exiting businesses. Those owners who do attempt to craft their own Exit Plans usually fail and, at best, they leave a lot on the table: a lot of money, time and/or their own happiness.

And, as skilled as is your attorney, CPA or financial and insurance representative, acting alone, each is unable to craft a successful Exit Plan. Successful Exit Planning is a multi-disciplinary effort that requires you and your advisors working together. No one profession possesses the breadth of knowledge necessary to advise a business owner on the wide variety of Exit Planning issues.

For your Exit Plan to succeed, you need legal expertise, financial advice, tax planning, financial advisory input, and often, consulting ideas. If you decide to sell to a third party, you may require the services of a Business Broker or Investment Banker. No one advisor can be an expert in all aspects of exiting a business.

What does it take to create an Exit Plan?

  • Understand that there is a proven Exit Planning process. Learn as much as you can before you make final decisions.
  • Commit to see the process through—holding yourself and others accountable.
  • Document your decisions and create a written plan.
  • Hire an experienced team of professionals—attorney, CPA and financial or insurance representative (at a minimum) to help guide you through this process. These professionals should more than pay for themselves by putting money in your pocket. If they cannot, you have the wrong team.

If you are to exit successfully, there is much to do. We can help by providing more detailed information on Exit Planning in general, and by giving you a sense of the time and resources this planning and implementation process will take.

Stay tuned for future issues of this newsletter for more information about various aspects of the planning process. Expect hints to save taxes, money, and time.

Subsequent issues of The Exit Planning Review™ provide balanced and advertising-free information about all aspects of Exit Planning. We have newsletter articles and detailed White Papers related to this and other Exit Planning topics. If you have any questions or want additional Exit Planning information, please contact us.

Article presented by Katie Horton, Integrated Wealth Counsel, katie@integratedwealth.com, a Member of Business Enterprise Institute’s International Network of Exit Planning Professionals™.  © 2012 Business Enterprise Institute, Inc.

The Road to Irrelevance: Transferring Your Responsibilities to Management

Longtime readers of this newsletter know that one of our favorite instructions to business owners is: Make Yourself Irrelevant!

Newer readers may find that recommendation off-putting so let us explain. Unless your business can run without you, your business has little value to a prospective buyer.

If making yourself irrelevant is the goal, how do you do that?

In our experience, owner irrelevance doesn’t happen by accident or overnight. It is the result of careful analysis and action.


 In those rare moments when owners think about their key employees running their companies, they often put on their rose-colored glasses. They expect, that with a few tweaks, their employees can easily run the show.

To those owners, we recommend: Take a trip for a few weeks, preferably to a remote island with no cellphone service. When you return, you will be in a better position to coolly assess your employees’ performance.

Don’t be surprised if you find that:

  1. There is no leader on your management team. There isn’t one person with the charisma or personality to inspire both managers and employees.
  2. There is no decision maker. When disputes arise among managers, there is no one or no mechanism in place to resolve them. In fact, this vacation exercise often illustrates that the members of your management team don’t even respect each other.
  3. You have created a work (or learning) environment very different from the one you experienced as you gained management experience. Most owners acquire their skills through trial and error. When (not if) they made mistakes, they fixed them and moved on. But these same owners unintentionally create a “no error” environment for their key employees. If key employees make a mistake, they are fired. Is it any wonder that management teams are replete with “yes men” rather than creative, entrepreneurial do-ers?


 After unpacking and dumping the sand out of their suitcases, how can owners address these issues and work toward owner irrelevance?

First, accept the challenge. It isn’t the management team’s job to fix the problem. It is yours. We encourage you to contact us for help in creating an action plan, but the job of becoming irrelevant is yours alone.

Second, make a list of all the activities that are involved in getting orders in and your product or service out the door. If you need help with that list, we can help as well, but the point is to write the name of the person responsible for managing that task next to each activity. One owner who employed Vice Presidents of Operations, Manufacturing and Sales, found that he was responsible for 94 of 136 tasks. That owner was far from irrelevant.

Third, consider hiring an industrial psychology firm to assess members of your management team to see if they possess the intangible skills necessary to run your company. If you learn that members do not have these skills, you may choose not to devote the time and effort necessary to train them to assume the technical responsibilities of their positions.

Fourth, once you’ve determined which employees have what it takes (or you have hired new people) to run your company, you must create a training plan that includes three important characteristics:

  1. It clearly establishes your expectations for job performance or standards for success.
  2. It provides the training necessary to meet performance expectations.
  3. It provides accountability. We don’t recommend that you hand over control of your company with a hope and a prayer. Instead, we suggest that owners set up measures of accountability. You must walk the fine line between staying involved and allowing employees to lead—and make mistakes.

There are a myriad of ways to transfer management responsibilities to your employees, but before embarking on any one program, we urge you to use these guidelines in your choice of the best method for your company.

Again, if you would like help on your Road to Irrelevance, just give us a call.

Subsequent issues of The Exit Planning Review™ provide balanced and advertising-free information about all aspects of Exit Planning. We have newsletter articles and detailed White Papers related to this and other Exit Planning topics. If you have any questions or want additional Exit Planning information, please contact us.

Article presented by Katie Horton, Integrated Wealth Counsel, katie@integratedwealth.com, a Member of Business Enterprise Institute’s International Network of Exit Planning Professionals™.  © 2012 Business Enterprise Institute, Inc.

Overview of Captive Insurance Companies

For the small business owner, captive insurance companies may provide several advantages in risk-management, income taxation, and generational wealth transfers.

Background on Insurance Companies

Insurance companies make money by pooling premiums in excess of underwriting costs and investing them for the company’s profit. The principal belongs to the insured premium-payers (it is what is used to pay claims for loss). The profits go to the insurance company.

What is a “Captive”?

A captive is an insurance company that is wholly owned by a parent company.

What are the Benefits of Establishing a Captive?

  • If there are not claims, uncollected proceeds are not lost premiums by the parent company as they would be if the premiums were paid to a third-party insurance company.
  • Captives may insure against risks that are generally uninsurable or which are hard to cover commercially.
  • The cost of insurance can be lower due to individualized, catered coverage that exactly matches the parent company’s risk profile and experience.
  • Premiums paid are still deductible.
  • Premiums paid and investment earnings on those premiums (float) are kept among the parent-company owners and their families.
  • Captive can earn an underwriting profit from a portion of premiums.
  • Allows companies to retain more, if they so desire.
  • Captives that qualify under I.R.C. §831(b) are exempt from income tax on the first $1.2 million of premiums received. (However, the IRS “red flags” captives that just happen to charge exactly $1.2 million in premiums… as they might be shams trying to exploit this advantage).
  • Parent company essentially gets to use pre-tax dollar for self insurance (because of the deduction for premiums paid to the captive). Ordinarily, cash-reserves held by a company to cover uninsurable risks, or to self-insure, are after tax dollars.
  • A captive may remain “in the family.” The value in unused premiums transferred to the captive is transferred to succeeding generations along with the closely held parent company.


Under some circumstances, establishing a captive insurance company can provide numerous financial benefits to parent companies, their owners, and successors in ownership.

When to Sell your Business – Merger and Acquisition Market

You have decided to sell your business to a third-party, but aren’t sure when the right time to sell is, or if it really makes a difference. The merger and acquisition market can dramatically affect the price you receive for your business. The difference between selling at a low point verses a high point in the M&A market could be a swing in the EBITDA earnings multiple of 4 or more. A quick calculation tells us that the price of a company with an EBITDA of $3 million could swing $12 million or more due to market fluctuations alone. Although there can be many more important factors used to determine when a business is sold, if you have the flexibility to delay the sale of your business, especially when the market is down, the payoff could be well worth the wait.

If you are trying to sell your business, a good time to do so is when there is lots of buying activity in the M&A market, the supply of companies is low, and the demand from buyers is high. The opposite is true for a poor market. Just like the stock market, the M&A market is volatile and difficult to predict, but there are some influences you can watch that signal if it is a good time to enter your company into the M&A market.

A positive influence on the M&A market is when the economy is strong. Indications of a strong economy include: a growing Gross Domestic Product, an expanding job market, high consumer confidence, increased retail sales, expanding manufacturing and high levels of new home construction. Other positive market influences are company profitability, positive public relations, well-funded Private Equity Groups and a low capital gains rate.  With the Bush tax cuts set to expire at the end of 2012, capital gains rates are going to increase to 20% if no changes are made which could effect the M&A markets. Keep an eye on what is going on in D.C. to see how rates will change.

For the most part, negative influences on the market are the opposite of the positive influences; however, there are also a few factors that create instability in the M&A market. When there is a terrorist event or some other traumatic activity, consumer confidence is shaken, and uncertainty results. After the events on September 11,2001, the value of many companies plummeted overnight, and it took five years for the M&A markets to regain their previous levels of activity. Also if there is a boom or bust in one sector, it can have an affect on the market as a whole. Think of the dot-com boom (and subsequent bust) for example, or more recently, the housing market. Other uncertain influences are changes in the global economy as well as interest rate manipulation.

As you can see, the M&A market is complex and difficult to predict. Timing is important for increasing the value you receive from your business. If you are thinking of selling your business in the future, begin to prepare yourself and your business by working with an expert in the M&A markets so that you can receive top dollar for your business when the time to sell is right.

Maximizing Business Sale Value With Charitable Strategies

The Basic Sale Of The Business

It is difficult to imagine that one might end up with more money by giving something away.  But recall the saying: you can’t receive if your hands are full.  Indeed there are many strategies in business exit planning and estate planning that leave a family with more money when gifting to charity than when not gifting to charity at all.

Consider a business owner who retires at age 65 and will live until 90 years old.  The sale of her business – with an estimated sale price of $1 million – will be the source of her retirement income along with a total of $32,000 from Social Security for her and her spouse.  She intends to spend all of the sale proceeds during retirement.

Upon the sale of the business, the owner will pay a combined Federal and State tax rate of 35 percent.  This will leave her with $650,000 of investable assets from which to generate retirement income.  We will assume that her investments will achieve a moderate 7 percent total return per year over her retirement and that the inflation rate will be 2.5 percent per year.

At what dollar rate can the owner begin drawing from her sale proceeds given the following?

–        She steps up her dollar rate of draw by the 2.5 percent inflation rate each year

–        She exhausts her sale proceeds at death

The answer is approximately $44,400 per year.  And, the inflation-adjusted value of the cash-flow stream is about $1.11 million.

Enter The Charitable Strategy

Now, let’s consider combining the sale of the business with a charitable strategy.  Let’s say that the owner creates a charitable remainder trust (CRT) and donates her business to the trust.  At a subsequent point, the trust sells the business.  (More on this aspect later.)

With a CRT, the donor can receive an income stream for life and the assets left in the trust upon the donor’s death pass to a named charity.  The donor can choose the income rate she wants.  However, the Internal Revenue Code specifies that the minimum income stream to the donor must be not less than 5 percent of the trust’s asset value per year.  Also, the percent rate can be as high as the donor wants but there must an actuarial remainder value of not less than 10 percent of the original donation.

There are two key tax benefits to a CRT in this situation.  First, the business owner sidesteps the taxes resulting from the sale of her business.  As such, the trust is funded with $1 million as opposed to only $650,000 she would have netted without the donation.  The key is that $1 million will be earning income for her instead of only $650,000.  Second, because there will be some assets remaining in the trust upon her death and those remaining assets will pass to the charity she names, she receives a charitable donation deduction on her income tax return in the year she donates the business to the trust as opposed to upon death.

Of course, the lower the distribution rate, the higher the residual value and thus the higher the tax benefit. The higher the distribution rate, the lower the residual value and thus the lower the tax benefit.

Our business owner can “dial in” various income rates that she might receive from the CRT to determine which rate maximizes her total economic benefit, that is, the combination of inflation-adjusted income payments and tax savings.  In this particular case, this would occur with an income rate of roughly 10.25 percent per year.  This figure totals about $1.474 million.  As a result of including a charitable strategy in the sale of her business, this business owner achieved approximately $364,000 (or 32.5 percent) more from the sale.

Moreover, the owner’s favorite charity receives a handsome gift.  And, the charity heaps glory and honor upon the owner for the legacy that she has left.  Everyone wins.


There are, of course, rules that one must follow to 1) secure the sidestepping of the taxes resulting from the sale and 2) keep the trust’s tax-exempt status.  There are various strategies to ensure this.  Having the right team of professional advisors who understand these strategies is the key.


Your Buy-Sell Might Be Great If You Die, But What Happens If You Live?


Few owners (or their advisors) give much thought or analysis to the likelihood of a lifetime transfer. Instead they focus all of their attention on dealing with the least likely event—an owner’s death. Yet, in our experience, lifetime transfers occur much more frequently, and when they do can cause huge problems.

Typically, owners create buy-sell agreements that may work well in the event of a shareholder’s death, but forget that the same provisions (such as a first right of refusal at a pre-determined price should one owner wish to transfer ownership to anyone) will govern in the case of a lifetime transfer. Because these agreements are designed for one event and used for another, the result is, at minimum, an impetus for re-negotiation, and at worst, a nightmare.

Let’s look how two owners’ exclusive focus on death crippled them when the thing they least expected happened.

H&T Custom Tack almost didn’t get out of the corral. Harry and Tom had talked about pooling their resources (Harry’s thriving tack business and Tom’s reputation as one of the best custom saddle makers in Texas) for years when Tom’s twin brother had a heart attack at age 55. Tom realized that life was too short to keep talking about creating a partnership and the two decided to merge their talents at last.

Along with all of the other documents that Tom and Harry’s attorney insisted on was a buy-sell agreement that established the price and the terms of the sale or purchase. Embedded in its creation was the assumption that one of them (probably Tom since he was eight years older than Harry( would die and Harry would purchase Tom’s ownership using life insurance proceeds.

The good news was that Tom answered the wake-up call to improve his life and lifestyle. He not only created a successful company, he replaced his daily drive across town to grab a chicken-fried steak or cheeseburger with brisk walks to the new vegetarian salad joint. He joined his wife for long bike rides on weekends and boasted that he’d never felt better.

The “bad” news was that before either of them could ride off to join the Big Rodeo in the Sky, Harry began to think about retiring and selling out. A quick look at their buy-sell agreement told Harry that he had to sell his stock to Tom based upon the price they had established when they assumed that there would more than adequate funding because of the life insurance policy.

Harry and Tom’s problems were just beginning. Because the price established in their buy-sell agreement had little to do with the fair market value of the company when one of them wanted to sell out, the price the buyer would pay was likely to be substantially higher or lower than the company’s current value. This means that one or the other partner would suffer.

Some owners resolve this problem by agreeing to ignore their buy-sell agreement and to hire a Certified Business Appraiser to establish a fair market value for the company. Harry suggested this route, but Tom insisted that they abide by their original agreement. First, Tom did not want to put a damper on the future growth of the company by siphoning off its cash flow toward Harry’s buy out. Second, the value in the buy-sell agreement was significantly lower than the company’s current value.

Harry felt he had proposed a fair alternative, resented Tom’s intransigence and didn’t want to sell his ownership interest for what he believed was an artificially low price. As you can imagine, the two partners stopped speaking.

Harry’s issue with the price was just the first hurdle. Because Harry and Tom had presumed that only death would separate them, they had done no planning to minimize the tax consequences of a lifetime sale. Further, since they assumed that the survivor would use life insurance proceeds (rather than company cash flow) to fund the buyout of the deceased shareholder’s interest, they had established a very short—only four-year—timeframe to pay for the purchase. Finally, their buy/sell included no “forced buyout provision” to resolve irreconcilable differences between the owners.

In short, the only way for Harry to leave the company with the amount of cash he felt he was owed was to die. Until he could do that, he was left owning a company whose performance he had absolutely no reason to improve.

The best, and perhaps only, way to prevent this impasse with your company is to address, today, potential problems caused by a buy-sell agreement drafted years ago for a transfer event (death) that is not the event (lifetime transfer) most likely to occur.

If you suspect that your agreement may be inadequate, review it immediately…before one owner decides it is time to ride off in the sunset. Please feel free to contact us if you need help identifying and resolving any problems with your current buy-sell agreement.

Article presented by Katie Horton, Integrated Wealth Counsel, katie@integratedwealth.com, a Member of Business Enterprise Institute’s International Network of Exit Planning Professionals™.  © 2012 Business Enterprise Institute, Inc.

Lifetime Buyout of a Co-Owner

When co-owners are united in striving toward common business goals such as growing revenue, building business value and increasing cash flow, the business dynamics can be wonderfully positive and strong. These owners move together to reach common goals. Contrast that bright picture with what can happen when, suddenly perhaps, the goals of the owners diverge.

Owner Disability and Other Lifetime Transfer Events

 Most closely held business owners are full-time employees (and more) in their businesses. What happens when one of the owners wants or needs to leave the company?

Possible reasons for leaving are many, ranging from boredom to more dramatic and unexpected events such as the sudden disability of an owner. Let’s use owner disability to illustrate some of the significant issues raised when ownership goals are no longer aligned.

When disability strikes an owner, the company will endure substantial hardships, both economic and operational. More importantly, in the absence of a buy-sell agreement, the disabled owner’s income stream from the company also may evaporate. This problem confronted Steve Hughes, one of three equal shareholders in a growing advertising agency.

At age 38, Steve suddenly had a stroke. As with many stroke victims, his recovery was incomplete. Physically, he was the picture of health (his golf game even improved!); but he totally lost his ability to speak and read. Doctors told Steve he would never be able to return to work.

Steve’s firm had a buy-sell agreement, but it covered only a buyout at death and an option for the company to buy Steve’s stock if he were to try to sell it to a third party. Trying to find and sell closely held stock to a third party is a difficult proposition anytime; Steve’s disability made it impossible. Even if his fellow shareholders had wanted to continue his salary, they did not have the resources to do so indefinitely.

As a result, the company and Steve were left in a classic dilemma—the company, or rather the remaining shareholders, wanted to purchase Steve’s stock so that its future appreciation in value, due now to their efforts alone, would be fully available to them. Conversely, as Steve’s family soon realized, the owners of closely held stock rarely receive current benefits in the form of dividends. The profits of a closely held corporation are either accumulated by the company or distributed to the active shareholders in the form of salaries, bonuses and other perks.

In short, Steve’s family would not get what it needed most—cash—to replace the salary Steve was no longer earning. Steve’s partners faced the prospect that their efforts to increase the value of the business would reward Steve as much as themselves.

This dilemma could be solved only by a buyout of Steve’s stock. His family then could receive a fair value for his business interest when they otherwise would receive nothing (until the company was eventually sold or liquidated). Meanwhile, ownership would be left with those responsible for the company’s success.

The Hughes buyout faced several problems arising from the now-divergent goals of the owners. Prior to Steve’s unexpected disability event, joint contributions of time, effort and capital created unanimity among owners. Now, one owner needs cash, while the company and the other owners want to retain earnings for growth.

Further, the remaining owners want to pay as little as possible over as long a time period as possible because they (or the company):

  1. Will pay for acquiring that value with after-tax dollars; and
  2. Want to preserve, not spend, capital on a non-productive asset such as stock of the company.

Before Steve’s stroke there was mutual agreement and understanding among the owners. After his disability, there are radically different owner wants and needs. The result: Owner discord and impaired business performance.

Typically, we must address four major issues that arise in situations like this:

  • Agreement on the business value.
  • Funding for the buyout.
  • Agreement on the payment terms of the buyout.
  • Payment to the departing owner with the least income tax consequences.

A buy-sell agreement drafted before such transfer events occur and when mutual ownership objectives unite all owners can anticipate and manage each of these issues.

In the subsequent Exit Planning Review™ article, we will look at each one of these common business transfer problems and identify ways in which the buy-sell agreement can prevent problems from arising, or, at the least, provide an agreed-upon methodology for resolving such issues.

If you would like to discuss in more detail ways to prevent problems in a transfer of ownership, please contact us.

Article presented by Katie Horton, Integrated Wealth Counsel, katie@integratedwealth.com, a Member of Business Enterprise Institute’s International Network of Exit Planning Professionals™.  © 2012 Business Enterprise Institute, Inc.