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How to Fund a Buy-Sell Agreement

Business Valuation | Estate Planning | Ohio CPA Firm

Don’t underestimate the importance of estate planning for your business. If you don’t have a plan in place, you could be throwing your hard-earned money away. Read on to learn more.

How important is proper estate planning for business owners? Consider this real-life scenario. The majority owner of a successful business, which had a buy-sell agreement in place, died unexpectedly. The buy-sell agreement was funded by a life insurance policy that was owned by the company. A valuation showed that the value of the company was significantly less than the value of the life insurance proceeds.

If the owner had a valuation done before purchasing the life insurance, he could have saved a significant amount of insurance premiums. In this case, the company gained from the policy, but it could have easily overpaid had the majority owner lived longer.

Don’t underestimate the importance of estate planning for your business. Some common funding options available for buy-sell arrangements are as follows. You can use just one, or a combination of two or more. Either way, if a triggering event were to happen, having this set forth in the buy-sell agreement will make it easier on both sides:

  • Cash. This would also include corporate assets in excess of operating requirements external borrowings. If your company has a healthy balance sheet, it could borrow funds from the bank.
  • Shareholder note. The buy-sell agreement would call for a note for the redemption amount and would set the terms.
  • Life insurance. When it is available and affordable.

If you need estate planning for your business, contact the business valuation team at Rea & Associates.

Protect What Matters Most

Family Business Assets Could Be In Jeopardy

Family Limited Partnership Debate | Know & Grow

For years, the Family Limited Partnership (FLP), has proven to be a safe way to manage family businesses and personal assets – much like one would protect a treasured collection of sea shells. Read on to learn why that tactic may be in jeopardy.

As a child growing up by the beach, I would spend countless hours scouring the shoreline for shells and sea glass. Some of my most treasured finds were sand dollars, purple clamshell pieces and blue sea glass – the quest for which would create a mostly friendly competition among little girls. The collection was undoubtedly one of my most prized possessions.  So, to keep it safe, I would store my treasures in a strong container on a high shelf – hidden away from my siblings’ curiosity. After all, it’s only natural to want to protect those things that matter most to us.

Families that have worked hard to build and grow their small businesses are particularly sensitive to economic risk. The Family Limited Partnership (FLP), an entity designed to centralize family business or investment accounts, has been proven to withstand the test of time for business and estate planning purposes. Not only has it provided owners with a strong “container” to manage family business and personal assets, it offers families the option of a metaphorical “high shelf” to keep assets  safe from the overly sticky fingers of certain outside interest holders and tax collectors.

However, recent legislative efforts have sent this ordinarily stable vessel into the proverbial eye of a regulatory storm.

Read Also: Gifting a Business Interest?

The Voice of the Small Business Owner

Last August, the Treasury Department proposed new Section 2704 regulations, a measure that would curtail the valuation discounts that have been typically applied in estate planning for family businesses over the past 25 years.

According to an article by Ashlea Ebeling, staff writer for Forbes, “the proposed rules had drawn 9,477 comments and resulted in the largest crowd ever at a Treasury public hearing.” The hearing, which was held in early December, turned into an all-day affair, included emotional pleas from small business owners, as well as numerous expert technical critiques.

In response to the concern of small business owners within their constituencies, lawmakers have also responded with comments and measures of their own.

Congressman Warren Davidson (R-OH) said the proposed rule changes undermine settled law, and “effectively increase the death tax by 30 percent or more on family-owned businesses.

“One of the industries hardest hit by the estate tax is family-owned farms that get passed on from generation to generation – an embodiment of the American Dream,” said Davidson.

Davidson and Senator Marco Rubio (R-FL) sponsored individual pieces of legislation (H.R. 6100 and S. 3436, respectively) in an attempt to block the IRS measures, and reaffirm Congressional power “to lay and collect taxes” according to the Constitution.  Both bills have garnered support from numerous co-sponsors, and free market and business groups alike, including the U.S. Chamber of Commerce.

In the September 2016 press release that introduced the Senate bill, Rubio, along with co-sponsors Senator Jerry Moran (R-KS) and Senator Jeff Flake (R-AZ), and 38 Senate colleagues, included a joint statement formally appealing to former U.S. Treasury Secretary Jacob Lew to withdraw the proposed changes. The statement highlighted that “they directly contradict long-standing legal precedent, create new uncertainty for taxpayers, and put family-owned businesses at a disadvantage relative to other types of businesses.”

Both bills have since been referred to their respective committees within the House and Senate – where they currently remain.

Regulations In Limbo

What now? Where do things stand? At this time, there are no definite answers.   According to the U.S. Department of the Treasury, regulations will not go into effect until comments are carefully considered, and then 30 days after the regulations are finalized.

The good news is that with the new administration ushering in a more deregulatory environment, there is optimism that long-standing valuation practices for FLPs will remain in place. The bad news is that, if action isn’t passed soon to specifically block this measure, a possibly modified Section 2704 is in fact on schedule to begin implementation this year.

Next Steps

While lawmakers continue to knock heads and hash out details, the best approach for small business owners is to keep calm and speak with a professional valuation expert. The business valuation team at Rea & Associates is staying abreast of the situation, and is dedicated to keeping the business owners with whom we work informed of any late-breaking developments that could impact your gifting strategy. Email us to learn more, and plan to keep those seashells safe from the breaking waves of current political uncertainty.

By Cathy Levins, Client Service Specialist (Dublin office)

Check out these articles for even more great insights:

Building a Business is About Building Value

Considering Gifting Your Family Owned Business?

Grow The Value of Your Business

How To Communicate To Your Employees That You’re Selling Your Business

Employee Communication | Business Sales | Grow Your Value

When you decide to sell your business, don’t forget to facilitate open, transparent communication with your key employees. Read on to learn more.

Once you decide that it’s time to sell your business, you’ll be faced with many challenges. Perhaps of the toughest challenges you’ll face is deciding when and how to inform key employees about your decision.

Don’t worry; you’re not alone. Many owners are reluctant to tell their key employees that they are selling the business. Why? They fear that their top employees will run out the door searching for a new job if they hear that the business is for sale.

One client told me that his biggest concern about placing his business on the market was that his employees would find out. He and his wife were in their 80s and frail. The reality was that the employees were scared that he would not sell the business and it would be liquidated after his death.

Succession Planning Communication Tips

It’s critical that you inform your key employees of your intentions. They will likely sense that there is something is going on anyway; so rather than letting them fear the worse, consider a transparent communication style. After all, rumor and innuendo can make your employees leave faster than the truth. Four things you should do upfront:

  1. Articulate to your key employees why you are selling your business.
  2. Assure them that you will tell the buyer how important they are to the business.
  3. Properly incentivize them to stay. A popular incentive in these kinds of situations is a large retention bonus that is paid to the employee(s) after the deal is closed.
  4. Make sure that your key employees understand the importance of confidentiality, and that not all employees need to know that the business might be sold.

The reality is that the buyer of your business will need almost all your employees to keep the business running smoothly and to generate a profit. A few employees could lose their job if the buyer is larger and can manage some of the administration function from the home office. But once the dust settles, most employees are likely to be retained.

Once the paper work is signed and your business is sold, it is important that you rally your employees and get them excited about working for their new boss. Not only it is the right thing to do, most deals have earn-out clauses that pay a portion of the purchase price over time depending on how well the new owner does with the business. Having motivated and good employees in place will increase your chance of maximizing your earn-out on a deal.

If you’re embarking on the journey of selling your business and need some assistance in figuring out how to communicate to your employees, email Rea & Associates’ business valuation team.

By Tim McDaniel, CPA/ABV, ASA, CBA (Dublin office)

Need more help to get you on the right track? Check out these articles for more helpful insight.

How Do You Choose A Business Exit Strategy?

How Do You Create A Succession Plan?

What’s Your Exit Plan?


Transitioning Your Company to a New Leader

Company Leadership Transition | Succession Planning | Business Value

If you own your own business, there will come a time when you will have to start thinking about your succession plan. Who will take charge after you leave? Will they have the skills needed to keep the business afloat? What if there are hard feelings? These are just a few of the questions you will have to consider when the time comes to transition your company over to new leadership. Read on for more FAQ to help you along the way.

As you approach retirement age, it’s important to plan ahead for transitioning leadership of the company you’ve worked so hard to build — and you may have more options than you realize. Read on for answers to some common questions clients ask when it comes time to start thinking about transitioning your company’s leadership.

How far in advance should I begin my succession plan? You’ll want to begin your succession planning as far in advance of your retirement as possible. Three to five years is optimal. Your plan has a better chance of succeeding if it is formalized and put into a written document.

How do I determine if it’s a better choice to transition my company to someone internally or to sell it? A detailed analysis of exit strategy options can be provided by a specialist in your CPA firm. Succession planning involves very complex issues including family dynamics, personal finances, business planning, business valuation and estate taxes; therefore, outside counsel can be beneficial. There are different strategies and tax consequences involved in both options, so a detailed written review can reveal the best choice for both you and the company.

What steps must I take to ensure a smooth transition? First, you must make sure you’re ready to leave the business – financially and emotionally. Ask yourself if you are emotionally ready to let go and whether you are financially secure enough to retire? Second, create your exit strategy. Your exit strategy should be properly communicated to all those involved.

Internal Transitions

How do I decide which family member/employee is best suited to run the business? Look for a strong leader. Somebody with with maturity, decision-making ability, and passion for the business. You may have more than one family member or employee interested in leading your company after you are gone. You will have more success if you simply pick a single leader. Don’t try to spread out the responsibilities.

How do I avoid hard feelings when naming a successor? If you’re in the difficult situation of having to choose between children, take the time to sit everybody down and discuss the decision. Communication and compassion is key. You should have a process for selecting which one will become the leader, and you’ll want to hold one-on-one meetings with each family member before the decision is made to discuss the process. Once you make the selection, explain why and gather support from family members.

I want to leave the business to a family member, but I’m not sure he/she can handle it on his/her own – what options do I have? There are three options to ensure the new leader is prepared for the job. First, transfer power one year before you leave so that you can be there to guide the individual. Another option is to hire a temporary outside manager to oversee the new leader for a term of one to five years. Or, you can create a board of advisors to meet monthly to act as a sounding board for the new leader.

Once I retire, am I out for good? What if I want to check in to see how things are going? Ultimately, once you leave, the new owner has complete control. If it’s a family member, consider family dynamics. Do you have a strong enough relationship that the son or daughter feels comfortable with you checking in? If so, state your expectations ahead of time, so he/she knows your interest in remaining involved.

External Transitions

What steps should I take now to make my business more valuable once I’m ready to sell? If you know you want to sell your business upon retirement, start planning early for ways to make it more attractive to buyers – this includes increasing cash flow or decreasing risk. You can improve cash flow through proper expense management and growth of sales. Diversification of product lines, establishing a solid management team, and reducing dependence on a single, large client are ways to reduce risk for buyers.

Are there ways I can ensure my vision is carried on after I am gone? It is difficult to ensure that it will happen, that’s why it’s so important to carefully consider the selling process. Decide from the beginning what’s most important to you. Is it making the biggest profit you can from the sale? Is it making sure your employees are cared for? Whatever your answer, look for a buyer who has the same values. You don’t have to sell your business to the first interested buyer. Make sure the buyer you choose is the right person for you, for your employees and for your business.

What steps must I take to ensure a smooth transition externally? Stay on for three months to a year after the sale, which is negotiated in the purchase agreement. Some buyers may want you to stay involved when you’re gone, and others won’t, so it’s important to establish those ground rules before finalizing the sale.

Contingency Plans

An important part of your succession plan not to be overlooked is a contingency plan. What happens if you must leave the business for an extended period for issues such as hospitalization? Or, what happens in the instance of a sudden death? While these things are not enjoyable to consider, you must prepare for the day when you can no longer run your business.

For more information on developing a successful succession plan, contact the Rea & Associates’ business valuation team.

How To Be A Visionary Leader

Family Business | Succession Planning | Know & Grow

More than 90 percent of businesses in America are family-owned. Unfortunately, most of them don’t have a written succession plan. Without one, they may be forced to close their doors before the second generation steps up to lead. Read on to learn more about succession plans for your small business.

One measure of a great business leader is that their business continues to thrive long after they’ve gone.  In fact, visionary leaders are those who captain the ship today while making plans for someone else to take the helm tomorrow. A proactive succession planning strategy allows businesses to sail along with minimal interruptions, which ensures continued operations and low employee and client turnover.

Planning for Business Transition

Unfortunately, for many businesses, leadership transition isn’t as smooth as we might like it to be. It’s estimated that more than 90 percent of American businesses are family-owned and that the majority have no written or formal plan for ownership succession. Unfortunately, without a plan in place to help govern a leadership transition, many are doomed to fail  – evident by the fact that 40 percent of closely-held businesses fail to make it to the second generation and 90 percent fail to make it to the third generation.

A succession plan is more than just declaring your intention to, “Leave the business to John, Jr.”  Proper succession planning requires great skill in the areas of taxation, valuation, mergers & acquisition, family relations, evaluation of talent and a host of other items. Additionally, it requires the business owner to confront some personal or family issues, such as deciding whether a family member is really competent to run the business.

Even though succession planning should be a priority for all business owners, there appears to be no sense of urgency when it comes to proactively putting one in place. In fact, oftentimes the owner won’t think twice about the issue until they are faced with a pressing need to leave the business.  As with any scheme, a hastily sketched succession plan may lead to the business’s failure.

Succession Plan Options

Many business owners will put off succession planning because, at first glace, it can appear too tough to tackle. Even though there’s no one “right answer,” there are a number of good options. Owners have the following possibilities when it comes time to transfer their business interest. (These are listed in order of which usually produces the least amount of cash proceeds for the business owner.)

  1. Liquidation
  2. Gifting to Family members
  3. Selling to Employees or Family Members
  4. Selling to an Employee Stock Ownership Plan (ESOP)
  5. Selling to a financial buyer
  6. Selling to a strategic buyer

With all these options, it can be hard to determine the type of succession plan that’s right for your business. Luckily, this isn’t a decision that you have to make alone. Email the Know & Grow division of Rea & Associates to start developing your business succession plan today.

By Tim McDaniel, CPA/ABV, ASA, CBA (Dublin office)

Check out these articles to learn more about succession planning:

Succession Planning: A Must For Every Business Owner

When Should Your Start Thinking About Succession Planning?

Executing and Reassessing Your Plan

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Rea & Associates Inc. | 5775 Perimeter Drive, Suite 200, Dublin, Ohio 43017-3224
phone 614-889-8725 | fax 614-889-0159