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Monthly Archives: June 2017

The Buy-Sell Agreement

Let’s take a look at the rationale behind a funded buy-sell agreement.

Creates a Market

Most businesses are closely held. A person can’t call their stockbroker and buy shares in the business. Essentially, there is no market for the business.

If the business is a sole proprietorship or one-man or one-woman corporation, who is going to buy the business when the owner dies? In rare cases, a family member may be able to step in and successfully continue the business. Most of the time, the businesses simply closes its doors.

If the business owner is a partner or minority shareholder in a corporation, where is the financial motivation for the other owners to buy a minority interest? A buy-sell agreement among the person’s partners, or one involving one or more key employees for the sole owner, creates a market for the business.

Avoids a New Partnership With the Heirs

In my experience, there is no quicker way to get a male business owner’s attention with respect to business succession planning than to ask two questions.

“Do you and your partner have a buy-sell agreement?”

“No.”

“If your partner died, would you like to be in business with his wife?”

Silence.

When a partner dies, and the dust settles, generally one of two things happens. The wife calls up her husband’s partner and asks where her paycheck has been for the last month. The partner has to explain that her husband’s salary was a result of his active participation in the business, not tied simply to the fact that he owned stock in the business.

The second possibility is the wife, who has no experience or participation in the business, takes over her husband’s position.

A buy-sell agreement avoids both of these scenarios.

Sets the Price

Assuming buyers surface, what is the value of the deceased owner’s interest? If the seller is the deceased owner’s family, they want as much as they can get. The remaining partners want to pay as little as possible. Oftentimes, the dollar amount is far apart.

By setting a price that everyone is happy with while living, there is no haggling over price at death. In addition, this “pegs” the value of the business for estate tax purposes. In the absence of an agreement, the estate lists a value on the estate tax return, if one is required. The IRS often comes back with their valuation opinion: a much higher amount. What ensues is a back and forth argument, involving attorney’s fees and stress. Some of these cases have dragged on for as much as ten years.

Converts an Illiquid Asset to Cash

A properly funded buy-sell agreement instantly converts bricks, mortar and steel into cash. This provides funds for the heirs to pay obligations and taxes. Cash can be invested to generate an income; cash is easily divided among heirs.

Funded With Life Insurance

Assuming that a buy-sell agreement has been drafted, the next question becomes, “Where will the funds come from for the obligation now mandated by the buy-sell agreement?” There are three typical choices.

1. Pay cash. This is only an academic choice. Most businesses don’t have cash in these amounts laying around.

2. Buy out over time. If the business interest is worth $500,000, the arrangement is to pay, for example, $50,000 plus interest over 10 years. Negotiations could be tough. The family wants their money as quickly as possible; the remaining owners want to string it out for as long as possible.

This option is expensive. It requires the survivors to pay principal plus interest. The payments put a mortgage on future earnings and have to go through the tax wringer. The result is paying much more than a dollar for each dollar of business interest purchased.

3. Fund the agreement with life insurance. This is the “discounted dollar” method. Money is available immediately to fund the agreement, and the total premiums on the policy will come nowhere near the amount received.

If you own a business and do not have a buy-sell agreement in effect, call your life insurance agent, attorney and accountant. Set up a meeting, come up with a value, have an agreement drafted, and fund it with life insurance. You have probably spent a lifetime putting your business together. Now allocate a couple of hours toward keeping it together for your heirs and circumventing a myriad of problems.

Consider These Things before Starting Your Own Business

Determining your entrepreneur style requires that you take an honest look at your business skills and motives for starting your business. For example, if you don’t like social settings and aren’t comfortable speaking with people, it’s not a good idea to invest in a company that requires constant face to face interaction with the buyer. Some companies to consider starting if you fall in this category may be housekeeping, commercial window washing, lawn care and even janitorial services.

If, on the other hand, you enjoy networking and speaking to others, direct sales (business to business or business to consumer) services may be best suited for you. In addition to your personality and entrepreneur style, there are several other areas to consider before starting your own business.

Ease of Entry – Industries and businesses vary in respect to the ease with which new competitors can enter. Some barriers of entry to consider would be over-saturation of businesses already offering the product you are looking to offer. Another main barrier to entry is cost. Will you have to save up or take out a serious loan before you know what type of profit to expect? What about cost of education or licenses? These are all serious questions to consider. That’s why some of the best small businesses don’t require much capital or experience and there is still ample growth in the industry for you and several other business owners. However, just because a good business doesn’t require much capital or experience to start doesn’t mean you will not have to eventually devote some time and capital developing your knowledge and experience in the field. To continue to grow and provide the best service, you will need to invest some of your profits back into the business and yourself.

Start-up Capital – Many small businesses call for thousands of dollars to get started. Many of us want a business to free up our time and bring in the necessary income to support our families. Businesses that require massive capital take much longer for the business owner to realize a return on income. They also require much more devotion of time away from family and other leisure activities. There are several small business owners with franchised restaurants and other business that did require a lot of capital that are now nicely reaping the benefits of all the hard work they put into it. However, many will also tell you that it came at a great price – time with family, friends and sacrifice of self-development. What’s strange is these are the exact reasons why individuals start their own businesses.

Before starting your own business make sure to develop a well thought out business plan that outlines what you expect to gain from this business and what resources, including time, money, etc. you plan to use or will need to really make your business profitable and bring to you the free time and other benefits you desire.

Ability to Make Money when not Present – In order for you to own your business and it not own you, you must find a way to make sure that your actions can be replicated. Whether it’s an insurance agency, a flower shop or network marketing company, it’s very important that you be able to leave that business for a day or even a month and know that it’ll still run smoothly and make money for you.

To do this, it’s imperative to have a system in place that allows your business to continue without your presence. You can do this by hiring employees and developing that will enable your workers to become copy cats of what you do and bring to the business in regards to service and profits. All employees, through the resources they provide, should in some way bring value and profits to your business. If they do not, you should either train them or terminate their position.

One important thing to consider in order to encourage your employees to bring profit to the business would be to reward them with incentives for certain behaviors, like great customer service or specific sales results. Determine what type of incentives will motivate your employees and what type of actions you would like reward. Estimate, track and compare the cost of incentives, as well as the other expenses associated with hiring an employee, to the profits gained by the business from the employee.

Another option is to consider looking into a business that has a proven system for doing business and making money without the expense of hiring employees. In other words, find a business you can replicate or copy that uses an automated, electronic email or internet marketing campaign. Remember though that even though you may save by not hiring employees, you will more than likely have a higher marketing expense than other small businesses. If you’re not sure about the cost of this type of campaign, do a search on the internet to compare prices of companies that offer this type of service. If you chose this option, it’s good to have at least three different types of automated leads coming into your business. For example, take note of the monthly cost for postcard, survey or email marketing campaigns. This will give you an idea of what type of expenses to expect if you choose this route. No matter what you decide, make sure you have plan that will enable you to grow your business without tying you to the office or computer all day.

Businesses that keep giving through “Residuals”! – The very best businesses keep rewarding you with profits by either providing you with return business or residuals. Residual income is profits that keep paying you over and over at certain intervals as a result of the customer continuing to use your service or product. With many businesses, nothing further is needed by you other than a great product. The business keeps renewing because the customers value the product, need the product and can’t get better service, prices, etc. through any other company. Even though these business and services are definitely out there, I encourage you to always strive to provide superior service. If something in the market or industry changes, this ensures that the majority of your customers will continue to stay with your company not only because they value the product but also because they greatly value the service. With other businesses it’s a given that you’ll need to continually service your customers to keep the business and keep getting paid residuals. The key is in duplicating your work habits by either hiring an employee or having some type of system in place that provides service and products through an automated service.

The Product – First and foremost, the product(s) being sold have to be good stand-alone products. This means that the product could sell on its own because people actually need and desire this type of product. There are countless of network marketing and direct sales companies that are built only on the compensation plan or creating downlines, and not on the product itself. Run very fast from these types of companies. If the product or service is not valuable enough to sell on its own, you’re going to have a very difficult time building and growing that business.

Attitude – Finally, you have to be passionate about whatever you’re selling or doing. If you are, you’ll be more eager to share your business and service with others. You can not be successful if you do not have pride in what you’re offering. For this reason, choose a business which provides a service or product that helps others or brings joy in some way to their lives. I would personally like to thank all the pizza shops in Indianapolis. They bring so much joy to my life because nothing makes me happier than a good slice of pizza. Do you see where I’m going? Your idea or business doesn’t have to change the world but if there are people out there that you know would get value and joy out of whatever it is you’re offering, then that’s a big step.

To really choose a business that will be profitable, take a close look at what you’re getting into and what you may have to sacrifice for the business. Sometimes, the business you always dreamed that would free up your time and give you the life you always wanted, can actually rob you of the things you value most.

Know The Essentials of Vision in Small Business

A small business vision is just like preparing for a vacation! People usually decide where they want to holiday based on the offerings of the destination.

If it is a vacation just to chill out they may go to Bali. But if it’s for shopping, then Dubai may be their choice. If it’s to climb the Sydney Harbour Bridge then they will go to Sydney, Australia.

Holiday destinations are determined by desires, with a few restrictions like budget and time available.

The same should apply to your small business. In 5 years time what do you want your small business to look and feel like?

Do you want a large street frontage or small office at home?

Do you want to be actively involved or have a manager controlling your employees?

How many employees do you want?

Do you want a business with excellent cash flow or a business that is worth a large sum of money when sold?

Answers to these questions and much more will help to provide a clear vision of your small business in 5 years time. And often this will completely shape your growth.

The majority of small business owners start a small business based on their trade or what they know. They never usually give much thought to their small business vision.

While it’s comforting running a small business using the skills you have, sometimes this can be a recipe for disaster.

Business should be kept simple and always be fun. But business owners tend to make a simple thing into a complicated thing and let others control them.

Your small business should be providing a better lifestyle for you – more money for less hours worked. But this is hardly ever the case; it’s more like working 60+ hours a week for about $4 an hour.

Why is this so?

Because small business owners have never sat down and thought about their vision. They don’t know where they are heading, they have nothing to aim for. They don’t have a crystal clear vision so they allow day to day activities to control where they are headed.

Decisions are based on what happened that day, instead of the business vision you are working towards.

Take the time now and think of your small business vision.

What will your small business look like in 5 years?

Why should your customers remain loyal to your small business?

How will you dominate your competitors and keep them wondering what you will be doing next?

What will make your small business attractive to any buyers?

What are all the potential risks?

Think carefully about these questions and then write your vision down. This will immediately tell you, the universe and anybody else, exactly what you are creating.

It gives you a defined target to aim for and achieve.