Tax Planning & Your End Game: What Business Owners Need to Know

We can’t stress enough the importance of having an exit plan for your business from the start. An exit plan allows you to lay out transition of ownership and passing of responsibilities associated with your business. Ultimately, it will give you peace of mind as you work on your business, knowing you already have your end game in motion.

Plus, by working on your end game early on, you can hopefully save yourself some time and headache later. One of the key areas where this is especially applicable is taxes. Without the proper planning, taxes can trip you up at the end if you haven’t planned from the beginning.

Here are a few common exit options and some key tax issues:

Buy-sell agreement.

A buy-sell agreement lays out a roadmap for what happens to the business should a specified event occur (we’re talking retirement, disability, death, etc.). Among other things, it can lay out methods for setting a price for owner shares, allows for business continuity and provides a buyer with a way to fund the purchase of the business.

But what about the taxes?

Life or disability insurance associated with the business often helps fulfill the need for funding the purchase. One of the biggest advantages of utilizing life insurance this way is that proceeds are generally excluded from the taxable income of the beneficiary (the person receiving the benefit from the life insurance policy).

Family succession.

You do have the ability to transfer your business to a family member. This is done by giving them interests or selling them interests in your organization (or both).

But what about the taxes?

There’s an annual gift tax exclusion which allows you to gift up to $14,000 of ownership interest under your gift tax annual exclusion without incurring federal gift tax consequences.

ESOP.

Some individuals choose to transition their business to their employees through an employee stock ownership plan (ESOP). An ESOP is a qualified retirement plan created to purchase your company’s stock.

But what about the taxes?

There are all sorts of tax implications and benefits for ESOPs. Check out the National Center for Employee Ownership for a list of some of the major tax benefits of going this route.

Sale and acquisition.

You’ve built something from the ground up and now you’re ready to sell it. Or maybe, you’re ready to add on through acquiring another company. Either way, you need to have your business in a ready state, including transparent operations, updated financials and streamlined processes and procedures.

But what about the taxes?

Here are a few tax considerations to think about:

  • Asset v. stock sale
  • Tax-deferred transfer v. taxable sale
  • Installment sale

The moral of the story.

It’s safe to say taxes have far reaching implications on your business, including how you plan to transition out of that business. That’s why it’s important to consider your end game early and prepare for the tax implications that come with it.

A trusted tax adviser can help you navigate all these circumstances and discuss what will work best for your business and your goals. That way you’ll prepared for the end, before you actually get there.

A version of this post first appeared in our 2017-18 Tax Planning guide.

An Exit Interview with Jim Ramstad

Jim Ramstad is no stranger when it comes to business. From starting businesses to selling businesses and every step in between, Jim has done it all. After all his time and experience, Jim has decided it’s time for a new path in life – retirement!

Jim has been an important part of our work here at Eide Bailly, and we know his advice and knowledge will be missed. We sat down with Jim to ask him to share some of his thoughts and advice with you, fellow business owners and entrepreneurs.

How long have you worked in the business world?

Altogether, I’ve spent 49 years in the business world, involved in various aspects of business.

How/what made you want to get involved in business?

Growing up and in high school, I never even thought of getting involved in business. In fact, I wanted to be a teacher and a coach. As I grew up, I watched as my dad’s family did very well for themselves in business. As I watched their successes and trials, I became more and more intrigued, and decided it was the right path for me.

If you weren’t in business, what would you be doing?

As mentioned before, I thought about being a teacher and a coach when I was younger. Now looking at it, I think it would be fun to be in politics. Twenty some years ago, I took a personality test that determined the top two areas that would make sense for me career wise. My top two were politician and ambassador, and accountant wasn’t even on the list. I feel like ambassador made sense, and I’ve gotten to do some of that in being an ambassador for other businesses.

How long have you been at Eide Bailly?

I’ve been working at Eide Bailly for 12 years, and I was a client here before I started working here. I’ve always had a connection with the Firm, which has led me to some of the career positions I’ve been in.

What positions have you held prior to being at Eide Bailly and at Eide Bailly?

Prior to being at Eide Bailly, I held many different positions. I’ve been an accountant, controller, CFO, COO and CEO. I’ve also done business development and government relations for a company in which I got to propose a piece of legislation that actually got approved into law in the energy bill.

Here at Eide Bailly, I’ve always worked in business advisory. In 2005, I started working with entrepreneurs to help get their businesses to take off. Throughout this role, I’ve been blessed and fortunate to take my personal experiences in business and apply it to other clients and help them learn from it.

What was your favorite position and why?

I don’t think I could really pick a favorite – I’ve enjoyed them all! I’ve really enjoyed the last twelve years here at Eide Bailly. I’ve enjoyed getting to apply my past experiences while also learning new things from our clients. Although there have been challenges, I’ve found it very rewarding.

What changes did you see take place in the business/accounting world during your tenure?

The biggest and most obvious change I’ve seen is in technology. From everything being completely manual to now being nearly all online and in the cloud, it’s been a total change. When I was 26, I worked with for a trucking company that completed everything manually. I gradually helped introduce them to technology, which was a process. Now, they use technology for everything.

What advice would you offer small to mid – sized businesses just getting started?

Get an advisor. It’s important to find people who are truly and genuinely interested in you and your success, not just in selling you something or getting a fee for the job. Find these people and rely on them – don’t try to do it all on your own.

What will you miss most about Eide Bailly?

The people, hands down. I am also sad that I won’t be around to watch the Possibilities Center grow into a bigger, Firm-wide practice, but I will be paying attention and willing to help if the need arises.

What are your plans after retiring?

I’m going to stay busy. I’m going to use my facilitation skills to start some groups in the FM area, such as mastermind groups and a bible study type group. I always want to continue to be a mentor and resource for Eide Bailly professionals who may need my help. The rest of my time will be spent with family, being a grandpa and a great grandpa.

While Jim isn’t leaving us for a few more weeks, please join us in wishing him well and thanking him for all his hard work and dedication.

Exit Planning: Estate Planning

As a reminder, this blog series is based on The Seven Step Exit Planning Process created by the Business Enterprise Institute (BEI).

After several blog posts, we’ve reached the final post in our exit planning blog series. So, what does the final component of the exit planning process have in store for you? Personal wealth and estate planning!

As a note, just because this is the last step in the process, it doesn’t mean this shouldn’t be considered when you’re actually out of the business. In fact, the earlier business owners start this step, the more benefits they may receive.

It’s no surprise that the IRS lays claim to a business owner’s wealth, especially when it comes to estates. However, there are other beneficiaries a business owner might want this wealth to go to. As a business owner, you will want to have a wealth transfer method that will pass on the wealth with minimal interruption from that pesky IRS.

So, how do you go about keeping the IRS interruptions to a minimum? According to the BEI, focusing on the following three issues can help ensure success in the wealth preservation planning process.

  1. Money for Yourself – To make decisions regarding how much money should be left (to children, charities, etc.), you must first decide how much wealth you want to keep for yourself after exiting the business. This can be determined by looking at the objectives and goals you set in the beginning of your exit planning process.
  2. Money for Kids – The idea of leaving money to children after the sale of the business is a common, but sometimes difficult one. It’s often hard to decide, given the success of the business, how much is too much or too little to leave to children. It’s important to remember that children usually do not receive the full amount up front. Rather, it is transferred through trusts or over time.
  3. Minimize Tax Impact – With tax outcomes always fluctuating due to governmental policies and procedures, it’s hard to make a solid plan and know exactly how much money will be left untouched. To try to keep the amount of money taxed to a minimum, business owners (and their advisors) must be proactive.

A few other pointers for estate planning…

  • Estate Planning Preferences –Having your preferences documented can make the estate distribution process go a lot smoother. Consider including how you want personal property distributed, any personal representatives you may have, donations to charities, how the estate will be distributed, trust designs and power of attorney, to name a few.
  • Personal Lifetime Wealth Management – Understanding the decisions and actions that must take place to manage your personal wealth is crucial in making sure you obtain the highest amount upon leaving the business. It is important to consider spending strategies, estimated income and retirement, investment strategies and possible insurance strategies.
  • Wealth and Estate to Family – More than likely, you have decided to leave some part of the estate to family members, be it your children, spouse or both. Things to consider for your family include insurance proceeds, timing of income stream, transfer of assets and estate allocation preferences.
  • Protection of Personal Assets – Protecting your personal assets can enhance security of your assets against any claims against your company. Such assets to be considered may be loans to the company, collateral, ownership and rights and lifetime transfers.

Personal wealth and estate planning can help ensure you have a solid exit plan in place that is ready for whatever life may throw at you next.

In closing, we want to remind you that exit planning is a crucial step to ensure your business continues on long after it has left your hands. If done correctly, having a solid exit plan in place can help business owners be sure their dreams and goals are reached.

Successful Succession: Starting Early

You may have just gotten started or are barely getting going. So why would you need to think about a succession plan early on?

Succession planning is the process of identifying and developing people inside your organization to fill key leadership and ownership positions. It’s also commonly known as transition planning, as you’re looking at how you’ll transition the business to the next leader(s).

Succession planning is important to the sustainability of your business. According to Harvard Business Review, “some 70% of family-owned businesses fail or are sold before the second generation gets a chance to take over.”

For many small businesses, leadership has been in place for a number of years, and with that comes a substantial amount of knowledge that could potentially leave your organization. Further, without a solid plan in place, until the very end, you’re leaving your business’ future to chance.

So how do you get started?

Come up with a plan. Start with the owner, which may very well be you. Talk through what you want your company’s end game to look like. Do you want to sell out for the highest price? Do you want to reward employee loyalty and hand over the company to one of your hard working professionals? Do you want to keep it in the family? And then there’s the question of timing … how soon do you want any, or all, of this to happen?

Then, look at your leadership goals. Where is there talent in your organization? Is there a particular group or individual that has the support of others? Will this succession change your organizational structure? Who do you want to incentivize to stay long term?

Also, remember talent might not present itself in picture perfect form. So do you have a diamond in the rough that will take some mentoring and coaching, but in the end will be a truly great leader for your organization?

Hint: You also need to be thinking about employee retention here. You don’t want to put a lot of time and effort into someone who ends up leaving before the transition. So make sure you think through an employee retention strategy.

Throughout this entire process, make sure you are COMMUNICATING. Ensure you have buy-in from any and all stakeholders in your organization. This will include investors and key personnel.

Make a date with your business advisor. It’s important to ensure you have a plan in place that serves the culture, mission, vision and people of your organization. But it’s also vital to have outside help.

You’ll need a full cast of business advisors to ensure your succession plan is successfully in place. These characters will include:

  • Attorney to help you walk through buy/sell agreements and transaction documents.
  • Financial Advisor to help you determine that your ownership lifestyle is met, as well as help you raise funds for your buy/sell agreement.
  • Tax Professionals to help you understand the tax implications of transitioning your business.
  • Appraiser in order to help you value the business for transition, gifting or sale.
  • Estate planner, who will help you see past the sale of your business and into retirement.

Be strategic. It’s important to be strategic as you prepare your succession plan and not just look at the current state of your operation. Succession planning should focus on growth, retention of talent and improve processes.

And one final thought … if all of this seems like a lot of work, that’s because it is. So don’t start at the end. Start early so you’re prepared to go forward with the end in mind.

 

Your End Game: Retirement Planning

By: Daren Pladson, Financial Advisor, Eide Bailly Financial Services

Let’s face facts. As a business owner you work tirelessly to grow your business, to make decisions and take responsibility and care for your employees.  Sometimes, in the day-to-day details, it’s hard to see ahead to the future. What happens when it’s time to walk away from the daily duties of all you’ve worked so hard to build?  Will you be able to enjoy your retirement (yes, it will happen … someday) and sustain the lifestyle you’re accustomed to?  Don’t ignore the question, embrace it. It’s important to consider your end game now and plan ahead.

While the thought of establishing a retirement plan may seem daunting, it is much easier than you think and may significantly benefit both you and your employees.
In fact, a recent survey conducted by Bank of America Merrill Lynch of small business owners reveals that only 33% of all small businesses offer retirement plans even though 75% of those businesses feel a sense of responsibility towards their employees. What many small business owners may not realize is that retirement plan options are fairly affordable, and there are several options to choose from.

You, of course, have to be armed with the right information. Here are a few of the major features of several plan types:

Simplified Employee Pension (SEP)
A SEP will allow you to set up a type of IRA for yourself and each of your employees. You must contribute a uniform percentage of pay for each employee, although you won’t have to make contributions every year. SEPs have low start-up and operating costs and can be established using a two-page form. As a small employer, you can also decide how much to put into an SEP each year, offering flexibility when business conditions vary.

SIMPLE
SIMPLE (Savings Incentive Match Programs for Employees of Small Employers) plans are usually set up as IRAs. They are easy to establish and inexpensive to administer. Your contributions as an employer are flexible: you can either match employee contributions dollar for dollar—up to 3% of an employee’s compensation—or make a fixed contribution of 2% of compensation for all eligible employees.

401(k)
401(k) plans – both traditional and Roth — have become a widely accepted retirement savings vehicle for small businesses. They can vary significantly in their complexity. However, many financial institutions and other providers offer prototype 401(k) plans, which can greatly lessen the administrative burden on individual employer.

Profit-sharing
Your contributions as an employer to a profit-sharing plan are discretionary. Depending on the plan terms, there is often no set amount that an employer needs to contribute each year. As with 401(k) plans, profit-sharing plans can vary greatly in their complexity, and prototype plans offered by financial institutions can reduce the administrative burden on individual employers.

But wait, there’s more. Another good source of information on retirement plans can be found at the Department of Labor’s website. And, of course, the financial advisor or CPA you work with should be able to provide you with educational materials.

Just as gowing your business is no easy task, finding the right strategy to save for retirement isn’t simple either. You’ll feel good knowing you’re taking steps today to ensure your (and your employees’) future.

Financial Advisor offers Investment Advisory Services through Eide Bailly Advisors LLC, a Registered Investment Advisor. Securities offered through United Planners Financial Services, Member of FINRA and SIPC. Eide Bailly Financial Services, LLC is the holding company for Eide Bailly Advisors, LLC. Eide Bailly Financial Services and its subsidiaries are not affiliated with United Planners.

Retirement Planning