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.

State and local tax issues when buying or selling a business

You’ve always dreamed of owning a business. Now you’ve found the perfect one to purchase. You ask all the questions you can think of, come to an agreement on price and now you’re ready to go, right?

One major thing that sometimes gets overlooked is something called “successor liability.” This is the idea that when you buy a business, or the assets of a business, you generally also inherit all the liabilities associated with that business or the assets.

Some of these liabilities are pretty easy to figure out, but others may be hidden and difficult to know about or quantify. For instance, you can be audited for periods before your ownership and you can be assessed for sales or other taxes owed by the last owner.

Don’t believe us? Here are some common examples of successor liability discovered after the purchase of a business:

So what are some issues that could create tax exposures for you and your new company?

  • Company had the duty to file but failed to do so
  • The return was filed, but tax was not remitted
  • Company failed to pay use tax
  • Company did not have all the correct exemption certificates
  • Local taxes were ignored

So what can you do to reduce your risk when purchasing a business? Perform the proper due diligence. Due diligence can take a number of different forms, but generally includes reviews of the following:

  • Is the seller filing in the states where it has a duty to?
  • Are the returns accurately and timely?
  • Are taxability decisions correct?
  • Is the proper tax rate being applied?
  • Are exemption certificates accurate and up-to-date?
  • Has the seller been audited or received inquiries from any state?

Hiring a professional to assist you with a due diligence study can help you properly assess the potential liabilities and arrive at a more informed decision. Plus, it will hopefully save you some headaches later on.

But due diligence doesn’t just apply to buying a business. Let’s say you’ve finally made it to retirement and want to sell your business. Performing a due diligence study can help you be sure you have handled all these tax issues correctly and nothing will pop up unexpectedly that may scare away a potential buyer.

No matter what side you’re on, a little additional work upfront could potentially prevent some difficult, timely and expensive mistakes later.

YOUR END GAME: The Importance of Sales Tax

One thing we find is that businesses are really excited to start. You have great ideas and you’re ready to make your dream a reality and introduce a product that will change the world … or at least the way we’ve always done something.

What few businesses add to their mounting to do lists when they start is to think about how they’ll END. Your end game is critically important to consider at the beginning because it helps you chart your course.

Here are a few questions you should be asking right from the beginning:

  • What is your business goal?
  • How do you plan to grow your business?
  • What happens when it comes time for you to exit your business? Who takes over?
  • How do YOU want to exit your business?
    • Merger?
    • Acquisition?
    • Sale?
    • Retirement?

These are just the beginning of numerous questions you can ask. And these don’t take into account a critical component to your end game: SALES TAX. Yes, the current sales tax laws at the time of a buy/sell transaction have an implication on your business. And for you serial entrepreneurs out there, it also has an impact on businesses you buy.

Buyers need to be alert to unpaid or unknown taxes in advance. Otherwise you may be in for a world of hurt when you acquire hidden liabilities. Sellers have to demonstrate you have addressed things like sales and use tax, nexus and payroll tax … to name a few. The way these items are handled can impact the purchase price and what can be done to successfully close the deal.

Now before you freak out, RELAX. We can help. Join us as we discuss how sales tax laws play into business transactions and things you should watch for. You can find us in Mankato on August 2, Sioux Falls on August 3 and Fargo on August 4. We’ll even give you lunch.

P.S. Check out these different considerations when talking about Your End Game. Just make sure you start talking about it early.

 

 

The Path to Buy/Sell Happiness

You’re going along, building your empire and running your company when all of a sudden, there’s a knock on the door. You open it to find someone asking to buy your business. You’re honored, flattered even. After all, someone just showed interest in the thing you’ve poured your blood, sweat and tears into. But in addition to the spring in your step, you also feel an ulcer coming on … what’s next? Where do I go from here?

Yes, the above situation is slightly exaggerated. But someone reaching out, completely out of the blue, with an offer to buy your business does happen. So it’s best to be prepared. Selling your business is more than a tour of the office, a handshake and exchanging a check. It’s complicated, often messy, and intense. We’re talking six months (yes, you read that right) of data gathering, negotiations, analysis and emotional upheaval.

Now, before you freak out, let’s take a step back and walk through the process. Consider it like a relationship.

First, let’s talk about the parties involved. The buyer is the person who wants to buy your company (clever right). They really want to date the seller (that’s you).  Other parties can include financial advisors, transaction advisors, banks, lawyers, etc. (otherwise known as the peanut gallery).

Step One: Getting to Know You

Once interested, a buyer will need information to determine the price they are willing to pay. After all, they want to be prepare for the date, not just fly blind. It’s up to you as the seller to decide how much information to give them and when. While this question is enough to constitute its own blog post, here’s the short answer: NOTHING.

You should give a potential buyer NOTHING until they sign a non-disclosure agreement (NDA). This is a legal document that protects your information as the seller and ensures the buyer is only going to stay on the up and up (read, use the information you give only to formulate their offer).

Only after a NDA is signed should you (with the help of your trusted business advisor), formulate a plan to give the buyer the information they need to understand your company. Note, this does not mean just giving them everything they ask for, but instead enough for them to submit a range of value offer.

Step Two: A Promise

After preliminary due diligence (using the information you have supplied them with as well as other research), the buyer will typically give a range of value in the form of an Indication of Interest (IOI).

Consider it like this. You’ve had some initial dates and things went well. The IOI is like a promise ring in your relationship with the buyer. It’s not always done or necessary, but it signals you’re ready to move to a more serious place, without making any concrete plans related to time, date or dollar amount.

Step Three: Opening Up

 If you like the indication of interest made by the buyer, you accept the promise ring and let your guard down a little more, allowing yourself to be more vulnerable. This means you give the buyer more access to information surrounding your company. This information may include key contracts or agreements, customer lists or more detailed financial information.

Step Four: The Engagement

This vulnerability or sharing of information allows the buyer to see a cohesive picture of your business and hone in on a more precise value. These terms are then laid out in the Letter of Intent (LOI). The LOI can be compared to the sparkling rock that accompanies the proposal in a relationship.

At this point, you both largely agree to the terms put forth. The LOI typically covers the purchase price, the structure of the deal, whether it is an asset or stock sale, the escrow parameters, the working capital allowance and other details that your advisor can help you understand. As a note, while the LOI is a very intentional document, it’s non-binding.

Step Five: Going to the Chapel …

After negotiation, review of legal terms and final due diligence, it’s time for your big day. Cue Canon in D and begin your walk down the aisle because you’ve made it to the marriage portion of the journey. Known as the Purchase Agreement, this binding agreement is agreed upon by both parties and will be a road map for how thing play out once the deal is closed.

The Selling Relationships (1)

This blog illustrates high level the transition through the selling journey. There will be bumps along the way (similar to a relationship), but it’s important to remember a few things as you go through:

  • Know your end game. This business is yours and you’ve put a lot of hard work into it. So know what you want from your business and a potential sale, as well as what you don’t.
  • Engage the peanut gallery. Don’t enter this relationship alone. Get advice from trusted business advisors and people who have gone through these situations before. They’ll help you navigate the bumps along the way and make sure you go down the aisle with confidence.

 

 

 

Advocating for Vacations!

Want to sell your business_

We all know those people. You know who I’m talking about. The ones who are so incredibly important that they simply can’t make any social function, future commitment or take a vacation. The success of their business, and ultimately their own self-worth, are tied to being present daily in their role.

Sometimes we don’t even have to look further than the mirror to find one of these super heroes.

Super heroes, unlike business owners, live into perpetuity and therein lies the problem. When it is time to transition your business you ideally get paid for what you have built. This assumes that you are not the glue that holds everything together. Success should be measured not by the time you spend in the office but the time you spend away from the office. The real value is in the team you have built and the processes you have implemented.

I haven’t come across a buyer yet that is looking for a business that is successful because it’s reliant upon them being there each and every day. Instead value is created when a seller can show a work force in place. It’s created when you can exhibit a refined set of processes or procedures and systems that capture and report the information needed so you can manage the business, but not also have to serve as the janitor, IT support person and the top revenue generator.

So before you think you are ready to sell your business, go on vacation! And then come back and assess the business you left and where you need to make modifications. Then go on vacation again and repeat the process until you have a finely tuned machine that runs without you. Only then are you ready to sell your business.

And as a refresher, it’s never too early to start thinking about selling. It’s important to prepare in advance, in case you didn’t get that from the example above (seriously, GO ON VACATION). By starting early, you can help ensure a smooth transition process. Here’s a few tips:

  • Get real. It’s important to get a realistic expectation of what your business is worth now and how to increase that value. There are changes that can be made and improvements added that don’t require a lot of time or money, but can significantly drive up value.
  • Gain understanding. It’s helpful to truly understand what your options are when it comes to selling a business (conveniently, we wrote this blog to help you navigate the options). There are several and it’s important to think about each, as well as the pros, and cons, to your business.
  • Be on the lookout. It’s never too early to start exit planning. You may face a challenging and highly competitive market when the time comes to sell your business. Even if a potential exit is years away, it’s important to focus now on key business issues, develop a planning process for the future exit and coordinate services with a wealth management team.

And one more bonus tip (for good measure): Take your CPA with you on vacation…just a thought.

S-Curve of Business: Stage 4

Hold up … before you continue, have you read about Stage 1, Stage 2 and Stage 3?

Okay, now that we have that cleared up, we move on to Stage 4: Stability. You’ve grown your business and you’ve had quite the surge. Now, your business has become fairly stable and predictable. You know that if you do certain things, customers will show up. Ads produce a steady stream of clients, cold calling or prospecting continues to get business. You know that if you go on x number of appointments you’ll close y number of sales. Your conversion rates are steady and predictable. Basically you take action and you get results, steadily.

But even this stage has situations you need to face. As an entrepreneur do you …

Stay a small business

  • Hope what you have created will be sustainable in the long term and support your endeavors

Continue growth … which may lead to a re-invention of your organization

  • Being a large business is not the same as being small. You’ll have to adjust your business model and your culture as you move from one level to another.

 

Get Acquired

  • Do you cash out and move on to your next endeavor? Or sell and remain with the company as an employee or consultant? (Psst … here’s a few things to consider when you get ready to sell)

Remain Stagnate

  • If you remain stagnate, you’ll eventually close the doors. At this point, you’ll have to hope that you have invested profits wisely to continue your lifestyle.

Stability

But the journey isn’t over yet. Stay tuned to our next blog for Stage 5. As a note, the next blog will assume you have decided to continue the growth of the company and transform to that next level. We’ll talk more about what that involves. Stay tuned!

5 Things You Didn’t Know Your CPA Could Do

Picture1By: Amber Ferrie, Partner

I laugh out loud when friends ask me to do their taxes. If they only knew that I don’t do my own! The initials behind my name (of which I have way too many: CPA/ABV/CFF, CMAP) can be deceiving. After all, not all CPAs specialize in tax and not all auditors work for the IRS. Below are five areas you may not have known your CPA can offer assistance in.

Forecasting. We’re not talking about channeling your inner weather girl/guy. Rather, we’re talking about mapping your future into something that banks and potential investors can relate to. Forecasting allows you to have a better indicator of things like profitability, growth rate and capital needs going forward. By having a business advisor help you forecast your business, you can plan ahead for things to come and, hopefully, take a lot of guess work out of the equation.

Dashboards. No, not the one inside your car. It’s a reporting tool that takes your critical success indicators (CSIs) and the metrics behind them and turns them into dashboards. These dashboards are highly customizable to whatever drives your business. As CPAs we have a sweet place in our hearts for spreadsheet applications like Excel, but to efficiently manage a company you shouldn’t have to dig through rows, columns and tabs to find the key pieces of information to analyze operations. These CSIs should be identified and then made readily available to management so that timely decisions can be made.

Strategic Planning. Is your accountant ready to think outside the box? While boxes often remind most CPAs of spreadsheets or tax forms (which get our hearts racing), a few outsiders in the group would rather help you plan strategically. They have a knack for analyzing dilemmas and finding solutions that can propel an organization to the next level, overcome a barrier or solve personnel issues that can be dicey. Strategic planning sessions can involve various levels of management and ownership, be on site or offsite in a retreat setting. The options are endless, and the outcomes pay dividends.

Personnel. North Dakota is in a unique position with a strong economy and a low unemployment rate. This leads to a workforce issue, where employees are difficult to find and expensive to train and retain. Positions that are even more difficult to fill can include CFOs and controllers who provide strategic advice, guidance and direction for your organization. Without these positions filled, the organization may suffer from a lack of timely reporting and decision making. Outsourcing this accounting and/or finance function is another possibility, allowing for real-time data and guidance while you’re still in growth mode.

Exit. Here’s a question … why did you get into business in the first place? Was it to be your own boss? Try something new? Make your first million? Take a company public? Your business advisor can help you plan for your end game, even if you’re just beginning to run the race. CPAs are not only the go-to for the life cycle of the business, but can also help you ensure a proper exit/next step when the time comes. Whether your goals are to transition to a family member or employee, sell to a third party, or start a new gig, your CPA should be able to assist you in that process. (Of course, I wouldn’t mind talking about your new Arizona retirement home on site or discussing how to make your first million over a round of golf or with a cocktail.)

The important thing is to truly use your accountants and CPAs to their full advantage, making them your business advisor, rather than just someone you visit once a year.

Eide Bailly can help with any of the opportunities listed above. Learn more at www.eidebailly.com/ebpossible or call 701.239.8500.