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Exit Planning for Business Owners

You’ve poured your blood, sweat, tears (and personal savings) into building a successful business. Congrats! You are considered a leader in your community, and you enjoy a sense of personal achievement that no corporate, government or non-profit employee could ever have. But there comes a time when taking some chips off the table—if not all of them—starts to sound appealing.

Most folks imagine you are quite wealthy by now but are you? Sure, you skimped on salary in the early years and didn’t put as much into your retirement account as you could have. But that shortfall will come back to you in spades after you sell, right?

With a median sale price of $225,000 for business, one can infer that only a small fraction of small business owners can cash out with enough money, so they never have to work again.

In fact, more than one-third of business owners (34%) have no retirement savings plan according to Manta, an online resource for small businesses owners. According to Manta data, many owners don’t feel they make enough money from their business to save for retirement. Others feel the need to tap all their savings to keep funding the business and don’t have enough left over to put toward retirement. More concerning, almost one in five owners told Manta they plan on using the expected proceeds from selling their business to retire on.

Supercharge your retirement savings especially if you’re in your 40s, 50s or 60s.

At a minimum, you should set up a 401(k) plan. If the plan is a “safe harbor” plan, then you should be able to contribute the maximum $19,000 a year to your 401(k)--$25,000 per year if you’re over age 50.  (A Safe Harbor 401k plan allows employers to provide a plan to its employees and avoid the annual testing to make sure the plan passes nondiscrimination rules. In this type of plan, employers contribute a minimum required amount to the employees to avoid testing. A non-safe harbor plan involves expensive annual compliance testing.)

Typically, if you make an additional profit-sharing contribution to employees, you should be able to max out at $56,000 a year, or $62,000 if over age 50. If this is still not enough to put you on track for your retirement goals, you can start a cash balance plan and contribute up to $200,000 a year or more to your retirement savings, but this requires an even larger employee contribution. See my article about Cash Balance Plans.

The exit planning process starts 3-5 years out

Rare is the owner who receives a buyout offer out of the blue that’s simply too generous to pass up.
You don’t just wake up one day and decide to sell. You don’t just pace a “for sale” sign on the door outside your offices and expect buyers to line up. It’s going to take some planning and spit and polishing beforehand….just like selling a house or a car. Research shows most owners don’t come close to getting an offer that’s commensurate with what they think the value of their business is. In fact, surveys indicate that one of the biggest deal breakers for prospective buyers of a business is the sloppy record keeping of the owner. It is critical to keep great financial records, so the buyer knows what they are purchasing. In addition, you should have audited financial records.

An AES Nation survey of 107 corporate attorneys three fourth (77%) of them said failing to prepare companies financially was a common or very common problem for business owners. AES Nation says that the three most important ways owners can prepare for a sale are:

1. Improving the balance sheet. This means being more effective with cash management and receivables and getting rid of non-performing assets.

2. Addressing the cost of funds. This means getting the right loan covenants and maximizing working capital.

3. Getting audited financial statements. This reduces the likelihood that you, the entrepreneur, will have liabilities after the sales closes.

I recently gave a presentation to a group of CPAs, and they told me one horror story after another about business owner clients who try to sell their businesses without telling their CPA beforehand. Even worse, the CPA doesn’t hear about the planned sale until the frantic owner calls with a last-minute question on the way to the closing. That is NOT the time to ask your CPA questions or to seek advice. You really need a professional team to strategize with before the sale. I’ll talk more about the kinds of specialists you need in a minute.


Preparing your business for sale—don’t wait until the last minute

In addition to getting your cash flow and financial statements in order, it’s very important to manage your human capital, too. Nearly three fourths (72%) of lawyers surveyed by AES Nation said it was very common for owners to forget to prepare their key personnel for the transition to new ownership. Your key employees are among the most valuable assets you can offer to new ownership. Make sure you have employment contracts in place that incentivize key personnel to stay with the company. You also need non-compete and non-solicitation agreements.

According, to Sheryl Brake, CPA/CGMA, CVA, CEPA of Encompass Transition Solutions, LLC, “The biggest mistake that business owners make when planning to sell their business is not beginning the process early enough.  The ideal time to start the process is 3 to 5 years before they actually want to transition out of their business. Beginning the process early gives the owner ample time to educate themselves, identify their options, and prepare the business for sale so that they maximize the value of the business and exit the business on their terms and their timeline.”

 

Avoid seller’s remorse

According to AES Nation, approximately half of business owners are unhappy after the sale of the company. To maximize the value of your business, you must improve the balance sheet, address the cost of funds, enhance the profits and make yourself “operationally irrelevant.”

One of the best books on business operations is called The E-Myth Revisited: Why Most Small Businesses Don't Work and What to Do About It by Michael Gerber. This book walks you through the steps from starting a business, growing a business and running a mature business. Until you can take a three-week vacation from the business and still have the enterprise run smoothly without you, all you really have is a demanding job. You don’t have a great business.


Don’t give your windfall to Uncle Sam


Selling a business is not all about getting the best price. It’s about maximizing the amount of money you and your family pocket after the sale is completed and what you do with that wealth—including planning the next chapter in your life.

According to an AES Nation, about 85 percent of business owners have not taken steps to mitigate taxes before the sale of a company. One way to lower your tax hit after selling is to utilize a “freezing trust.” This is a trust that passes on the value of your business to your children or grandchildren free of estate tax. I can tell you more about this technique when we meet.

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The general idea of a freezing trust is to gift some of your company stock to a trust and to sell more of the stock to the trust for a promissory note. When you gift the company stock to the trust and sell the company stock to the trust for a promissory note, you are getting the assets and future appreciation out of your taxable estate. When you sell the company, the value of the shares in the trust escapes estate taxes.

Your life v2.0

One of the hardest parts of retirement is deciding how to spend your time in your post-working retire. It’s even harder for successful business owners whose personal identify, values and reason for getting up in the morning is so intertwined with the business. Again, this process must start three to five years (not months) before you plan to sell. Some owners retire completely. Others stay on with the business in an advisory capacity. Others go back to work in another position—some even start a brand-new venture.

Don’t be a DIY when it comes to your exit

While it’s hard for many entrepreneurs to think they can’t sell their own business—who else knows it better? —countless studies show this is not a good idea. Selling a business successfully requires special skill sets that even your CPA and attorney often won’t have, let alone you.

You need a strong team including a CPA with experience in business transactions and possibly an investment banker. According to an AES Nation survey of corporate attorneys, nearly 92 percent strongly recommend using an investment banker if your business is valued between $1 and $10 million and almost all surveyed attorneys recommend using an investment bank if your business was valued at over $10 million. In fact, nearly half of surveyed attorneys (41.1%) recommended using an investment banker even if your business is valued at less than $1 million.

Conclusion

If you or someone close to you is considering selling their business, please don’t hesitate to contact me. I’d be happy to help.

Robert J. Pyle, CFP®, CFA is president of Diversified Asset Management, Inc. (DAMI). DAMI is licensed as an investment adviser with the State of Colorado Division of Securities, and its investment advisory representatives are licensed by the State of Colorado. DAMI will only transact business in other states to the extent DAMI has made the requisite notice filings or obtained the necessary licensing in such state. No follow up or individualized responses to persons in other jurisdictions that involve either rendering or attempting to render personalized investment advice for compensation will be made absent compliance with applicable legal requirements, or an applicable exemption or exclusion. It does not constitute investment or tax advice. To contact Robert, call 303-440-2906 or e-mail info@diversifiedassetmanagement.com.

 

The views, opinion, information and content provided here are solely those of the respective authors, and may not represent the views or opinions of Diversified Asset Management, Inc.  The selection of any posts or articles should not be regarded as an explicit or implicit endorsement or recommendation of any such posts or articles, or services provided or referenced and statements made by the authors of such posts or articles.  Diversified Asset Management, Inc. cannot guarantee the accuracy or currency of any such third party information or content, and does not undertake to verify or update such information or content. Any such information or other content should not be construed as investment, legal, accounting or tax advice.

Time Is One of Your Most Valued Assets

Like any other asset you possess, you must be diligent about protecting it, managing it and sharing it

Key Takeaways:

  • Time management is a critical skill set required to achieve success whether you’re retired, in your peak earning years or aught in the Sandwich Generation.

  • Identify where you are spending your time each day that create the most success and happiness.

  • Identify and remove the time bandits that steal precious hours and minutes from the activities that create the most success and happiness.

  • Always heed the 4 D’s.

 

Overview


As many of you have just completed the annual rite of spring known as last-minute tax planning, procrastination and portfolio rebalancing, now might be a great time to hit the “pause” button for just a second.

Equity markets are at or near their all-time highs, interest rates are near their historical lows, inflation is in check and millions of Americans are expecting tax refunds. So why isn’t everyone racing out to purchase new yachts, cars and horses? Because they’re not all that secure, thanks to newfound uncertainty about trade wars, North Korea nukes the revolving door in the White House and interest rates poised to keep rising.

You probably don’t have time to go luxury good shopping anyway.

One of the most significant challenges we face in today’s fast-paced society is controlling our limited time. If you can develop better time management skills, you will have a leg up on your career, family relationships and/or retirement lifestyle. In addition to life coaches and time management experts, many wealth advisors can help you with time management as well—but it all starts with you.

Getting started on the right time management path

Good time management is a two-step process. First, you must clearly identify activities that only you can do and that add significant value to your day. Second, you must identify the time bandits that steal your limited time from the activities that really matter.

Top 8 time bandits


Here are some of the most common time bandits and remedies we see in our work among successful individuals and retirees.

1. Losing time due to lack of organization (specifically, prospect lists, meetings and personal calendars)
Plan and prepare for meetings, medical appointments media, even consultations with your tax and financial advisors with agendas, on-topic communication and hard stops for every meeting to respect everyone’s time.

2. Discussing market forecasts when all crystal balls are cloudy

As the old saying goes: “Everyone’s crystal ball is cloudy.” Why spend your limited time reading, viewing and participating in conversations related to forecasting?

3. Sending multiple emails instead of engaging in verbal communication
Ever notice a long chain of emails attached to one email? This is a great example of where a scheduled call could save time over a group of people typing email responses. Schedule the call and keep the time short. Avoid sending emails for every communication.

4. Losing time (and important information) to desk clutter
It is difficult to guess how much time is wasted by moving piles of paper around a cluttered office. Searching through piles of desk clutter for the critical information needed for a call or meeting requires time. The time-saver is to move toward an efficient paperless office with a system that still allows you to take files with wherever you go.

5. Browsing the Internet, including social media
Digital media usually starts out with a search for specific information, but it can quickly lead to a deep dark hole of distraction and procrastination. Instead, limit Internet browsing to a certain amount of time per day, much like a scheduled call or meeting. The way things are going, Facebook may be taking up less and less of your time.

6. Implementing technology tools before they are efficient
Attempting to use technology before it is fully installed or before your training is complete is a big time-waster. If it does not work properly, it is a time-waster. Using technology in this way could cause loss of data or excess data retrieval searching. This applies to everyone from busy professionals, to busy homemakers to retirees.

7. Completing administrative tasks
It is easy to drift away from your goals of the day by getting bogged down in administrative tasks that could be accomplished by someone else. I recommend avoiding these tasks by using the following four Ds:

  • Don’t do it if it is not worth anyone’s time.

  • Delegate it to someone else if it is worth doing, but not by you.

  • Defer if it can be done only by you, the wealth manager, but is also a task that can wait.

  • Do it now if it can be done only by you, but it must be done now.

The problem with administrative tasks occurs when we default to “do it now” without considering the other three options above.

8. Reading and replying to email on demand
Email has become one of our greatest tools—when it is properly used. If it is not properly managed, email becomes one of our greatest time-wasters. Successful people are not at their desks waiting to send the next email. I recommend setting aside scheduled time in the morning and afternoon to manage email. The same applies to text messaging. It doesn’t have to be instant! Also, I recommend the following approaches to managing incoming emails:

  • Delete the email without reading it if it is from an unwanted sender.

  • Scan the email if you are unsure of its content, then take the appropriate action.

  • Read the email and determine whether a reply is necessary.

  • Reply to the email only if required.

  • File the email only if it needs to be saved.

  • Save the email if it contains sensitive information.

Conclusion

There is a great deal of competition for your time and attention no matter what stage of life you are in. We have found that the happiest and most successful people determine the most valuable use of their time and avoid the time bandits that prevent their success.

 

Robert J. Pyle, CFP®, CFA is president of Diversified Asset Management, Inc. (DAMI). DAMI is licensed as an investment adviser with the State of Colorado Division of Securities, and its investment advisory representatives are licensed by the State of Colorado. DAMI will only transact business in other states to the extent DAMI has made the requisite notice filings or obtained the necessary licensing in such state. No follow up or individualized responses to persons in other jurisdictions that involve either rendering or attempting to render personalized investment advice for compensation will be made absent compliance with applicable legal requirements, or an applicable exemption or exclusion. It does not constitute investment or tax advice. To contact Robert, call 303-440-2906 or e-mail info@diversifiedassetmanagement.com.

 

The views, opinion, information and content provided here are solely those of the respective authors, and may not represent the views or opinions of Diversified Asset Management, Inc.  The selection of any posts or articles should not be regarded as an explicit or implicit endorsement or recommendation of any such posts or articles, or services provided or referenced and statements made by the authors of such posts or articles.  Diversified Asset Management, Inc. cannot guarantee the accuracy or currency of any such third party information or content, and does not undertake to verify or update such information or content. Any such information or other content should not be construed as investment, legal, accounting or tax advice.

 

 

The Lowdown on Robo-Advisors

The trend toward online investing and advisory services, also known as robo-investing and robo-advice is gaining momentum, but industry participants are struggling to get a handle on how retail investors view and/or use robo-services to conduct their financial affairs.

Studies Abound

Recent research conducted by major asset management firms has gleaned insight, yet often their findings turn up contradictory information. For instance, one study conducted by State Street Center for Applied Research found that 65% of retail investors believe that technology will do a better job at meeting their needs than human advisors.1 Other research conducted by Allianz Life®, which focused on generational approaches to investing and managing finances, revealed more complex attitudes.

Case in point: When baby boomers and Generation Xers were asked about using robo-advisors, a significant majority (69%) from both demographi c groups said they "don't really trust online advice." Further, 76% opined that "there is so much selling online that it's hard to trust the financial advice."2

The same study revealed that while more than a third of respondents expressed some interest in working with a robo-advisor, just one in 10 would be comfortable having a relationship with an advisor that existed solely online.2

Yet as technology evolves and financial information proliferates online, investors are spending more time on financial websites, with 40% saying they visit such sites regularly, 13% go to financial sites daily, and 22% do some trading online. Among this group there appears to be a growing comfort level with the robo-experience, as 42% stated that "there's nothing a financial advisor can tell me that I can't find out online."2

A Push-Pull Message

Indeed, study after study on the emerging impact of digital advice is finding widespread ambivalence on th e part of investors. On one hand, they are increasingly comfortable with getting their financial information and conducting more business through digital channels, while on the other, they still gravitate toward human relationships when dealing with complex "big picture" planning issues such as meeting their income needs in retirement and setting and managing other long-term financial goals.

Still in its infancy, the world of Web-based financial services will no doubt evolve and present exciting new developments in the future.

This communication is not intended to be investment advice and should not be treated as such. Each individual's situation is different. You should contact your financial professional to discuss your personal situation.
 

Source(s):

1.  financial-planning.com, "Can Advisors Rebuff Challenge o f Automated Investing?" February 25, 2016.

2.  Allianz Life®, ' "Robo" Financial Advising on the Rise, But Gen Xers and Boomers Still Prefer the Human Touch,' February 16, 2016.

Required Attribution

Because of the possibility of human or mechanical error by Wealth Management Systems Inc. or its sources, neither Wealth Management Systems Inc. nor its sources guarantees the accuracy, adequacy, completeness or availability of any information and is not responsible for any errors or omissions or for the results obtained from the use of such information. In no event shall Wealth Management Systems Inc. be liable for any indirect, special or consequential damages in connection with subscriber's or others' use of the content.

© 2016 DST Systems, Inc. Rep roduction in whole or in part prohibited, except by permission. All rights reserved. Not responsible for any errors or omissions.

Robert J. Pyle, CFP®, CFA is president of Diversified Asset Management, Inc. (DAMI). DAMI is licensed as an investment adviser with the State of Colorado Division of Securities, and its investment advisory representatives are licensed by the State of Colorado. DAMI will only transact business in other states to the extent DAMI has made the requisite notice filings or obtained the necessary licensing in such state. No follow up or individualized responses to persons in other jurisdictions that involve either rendering or attempting to render personalized investment advice for compensation will be made absent compliance with applicable legal requirements, or an applicable exemption or exclusion. It does not constitute investment or tax advice. To contact Robert, call 303-440-2906 or e-mail info@diversifiedassetmanagement.com.

The views, opinion, information and content provided here are solely those of the respective authors, and may not represent the views or opinions of Diversified Asset Management, Inc.  The selection of any posts or articles should not be regarded as an explicit or implicit endorsement or recommendation of any such posts or articles, or services provided or referenced and statements made by the authors of such posts or articles.  Diversified Asset Management, Inc. cannot guarantee the accuracy or currency of any such third party information or content, and does not undertake to verify or update such information or content. Any such information or other content should not be construed as investment, legal, accounting or tax advice.