How To Avoid the Family Business Wealth Evaporation Trap

Jim Lorenzen, CFP®, AIF®

Family business owners face wealth evaporation daily.  It’s like glaucoma.  You can’t tell it’s happening on a daily basis, but the cumulative results can be costly.

Many years ago – before the internet – I was in the business of publishing weekly newspapers and shopping guides.   It was a business that included advertising sales, ad layouts and graphic design, production and composition, printing and distribution, and (of course) all the financial disciplines of managing cash flow and credit lines.

I mention this simply to point out that I know the challenges the owners of closely-held businesses face… and also to point out that there are some common mistakes many such owners have in common.

It was during this period I remember reading an interview with Jack Nicklaus, who was then at the top of his game and was THE golfer that “moved the needle”, as they even said back then.  It was in that interview he pointed out one of the biggest mistakes he made had to do with his approach to cash management, pointing out just how costly his mistakes were – until he corrected them.

I learned from that article and it made a huge difference in my life.    That article, however, didn’t provide much detail; it was, after all, a golf magazine and didn’t have a financial focus.

Santa Barbara-based business expert George Issac, however, has written an excellent piece, entitled, Avoiding the Family Business Wealth Evaporation Trap.   If you own a family business, you just might find this information highly valuable.

I recommend it highly; and you can get your own copy when you subscribe to my ezine –  If you decide later you don’t want the ezine, you can unsubscribe immediately with a single click.  By the way, IFG never shares your email address with anyone.

I recommend this piece by George Issac.  I think you’ll be happy you read it.
Click Here
Enjoy!

Jim


Jim Lorenzen is a CERTIFIED FINANCIAL PLANNER® professional and An Accredited Investment Fiduciary® serving private clients since 1991.   Jim is Founding Principal of The Independent Financial Group, a  registered investment advisor with clients located across the U.S.. He is also licensed for insurance as an independent agent under California license 0C00742. The Independent Financial Group does not provide legal or tax advice and nothing contained herein should be construed as securities or investment advice, nor an opinion regarding the appropriateness of any investment to the individual reader. The general information provided should not be acted upon without obtaining specific legal, tax, and investment advice from an appropriate licensed professional.

Business Valuation Matters

Jim Lorenzen, CFP®, AIF®

Business valuation matters!   And, not just when you plan to sell.   Few business owners realize that valuation ‘what-if’s’ can help determine the advisability of major purchases and investments, not to mention the implementation of pre-funded buy-sell arrangements.   Yet, of the more than 200 million businesses in operation globally, fewer than 2 percent value themselves annually.   Over the next 10 years, approximately 10 million businesses will change ownership, according to BizEquity, but 75 percent of small business owners don’t know what their business is worth.

Business owners often hold mistaken assumptions about their business’s value, he says; technology companies often overvalue themselves while retailers, manufacturers and professional firms don’t value themselves highly enough.

The lack of knowledge puts small and midsize business owners at particular risk because they are unaware of how to create the right capital structure for their business, what amount of insurance to buy or how to plan for a business transition into retirement.   According to BizEquity, 50 percent of small businesses are uninsured and more than three-quarters of business owners plan to fund 100 percent of their retirement through the sale of their business.

How do you establish business value?  You might find our report helpful.  You can learn more here.

Enjoy!

Jim


Jim Lorenzen is a CERTIFIED FINANCIAL PLANNER® professional and An Accredited Investment Fiduciary® serving private clients since 1991.   Jim is Founding Principal of The Independent Financial Group, a  registered investment advisor with clients located across the U.S.. He is also licensed for insurance as an independent agent under California license 0C00742. The Independent Financial Group does not provide legal or tax advice and nothing contained herein should be construed as securities or investment advice, nor an opinion regarding the appropriateness of any investment to the individual reader. The general information provided should not be acted upon without obtaining specific legal, tax, and investment advice from an appropriate licensed professional.

What To Do With Business Sale Proceeds

Jim Lorenzen, CFP®, AIF®

 

When you receive business sale proceeds, you’ll likely pay a capital gains tax; but, that may not be the end of the story.

Suppose you have $1 million or more after the sale – money you’d like to put somewhere for future use – but you also want growth with safety and tax-deferral, too!

You could use our 401(k); however, there are funding limits in any given year and those limits don’t carry over.  Besides, the safety issue could be problematic.

Bank certificates of deposit can provide safety, but not growth or tax-deferral.

If you’re selling your business next year, you’ve waited too long to plan.  However, if your sale is scheduled for ten, fifteen, or twenty years from now, this IS the time to get your ducks lined-up – and this report might help.
Click Here!
By the way, when you get the report, you’ll also be subscribed to our free ezine.  If you decide you don’t want it, simply unsubscribe at any time – your name will be removed immediately.  IFG will never share your email address with anyone for any reason.

If you would like help, of course, we can always visit by phone.

Enjoy!

Jim


Jim Lorenzen is a CERTIFIED FINANCIAL PLANNER® professional and An Accredited Investment Fiduciary® serving private clients since 1991.   Jim is Founding Principal of The Independent Financial Group, a  registered investment advisor with clients located across the U.S.. He is also licensed for insurance as an independent agent under California license 0C00742. The Independent Financial Group does not provide legal or tax advice and nothing contained herein should be construed as securities or investment advice, nor an opinion regarding the appropriateness of any investment to the individual reader. The general information provided should not be acted upon without obtaining specific legal, tax, and investment advice from an appropriate licensed professional.

Business Owners Face Potential Tax Law Changes

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Jim Lorenzen, CFP®, AIF®

1954

1986

2017

What do those years have in common?    If you guessed those were the years of major tax reform, you’d be right—at least about the first two.  2017 is still a question mark.

While tax law changes can occur quite often, major reforms appear to come around about every thirty years.    Business owners, unlike the rest of America, will have to deal with the impact of any changes on both the personal and business front.

Most Americans don’t own businesses and can be excused for not understanding many of the issues business owners face.    First, most businesses tend to be small – proprietor-owned – and are therefore taxed at individual rates; and that includes partnerships.  They don’t get taxed at the lower corporate rate; yet, these owners represent most of the job creation.  Those who are successful, pay at high rates – and even more if they’re in a high tax state!   It’s not uncommon for a successful small business owner in a high-tax state, like California or New York, to be faced with having to make $300,000 in pretax profit, only to see half of it go to federal, state, and local government, leaving about $150,000.  Sound like a lot?  Not if you’re in one of those high cost-of-living states, which usually happen to be the same ones, in which case $150,000 is often just middle-income.   Makes it pretty hard to create jobs for other people – often the reason many of these businesses often relocate to low-tax states (with a lower cost of living) to grow their businesses, where they find it easier to create jobs.

How about corporations?  Most Americans don’t realize that those who incorporate their businesses are taxed twice.   Their business pays a tax on profits BEFORE the business pays a salary to the business owner, who then must pay a second income tax!  And, of course, we’re back to the high income-tax state issue.

The government drains money from the people who create the jobs; so, no wonder – as people want to see more jobs in the economy – tax reform is such a big issue.

Proposed Changes for Business

Under the proposed tax bill, which still faces much debate, the corporate tax rate would be reduced to 20% – a substantial cut.  S-Corps would see their rate drop to  25%.  Well, maybe not – what day is it?  This all changes with the wind until it’s law.

One of the proposed changes, favored by many business owners,  would allow for the expensing of capital expenditures—no doubt in an  effort to spur growth.   However, there could be a fly in the ointment for many business owners in a provision no one’s talking about.

You’ve heard about the  ‘border tax’.  Under this provision, there would be no cost-of-goods deduction on imported goods—a potential problem for many retailers, as well as manufacturers who outsource some or all of their supply chain.

Many businesses that have spent years researching and developing their supply chains may face some formidable challenges.  There would be a deduction for the cost of goods exported.

Finally, there would be no deduction for business loan interest under the proposed plan.  This may not be a big issue now, given today’s low interest rates; but, it could become a major issue if we should ever experience the double-digit interest rates similar to those of the late 1970s.

Business owners are individuals, too.

As if dealing with all a business owner faces isn’t enough, there’s also the personal side.   There are  some potential changes looming on the horizon there worth knowing about.

Individual tax rates would come down and reduced to three brackets.

The elimination of all itemized deductions except for mortgages and charitable contributions is also popular with many, but not everyone.  The proposed change for charitable deductions limits those deductions to $100,000 for a single payer and $200,000 for a married couple.  It may become difficult for a  charity to convince a multi-millionaire to donate that $1 million work of art !

And, while there’s talk of repealing the estate tax, it doesn’t appear to be a complete repeal.  The government still wants that unrealized appreciation taxed!  The talk is about going to a system similar to what they have in Canada.

The idea would be to tax unrealized appreciation over $5 million at a capital gains rate.  Taxes on gifts would correspond to eliminate people using gifting to avoid the estate tax.

Finally, the newest proposal would also do away with deductions for medical expenses—or at least have a very high threshold.

All these are proposed—not passed.  But, it’s good to be aware

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of what could be on the horizon.

What Should Business Owners Do?

You might discuss these points with your tax advisor—I am not a CPA.  I am a CFP®, AIF®,,,,  EIEIO.

 

Planning Point

If you don’t have an executive bonus plan, you may want to consider starting one and paying the bonus before March 15, 1018.  Same if you do have one.  Your business gets the 2017 deduction while the employee may be paying tax on the bonus received at lower tax rates.   If you’re `grossing up’ the bonus to cover the employee’s  tax payment, that would be under the 2018 rates, as well—remember, talk to your tax advisor.   If you want to learn more about these plans, you can access my special report here.

Planning Point

Don’t neglect what is probably the most versatile financial tool available today:  cash value life insurance—it has tax benefits that no other financial vehicle can provide and is an ideal retirement supplement—especially for high-earning executives and owners who are limited in what they can put away in qualified tax-deferred vehicles.  Quite often, these executives are stunned to find out those limits simply will not allow the account to provide enough capital at retirement for them to preserve their desired lifestyle.

As David McKnight points out in his book, Tax Free Retirement, life insurance is used as a key retirement strategy by more than 85% of Fortune 500 CEOs and many members of Congress.  The book was also endorsed by retirement guru and CPA Ed Slott, as well as David M. Walker, former Comptroller General of the United States.

Sometimes, I will see arguments against this approach in the media – arguments that are little short of idiotic – but, the simple truth is that insurance, including indexed universal life (IUL) in particular, is becoming widely accepted among leading experts in the profession as a true asset class (in addition to cash, stocks, bonds, real estate, and commodities), probably as a result of an aging population with changing priorities and increasing economic uncertainty (where the government’s future need for tax revenue is concerned).

  • Your tax advisor can provide the best insight regarding tax strategy;
  • your estate planning attorney can help you make sure your documents are updated and in order; and
  • your financial advisor should be able to help you arrange assets to fit your needs.

Never use a podiatrist for dental advice.

I hope you found this helpful.

If you would like help, of course, we can always visit by phone.

Enjoy!

Jim


Jim Lorenzen is a CERTIFIED FINANCIAL PLANNER® professional and An Accredited Investment Fiduciary® serving private clients since 1991.   Jim is Founding Principal of The Independent Financial Group, a  registered investment advisor with clients located across the U.S.. He is also licensed for insurance as an independent agent under California license 0C00742. The Independent Financial Group does not provide legal or tax advice and nothing contained herein should be construed as securities or investment advice, nor an opinion regarding the appropriateness of any investment to the individual reader. The general information provided should not be acted upon without obtaining specific legal, tax, and investment advice from an appropriate licensed professional.

What Business Owners Need Most!

Jim Lorenzen, CFP®, AIF®

 

Business owners spend long hours for many years trying to build their dream.  For many, their business represents 70%, 80%, even 90% of their net worth!   It’s not unusual to have everything tied-up in their business ownership.

In essence, they have everything riding on one stock – something they’d never do with any other stock, even if the company was run by the greatest CEO on earth.

Their business is the source of their income, including salary and bonuses, as well as the source of all their benefits, including retirement funding and health insurance.

Business owners spend 110% of their energy on trying to grow their business; yet, if you ask them how they’ve planned their exit, you’ll often get a blank stare.  Some say they plan to work ’til they drop; others say they’ll sell it, sure that it will be an attractive purchase.

How many will exit their business?  Answer: 100% – either head first or feet first.   Either way, how will the business be monetized?

Many don’t know what their business is worth.

I personally know one person who built a small but very successful restaurant chain that enjoyed excellent sales – until he unexpectedly (and rather quickly, unfortunately) contracted terminal cancer and died.   The restaurants soon all went into receivership and were either liquidated or taken-over for pennies on the dollar – the family left with only his life insurance proceeds.

Many have no idea how they will exit.

It didn’t have to happen that way.  He had key people in-place; but, he didn’t know how to plan business continuity.   He also could have created a funding mechanism for his family to monetize all he’d worked for (in addition to his life insurance), but he hadn’t done that, either.

He, like many successful business owners running established businesses, didn’t even know what his business value, let alone have a mechanism in place to convert his asset into liquid dollars…. something he could have enjoyed even if he’d lived.

He probably didn’t want to spend the money on a formal appraisal; but, he didn’t have to do that, either – informal valuations for retirement and exit planning could have met his needs.  [You can learn more about business valuation in our free report, which you can access here.  If you would like a copy, we’ll also make sure you receive other relevant information from time to time.]

How about the business with multiple ownership?  If/when something happens to one of them, do the others want to have the surviving spouse as a partner – maybe an equal partner – even though they may make little or no contribution to business success?

What if there’s a divorce?  What if one simply decides to ‘hang it up’?  What if one files for bankruptcy?  Without the right mechanisms in place, the other owner(s) could be facing litigation or liquidation.

Many don’t know the solutions that are available.

He might have felt he didn’t want to siphon off dollars from cash flow that could be otherwise used to grow his businesses; but, there are mechanisms that can mitigate that concern, as well.

Successful owners of established businesses can be busy – often too busy to pay attention to the very issues they see as their ultimate objective in the first place.

I can empathize.  Years ago I built a publishing business.  Publishing weeklies combines the functions advertising, sales, production, manufacturing, distribution, credit and collections.   Front to back, it entails virtually every business function you can think of, including deadlines and resource management.

I had a general manager named Nick who came up ‘through the ranks’ and became very capable at running the entire organization, allowing me to pursue other initiatives.  I ended-up selling my businesses on the open market; but, had I known, I could have actually sold the whole thing to Nick – probably for more money even though he didn’t have much money.  Simply by putting the right mechanisms in place early, I could have had a ready-made buyer in place… and one who not only knew the business, but knew the customers – and one that wouldn’t have made the bankers nervous.

Enjoy!

Jim


Jim Lorenzen is a CERTIFIED FINANCIAL PLANNER® professional and An Accredited Investment Fiduciary® serving private clients since 1991.   Jim is Founding Principal of The Independent Financial Group, a  registered investment advisor with clients located across the U.S.. He is also licensed for insurance as an independent agent under California license 0C00742. The Independent Financial Group does not provide legal or tax advice and nothing contained herein should be construed as securities or investment advice, nor an opinion regarding the appropriateness of any investment to the individual reader. The general information provided should not be acted upon without obtaining specific legal, tax, and investment advice from an appropriate licensed professional.

Someone else likes your key employee – Your competition!

 

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Jim Lorenzen, CFP®, AIF®

Successful business owners know they’re successful because of their people.  Within that group there’s usually one or two key people that either seem to make everything run well or, without their presence, the business would suffer a significant loss of revenue.   Sometimes they have special vendor or banking relationships, which means the banker’s terms may not be as good if those key people left, until the business could ‘prove itself’ again.

You value your key people.  So do your competitors.

How does the small business owner compete with competitors who can offer hefty benefit packages – or keep key employee(s) from striking out on their own?

This report shows one easy way small business can compete!  You can access it here.

Hope you find it helpful.

Enjoy,

Jim


Jim Lorenzen is a CERTIFIED FINANCIAL PLANNER® professional and An Accredited Investment Fiduciary® serving private clients since 1991.   Jim is Founding Principal of The Independent Financial Group, a  registered investment advisor with clients located across the U.S.. He is also licensed for insurance as an independent agent under California license 0C00742. The Independent Financial Group does not provide legal or tax advice and nothing contained herein should be construed as securities or investment advice, nor an opinion regarding the appropriateness of any investment to the individual reader. The general information provided should not be acted upon without obtaining specific legal, tax, and investment advice from an appropriate licensed professional.

Is Your Business A Ticking Grenade?

Jim Lorenzen, CFP®, AIF®

Did you know that as much as 80% to 90% of many business owner’s net worth is tied-up in their businesses?

According to the Exit Planning Institute’s State of Owner Readiness survey, 83% of business owners do not have a plan for how they will leave their business.

It’s interesting when you consider the number one reason a business owner sells is to fund retirement.  The stats above are even more alarming when you consider that 70% of those doing over $1 million in revenue are 54 years old or older; and many businesses distribute all their cash flow to their owners with little in the way of cash reserves set aside.

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Businesses like these are called “lifestyle’ businesses; and many experts  agree that up to 90% of all closely-held businesses operate just this way:  They are simply operated until they shut the doors.   This being the case, it’s no wonder that 50% of all businesses end-up closing their doors unexpectedly.

When this happens, the only thing the business owner can fall back on is retirement savings, if there are any, including the business’ 401(k), which often proves insufficient simply because it’s funding limitations often can fall short of what an owner will need in retirement to preserve his/her pre-retirement lifestyle.

Many business owners intuitively understand that there business either does or should have resale value allowing them to cash-out their equity.  The problem arises, if they’ve waited too long to address this issue, is not only the ability to find a viable buyer with money, but even one that’s ‘bankable’ – one able to arrange financing outside of the selling owner; after all, no seller wants to have to come back in and retake control of a now failing business.

There are a number of solutions available to an owner who begins planning early – the earlier the better.  Just to provide one example, one solution is called the “One-Way Buy-Sell“.

It’s just one possible option among many, but you may find it interesting.  I caution, however, not to assume it’s the right solution for you.  The best solution is one that’s tailored to the business owner’s unique circumstances; but, FYI, you may enjoy learning about this one.  You can get a copy of our One-Way Buy Sell Report by using the link below:

One-Way Buy-Sell Report
Enjoy,

Jim


Jim Lorenzen is a CERTIFIED FINANCIAL PLANNER® professional and An Accredited Investment Fiduciary® serving private clients since 1991.   Jim is Founding Principal of The Independent Financial Group, a  registered investment advisor with clients located across the U.S.. He is also licensed for insurance as an independent agent under California license 0C00742. The Independent Financial Group does not provide legal or tax advice and nothing contained herein should be construed as securities or investment advice, nor an opinion regarding the appropriateness of any investment to the individual reader. The general information provided should not be acted upon without obtaining specific legal, tax, and investment advice from an appropriate licensed professional.

Jim’s background includes founding, building, and selling five successful businesses and international consulting.  He has been the headline speaker at more than 500 national and international association and corporate conventions for clients such as Foster Grant, Hobie Cat, CapCities/ABC, H.R. Textron, Hearst Corporation, The National Management Association, the National Newspaper Association, and Cox Communications, as well as scores of state, regional, and national conventions.  Jim has also been featured on American Airlines’ Sky Radio heard on more than 19,000 flights, as well as in The Wall Street Journal’s SmartMoney magazine, The Profit Sharing Council of America’s Insights, and has been published in the Journal of Compensation and Benefits, NASDAQ, and in scores of national and international association trade publications.

Trying to Keep Top Talent? This could be your roadmap

 

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Jim Lorenzen, CFP®, AIF®

No, that’s no my picture – I wish I were that young and good looking; but he does look like a happy executive who’s worth keeping…. a key employee!

Key employees don’t have to be executives.  It can be anyone who is valuable to a business, particularly a small business that has to compete to attract top talent – and keep them from jumping ship to join a larger competitor or to start their own business in competition with you (trying to enforce non-compete agreements is no fun and costs far too much time and money, not to mention lost opportunities).

Small business owners often aren’t established enough to offer expensive benefit packages, but they want to find a way they can offer the right incentives to benefit their top people.

You might be interested in learning about the REBA, or GEBA, as some call it.  It’s a Restrictive Executive Bonus Arrangment, or Golden Executive Bonus Arrangement.

They’re pretty simple to set-up and can be designed to provide flexibility for the owner.

You can get a copy of the REBA Report by using the button below.  Hope you find it helpful.
Get My REBA Report!
Enjoy,

Jim


Jim Lorenzen is a CERTIFIED FINANCIAL PLANNER® professional and An Accredited Investment Fiduciary® serving private clients since 1991.   Jim is Founding Principal of The Independent Financial Group, a  registered investment advisor with clients located across the U.S.. He is also licensed for insurance as an independent agent under California license 0C00742. The Independent Financial Group does not provide legal or tax advice and nothing contained herein should be construed as securities or investment advice, nor an opinion regarding the appropriateness of any investment to the individual reader. The general information provided should not be acted upon without obtaining specific legal, tax, and investment advice from an appropriate licensed professional.

SELLING YOUR BUSINESS? This may be the best kept secret you’ll need.

Jim Lorenzen, CFP®, AIF®

Ever heard of a “One-Way Buy-Sell” arrangement?  Don’t feel bad.  Few people have.  I know when I was in publishing I hadn’t heard of it, either.  I wish I had.

Here’s the tease:  How to sell your business – in advance, at a price you want, and secure the funding, too!

Most businesses are sold on some form of the installment plan; for closely-held businesses, the ‘all cash’ buyer is virtually a misnomer.  The problem with the installment plan is obvious:  What if the business should suffer reversals during the buyout period?  Do you really want to come out of retirement to save the business and go through another sale all over again?

i806a_One-Way Buy-Sell Agreements_001The One-Way Buy-Out arrangement not only addresses all the issues cited above, it also protects against reversals and can secure your retirement, as well as the security of employees and family if something should happen to you before you get your ducks lined up.

Want to learn more?  You can get my report here!

Enjoy,

Jim


Jim Lorenzen is a CERTIFIED FINANCIAL PLANNER® professional and An Accredited Investment Fiduciary® serving private clients since 1991.   Jim is Founding Principal of The Independent Financial Group, a  registered investment advisor with clients located across the U.S.. He is also licensed for insurance as an independent agent under California license 0C00742. The Independent Financial Group does not provide legal or tax advice and nothing contained herein should be construed as securities or investment advice, nor an opinion regarding the appropriateness of any investment to the individual reader. The general information provided should not be acted upon without obtaining specific legal, tax, and investment advice from an appropriate licensed professional.