Business Owners

You’ve Worked Long and Hard to Make Your Business What It Is Today.

You’ve made financial sacrifices by using most of the revenue and profits to continue to grow and build the business, instead of using the money for yourself and your family.

Your family has had to remain strong and supportive, and may have even made some sacrifices, while you concentrated your efforts on the business.

It hasn’t been easy, but you’re finally seeing the fruits of your labor. Your dreams for your business and your family are coming true. You can start seeing the day when you and your family are finally rewarded for all of your hard work.

But wait … have you taken all of the necessary steps to protect what you have already built so that your business can continue to grow and that your dream will actually be realized?

Business Continuation Plan

If you’re a sole proprietor, you probably are the business.

If you’re a partner in a partnership, it’s the teamwork between the partners that has created the synergy to be a successful business.

If you’re a shareholder in a closely held corporation, the growth and success of the business depends upon the shareholders, even if, at some point, a non-owner employee manages the daily operations.

If you’re a member of an LLC, your business can be operated similarly to a partnership or corporation, but in either event, the continued success and growth of the business rests on the shoulders of the owners.

The common theme in each situation is — what happens to the business if you, or one of your co-owners, dies or becomes disabled? What happens to your family’s financial well-being? What happens if you’re in the best shape of your life but you want to simply transition out of the business to do something else, pursue a lifelong passion, or simply retire?

To obtain this freedom and financial confidence requires you to sit with your Financial Representative, along with your other advisors, (such as your accountant, attorney, liability insurance agent, etc.), to discuss a business continuation strategy, and to implement that strategy with a properly funded buy-sell agreement (also commonly known as business continuation agreement or keep-sell agreement).

Buy-sell agreement

A buy-sell agreement is a written legal contract that specifies what happens to your business interest in the event you die, become disabled, or otherwise leave the business. The same is true for your co-owners. This agreement, when funded, will:

Establish a ready market to purchase a business interest.
Establish a value for the purchase price of the
business interest.
Identify the future buyer(s) — typically your co-owners or key employees.
Identify the events that would trigger the buy-sell agreement.
Create a legal obligation for the departing owner to sell his or her business interest, and a legal obligation for the buyer to purchase the interest.
Provide a source of funds necessary to make the buy-sell arrangement effective.

Valuing the Business

A key component of any buy-sell agreement is the method used to determine the value of the business and hence, the value of the business interest being sold. While there are many ways to value a business, each has its advantages and disadvantages, and rarely is one method, on its own, the right method^.2Some of the more common valuation methods include:

Fixed price — co-owners periodically fixing the sales price based upon agreement. Using this method, the value must be constantly updated. In addition, the IRS may ignore the sales price and attribute a higher value to the business interest.
Book value — equates to the owner’s equity determined by the value of assets less liabilities. While simple, this method ignores the earnings potential of the business.
Straight capitalization method — this method determines value by multiplying earnings by a certain capitalization factor. In closely held businesses, however, earnings may not be reflective of the true value of the company since the owners of comparable companies may take different salaries and benefits, impacting earnings.
Comparative sales method — this method seeks to compare previous sales of similar businesses. That is difficult to do because most sales of closely held businesses are private, and in a particular geographic region, there may not be enough recent sales of similar companies to make a realistic comparison.
Formula — this method seeks to utilize a combination of several different methodologies.

Perhaps the best method is to have an independent appraisal made of the business by a qualified appraisal firm that has experience in valuations and the type of business you have to come up with a fair market value.

²Revenue Ruling 59-60 provides guidance with respect to some of the various factors that must be considered when valuing a company. They are: (1) The nature and history of the business; (2) The economic outlook of the industry in which the business is engaged; (3) The book value of the business and its financial condition; (4) The business’s earning capacity; (5) If a corporation, its dividend-paying capacity; (6) The existence or absence of goodwill and other intangible values; (7) Prior sales of stock and the size of the block of stock to be valued; and (8) The market price of stock in comparable companies.

Conclusion

Now is the best time to create a plan to protect your business, and to protect your family, before something catastrophic happens.

You will feel more secure and have peace of mind that you have done everything you can to ensure that you and your family reap the benefits of all of your hard work to build the business to where it is today. If you have partners or co-owners, now is the time to plan together while times are good, and the business is operating smoothly. You need to keep it that way. We can help.

For more information, please contact a member of Team Hicks.

Office: 412-391-6700

Fax: 412-391-1728

244 Boulevard of the Allies

Pittsburgh, PA 15222

rhicks@lfgco.com