Preface: A few common areas that can lead to disagreements in implementing a Buy-Sell agreement include: discounts in value for — tax-effects, minority ownership, key-persons, and marketability. Understanding these risk will help you develop a increasingly practical Buy-Sell Agreement. Handshake agreements work only among good friends, and good friends minimize risk for good friends (disagreements.) A written Buy-Sell agreement is a minimization of risk.    Wrapping-Up on Buy-Sell Agreements – What to Ameliorate Beforehand In wrapping-up our series on Buy-Sell agreements, we will look at a few problem areas you should have an awareness of to refine your Buy-Sell agreement. Buy-Sell agreements are frequently required for transfer of interest from retirement, or life-changes, and less frequently for death or disability. For this reason, sellers and buyers will be inclined to make the process of an agreements practicality, complex. The following are common causes of disagreement in union on buy-sell transactions. One complexity is the tax effect of value in pass-through entities. For instance, if your business is an S-Corporation and net income flows to your personal tax return, the cash flow value multiple of your business may be lower when the tax-effect of those earnings is calculated. For instance, if the seller’s K-1 has textbook consistency of $100,000 per year with a five year history, and the seller’s appraisal counsel says it should easily have a 5x multiple of earning value, $500,000. On the other hand, the buyer’s appraiser may tax effect those earnings for a 40% tax rate. Thus the value of business interest would be $300,000. These types of polarities should be ameliorated beforehand, with an agreed base-line appraisal methodology  between all buy-sell members. Some businesses still operate as C-corporations. Only C-Corporation need worry about the problem of appreciated assets. Here’s the concern – if your business has appreciated assets, e.g. real estate, or say investment…

What is Strategy – Michael Porter Read Here: “A company can only outperform if it can establish a [marketplace] difference it can preserve” Competitive strategy is simple – its about being different – in right ways. “Strategic positions should have a horizon of a decade or more, and not of a single planning cycle” Leadership [management] must have the expertise to scope opportunities accurately, and then follow with choices that obtain good benefits.   Reconnecting with Strategy: What products and services in our business are most distinctive? What products and services in our business are most profitable? Which of our customers are most satisfied? What activities in our value chain are most unique [provide a competitive edge]?   If you forget everything else you read here: remember this: Competitive strategy is simple – its about being different – in right ways.

Merry Christmas to you!

Preface: Buy-Sell agreement funding terms are key to the effectiveness of the agreement. You should properly plan funding to improve the success of your buy-sell agreement.   Funding a  Buy-Sell Agreement is the Key to the Agreements Effectiveness A buy-sell agreement is only as effective as the agreement terms for funding. You can appropriately document in the plan i) how the business will be valued, i.e. valuation methodologies, ii) restrictions on who can participate, i.e. right of first refusal, but if the buyer cannot pay the seller, the buy-sell agreement is ineffective. Funding options for a buy-sell agreement include i) cash ii) owner notes iii) combination of cash and owner notes, or iv) life insurance.   Cash can be obtained from corporate assets, personal assets, or external borrowings. Say that a buy-sell agreement is sparked and cash required. If the purchaser in the buy-sell agreement is relatively young, and has yet to build the capital reserves to purchase with cash say a $1,500,000, 40% business interest that is being liquidated, the company can sometimes borrow against its capital assets to fund that purchase of the business interest; or maybe the company can distribute the cash if an appropriate plan is in place. A little forethought here can help those left-behind. This can be as simple as creating and contributing cash to a reserve account for fund a buy-sell agreement, and/or building equity in the business that can be borrowed against.   Owner notes can be written between buy-sell agreement participants. For instance if a $5,000,000, 50% interest is at stake in buy-sell agreement discussion, a seller note can written that will fund the business interest with-in say a 7 year amortization period, with applicable interest. The risk is that cash flow, and earnings from the company must be adequate to fund the…

Preface: Michael Porter is the Bishop William Lawrence University Professor at Harvard Business School. University professorship is the highest professional recognition that can be awarded to a Harvard faculty member. A leading authority on company strategy, the competitiveness of nations and regions, and strategic approaches to societal problems, Michael Porter’s work is widely recognized in governments, corporations, non-profits, and academic circles across the globe. A sought after teacher and the author of 19 books and over 125 articles, Professor Michael Porter is director of the Harvard Business School’s Institute for Strategy and Competitiveness, which was founded in 2001 to further his work and research. Michael is an advisor to countries, corporations, non-profits, and academic circles across the globe, Seven-time winner of the McKinsey Award for the best Harvard Business Review article of the year, Ranked among the world’s Top Ten Management Thinkers by Thinkers50 every year since 2001, Frequent contributor to The Wall Street Journal and numerous other national publications and academic journals, Lifetime Achievement Award in Economic Development from the U.S. Department of Commerce, 22 honorary doctorate degrees from universities and learning institutions, Curriculum on Microeconomics of Competitiveness (MOC) taught at more than 100 universities worldwide Michael Porter: The case for letting business solve social problems The largest business opportunity today……….   “Business profits from solving social problems” “Only businesses create resources” [to solve problems]. Synopsis: What values does your business share….what resources does it create….and what problems does it solve?

Preface: Buy-Sell agreements are vital to multiple owner businesses. This blog is  a guideline to understanding pricing option methodologies for buy-sell agreements.   Pricing Options for Buy-Sell Agreements Typically, there are three methodology options for purposes of pricing a business for a buy-sell agreement, i) fixed pricing, ii) formula pricing iii) valuation pricing. Often business owners underemphasize the importance of a buy-sell agreement when multiple owners are involved in a business. Buy-sell agreements are like fire coverage. You don’t want to spark them, but if they are required, you are thankful for the contributions towards an appropriate buy-sell agreement plan. The problem often is that many business owners lack the awareness of the importance of a well-developed buy-sell agreement until after it’s required. If you’re reading this, you are now foreadvised. Beyond overemphasizing why you need an effective buy-sell agreement, e.g. a sale of ownership for reasons sometimes unanticipated or unplanned, to prepare or update your buy-sell agreement you need understand buy-sell agreement characteristics, e.g. the pricing methodology options. Fixed Pricing: A fixed pricing agreement for a buy-sell agreement, sets a specific value to your business, e.g. $2,000,000 or say maybe $9,000,000. If you own 20%, your value is 20% of that fixed price. Simply easy. Here is the problem with a fixed price agreement. If your business is growing at 10% or say 20% on a compounded rate, the value of the business asset should be appreciating too. After only say two years of development, your fixed price would be below fair market value, out of date, and someone would lose value if a sale transpired. Be fair to others, and be fair to yourself. You don’t know who will need the buy-sell agreement first; but every successful business will either later or sooner, need a buy-sell agreement. Fixed pricing options…

Preface: the 2015 PATH Act has many key tax provisions, read further to see how it can benefit you or your business. 2015 Tax Extenders Bill – Protecting Americans from Tax Hikes (PATH) It’s here! The new “tax extenders” bill, long-awaited, has passed Congress, and the legislation is now effective. Among the tax extensions lawmakers approved on the PATH Act of 2015, officially coined “Protecting Americans from Tax Hikes,” are numerous key tax provisions, that will be appreciated by many business owners. Some of the provisions are highlighted as follows. Highlights: Section 179: The Section 179 expense for capital purchases (depreciable property) that reduced accelerated depreciation expensing to $25,000 for 2015, is now adjusted back up to $500,000, retroactive January 1, of 2015, e.g. if you purchased $300,000 of new equipment in 2015, and have $300,000 of taxable business income, you could expense all the equipment and reduce your federal taxable income to zero. This threshold phases out if a business acquires more than $2,000,000 of depreciable equipment during the tax year. The expense is now the same as it was in 2014; and is now a permanent tax provision. Bonus Depreciation: Bonus depreciation on new assets has been extended at 50% into 2017. Qualifying assets could be depreciated at an accelerated rate, and can be combined with the Section 179 expense too. Bonus depreciation can be deducted even if the expense creates a loss, e.g. if you purchased $300,000 of new equipment for the tax year, and your taxable business income is $100,000 before bonus depreciation expenses, you could deduct $150,000 of the equipment with the 50% bonus depreciation, and have a $50,000 tax loss carryforward, or carryback. Employee transportation benefits: The tax extenders bill provides tax-free fringe benefits for employee transportation expenses, i.e. van pooling, or say parking fees,…

Preface: Multi-State tax is an area of increasing relevance to many entrepreneurs. Does your business have nexus? The following blog is an introduction to multi-state tax and Public Law 86-272. An Introduction to Multi-State Taxation As commerce and business circumferences develop for entrepreneurs, multi-state tax compliance becomes increasingly important. 46 states and Washington DC impose a net income on tax on businesses with nexus in their state. Nexus is a technical term for the degree of business activity that subjects a business to a specific state tax jurisdiction. A business may have nexus if it is doing business outside its home state, maintains a place of business outside the state, or has income that another state could tax. Methodologies on the business-level tax vary from state, i.e. franchise tax, income tax, combination of an income tax and franchise tax, or a capital stock tax. More than half of the states have a franchise tax on capital stock that taxes the privilege to hold property in the state, while say Ohio has a Commercial Activity Tax based upon gross receipts. Most state tax liabilities start with federal taxable income and contain modifications that either add or subtract from federal taxable income, e.g. depreciation, contributions, state income taxes. A multi-state tax filing most often has an apportionment methodology that calculates business income taxable to the specific state. Typically this is a three factor apportionment on a ratio, e.g. in Pennsylvania it is payroll, property and sales. However, fewer than 15 states still use this formula for standard apportionment. Many states weight the formula to sales, or just use the sales apportionment (sales-in-state/sales-outside-state.) Alternative methodologies are applied in specific industries, say transportation, that may use a formula based upon state miles or state revenue miles, or banks that use an apportionment on say state…

Preface: Thanks to the works of men like this, tax accountants have work.   http://www.bloomberg.com/news/videos/2014-12-04/the-dinner-napkin-that-changed-the-us-economy    

Preface: Tax compliance with foreign interests is increasingly complex and subject to compliance costs and risks that you should assess before investing in a foreign interest.   What Tax Compliance Risk Should You Be Aware Of Before Investing In Foreign Interests With the advent of small business trade being global, entrepreneurs may periodically consider investments in foreign interests, e.g. funding a manufacturer facility in China. An area of tax law that once was only pertinent to multinational businesses, is now increasingly pertinent to small business owners. Before you look to far at these eclectic investments, first, remember this. You can enter foreign interests with the best of intentions, but if you fail to do your due diligence, foreign IRS tax reporting requirements and rules could soon make you think you invested in funding the implementation of the Affordable Care Act. The rules are extremely complicated; and standard compliance costs are high. Entrepreneurs understand better than most the importance of risk; but you should fully understand the risk(s). The fines and costly penalties for noncompliance are often hidden to the unaware. Yet, maybe in some instances, for some, the risks make sense. This blog will help you be aware of IRS foreign reporting requirements, but is not a comprehensive list of foreign tax compliance. First, any foreign financial accounts must be reported with Foreign Bank Account Reports (FBAR) on form TDF 90-22.1 if the aggregate value of all accounts exceeds $10,000. Failure to file an FBAR could result in a penalty as high as $250,000. IRS enforcement of foreign compliance is serious. For US Citizens who are officers, directors, or shareholders in certain corporations, e.g. material ownership percentages, the IRS Form 5471 – Information Return of US Persons with Respect to Certain Foreign Corporation – is required. Failure of non-filing can lead to penalties of $10,000 for each report not…