Ready to Sell Your Business and Retire?

WSJ.com:

By VERONICA DAGHER

The wealth of many boomers is tied up in businesses they own. And that can be a problem when it comes time to retire.

Advance planning for the sale of a business is more important than ever, ... Even when families transfer ownership to the next generation without a sale, the tax consequences can be huge without proper planning.

Too many owners aren't prepared for the day when they'll need to cash out. Some haven't done their homework to figure out what the business is really worth. Others undermine their company's value with their inability to let go.

Below, financial advisers and exit-planning specialists weigh in on some of the most common mistakes business owners make when they're ready to retire, and how those mistakes can be avoided:

Gary Hovland

The Mistake: Creating a Business That's Too Dependent on the Owner

One of Paul Pagnato's boomer clients spent decades building his company. When he decided to retire, he was not only chief executive, he was handling all key decisions in marketing, sales and client service, despite having hired executives to handle those functions.

WASHINGTON, DC - FEBRUARY 21: Chairman, President, and CEO of the Boeing Company W. James McNerney, Jr . (Image credit: Getty Images via @daylife)

"He was the business," says Mr. Pagnato, a Washington, D.C.-based adviser who works exclusively with entrepreneurs. But Mr. Pagnato says having a business too dependent on the owner or a handful of major customers can dramatically hinder the company's sale price, as buyers are likely to perceive more risk. Indeed, Mr. Pagnato's client ended up selling his business for less than he originally planned and was required to stay on longer to insure a smooth transition.

The Fix: Mr. Pagnato says it's important to delegate responsibility well before the sale to help insure a smoother transition and diversify the company's customer base.

The Mistake: Ignoring the Tax Benefits of Planning Ahead

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Adam von Poblitz had a client whose 10-year-old business was valued at $20 million two years ago. The owner had always planned to transfer an interest to her son, says the New York City-based estate-planning attorney. But the client procrastinated. Today, the client is ready to transfer a 50% interest in the company to her son, but the company is now valued at $40 million. As a result, she will pay gift tax on a much larger taxable gift.

The Fix: Had the client transferred the half interest two years ago, she would have paid gift tax on only $10 million rather than on $20 million, thus avoiding the tax on the post-gift appreciation attributable to her son's half interest.

Mr. von Poblitz says that if an owner anticipates transferring ownership in the next five years, it may make sense doing it sooner at a lower valuation.

The Mistake: Incorrectly Valuing the Business

Unfinished Business Is it a folly? or has someone run out of money or fallen foul of the planning people? (Photo credit: Wikipedia)

Richard Jackim worked with a client who was the founder of a small but successful consulting firm. The client calculated he'd need to sell his business for $6.25 million to maintain his lifestyle in retirement, says the Chicago-based exit-planning adviser, and figured his business would be worth that much. He was wildly optimistic, however. All too often, owners base retirement plans on faulty valuations, causing drastic overhauls in retirement plans, not to mention blows to self-esteem, says Mr. Jackim.

The Fix: Well in advance of retiring, business owners should get a realistic appraisal of their business, to see if it will fetch what they'll need to retire. If it won't, the owner needs to adjust his or her retirement plans, or come up with a financial strategy to boost their income.

Mr. Jackim says a mergers-and-acquisition adviser can help determine what a business actually might sell for.

Also essential: understanding if there is a market for the company, how liquid the market is for lending and equity, what buyers are paying for similar companies and how they are structuring the deals.

The Mistake: Rushing to Accept a Rich Number

Understanding Financial Leverage (Photo credit: Wikipedia)

Sellers often jump at what appears to be the highest bidder, ignoring other bids, says Fentress Seagroves, an Atlanta-based transaction-services principal. ... The seller doesn't take into account the due diligence that the buyer is undertaking, and how that could change the final number. The seller also ignores other crucial elements of the bid, such as how employees will be treated, or how the buyer will finance the deal. In the end, the seller may have ignored what would have been truly the best deal.

The Fix: Don't fixate on what is superficially the richest offer, Mr. Seagroves says. ...Try to anticipate how the due diligence the buyer is undertaking could change his or her offer at the close. Consider all aspects of the transaction, not just the nominal price.

The Mistake: Hiring Your Brother-in-Law to Do the Deal

Thomas Bonney had a client whose legal counsel's expertise was in general legal matters for small businesses. The lawyer also happened to be the husband of the company's controller, says the Philadelphia-based exit-planning adviser. The lawyer's lack of expertise with merger-and-acquisition transactions and lack of understanding about the time-sensitive nature of the deal resulted in the family's missing the opportunity to sell the business in a strong deal market.

The Fix: Too many family businesses keep everything in the family—including legal services. That can be ... foolhardy when looking to sell. Mr. Bonney advises clients who are considering selling their business to interview three to five separate firms early in the process. He says they should ask the lawyers how they would structure the deal, how they can help with negotiations and ultimately, make a quick close. This process will not only allow the owner to see how an attorney works with them, but they will also have an opportunity to get some good ideas on both legal and personal issues—such as what should a compensation package look like for a family member who wants to continue to work in the business.

The Mistake: Underestimating the Emotional Impact of Selling a Business

John Leonetti, a certified business-exit consultant based in Canton, Mass., has seen all manner of crises erupt when a business owner prepares to sell, causing disastrous moves that wound up hurting the sale and the seller's personal life. ...

Because owners' sense of self and purpose is often wrapped up in their business, letting go is often more difficult then they realize and sometimes causes them to act irrationally, he says.

The Fix: Mr. Leonetti says owners can make their exit easier by mapping out their post-exit lifestyle before the sale. He advises clients to get a calendar and fill in how they are going to spend each day for the six to 12 months after the deal goes through. He's also seen clients do consulting work or start a scaled-down version of their former business, allowing them to stay in the business they love and adjust to a new schedule.

Ms. Dagher is a reporter for Dow Jones Newswires in New York.
She can be reached at veronica.dagher@dowjones.com.

A version of this article appeared April 30, 2012, on page R3 in some U.S. editions of The Wall Street Journal, with the headline: Preparing to Leave.

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New proposed regulations could mean changes for employee retirement plans

Employee Benefit News:

By Sally Doubet King & Carolyn M. Trenda

April 23, 2012

Seal of the United States Department of the Treasury (Photo credit: Wikipedia)

... For several months, the Department of the Treasury, the Internal Revenue Service and the Department of Labor have been exploring ways to provide “income-stream” options for more retirement plan participants. The agencies have focused on finding a balance between lump-sum cash distributions (which provide liquidity) and lifetime-income options.

This past February, the Treasury and the IRS released two proposed regulations, and the IRS issued two revenue rulings, that provide different strategies for achieving such a balance. Here, we go over two:

Logo of the Internal Revenue Service (Photo credit: Wikipedia)

- A longevity annuity option, providing an annuity that begins at an advanced age under a defined contribution plan.

- A deferred annuity option from a defined contribution plan.

Longevity annuity option under defined contribution plan

To address the concern that retirees may outlive their savings, especially where the only retirement plan distribution received by the retiree is a lump sum from a defined contribution plan, the guidance package includes a proposed regulation that introduces a new concept, the “qualified longevity annuity contract." Such a contract would provide a stream of income commencing at an advanced age, such as 80 or 85, and would continue as long as the individual lives. ...

Under the proposed regulation, if a plan offered a QLAC, the QLAC would be disregarded in determining RMDs. Therefore, a participant would not need to commence distributions from the QLAC before the age selected under the QLAC contract.

Also under the proposed regulation, a QLAC would be an annuity contract purchased from an insurance company for a plan participant that satisfies each of the following requirements:

- Premiums for the contract satisfy a specific dollar limitation and percentage of assets limitation, i.e., the lesser of $100,000... or 25% of the account balance.

The contract provides that distributions must commence not later than a specified annuity starting date, and that annuity starting date cannot be later than the first day of the month coincident with or next following the participant’s attainment of age 85. ...

The contract does not make available any commutation benefit, cash surrender right or other similar feature.

There are no benefits provided under the contract after the death of the employee, other than a life annuity payable to a designated beneficiary.

The contract, when issued, states that it is intended to be a QLAC.

Additionally, issuers of QLACs are subject to certain reporting and disclosure requirements.

QLACs could also be provided under 403(b) plans and traditional IRAs, but not under 457(b) plans, defined benefit plans or Roth IRAs.

Note: Similar to the proposed regulation on partial annuity distributions, the new guidance on QLACs would be effective for contracts purchased after the publication date of a final regulation; in the interim, plans cannot rely on the proposed regulation.

Deferred annuities from defined contribution plans

The final piece of guidance is Revenue Ruling 2012-3. This ruling describes how the qualified joint-and-survivor annuity (QJSA) and qualified pre-retirement survivor annuity (QPSA) requirements in Code Sections 401(a)(11) and 417 apply when a deferred annuity contract is purchased under a defined contribution plan.

The ruling provides three examples that illustrate different deferred annuity design alternatives, each with different conditions: a revocable annuity, a fixed annuity and a fixed annuity with an election not to pay amounts attributable to matching contributions under the annuity contract in the event the participant dies prior to the annuity starting date. The ruling then provides an analysis of how each alternative would necessitate certain plan terms, including compliance with QJSA and QPSA notice, waiver and consent requirements.

The ruling clarifies that where the plan separately accounts for the deferred annuity contract, the remainder of the plan is not subject to the QJSA and QPSA requirements.

Future considerations

Employers may wish to provide comments to the Treasury on either or both of the proposed regulations; these comments must be provided by May 3, 2012. In addition, plan sponsors interested in the new options should evaluate how the options could be integrated into current plan design and communicated to participants.

For more information, contact Partner Sally Doubet King at            (312) 849-3684 begin_of_the_skype_highlighting            (312) 849-3684      end_of_the_skype_highlighting       or sking@mcguirewoods.com and Associate Carolyn M. Trenda at             (312) 849-8130 begin_of_the_skype_highlighting            (312) 849-8130      end_of_the_skype_highlighting       or ctrenda@mcguirewoods.com at the law offices of McGuireWoodds LLP.

Related articles

• Retirement: Ensuring a life-long income stream (business.financialpost.com)
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A Look at Obama's JOBS Act

The Network Journal:

By: ANN BROWN

Wednesday, April 25, 2012

• Business

On the surface, President's Obama's recently signed the JOBS Act, for Jump-Start Our Business Start-Ups, which will roll back restrictions on the way start-up companies can raise money from individual investors, seems like a win-win for small businesses. But says management, strategy and branding consultant Steven Mason, president of the Brand Mason, there is more to it.

"The JOBS Act is a boon to private companies, which drive job creation and the GDP. The most significant impact of the recently passed JOBS Act is that private companies will be able to raise money from individuals who are not "accredited". This means that investors who have not been considered wealthy enough by the SEC to be designated an accredited investor will now be able to make direct equity investments in private companies,” says Brian Hamilton, CEO of financial information company Sageworks and a noted expert on privately-held companies. “It would be hard to overstate the implications of this legislation as it allows small investors access to a market that previously didn't exist to them. Additionally, it gives private companies access to millions of dollars they couldn't previously tap into. It introduces some risk for a new class of investors, but it is very positive for private companies."

BEA logo (Photo credit: willida)

Small businesses can throw a wider net for investors, says Mason. "If you are good at getting hundreds of people to invest small amounts of money, you can potentially raise a large amount of money," he says. Potentially, the bill gives more freedom to startups—and investors. “Small investors can direct investments to their community,” explains  David M. Williams, founding director of professional consultant firm Business Enhancement Associates. “It allows small businesses to go public without SEC filing. It also exempts small businesses from Sarbanes-Oxley audit requirements for five years.”

Among other things, it would allow them to raise small sums from investors via the Internet. According to Obama,  websites will be closely monitored by the Securities and Exchange Commission. Some critics say this component of the bill may leave people vulnerable to fraudulent online schemes. “The abundance of online options for connecting unaccredited investors with private companies presents an inherent potential for fraud and misrepresentation and may draw in undiscerning investors,” notes Hamilton.

There are other cons, he points out. “Comparatively riskier investment opportunities will become available to unaccredited investors since new companies are always the least well known and many young companies fail,” he says. “As far as IPO investing is concerned, private conversations with the SEC about disclosures are not released immediately, and while the company may benefit, it's hard on investors seeking transparent information.”

Also, “crowd-funding platforms and this type of investing are so new that there is likely to be additional fraud. The risk factors of these investments should be made clear. Maximum amounts that individuals can invest based on their income is at a minimum now,” says Hamilton.

David M. Williams, founding director of professional consultant firm Business Enhancement Associates, agrees. “Crowdfunding investors would have no control in management decisions, and no guarantee that their interests would be represented. Small investors add liability, investors who would normally not be qualified or accredited. And the lack of SEC oversight or Sarbanes-Oxley guidelines make fraud or mismanagement more likely,” he says. There are other drawbacks to the bill he says. “It adds the burden of up to 200 shareholders to management used to closely-held ownership. It also complicates future equity raises, debt financing or recapitalization,” says Williams.

Among the other negatives, says Mason, are "you can raise a maximum of $1,000,000 in any 12-month period and individuals can't invest whatever they want. They are limited to investing percentages of their income and net worth and there's only so much they can invest in one year, across all crowdfunded companies." There are restrictions that may also hinder small businesses seeking funding under the new bill. "Funding Portals have to be registered with the SEC and the SEC hasn't even written all the regulations for them yet, so if the regulations are onerous enough, the entire point of this crowdfunding could be a chimera. Basically, the SEC and the government have the power to make this a complete boondoggle, because these Funding Portals are subject to so many restrictions that it's going to cost issuing companies real money just to comply," Mason points out. "There are significant accounting fees companies will have to incur, and if they are raising more than $500K, they'll need audited financial statements, which are very expensive."

Occupy the Jobs Act (Photo credit: DonkeyHotey)

Adds Mason, “What's happening is that a new surge of available capital will enter the market, making possible a far greater diversity of startups otherwise unable to get funding through other sources, at least in their early stage. At the same time, those funding these businesses will not be professional investors, and there are intriguing issues associated with their different expectations as well as with the ultimate success or failure of their endeavors. Last, while President Obama signed the bill, I would not characterize the bill as an "Obama policy" as the impetus for the main features of the bill did not come from the President. Further, the JOBS bill imposes a number of SEC reporting requirements on those seeking crowdsourced funding: it's not as easy as it sounds, but it certainly sounds great politically.”

The bill was supported by bipartisan lawmakers and entrepreneurs.

Related articles

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3 Tips on Investing Wisely in Your Business

Gist blog:

by T. A. McCann | April 24th, 2012 

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In an ideal world, we’d all have access to unlimited capital, along with a team of mentors that recognized our true genius and supported our every decision.

But let’s face it – we’re startup entrepreneurs!  Getting things done on a budget isn’t just smart financial planning; it’s the only way to operate in an environment that forces you to be a lean, mean, business-doing machine.

Really, investing wisely in your business can make the difference between a company that survives its early growth periods and one that burns itself out before reaching its true potential.  So read on for more tips on how to make the smart financial decisions needed to lead your business to success:

Tip #1 – Spend Money Strategically

This tip might sound obvious, but the problem is that most of us are pretty good at talking ourselves into justifying any purchases we really want to make as “strategic.”  Of course, when you’re running on limited funding, you’ve got to be pretty strict with yourself about what constitutes a valuable business expense and which costs can be pushed aside until you’re better capitalized later on.

The following are a few “must have” expenses you can probably do without until your company has extra cash on hand:

• Office space and office equipment – Yes, you need somewhere to conduct business, but in many cases, this space doesn’t need to exist in a separate office.  There are plenty of options out there that provide business space on a startup budget, so be sure to investigate these opportunities before committing to a commercial real estate lease.
• Industry conferences and travel – While conferences can be a great way to make vital connections within your industry and network with your peers, there’s no arguing with the fact that they’re expensive.  If you feel you must go to a conference to build brand recognition, identify key contacts you’d like to connect with and determine which single conference they’ll all be at in order to maximize your investment.
• Expensive training courses – Online sales pitches can be incredibly persuasive, but unless you’ve identified a specific education need that only a certain coach can fulfill, it’s best to hold off on expensive training products until you have the cash on hand to reinvest in your education.

Tip #2 – Recognize the “Time versus Money” Tradeoff

Time is what life is made of - spend it wisely^ - NARA - 534959 (Photo credit: Wikipedia)

Now, although my first tip revolved around cutting costs, this isn’t an article on saving money or setting a business budget.  Instead, we’re talking about investing wisely in your business – and sometimes, that requires spending money.

For example, suppose you’re a skilled graphic designer who has a great idea for a web app.  Unfortunately, you don’t know how to code well – which means you’ve got to either learn web development yourself or hire the task out to someone with more experience in that area.  However you decide to proceed, there will be a cost associated with your choice – but it’s up to you to determine whether that cost will be assessed in term of time or money.

Of course, your specific situation will dictate how “time versus money” tradeoffs will be made.  If there’s absolutely no way you can spend money on your web app, you’re going to have to learn how to code.  On the other hand, if you have even a small amount of capital (whether your own savings or personal credit, or an investor’s monetary injection), you may decide to spend this money on hiring a web developer or on some even larger task that’s looming large over your head.

Be sure to investigate all factors involved before making these decisions.  Following our example, if the time it will take you to learn how to write web code risks erasing the competitive advantage your app would hold by being the first to market, it may be in your best interest to come up with the necessary cash.  Keep in mind the popular saying, “Don’t be penny-wise and pound-foolish,” and apply this bit of wisdom to the difficult financial choices that will need to be made within your startup.

Tip #3 – Seek Out Free Options

Finally, keep in mind that too many people automatically assume they’ll need to shell out their limited funds for the products and services needed to grow their businesses.  In fact, there is a wealth of free resources out there, if you simply take a minute to open your eyes and look for them!

For example, instead of hiring a web developer and burning through your cash as a result, you could seek out a coder who’s open to bartering web services in exchange for graphic design work.

Instead of investing in paid business management tools like Basecamp or Salesforce, you could seek out free alternatives, including Trello or Gist.

And instead of spending money on that expensive training program you know you want to buy, you could simply run a Google search for advice on your specific questions.  You’ll be amazed by how many free resources exist in the business world today that will give you all the information you need to succeed without requiring a dime in return.