The Wiewel Law Firm

Wisdom To Protect Your Windfall

If you have substantial assets or are coming into a windfall from a sudden wealth event such as an inheritance, lawsuit, stock options sale, business sale or from a sports/entertainment contract, there are several money moves you should consider to best protect your new wealth against lawsuits and from others.

The bigger the target the easier and more appealing the target. Sad, but true. Legally speaking, every financial gain brings with it a new amount of risk. Oftentimes, the legal risk is directly proportionate to the size of the financial gain.

So, if you have come into a sudden amount of wealth – whether by windfall, asset sale, or inheritance, etc. – then now is also the time for some immediate asset protection planning.

Structuring your ownership and protection of those assets is an important step you cannot afford to overlook. However, such structuring and protecting can get complicated. Much of what you can do (and cannot do) hinges on the very nature of the assets and the risks themselves.

Thankfully, there are some common strategies worth exploring. Forbes recently offered six proven asset protection strategies to shield both you and your important assets.

The article, titled “6 Asset Protection Strategies To Shield Your Wealth,” is worth a read.

If you are pressed for time, here is a capsule summary:

1. Increase liability insurance: insurance is a product to solve risk, after all, and liabilities are exactly the kind of lightning rod to be struck.
2. Separate assets: shared assets, with a spouse or family members, means doubling the risk on those assets, so separating them into your own accounts (or entirely out of your estate and control) can shield them.
3. Consider a business structure: the business exists as an entity that is not “you” and its liabilities are not your liabilities, so owning special assets (like rental properties) through an LLC or corporation will work to shield you and your individual assets.

Reference: Forbes (October 9, 2013) “6 Asset Protection Strategies To Shield Your Wealth”

Making The Most Of Your Business Sale

When business owners take these three sets of actions, they’re strongly positioning themselves to not only get the best price for their companies, but to also make certain they and their families become as wealthy as possible. Unfortunately, not all that many business owners are taking these actions.

It is so easy to pour your life into the business. You may even regard the business as your life, especially if you love the work and it is a family business to boot. Unfortunately, for many a business owner the life after the business seldom gets the attention and planning it requires.

If you might wish to sell your business in the future for the good of your future life, then there is much planning to do even now.

Since the business is such an integral part of your personal wealth, and perhaps also of your family wealth, planning time is time well invested. Thinking about, planning for, and knowing when to pull the trigger on the sale is just good life-planning. It can be tricky, too.

Forbes gave a few tidbits of wisdom on the topic of maximizing your business sale and the ensuing wealth in a recent article titled “How Business Owners Maximize Personal Wealth Selling Their Companies.” The article provides three steps worthy of consideration.

Essentially, you must plan to put the business in the right place to be bought, plan to put the family and yourself in the right place to sell, and plan to come to the negotiation table ready to get what you need.

Because your business, your family and your life goals are unique, be sure you “measure twice (at least) and cut once” when it comes to this major event.

There are no mulligans you can use once the ink is dry and the money has changed hands regarding your business sale.

Reference: Forbes (October 1, 2013) “How Business Owners Maximize Personal Wealth Selling Their Companies”

Easing The Tax Bite When Selling Your Business

A lot of small business owners accelerated sales of their companies into 2012 in anticipation of the new higher tax rates for 2013, but for those who are thinking of selling now, don’t despair. “There are things you can do to minimize—or with the right set of facts—eliminate taxes.”

Is any of your personal wealth tied up in your business? Well, for some people, the business is their current life, both in time and wealth. Consequently, it can be an especially rude shock to see so much of that wealth snatched away in taxes paid upon the sale of that business.

The tax bite is a bit bigger these days, too.

So, whatever you can do to shelter the business sale from taxation can mean a world of difference for your retirement and even for the whole family. Turns out there are more than a few important tools at your disposal.

First, why is the tax bite bigger these days? The American Taxpayer Relief Act of 2012 (ATRA) befriended a new surtax added through Obamacare and this friendship brought the capital gains tax up from last year’s 15% to 20%, or even a whopping 23.8% for some earners. But wait, there’s more.

An extra provision of ATRA is set to add yet another 1.2% as of the new year. Then add state taxes. It just adds up, and that is really bad math for you.

So what are some tools and ways to lessen the tax bite? Depending on your business, your needs, and your timeline, consider three tested tools discussed in a recent Forbes article titled “Selling Your Business? 3 Ways To Cut The Tax Bite.”

While you will want to read the original article, here are the three ways:

• The ESOP Plan,
• The Qualified Small Business Stock Plan, and
• The C-to-S Corporation Conversion Plan.

Essentially, the plan (as far as capital gains taxes) is to either find a way to defer the taxation until you leave assets to your heirs (to secure the capital gains eliminating stepped-up basis), to fall under a discounted category, or to actually change the form of the business so as to skate right below that low ceiling.

There are a few more ways of doing any one or all of these steps cleanly and efficiently, especially with those with the foresight to plan well in advance.

Reference: Forbes (September 6, 2013) “Selling Your Business? 3 Ways To Cut The Tax Bite”

Key Considerations When Selling Your Business

While the truth may be painful, an entrepreneur who recognizes the realities they will face when selling a business will fare much better than one who does not.

Now that you have built a successful business, are you ready to sell it? You only get one shot to get it right. Best to measure twice and cut once.

Your business may have been years or decades in the making. Selling it, on the other hand, can be tricky. Forbes recent took up this topic in an article “The 5 Things Entrepreneurs Must Know When Selling A Business.”

So what are these truths?

1. You Really Don’t Matter. Ouch! Buyers simply want to buy a business that is profitable in-and-of itself. When you, the owner, are not the greatest asset of the business, then the business is generally considered to be more attractive.
2. Buyers Know Which Employees They Will Keep. That is right. Over the years, you may have hired family and friends as employees. While you value them, the buyer may not. In fact, the buyer likely has his or her own family and friends to employ.
3. Even Good Debt May Catch Up to You. Debt is debt. The red and black ink on your business ledger can get in the way, especially if it is not structured properly.
4. Handshakes and Signatures May Do You In. Your business wheeling and dealing may kill the deal. In other words, the buyer will have to contend with those agreements, promises, and sheer liabilities you have incurred building your business. This is commonly a problem when “agreements” were done on the fly, never reduced to writing or barely a handshake. A disadvantageous agreement penned in black and white can be as damaging as a solid agreement can be lucrative. It is the proverbial two-edged sword.
5. Your Business May Be Your Accountant’s Biggest Annuity. Not only may family and friends get their paycheck under your signature, but so do various professional advisors. This can create (potential) conflicts of interest. Just be alert. If outside advisors find their “rice bowls” threatened, then they may drag their feet or at least be less than helpful. 

The original article goes into much more detail, with even a bit more brow-beating.

Bottom line: the sale of your business is fraught with many challenges. Proper planning is key to navigating them successfully.

Reference: Forbes (September 3, 2013) “The 5 Things Entrepreneurs Must Know When Selling A Business”

Successful Successions Require Planning

He chose two people he wanted to sell to who were already working in the company. They were young, they were paid well, and they were happy with what they were doing. “Look,” he told them, “I’m going to be out of here in 10 years. You’re going to own the company if you want it. Here’s what you need to do.”

It was the best of business successions; it was the worst of business successions. There is a right way to sell the business to your own managers or your own family members, and then there is a wrong way. Since you cannot live long enough to make all of life’s mistakes, then it is wise to learn from the mistakes of others.

In this spirit, consider a recent article in The New York Times titled “The Wrong Way to Sell a Business.”

Essentially, there are two types of owners when it comes to the sale or succession of their business. First, there is the one who knows they will sell the business, but procrastinates all the way up to the bitter end. This is not the owner/manager to emulate, and the article showcases a proof-positive example.

While you might think your managers are ready and willing to buy your business, they may have other ideas. Regardless, they likely will need time to acquire the capital and then structure their affairs accordingly. If nothing else, managers are not owners until they start thinking of themselves as such, and a bit of lead time can instill such a feeling.

But what about the other type of owner? Again, the article provides an example of an owner/manager who has a very decided life-goal in place and can therefore work to instill life-goals in his managers. Accordingly, if you plan for yourself, and allow your managers to plan for themselves, then you can train managers who can transition into becoming owners.

When the succession planning is successful, the transition is almost nothing more than economics. True, sometimes these transitions just do not work out, but it is rarely out of an abundance of planning or understanding. Instead, more than a few deals fall apart simply because they are all too sudden and unplanned.

Reference: The New York Time (August 29, 2013) “The Wrong Way to Sell a Business”

Business Succession – A Lesson From The Royals

Outside of the world of pomp and circumstance, failure to pass the baton to the next generation before the senior generation has actually passed away is detrimental both to the family and the business. A leadership gap weakens any business, while an unrehearsed succession process can tear apart even the most tightly knit families.

Likely you have seen and maybe read a steady stream of articles on the subject of “business succession.” As the demographics reveal, there is a tidal wave of aging baby boomer business owners who will be passing the baton by design or by default. The latter is a much messier affair than the former.

If you are a baby boomer business owner, then consider a family that has some real life experience in managing successful successions – the Royal Family.

For some royal perspective and thoughts on the young Prince George Alexander Louis (the instant media darling and infant son of Prince William and Kate Middleton), WealthManagement.com recently offered an article titled “A Lesson from the Royals: Succession Is a Two-Way Street.”

Succession really is a two way street. In one lane, it is the king stepping down to name his successor. In the other lane, it is his successor seeking to prove himself worthy to be the king. The principal is the same in business, and yes, even in small family businesses.

The perennial problem is that a business requires tested leadership and ability. Unfortunately, real life experience is a very difficult thing to acquire until you are actually holding the reins. That noted, few business owners are comfortable handing over reins even to their own successors.

If you are a would-be-king, then there are some principles to learn to prove yourself, to stand out, and to step up to the task on your own. Fortunately, the original article offers some practical advice.

And then there is the other side. As the current business owner – king of all you oversee – you also need to be mindful to give your successor some “playing time” while you can coach them.

The actual act of transferring the business can be complicated, for reasons legal and financial. As with any “dance,” timing is key.

If your family business is worth keeping afloat, then the successful succession of its leadership is as great a goal worthy of your time and focus.

The Owner has retired; God save the Owner.

Reference: WealthManagement.com (August 30, 2013) “A Lesson from the Royals: Succession Is a Two-Way Street”

Entrepreneurs Asking For An Early Inheritance

Asking a parent for money to start a business is always a complicated conversation …  asking for an early inheritance can add to those complications.

If your parents are retiring or already retired, then likely they will need their own retirement savings to maintain their lifestyle. On the other hand, as an entrepreneur you might be on the verge of rolling out the next big thing in the marketplace. Should you ask your folks for an early inheritance?

The Wall Street Journal considered this matter in an article titled “Cash-Strapped Entrepreneurs Seek Early Inheritances,” with ideas for parents and their entrepreneurial heirs alike.

In an economy starting to show some signs of life, many business plans that have been mothballed are being reconsidered. As an heir, is it ok to want your inheritance now? As a parent, is it ok to give it up early? Well, yes to both.

All parties concerned must be mindful of tax issues, as well as future financial needs that include planning for retirement, old age, health issues and even the rest of the estate.

The original article explores the emotional aspects of this issue, too. Indeed, it can be difficult to ask for an early inheritance and, conversely, it can be difficult being asked for an early inheritance.

Regardless, whether you are asking or being asked, you will need competent legal, accounting and financial counsel to guide you. You do not want the potentially competing dreams of business success and a secure retirement to turn into nightmares for all concerned.

Reference: The Wall Street Journal (August 19, 2013) “Cash-Strapped Entrepreneurs Seek Early Inheritances”

Business Owner Bankruptcy Pointers

I never advocate going all-in on a business, but at the very least it should be something that crosses your mind before taking the road less traveled. However, if you choose to take the road less traveled and find yourself in the unfortunate circumstance that is bankruptcy, then the following are mistakes you should avoid and important things you should know.

Your business is your business and, likely, an important part of your life. That includes your personal financial life, too.  When the liabilities of your business become your personal liabilities, then your business and personal lives can get pretty complicated.

Small business owners know more than anyone about the realities of bankruptcy, either in the form or near-misses or through personal experience. Consequently, no one needs to protect their assets quite as thoroughly or understand bankruptcy like a small business owner.

If you cannot imagine and bear the consequences of a personal bankruptcy then perhaps you should not start a business. Such was the advice in a recent Forbes article titled “How To Bounce Back From Bankruptcy & The Loss Of Your Home.”

There original article offers some practical steps to help understand the mechanics of bankruptcy – such as who, what, where, why, when and how – but the most important things to understand are the exemptions.

Certain aspects of your personal financial life are legally protected under state laws, even in the face of so many liabilities and debts. You should plan accordingly.

For example, most states offer a homestead exemption from bankruptcy that will save your home from liquidation to creditors, unless of course you have mortgaged the home. There are other ways to lose the homestead protection that are less obvious, too.

Knowing your protections can enable you to structure your business and operations to protect your interests, and indeed there is much that can be done. At the most basic level, even the choice of form for your business (Limited Liability Company, Corporation, etc.) can have important ramifications to understand.

Regardless, the time to make plans to protect your personal assets from your business liabilities is now, rather than later.

Reference: Forbes (August 5, 2013) “How To Bounce Back From Bankruptcy & The Loss Of Your Home”

Is Your Business Your Retirement Nest Egg, Too?

Many businesses simply cannot be sold, and others end up being sold for far less than expected, said Randy Gerber, founder of Gerber L.L.C., which helps business owners manage their personal finances. And even if a business can be sold, he said, owners often have an unrealistic notion of how much it might be worth. That is why a potential sale should not be an owner’s only plan for retirement.

As a business owner, your business and your life are pretty hard to separate. Your business partner or right-hand employee may be a spouse, a sibling or that college roommate. Chances are your assets are entirely bound up in the company, and you might even intend to sell the business to fund your entire retirement. Not so fast!

This was the advice given in a recent New York Times article titled “Sell a Business to Cover Retirement? Don’t Count on It.”

When it comes to your business, you might be OK with the idea that it is empowering your financial life (or is it your life that is empowering the business itself?). Regardless, there will come a time when you and the business must part. This will be one of the most important events in your life and in the life of your business. Question: will this even be planned or just happen?

If the business is your greatest asset, you are just going to sell it and live comfortably in retirement, right? Perhaps. What if it is not worth as much in the market as it is in your mind?

If the business is your principal retirement asset, then knowing its value and preparing it for the transition is of utmost importance. This transaction will determine your future well-being, and perhaps the future well-being of your entire family for a long time. Accordingly, this transition will take structuring and forethought.

Will your business be your retirement? If yes, then it is never too early to structure the transaction.

Reference: The New York Times (July 24, 2013) “Sell a Business to Cover Retirement? Don’t Count on It”

Employee Skin In The Game – Family Business Stock

Owners want non-family business leaders to behave like owners, and so they give them shares.  Trying to align incentives is right, and families certainly want to reward executives when the business does well.  But the family needs to exercise extreme caution when giving shares outside the business-owning family.

Some businesses are family owned, but not run by members of the family. So, how do you make such non-family key employees act like they are owners? Give them skin in the game.

The most common form of “skin” in the game is company stock. Done right, this approach can be a win-win for all parties involved. That said, great caution is due; beware, as described in a recent WealthManagement.com article titled “The Tyranny of Minority Shareholders.”

Structuring your family business for the future is not an easy task. What of value in life is? While each company and family is different, making a key employee a part owner certainly can give them added incentive to run things when the family cannot or will not.

On the downside, you can create tension between the family owners and the key employee turned minority shareholder. For example, conflicts can arise should the majority owners (i.e., the family members) take actions in their own self-interests without considering the concerns of the minority owners (i.e., non-family members). In some cases, a minority shareholder can be protected by state and federal laws as in the case discussed in the original article regarding the Empire State Building IPO.

Even if you do not own an international landmark, there are many ways you, your family, your non-family executives, and, yes, your business, can find a happy medium. However, it takes time and qualified counsel to structure things correctly.

Reference: WealthManagement.com (June 20, 2013) “The Tyranny of Minority Shareholders”