Business owners spend most of their time on operating and expanding their enterprises. Many entrepreneurs think that when they retire, they will sell their businesses. Unfortunately, most businesses are not sold.
In many cases, the owner sells the assets and winds the business down or works until death. We all will exit our respective businesses whether voluntarily or involuntarily. Here are three ways that an owner can successfully exit their businesses.
An ESOP or Employee Stock Ownership Plan is one of the most equitable ways to exit a business. An ESOP is similar to a Profit Sharing Plan. It allows employees to participate, directly, in the financial success of a business. Under this structure, the company can use pre-tax future earnings to purchase shares from the owner. The plan can be funded with a lump sum or a periodic payment. An ESOP is a tax efficient way for an owner to exit their business.
The second way that an owner can exit a business is through the sale of the company to a strategic buyer. A strategic buyer is usually a competitor or a company who is looking to add to their customer base, product line or market share through an acquisition. Generally, a strategic buyer will pay a premium for a company to increase their competitive advantage.
Financial Buyer (PEG/PIG)
An owner can also turn to private equity or private investment groups to exit their business. These financial buyers are primarily interested in increasing revenues and reducing expenses to maximize the value to the business. Their goals are to make a profit for their investors. A financial buyer can close the sale and put money in the owners pocket relatively quickly.
Developing an exit plan should be a priority for any business owner. A proactive business advisor, financial planner, or mergers and acquisitions (M&A) professional can help you prepare and implement a plan. It is important to consider your how a liquidity event will affect your retirement plan, tax situation, and lifestyle. Once you have a plan in place you can concentrate on what you do best-building your business and serving your customers and community.
After the credit crisis in 2009, financial institutions were forced to shore up their reserves and tighten their lending requirements.
The unintended consequences have been severe. Only the largest and most credit worthy businesses have been able to access capital. Small businesses have had to turn to nontraditional lenders who charge higher interest rates and more fees than traditional banks.
Fortunately, there are options that businesses can use to secure financing. Here are three alternative solutions that business owners can tap into.
Community Development Financial Institutions, or CDFIs, are nonprofit or bank sponsored loan funds that exist to stimulate economic activity in underserved markets. They provide technical assistance and advisory services to small and medium sized businesses. Some of the products that they offer include lines of credit, working capital, and equipment financing.
Their interest rates are reasonable and payment terms are flexible.
The second alternative financing solution is factoring, also known as accounts receivable financing. A business can raise capital by selling their accounts receivables, often at a discount, to a factoring company. This allows the business to meet its cash flow needs without acquiring debt.
3. Vendor Financing
A third alternative financing solution is vendor financing. In many industries, a vendor will allow extend credit to a customer to purchase its products. Once the customer sells the products to the end user, the business repays to the vendor. This kind of financing usually carries higher interest rates than bank financing and CDFI loans.
While there have been initiatives to spur traditional bank lending, the small and medium sized business community still struggles to acquire capital. Thanks to these nonconventional approaches, business owners can access solutions that will help to fund their business’s growth.
Cash flow is the lifeblood of any business. Without it, the enterprise cannot pay its bills, compensate its employees, reinvest in growth, and serve its customers. I’ve encountered many businesses with positive revenue growth but they ended up in the red at the end of the month. Here are three ways that owners can optimize their cash flow to operate and expand their businesses.
1. Track Cash Flow Daily
We live in a data driven world. It is important to know how your business is performing so that you can achieve your organizational and personal goals. The days of tracking your profits and losses in a notebook or on an excel spreadsheet are long gone. There are several inexpensive, cloud based solutions that will enable you to record daily and weekly financial information to keep you on track.
2. Manage High Risk Customers
The second way to optimize your cash flow is to manage high-risk customers. One of the biggest drains on a business’s cash flow is a slow paying customer. You can mitigate this risk by getting up front payments, establishing retainers, and offering discounts to customers who pay early.
3. Segment Your Customers into Tiers
The third way to optimize you cash flow is to segment your customers based on their profitability and average time to pay. I suggest using tiers-green, yellow, and red. While you always want to treat each of your customers well, you want to make sure that you provide your best customers with the highest level of service that you can offer. Separating customers into tiers is the cornerstone of customer relationship management. Our goal is to move customers in the lower tiers, yellow and red, into the highest tier, green. It doesn’t always work out the way we’d like and we may have to fire some customers. And that’s okay. We can only provide the best possible service when everyone in the supply chain is on the same page.
Working with a business advisor to design and implement a system will produce numerous dividends. Once an effective system is deployed, you will receive actionable information on performance and profitability. This data will empower you with the intelligence to make better decisions, reduce costs and maximize profits to reach your personal and professional goals.
Lately, there has been a lot of discussion in Washington about tax reform. Whether or not Congress is able to compromise on this issue, many business owners will agree that taxes take a significant bite out of their revenue. Here are two ways to reduce your tax liability and reinvest in your business’s growth.
Tax credits for businesses and self-employed individuals are one to reduce taxes. According to the irs.gov, a credit provides a dollar for dollar reduction of taxed owed. For example, every $1 in credits you receive, you will receive a $1 reduction in your taxes. You may even receive a refund if your tax liability is reduced to a certain point. Credits that are available for small businesses include the Manufacturers’ Energy Efficient Appliance Credit and the Plug-In Electric Drive Vehicle Credit.
Deductions are expenses that occur while operating a business. These expenses allow a business to reduce its taxable income.
Some of the ordinary expenses include costs of goods sold and capital expenses. Costs of goods sold, or COGS, are costs associated with manufacturing or purchasing products for sale. These include raw materials, direct labor, and overhead. Capital expenses are investments in your business. They include start-up costs, machinery, equipment, and improvements. There are additional expenses that will reduce your tax liability including rent, taxes, interest, and retirement plans.
There are dozens of credits and deductions that can help businesses keep more of what they earn. With the advice of a proactive tax planner, a business owner or self-employed individual can use the tax code to create jobs, service their customers, and secure their financial future.
Small businesses are the backbone of the U.S. economy, and according to the SBA, small businesses make up 99.7% of U.S. employer firms and 49.2% of private sector employment. Historically, these employers have faced challenges when it comes to providing affordable health care for their employees. It is estimated that smaller firms pay 18% more, on average, than larger employers.
If you own a small business, with less than 25 full-time equivalent employees, you may be eligible for the Affordable Care Act Tax Credit. A full time equivalent employee is categorized as someone who works 2,080 hours per year, and several part-time employees can be categorized as one full-time equivalent employee.
Small employers can sign up through the Small Business Health Options Program (SHOP), an online marketplace that offers health and dental insurance plans to firms with less than 50 full time equivalent employees. In order to qualify for the tax credit, each of the following conditions must be met:
• 25 or less full-time equivalent employees
• Average employee salary must be $50,000 or less
• The employer pays at least 50% of the premium costs for full time employees
• The coverage must be purchased through the SHOP exchange
The credit is worth up to 50% of the premiums that you pay for your employees. For example, if you have paid $10,000 in premiums for your employees, you will qualify for up to $5,000 credit. If your business employs less than 10 full time equivalent workers, who earn $25,000 or less, you may receive a higher tax credit.
The Affordable Care Act has not been without challenges. Many smaller employers with more than 50 employees have seen their premiums increase. Nationally, there have been insurers that have withdrawn from state exchanges because their risks have increased. While these challenges persist, many small businesses, micro-enterprises, and freelancers have benefited from the tax credit available through the SHOP marketplace.
Small business owners wear many hats. Running a business and handling administrative tasks can leave very little time for strategic planning, but one of the most important actions that an entrepreneur can take is to establish a retirement plan. Here are several reasons why you should establish a plan for your business.
1. Attract and Retain Employees
One of the challenges that small business owners face is attracting and retaining qualified employees. As wage pressure increases for employers, offering a retirement plan may alleviate some of those concerns. Many employees are willing to forgo higher wages for a generous benefits package. Potential hires may also feel comfortable knowing that you have a plan in place in case they would like to rollover a plan from their previous employer.
2. Tax Benefits
Offering a retirement plan can provide small businesses with many tax benefits. Employer contributions to the 401k plan are tax deductible. These contributions can accumulate and any investment gains will enjoy tax-free growth until there is a distribution.
3. Succession Planning
Many entrepreneurs do not have a plan for their retirement. Small business owners tend to reinvest and put profits back into their business. As they prepare for retirement, many plan to sell their business. If they are unable to, they may find themselves working far longer than they had ever intended to. By developing a retirement plan and maximizing their annual contributions, small business owners have a better chance at achieving retirement security.
The benefits of establishing a retirement plan are many. As the costs decrease and the number of 401k providers increase, small business owners have a variety of options to choose from.
Millions of Americans are having difficulty saving for retirement. Student loan debt, increased food and housing costs, and stagnant wages are contributing factors.
If you have an employer-sponsored retirement plan, there are several steps you can take to boost your 401K.
1. Maximize Your Contributions
Once you establish your 401K account, you may want to increase your contributions. Usually the default contribution rate is between 3% and 5%. It is recommended that you should save at least 10% of your income. If you can afford to do so, I would recommend maximizing your contributions. In 2016, you can make a maximum contribution of $18,000. If you are 50 or older, the IRS allows you to make a catch-up contribution of $6,000 for a total of $24,000.
2. Take Advantage of Your Employer Match
Many employers offer to match your 401K contributions by a percentage or dollar amount. An employer may offer a 100% match up to 5% of your contribution. For example, if you contribute 5% of your salary to your 401K, the employer will match your 5% for a total of 10%. The employer may or may not offer additional matching beyond this 5% but it is an incentive for you to save. If you do not take advantage of the match, it is money that you are leaving on the table.
3. Minimize Expenses
While a 401K plan allows you to defer taxes, there may be fees associated with the investment vehicles offered by the plan. Choosing an index fund or an exchange-traded fund with low expense ratios will minimize your expenses while adding to your long-term returns. Sales loads can also take a bite out of your returns. Sales charges are paid to the broker who sold you the mutual fund. Consider choosing a no-load mutual fund as an alternative. Another set of fees that you may notice are commissions or transaction fees. If your plan offers a brokerage account, you may be paying a commission on each trade.
4. Consolidate Your 401K Plans
Nowadays, it is not uncommon for someone to have had several jobs. We may have contributed to several different 401K plans with our former employers. Rolling over these balances into your existing employer’s plan would give you full control over your retirement assets. If you are in transition or self-employed, you can consolidate your retirement plans at a brokerage firm or a bank.
The federal government has developed a retirement vehicle, myRA, to help people without a retirement plan save for their future. Several states are planning or implementing their own retirement plans. Although these efforts are commendable, they are limited in their scope. Ultimately, we must be responsible for our own retirement planning.
Planning a successful retirement is important to us all. However, the amount of information on and offline can leave us feeling overwhelmed. One of the key places to find out where you stand is your quarterly retirement plan statement. The statement contains information that allows you to track your progress and where you need to pick up any slack. Here are the four most important parts.
1. Your Retirement Income Projection
The retirement plan projection is the most important part of our statement. The portion includes contributions made by the participant (you), employer matching contributions and vesting information. It also gives you a snapshot of where you are in comparison to where you want to be when you retire. For instance, you may see that you need to increase your contributions to reach your retirement goals.
2. An Asset Allocation Summary
The asset allocation summary is another important part of your statement. In this section, you will find a breakdown of the investments (cash, stocks, bonds, mutual funds, exchange-traded funds (ETFs), etc.). Think of your portfolio as a pie. Each slice represents an investment with outcome expectations. For example, a small-cap growth mutual fund may provide you with a higher return over time. In exchange for the chances of a higher return, you are also assuming higher risk. Asset allocation allows you to diversify your portfolio among high return/high risk, moderate return/moderate risk, and low return/low risk investments according to your long-term goals. It is important that you monitor this section and rebalance your investments periodically to keep them consistent with your goals.
Fees are often overlooked when it comes to reviewing your portfolio. There are a couple of important fees to be aware of.
The disclosure section is also an important section of the account statement. This is where you will find miscellaneous items. The firm is responsible for providing you with information that is required by federal and state securities regulators. This section also defines the various terms and codes that you will find throughout your statement. Any legal information or disclosures regarding your retirement plan may also be summarized in this section. It is important that you pay attention to this section for any changes to your plan.
As employers shift the responsibility of retirement planning onto employees, it is important that we familiarize ourselves with our retirement plans. Performing a retirement statement analysis every quarter will give you the ability to take control of your investments to reach your retirement goals. Although it may seem intimidating in the beginning, over time, it will give you the tools that will help you to enhance your financial situation.