Established Company

An established company is one for which business has become routine. It has matured and is doing well with the typical business cycles one has. Sales are under control.

1. Complacency
   Complacency: a feeling of quiet pleasure or security, often while unaware of some potential danger, defect or the like; self satisfaction with an existing situation.
   
   Read the definition and one can see how this attitude can slip into an organization at any stage of development, but particularly in the matured business. Management weaknesses, deteriorating market culture, and decreased cash flow can occur at any stage. Management should pay particular attention to
   
   
   1. Paradigm shifts - Internal and external influences keep changing and management must always be ready to move in new directions.
   2. Greed - When financial returns are good management needs to be diligent in turning profitability back into the capital of the company to weather downturns when they arise because they will happen.
   3. Lack of succession planning - for the business to keep thriving "new management or leaders" need to be developed and brought into the core of the business as the founders age and want to slow down. Succession planning needs to begin early in the business life cycle. As a business evolves, one would usually find clearly established goals in the early stages, but, as time passes and business "does well" the goals become less defined and complacency takes over. It is important to redefine goals and work as hard on the established business as when starting the entity.
   
    
2. Succession Plans
   
   Succession panning is a very important process that affects not only a company, but the owners, the owner’s family, employees, customers, suppliers and even professional consultants and landlords. Succession planning can even affect a community.
   
   Succession planning should be done even if there is no immediate plan to retire. A business owner has a responsibility to consider the needs of everyone involved. The owner’s advisors should relate the plan to the owner’s personal interest. It is in an owner’s best interest that a succession plan be conceived, planned, and implemented. Some key reasons to have a succession plan are:
   
   
   1. Employees know when owners are getting older or lacking the enthusiasm or drive they once had. This can create doubt with the employees about the future of the business and their positions and can affect performance and even cause great employees to seek opportunities elsewhere.
   2. Customers can get the same sense and it may cause them to seek alternate sources affecting sales and the future of the company.
   3. Suppliers may no longer feel as secure in the relationship. This may cause your orders to lose some importance and affect the quality or timeliness of delivery.
   4. Some professionals such as attorneys, accountants and marketing advisors may no longer consider the relationship long-term and look for replacement business affecting the time they have available for the company.
   5. Bankers may start “thinking” about their loans, especially if it appears there is doubt the owner will survive the term of the loan.
   6. Landlords may start considering the loss of a tenant which could affect the availability of the company to stay in the currently leased facility.
   7. A general feeling of lethargy creeps into the company, taking away the “wow” it once had. The fun dynamic of the owner is no longer there and business becomes a chore.
   
   
   Every business owner will part with their business at some point, either voluntarily or involuntarily, but it will happen. Failure to plan forces a decision, which is to do nothing and that has real life consequences.
   
   A true succession plan involves the sale or transfer of a business to the next generation of owners which could be family, long-term employees or even an unrelated party. Transfers may be made in many ways, including, but not limited to, sale of stock or units, gift of stock or units, stock or units given as additional compensation, stock or units and cash given as additional compensation, stock options, restricted stock issuance, golden parachutes, phantom stock, shareholders’, members’, or partners agreements, clauses in compensation agreements, setting up a new business, clauses in a will, stock or unit redemption, installment sale, self-cancelling installment note, installment sale to a “defective” grantor trust, charity remainder trust, transfer to a variety of types of trust, employee stock ownership plans, sale-leaseback, preferred stock recapitalization, S Election, A-B stock recapitalization, private annuity, stock split up, family limited partnership and leveraged buyout.
   
   Structuring a business transfer involves great skill and effort. The plan must take into account the sources of funds, tax effect (including income, gift and estate), reasons for the plan, personalities involved and the wishes of the current owner and the successor owners. Many of the methods previously listed are used in conjunction with one another. Also, many can be done pre- or post- death, you just need to have the proper contractual agreements in place. The accountant, as the advisor usually closest to the business, is often the quarterback of putting a succession plan into place. It is important to note that many of these methods are highly technical and provision of the Internal Revenue Code and regulations just be adhered to.
    
3. Value of My Business
   
   The value of a business can vary significantly depending on the specific assets or interest being valued, the industry in which the business operates and the purpose of the valuation. Every business is dynamic and has unique strengths and weaknesses that contribute to value. Fair market value (FMV) of a business is defined by the American Society of Appraisers as “the amount at which property would change hands between a willing seller and a willing buyer when neither is acting under compulsion and when both have reasonable knowledge of the relevant facts”. This definition conforms to that found in Internal Revenue tax code and is used for estate and gift tax valuations.
   
   Your business may have a very different value to you than it does to a third party. To you, it is your source of livelihood and may have more value as an ongoing source of income and legacy for your heirs than it has to an unrelated party. At the same time, a particular buyer may have a strong strategic reason for acquiring your company and may be willing to pay a premium over an average buyer.
   
   Business valuation methods generally fall into the following categories:
   
   
   1. Business assets - including book value and liquidation value methods
   2. Historical earnings – including gross income multipliers, capitalization of cash flow or earnings, debt-paying ability, and dividend-paying ability methods
   3. A combination of assets and earnings
   4. The market for similar businesses – including comparable sales, industry rule of thumb, and price to earnings ratio methods
   5. Future earnings – specifically discounted future cash flow or earnings methods
   
   In certain industries, some businesses routinely sell for a fraction of sales, such as 48% of gross sales. In other industries, businesses often sell for a multiple of EBITDA (earnings before interest, taxes, depreciation and amortization), such as three or four times EBITDA.
   
   In general, your business should be worth more than the total value of the hard assets. Unfortunately this is sometimes not the case with small businesses. However, for a buyer, it is typically key that your business already has everything necessary for successful operations – equipment, location, inventory (if applicable), and also intangible assets such as experienced employees, suppliers, business processes, customers, name recognition, telephone numbers, website and email addresses.
   
   Remember that the value is in the mind of the beholder. A professional appraisal performed by an independent appraisal firm can tell you the average price that a willing buyer might pay for your business; it also can be used as support for the value of your business in the event of a transfer for estate or gift purposes. However, in the case of the sale of your business, an appraisal would generally be a starting negotiation point or a tool to help you understand the price you should be able to obtain and not a fixed sales price.
    
4. Estate Planning
   
   Estate and gift tax laws as detailed below are current as of January 1, 2009. Because the estate and gift tax laws are to be repealed in 2010 under current law, most practitioners feel that the estate tax law will be changed in 2009. Please check back on our website for any information on changes to the estate and gift tax laws.
   
   Current tax law allows each taxpayer to gift in their lifetime up to $1,000,000 of fair market value without incurring a gift tax liability. In addition, up to $13,000 may be given to any number of individuals each year without using any of your $1,000,000 lifetime exemption. In addition, as of January 1, 2009, every taxpayer may transfer, at death, up to $3,500,000 of property, (reduced by prior gifts), to a non-spouse and not incur an estate tax. Gifts to a spouse who is a U.S. citizen are unlimited in value as long as the spouse has the current right to the enjoyment of the property bequeathed to him or her.
   
   The estate tax is determined by totaling the fair market value of all assets owned by the decedent either in the entirety or jointly with someone else at the date of death. This is called the gross estate. Various allowable deductions, such as funeral expenses, accounting and attorney fees, debts at the date of death, administrative expenses, charitable bequests, and bequeaths to the surviving spouse are subtracted from the gross estate leaving an amount that is your taxable estate. Add prior gifts made by the decedent since 1977 to the taxable estate and if this amount is less than $3,500,000 the estate will owe no estate tax.
   
   Taxpayers are allowed to directly pay a medical provider or pay school tuition for another individual and not have this be considered a gift as long as the payment is made directly to the provider.
   
   Estate and gift tax laws are quite complicated, so please contact someone in our office and we will be glad to meet with you to discuss your particular situation.