Remember the purpose of being in business is to “maximize profits” but also to build a company that has enough value to transition or sell when your ready to wind down. From the start, it’s critical that you build the right ”legal infrastructure” so that the assets are well protected and that they have “fair market value” independent from you as the owner. Make sure that your intellectual property is contractually safegaurded, that your trademarks, patents and copyrights are in place and that your employees, contractors and other “vested parties” are well trained and “contained” to protect your business interests. Lastly, make sure that the “goodwill” (your customer base) is tied to the products and services of your business, not just tied to your personal relationships. This is important from a tax perspective when you sell.

Assuming your assets are well protected and are linked to the nature of your products and services, you are on your way to posturing your company for potential sale or transition.

There’s more to come on “safegaurding your assets” in next weeks post.

WHAT IS IT?

Succession Planning is preparing a business and its owners for all “foreseeable” circumstances that may arise during the life cycle of the business. The process requires the owners to identify the immediate requirements for managing and running their business, and the “long term” goals and strategies for exiting the business. From there, the business’s advisory team will develop a customized plan consisting of strategies to help ensure that the desired results occur in the event any of the foreseeable circumstances occur. Each strategy takes into account the potential management, liability and taxation consequences and is implemented over the life of the business, with the idea that the strategies and tools may be modified or replaced in the event any of the following considerations change.

For most business owners, their business interests are their most important assets, therefore its critical that their Succession Plan is customized to address their specific needs and goals and is reviewed and updated at least annually to take into account the following considerations:

Short Term considerations:

• Management and Control
• Available internal and exteral resources
• Maintaining existing customers

Long Term Considerations:

• Death or disability of owners
• Retirement or withdrawal of owners
• Sale of ownership and purchase of business by outside parties
• Expulsion and termination

Stay tuned next week as we uncover the specific issues related to each of these considerations…

In the meantime, please feel free to contact me or follow up with comments or questions related to planning or general business law issues: john@witzkeberry.com or 248 481-4000

Here are some things to keep in mind…

In today’s market, sellers need to take the necessary steps when preparing to take their business to market or entertain realistic offers, and buyers need to be equipped to properly evaluate a prospective seller and lead the purchase process through completion.

From the “sell side”, companies need to ensure that all of their financial documents and records are accurate and up to date. Specifically, that their financial statements and tax returns are consistent and that their earnings and cash flow are significant enough to justify the initial asking price. Also, it’s a great idea for prospective sellers to have their assets valued by an independent “certified valuation analyst” prior to listing. This process enables sellers to determine the “real value” of their business and flag any potential financial issues that may arise during the negotiation of the sale.

From the “buy side”, purchasers need to determine “what” and “how” they are purchasing. This generally includes identifying the specific “assets” or “stock” of a prospective seller and determining “how” to structure the deal. It’s generally more favorable to purchase the business “assets” since the buyer can “cherry pick” the specific assets that have the most value, while only assuming those “liabilities” that are necessary to operate those assets. This enables the buyer to determine how the assets will be purchased, over what period of time they will be purchased and how they can be amortized and used by the buyer.  Next, the buyer should commence a thorough “due diligence” and review the Sellers assets, operational processes, customer base, and other tangible and intangible interests to validate the purchase price and verify that the deal is worth pursuing.

For more info on Buying and Selling a business or answers to your questions, please feel free to contact us at John@witzkeberry.com and stay tuned to our next post…

Well, good news!! One way to lower your total tax consquence and mimimize your potential liability is to change your management structure.

 The IRS allows members in a LLC to “re-classify” their membership status from a “member manager” to a “member”, thus allowing members to delegate their management authority to others in the organization and reduce the total number of hours they dedicate to their ”practice or trade”.  As a result, the distributions that those members receive are expempt from self employment tax. Likewise, the delegation of management authority releases the member  from any potential liability associated with the future management of the business.

 For “single member” and “multiple member” owners in a LLC this is a great deal if they can appoint/hire someone as a “Manager” to run the daily affairs of the business. This becomes an issue of knowing and trusting the right person and creating the appropriate management structure between the Member(s) and the Manager. Sometimes easier said then done.

There are other tax and ownership issues tied to this model, and although it’s not possible for all businesses, it’s something most growing businesses should consider during tax season.

For more on this and other “Business Structure” topics, stay tuned for our next post!

As a new Michigan entrepreneur it’s extremely important to “know what you don’t know” when selecting the best legal entity for your business. As an attorney and small business advisor, I am shocked by the amount of conflicting and somewhat confusing information now available to first time entrepreneurs. Consequently, I am not surprised by the number of people that have put the “cart before the horse” by beginning their business without knowing the facts.

 When selecting a legal entity for your business, it’s critical to look at the following “Key Considerations” as they pertain to your specific individual goals and the short and long term impact on your business.

Management and Control:

The first Consideration is determining the appropriate management structure. How and by whom will the business be managed, and what rules, policies and protocols will be implemented for the success of the business?  First, does the entrepreneur possess all of the knowledge, skill, client contacts and insight to operate the business by themselves, or do they need assistance from others who will provide different but complimentary resources (e.g. knowledge, property or cash)? Once this is determined, the business will need to establish a set of rules and protocols for managing the business operations. Issues associated with how daily decisions and disagreements are handled, what products and services the business will offer and what happens if the principle becomes unavailable, deceased, permanently disabled, divorced (life’s unexpected circumstances) must be accounted for. These issues are addressed in the “By-Laws” of a corporation or “Operating Agreement” in a LLC. Each legal entity has its own management structure and rules for governance set forth under Michigan law, it’s not a “one size fits all”. The trick is to identify the entity that provides the type of structure that resembles your business model and to have your operational documents “customized” to reflect the specific needs of the principles. This process is not rocket science but does require the input of a business professional that understands the effects of the desired structure and can help facilitate the process.