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Owner’s First™ is our proprietary process for helping business owners keep more of what they earn. If you aren’t intentional about taking care of yourself, your employees and business will get all the cream, and you’ll be left with the scraps.
Taxes: This is where it all begins. Most business owners don’t realize they are overpaying their taxes, and accountants never tell them.
As a business owner, your benefit plans should provide the maximum benefit to you, first. Then, if you want to provide a benefit to rank-and-file employees, you can do so. But that’s the opposite of how most people do it. Employers often start plans that benefit employees—at cost to the business owner—and then limit the owner’s benefits because of something call “top heavy.” That leaves the business owner taking the leftovers! We think that’s backwards! As the owner who has taken all the risks and poured blood, sweat, and tears in to your business you should be the greatest beneficiary of your company’s profits.
In both of these cases we helped the business owners develop outside financing so they were able to walk away from their businesses with tax-free cash in their pockets, and with no risk that the business would come back to them if the new owner for any reason failed to take the business forward in the decades ahead.
Do you have a “Business Will?” This is a plan that spells out who owns and controls the business if something should suddenly happen to you, or in the event you and any partners decide to sell all or part of the business. Many businesses start with the best of intentions, among good friends. But a little success and a few years later, it’s a tangled mess of ownership with no real concrete plans for what happens when “eventually” occurs. An owner dies and leaves a spouse who really doesn’t understand the business, or a partner who suddenly finds themselves in partnership with a surviving spouse or child that they never intended to be partners with.
Jill and her husband are successful multi-concept business owners who want to retire in a few years and have their son take over the businesses. But they are too busy running the businesses to spend anytime planning on how to make this happen, and they are so angry with the amount of taxes they are paying that they can’t really think straight about it. They need a “Business Will.” They need to figure out what their business is worth; that’s “Business Valuation.” They need a plan for how to transition the business to the son, and how to finance it so they aren’t left holding the bag when they are 75 years old, if the son should get sick, or die, or divorced.
Arnold is 66 and owns a service business that treats him well. He’s thinking about selling out and has identified a key employee—his current operations manager—who he thinks he should probably sell the business to. He’s planning to just walk away and let the manager “send him a check” for twenty years after he retires. But what happens if the manager takes over the business and then fails, or dies, or gets divorced. Arnold’s twenty year paycheck could disappear.
If you have a profitable business with 50 or more employees, an ESOP might be the right way to exit your business. An ESOP gives you cash while allowing you to defer the capital gains to a future date.
An ESOP rewards your employees who helped you build the business by giving them a stake in the ownership outcome. They’ll no longer be employees, but they’ll be owners in the business. Their future is tied directly to the future of the business giving them an incentive to perform their responsibilities well.
An ESOP frees up your equity. Most business owners have the majority of their net worth tied up in their business. If the success of that business depends on the management of the owner, and he or she suddenly dies or is disabled, their family suffers because the business deteriorates due to the absence of the owner. An ESOP cures that. It begins freeing up your equity year-by-year, as you sell the business to the ESOP trust, and new
management begins to slowly take over the everyday tasks of the business as you walk alongside them and train them.
An ESOP allows you to exit on your timeline. With an ESOP you don’t just take a check and walk away. You start planning perhaps five years ahead of retirement, begin grooming the next generation of management, and slowly turn the reins over to them while at the same time taking a little more time off each year, and getting paid out gradually as you sell the company. And you don’t have to immediately pay capital gains….maybe never!
What is your business worth? Really worth? Frank was a business owner of a company that regularly throws off a half-million dollars per year. He has a key employee who he thinks could run the business, and his plan when he retired was to walk away for a couple of hundred thousand dollars, and essentially give away the business he’d worked over thirty years to build.
We did an analysis on Frank’s business, including comparing it to other businesses in the same industry providing the same services. We discovered that Frank’s business values today at about $1.8 million, yet he was going to sell it for $200,000.
Frank is very good at what he does, but he’s not a business valuation expert. As a result, he was about to make a $1.6 million dollar mistake.
Tom & Julie made a similar mistake. They owned a business that was worth somewhere around a million and a half dollars, but they sold it for a million planning to retire in their 50’s. Unfortunately, they came to see us after they’d sold the business, and the first thing we had to point out was that they owed $300,000 in taxes, and didn’t have enough money to retire and stay retired.
Karl owned a construction specialty business with eighteen employees, a fleet of trucks, and a shop/office from which he netted about $600,000 per year. He came to us because he was concerned that he was paying too much in income taxes.
We showed Karl the Tax BlueprintTM process and explained how we’d review his business structure and tax returns, then come back with recommendations for how he could improve things. Karl was understandably leery, until we explained that the way our Tax BlueprintTM process works we guarantee that the taxes saved in just the first year alone (not to mention every year after that) will be double the amount he paid as our fee. He immediately said “I’m in!”
We evaluated Karl’s business and tax returns, and came back with a plan that included property leases, a qualified health savings strategy with business paid health insurance, a vehicle leasing
program, a risk mitigation strategy, and an (deductible) owner’s pension plan. His total tax savings was $133,000 this year, and every year going forward. The result is a 22% increase in his net benefit from owning the business.
Another client, Frank, only reduced his taxes by $34,000 per year. And Arnold, he reduced his taxes by $10,000 per year. But regardless of the amount—$133,000 or $34,000 or $10,000—it’s all free money that they were paying the IRS that they aren’t paying any more.
Very few people know about this strategy, even though it has been around for over 40 years. You can make a $200,000 tax deductible contribution to your retirement plan this year, and every year for the next five years. You might even qualify to contribute and deduct more!
If you are in the top tax bracket, this deduction would reduce your taxes by approximately $86,000 per year, for $430,000 in tax savings over the next five years. That’s nearly a half-million dollars that stays in your family, and doesn’t go to the IRS.
Now, here comes the best part. When you retire, you can begin drawing an income that will be guaranteed for life!
Isn’t that why you worked so hard, so you could walk away and have a guaranteed check for the rest of your life?