Exit Planning Tools for Business Owners

exit strategies

Utilizing a NING Trust as Part of a Business Exit Strategy

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Signing Trust DocumentsThe most commonly stated goals of an exit plan for a business owner are to exit their business on their terms, to receive the highest possible value (or their desired value), and to do so in the most tax efficient manner. It takes time to implement the process to accommodate those objectives. When a business owner rushes to sell their business many things can be overlooked including how to set up the exiting transaction in a way that minimizes taxation.

Particularly in California, state income taxes are excessive in relation to other states, especially compared to states that don’t have any income taxes. For 2020, the top tax bracket for California is 12.3%. Upon the sale of a valuable business, the realized gains can be substantial enough to hit this top tax bracket, especially if the business has a low cost basis. To put it into perspective; if a company is sold, realizing taxable proceeds of $12,000,000.00, the potential taxation in the state of California is approximately $1,476,000.00. That’s a significant amount but, if planned carefully, this potential taxation can be avoided.

Though it is not the only solution for a California business owner, a NING Trust (Nevada Incomplete Gift Non-Grantor Trust) is a tactic that be utilized to avoid California income taxes, if the right conditions are met.

What is a NING Trust?

A Nevada Incomplete Gift Non-Grantor Trust is an irrevocable trust designed to reduce or eliminate the potential State income tax for high income earners or on a significant capital gains on a sale of an asset, and the owner lives in a high income tax state. An irrevocable trust is often a trust to which the assets placed in it are no longer owned by the Grantor (Owner). Therefore, it has a third party trustee, and the trust and the assets in it are considered to be outside of the Grantor’s estate. However, because the NING trust is considered to be trust with an “incomplete” transfer status, it is still in the owner’s estate, but we will get into the benefits of that later. Because it is a Non-Grantor trust, the trust is the entity that pays the income taxes and not the Grantor, or owner of the assets. Because Nevada does not have a state income tax, a resident or a trust in Nevada would not owe income taxes.

A NING Trust is created under Nevada state laws. It is considered to be a “self-settled” trust, which means you are the creator and primary beneficiary of the trust. The NING trust would be utilized if you have a desire to receive distributions from this trust. Furthermore, you could benefit from a “self-settled” asset protection statue of this trust, which the state of Nevada recognizes. Although Nevada isn’t the only state to recognize this statute, Nevada is a very trust friendly state and is convenient for California business owners, which we’ll get into in a moment.

Estate Planning with a NING Trust

For estate planning purposes, it is important to realize that asset transfers into a NING trust is considered to be an “incomplete gift”. Because of this, the assets in a NING trust will be included in the asset owner’s estate and will receive a step up in costs basis at death, if the low cost basis assets are still existing in the trust. But, you will have the benefit of transferring assets into the trust and not be subject to gift taxes. Furthermore, keep in mind, that the NING trust is for income tax strategy purposes and not for estate planning to reduce an estate tax liability.
So here’s the catch. In order to take advantage of a NING trust, the business owner residing in California that is looking to sell their business should first purchase a home in Nevada or another state without income taxes and establish residence there. You will need to definitely work with a business transaction attorney or an estate planning attorney that is well versed in NING trusts.

Later, the shares of the corporation are placed into the NING trust (after it is established), which then the shares of the corporation are then sold to the buyer. The business owner, now a resident of Nevada, can eventually begin to take distributions from the NING trust. You will need to work with a C.P.A. or tax attorney, but some say that after a year or so after the sale, the Grantor can begin to take distributions from the trust.

NING trusts can only own intangible assets, so shares of a corporation or an investment account. But that is okay in this instance, because the shares are sold and then placed into an investment portfolio to continue to grow.

Maintaining Non-Grantor Status

In order for the trust to maintain a Non-Grantor status or not violate the Grantor trust rules (which would make distributions taxable), the Grantor needs to exercise Powers of Appointment or Non-General Powers of Appointment. This means you retain the power to appoint anyone in the world except yourself, your estate, or creditors of your estate. For this discussion, we will refer to the “Inter Vivos Powers of appointment”, or powers during life. In this situation, distributions must be facilitated by a committee of adverse appointees. Second, the distributions need to be made in a non-fiduciary capacity and based on HEMS (Health, Education, Maintenance, and Support). Adverse committee members may include siblings, children, or other relatives that may be beneficiaries. There are many more nuances to these rules, which we won’t get into for sake of time. Besides, an expert attorney will explain all you need to know.

The bottom line is, this trust has a lot of rules and must be carefully written and set up. But it is feasible.

To Summarize, the trust needs to:
1. Be self-settled to give the grantor the ability to receive distributions.
2. Be a non-grantor trust so that the grantor won’t be taxed on the trust income at the rates of their home state.
3. Ensure the grantor be given a non-general power of appointment to direct disposition of the trust.
4. Furthermore, the transfer of the business to the trust would have to be an incomplete gift, includible in the grantor’s estate at their death.
(source: Save State Income Taxes Using a Nevada Incomplete Gift Non-Grantor Trust; Steven J. Oshins, Esq., AEP & Brian J. Simmons, CFP)

There are other solutions other than a NING trust to accommodate a business exit planning strategy. It all depends on the business owner’s situation, and what state they live in or operate the business in.

If you are interested in learning more about these tactics, or would like to see what solution is best for your exit planning needs, feel free to contact me by email: szeller@zellerkern.com.

Steven Zeller is a Certified Business Exit Planner, Certified Financial Planner, Accredited Investment Fiduciary, and Co-Founder and President of Zeller Kern Wealth Advisors. He advises business owners with developing exit plans, increasing business value, employee retention, executive bonus plans, etc. He can be reached at szeller@zellerkern.com

Exit Planning and Marathon Runners

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marathon race“Eat well and exercise!”

Just about everyone over 30 has heard this advice from someone interested in our health, usually a doctor. We all know that we should begin by doing SOMETHING, yet we wind up not really doing anything. We know deep inside that if we want to live long and prosper, taking a few painful steps will have long-term pay-offs, but all too often those first few steps never happen.

What has this got to do with Exit planning?

Business owners know they should be taking steps to plan for the future, but all too often they don’t seem to get around to it. With each passing year comes the thought, “I’ll get to that.” But, like the good intentions for diet and exercise, the longer one waits, the harder it gets.

Exit Planners Help Businesses Get In Shape

Exit planners are a bit like personal trainers. What personal trainers do for fitness, exit planners do for businesses. They take a look at the shape a business is currently in, and develop plans to improve that business until it is in optimal condition, usually so that the business can be transferred or sold in such a way that the owner remains in control of the sale. A business in less than optimal condition often means that the owner will lose some of control of the sale to the whims of the buyer.

Dream Big

A middle-aged person who develops a dream to run a marathon soon finds that just reading about marathons is not enough to get in the race. Still, if they never dream the marathon dream the race has no chance of being run at all.

Business owners who intend to sell also should not hesitate to dream big, even if they do not plan to sell for five or ten years. Big dreams mean big accomplishments. Every business owner should dream big about two things:

1. The ultimate objectives (financial, personal, family, and/or philanthropic goals) for leaving the business.

2. The “transferable value,” of that business, which should ensure that the owner does not have to go with the business when it is sold.

Set Small, Achievable Goals

Like someday wanting to run a marathon, dreams are easy to write down, but need diligent daily work to achieve. They will not happen on their own. Whether you a baby boomer nearing retirement, in the middle of your career enjoying the excitement, or just at the very start of a venture, taking these simple steps will prepare you for the future:

1. Get help to develop a “workout plan.” Just as it can be helpful to get a personal trainer involved when you begin to exercise, the same is true for business planning. It’s a complex process that requires specific knowledge in certain areas (legal, financial, estate planning, human resources, etc.) to ensure your business gets in optimum shape.

2. Set simple goals – Simple goals when one begins exercising help to prevent accidental injury, and the same is true for exit planning. Three simple, easily achievable goals are:

     a. Determine how much money you need, or want, for retirement

     b. Decide when you want to leave your business

     c. Identify the person, or persons, to whom you want to transfer the business

3. Start slowly – you can’t rush getting into great physical conditioning, and you can’t rush the business planning process. Set realistic goals and act on them one by one.

4. Stay steady and consistent – sticking with the plan and taking small, consistent steps will pay off. Make time in your busy schedule to do the essential steps.

5. Measure progress – in order to ensure you’re making progress toward your goal you’ve got to measure it. Setting 90-day goals allows manageable progress and the ability to celebrate the small wins.

As you work hard in the business day-to-day, take the necessary time to prepare for tomorrow – starting your exit planning program now will maximize your quality of life in the future.

Invest 15 Minutes and take our FREE Exit Readiness Assessment. We do not request any confidential information.

Corby Megorden is a Principal at ENNIS Legacy Partners. The mission of ELP is to help business owners build value and exit on their own terms and conditions.

The Coaching Skill in Exit Planning

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The single most important talent in your exit planning team is coaching skill. I’ve written often in this space about the need for multiple talents, from taxation to legal, financial planning, and risk management. None, however, is more important than coaching.

Let me put it this way. Your planning team can be led from any position, as long as the person leading has coaching skill. If he or she doesn’t, all the clever tax advice or ironclad documentation in the world won’t lead to your successful transition. But if the person leading the team is an experienced coach, you’ll probably be okay.

What is Coaching Skill?

Let’s make it simple. Coaching is asking questions. An experienced coach will ask the questions that no one else does, preferably in a way that doesn’t offend.

Do you want to save money on taxes? Of course, and that should be apparent to every professional involved. Do you want to maintain control until you are paid what the company is worth? Sure. Do you want to ensure that your family is taken care of? Naturally.

These aren’t the questions that derail a transition plan. Here are a few that, left unasked, will.

Is there something more important to you than the proceeds from selling? Is there a part of your legacy that must be preserved if at all possible? Are there non-financial or non-equity stakeholders whose welfare must figure into the plan? Is your family on board with this?

These are the questions that an advisor who is focused on the technical complexities of exiting will often omit.

The Most Important Question

What will you do when you no longer own this business?

For many entrepreneurs, that’s the stumper. Unless you can answer it comfortably, your plan is very likely to fail. Most advisors will ask it in a casual way. “So what will you do next?” They may react little or not at all if your response is “I don’t know.”

When I was active as a business broker, I would decline a listing if an owner couldn’t enunciate a plan for life after the business. In my first book, 11 Things You Absolutely Need to Know about Selling Your Business, I describe a case where an owner declined two offers, each for twice his company’s estimated value. He simply didn’t know what he would do next.

“I don’t know” is a signal that the owner can’t envision life without the activity of the business.

Sometimes the answer is too facile. “I’ll play a lot more golf!” Nice try, but I’ve heard many a retiring owner tell me “I never thought I could play too much golf.” Here is an exercise I use with clients to help them visualize the next phase of their lives.

Filling in the Week

Start with the time you currently spend at the business. Include that “quiet time” at the beginning or end of the day when you like to think. Add in answering emails and texts at home or reading reports and articles on the weekend. Let’s say, conservatively, that you are engaged with your business for 50 hours a week.

Now, let’s start retirement with golf every Monday, Wednesday, and Friday. That’s a lot of golf, but we have only consumed about 15 hours of your workweek. What else?

Many folks will say they want to do more community service. Unless you plan to take on the full-time responsibility of running a charitable organization, let’s try simple volunteering to start. Two half-days a week? That’s another ten hours. We are up to twenty-five.

Travel is a big goal. How do four, two-week trips a year sound? That’s an average of another 8 hours a week.

Now you have two months of traveling, 150 golf outings, and 100 days a year working for charity. That only leaves you with about 17 hours a week to fill. Sleep in, exercise more, catch up on your reading?

There are lots of ways to fill the remaining time, but remember we are starting with someone who has a lot of plans. Many business owners have none.

Unhappy Exits

According to a survey by the Exit Planning Institute, up to 75% of former business owners are unhappy with their exits one year after selling.

I don’t know of any of my clients who are unhappy with the results. Perhaps that’s just luck, but I like to think it’s at least partially due to my coaching skill. The technical and financial complexities of a successful transition are nothing to sneeze at, but helping an owner be prepared is so much more than that.
Invest 15 Minutes and take our FREE Exit Readiness Assessment. We do not request any confidential information.

John F. Dini develops transition and succession strategies that allow business owners to exit their companies on their own schedule, with the proceeds they seek and complete control over the process. He takes a coaching approach to client engagements, focusing on helping owners of companies with $1M to $250M in revenue achieve both their desired lifestyles and legacies.

The Dismal Ds and Exit Planning

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The “Dismal Ds” is an inside joke in exit planning. Every industry and profession has them. In some, it’s “You can have it done well, done fast, or done cheaply. Pick any two.” In planning it’s “Sooner or later, every owner exits his or her business… 100% guaranteed.”

Clearly, that refers to the unplanned but inevitable departure from the biggest D – Death. That isn’t the only D, however. There are others, NONE of which lead to a controlled, lucrative, or enjoyable transition. Most start with dis- defined as “dis– 1. a Latin prefix meaning “apart,” “asunder,” “away,” “utterly,” or having a privative, negative, or reversing force.”

The other Dismal Ds include:

  • Disease – the critical illness of the owner or an irreplaceable employee.
  • Dissension – between partners, shareholders, or family members
  • Disaster – Fire, flood, storm, or accident
  • Disability – An owner’s inability to oversee operations
  • Disinterest – of the founder or next-generation ownership
  • Distraction – When an owner’s focus is elsewhere. (frequently love or bar ownership)
  • Disarray – More simply, bad management
  • Dishonor – financial fraud or other skulduggery
  • Disenchantment – A fancy word for burnout
  • Divorce – a bitter fight over the business asset or its value
  • Debt – Leverage taken on in good times but no longer sustainable
  • Depression – Economic malaise (think hospitality in 2020.)
  • Defection– The poaching or bolting of a key employee, frequently in sales
  • Defenestration – Getting thrown from a window

(Okay, I may have gone too far with that last one, but I couldn’t resist.)

Planning – The Cure for the Dismal Ds

The point is, there are many ways of a forced exit from your business due to circumstances. Some might be beyond your control, but most can be avoided.

  • Disease – Have solid business continuity instructions in place
  • Dissension – Start with a good buy/sell or shareholders’ agreement that makes it plain how disagreements will be handled
  • Disaster – Fire, flood, storm, or accidents can be insured, including for loss of revenue.
  • Disability – Business continuity instructions again
  • Disinterest – Start implementing an exit plan before your business shows the effect. For example, in brokerage, we used to say “Show me an owner who says he is burned out, and I’ll show you financial statements that evidenced the problem three years ago.”
  • Distraction – Don’t buy a bar. Don’t buy another business. Don’t have an affair.
  • Disarray – Get help. Consulting, coaching and peer groups all work.
  • Dishonor – Have an outside party check your systems and security.
  • Disenchantment – See Disinterest
  • Divorce – Settle the value of the business first, preferably before the lawyers do it for you.
  • Debt – Limit your debt to half what your current cash flow can service.
  • Depression – If you have to cut expenses, do so deeply and quickly.
  • Defection– Two words- employment agreements
  • Defenestration – Stay away from the Departed, or Irish, Italian, and Jewish mobsters in general. Alternatively, live where there are only low-rise buildings.

Dismal DsI obviously have my tongue firmly planted in cheek for this column, but my point should be clear. Your business is probably the most valuable asset in your life. Losing it to unplanned events hurts. So even if you are no longer in the picture, you have some responsibility to your family, employees and customers.

A good exit plan, whether it’s for implementation now or years down the road, should take many, if not all of the Dismal Ds into account. All entrepreneurs want control over their future. That is why they are entrepreneurs. Planning isn’t merely an intellectual exercise. It’s all about control.

John F. Dini, CExP, CEPA is an exit planning coach and the President of MPN Incorporated in San Antonio Texas. He is the author of Your Exit Map: Navigating the Boomer Bust, and two other books on business ownership. If you want to see how prepared you are for transition, take the 15-minute Assessment at MPNInc.com/ExitMap. 

 

Succession Planning Starts with “What’s Next”

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Asking the Right Question

What makes a business successful? In many small businesses, the owner is the principal driver, particularly from a technical and sales aspect. They are the ones running around, coordinating sales, staying late to ensure that products get made. They are the ones working the relationships with clients to ensure that the orders continue to come in.

man driving carWith all that these individuals is doing, exit planners ask, “have they ever thought about what they want to do next?” Unfortunately, there is a good chance that one of the 5 D’s (Death, Divorce, Disability, Distress, and Disagreement) could affect their businesses. Let us hope that this does not happen. However, we all know what happens when we have hope on one hand and do something else on the other!

Consider this, a $10MM S-Corporation manufacturer, with a single owner. The owner’s best friend is diagnosed with cancer. Now the owner realizes that they want to sell their company because they want to spend more time with their kids and grandkids. Will this business be able to maximize value upon exit?

Three Areas of Focus

Most owners have the majority of their wealth tied into the business. One of the ways to get that wealth is to sell the company. A successful transition plan has three areas of focus:

1. Understanding and maximizing the value of the company
2. Understanding the owner’s future financial needs
3. Understanding what the owner wants to do after exit

The owner has an idea about one of those areas, but it is very vague. Working with owners to understand what they want to do upon exit helps with another area, the owner’s future financial needs. It is important to create a plan to understand how they want to spend their time with their grandkids. For example, the planner may ask, “Do you want to be able to pay for their future college needs, take them on nice vacations every year, or spend time skiing with them?”

Further understanding of what the owner wants to do next will help the financial planner develop an exit plan. They will be able to determine how much money that owner needs to achieve their desired lifestyle.

Once the future needs are determined, the owner can look at the current business value. The company should have a rough idea of business value. For example, it may be a function of EBITDA multiplied by a market multiple factors. While this seems simple, there are ways to improve the overall value of the company. Some of the factors may not be solely financially driven.

Succession Planning Starts With “What’s Next”

Developing a plan that addresses the owner’s exit ahead of time isn’t just good succession planning; it is good strategic business planning. By creating this plan, the owner can understand the context of what the company is worth. They will find ways to maximize business value and take into account their financial needs for the future. And finally, they can create a plan for how they will spend their time and lead to a successful exit from the company. As a result, the owner can enjoy their time instead of wondering, “Did I do something wrong? Could I have gotten more out of the sale? What am I going to do now?”

This article was first published on the Schneider Downs blog “Our Thoughts On.” John Kohler, CPA, CEPA has more than 15 years of experience in assisting clients in a variety of tax and accounting functions across numerous industries. He actively assists clients with business succession opportunities, helping them identify options for successful ownership transitions to families, third parties, and strategic partners.