Month: February 2018

What does Tax Reform mean for Departing Business Owners?

Legal matters, business strategy, and life perspectives from the mind of a non-attorney.

 

Do you remember that sinking pit in your stomach you got after you received an exam back from the teacher and it was a bad score?

68% D

That feeling has got to be one of the worst things ever.

At least it was for me.

I’ve always been my own worst critic, so it killed me inside when I didn’t live up to the standards I set for myself.

Thankfully, my mom always knew what to say to get me back on track.

“It’s done now. Control what you can control.”

Simple, but great advice. It helped me refocus my perspective and move forward with new energy.

Talk to the teacher, do extra credit, and above all else: Bust my a** to make sure it didn’t happen again.

 

2018 Tax Reform

Whether you were a big proponent of the Tax Cuts and Jobs Act, or a harsh critic, my mom has some advice for you:

“It’s done now. Control what you can control.”

The bill was passed and signed. Barring something unprecedented, it will be effective for at least the next 4 years.

If you’re a small business owner nearing the end of your runway, in some respects this bill should feel more like “100% A+” territory than anything else.

Why?

2 reasons.

1. Higher Net Cash Flows Leading to Higher Valuations

BizEquity recently published a white paper predicting trends for 2018 valuations of privately-held businesses. The spark-notes version of their findings is that valuations are expected to trend upwards, across the board, in 2018 due to positive GDP growth and tax cuts.

The overall methodology is pretty simple: The economy is doing well, so in general, businesses should make a little more money than last year. Those businesses also don’t have to pay quite as much in taxes as they did last year. These two elements result in more money on the table for the owner(s) of the business at year-end. Increasing the “bottom line” is one way to increase the value of your business. The bottom line of every business in the nation was just increased, by virtue of the 2018 tax bill.

2. Lower Taxation of Asset-Based Sales

According to wbjournal.com, more than 90% of business sales to an outside 3rd party (where the purchase price is < $10 million) are Asset-Based sales.

So?

Asset-based sales are confusing. I won’t get into the details of how they differ from stock-based sales this time (we’ll save that for later), but this is what you need to know:

  • 99% of the time, an asset-based sale requires the seller to pay ordinary income tax on some portion of the gain from sale.
  • Sometimes, like in businesses that have a large amount of fixed assets, accounts receivable, or work-in-progress, the amount taxed as ordinary income is quite large.

Thanks to the new tax bill, the highest marginal rate fell from 39.7% to 37.0%.

2.7%, for many business owners, can mean tens – if not hundreds – of thousands of dollars in tax savings – if you sell your business in an asset-based sale under the current regime.

I would get into an example, but again, it’s highly complex and I don’t want to distract from the point (look for a future post on asset vs stock sale).

Bottom line: Business owners who are approaching the end of their runway just received an A+. Especially when you consider that tax rates could have easily gone the other way

 

What will tax rates do in the future?

Look, I’m not here to speculate. I’m here to bring you facts. Period.

Some people like to look at the past to predict the future. If that’s you, you’ll enjoy the following chart. The blue line represents the United States’ highest marginal tax rate for each year since 1913. The orange line shows the current highest marginal tax rate.

Based on that chart, in the last 100 years (since 1918), there have only been 22 years of MORE FAVORABLE tax environments to departing business owners.

Other people like to look at the Nation’s current Debt situation as an indication of where taxes might head in the future. If that’s you, you’ll enjoy the following chart. The blue line is the same. The grey line represents Debt / GDP (an indication of our country’s ability to repay debt) for each year since 1913.

Based on that chart, it’s interesting to see that the last time our Debt / GDP trended downward was between 1946 and 1981. The average highest marginal tax rate in that time? Over 80%. Current highest rate: 37%

I don’t know what the tax situation will look like the next time someone rolls out a new tax bill.

To be honest, I don’t care.

Neither should you.

I’ll say it again: CONTROL WHAT YOU CAN CONTROL.

If you are a business owner who is approaching retirement, you were just given an A+ grade.

Now you control the situation for at least the next 4 years.

It’s time to strike while the iron is hot.

Use your time to develop an Exit Plan. Control your risks. Maximize the value of your business. And get out on favorable terms.

None of us know what the future holds, so there’s no sense wasting any more time worrying about it.

Let’s get to work.

 

The time to start your Exit Plan is NOW. Contact Epiphany Law to do so.

 

 

Thanks for reading! To subscribe to our weekly content, you can enter your email on our homepage. You can also follow Epiphany Law on Facebook and LinkedIn for regular updates from the Firm. Finally, you can follow me on Instagram (@kelton.official), where I regularly post links to new blogs, as well as random pictures of my life.

http://www.taxpolicycenter.org/statistics/historical-highest-marginal-income-tax-rates

https://www.usgovernmentdebt.us/spending_chart_1900_2020USp_XXs2li011tcn_H0sH0lH0f_Combined_Gross_Public_Debt#copypaste

 

Got Sued? Now what?

 

Legal matters, business strategy, and life perspectives from the mind of a non-attorney.

Careful what you wish for…

In 2016, 852,828 new lawsuits were opened in the state of Wisconsin… We only have 5.8 million people living in the state. For those that were never “math” people, that’s roughly 1 lawsuit for every 7 people in the state.

The statistics get even more mind-numbing if you expand the scope to include the entire United States, where over 100 million new cases are opened each year in a country that is home to 323 million (about 1:3).

Facts:

  • On average, a new lawsuit is filed every 30 seconds.
  • 78% of lawsuit defendants never thought it would happen to them.
  • America has 80% of the World’s lawyers.
  • 96% of the WORLD’S lawsuits are filed in the United States.

Yikes.

Unless you’ve had the misfortune of being involved in a lawsuit, the likelihood is that you have no idea how the whole process works.

USLegal.com explains it this way:

“In Wisconsin a civil action commences by filing of a complaint.  (The) Party who commences the action is called the plaintiff, and the opposite party is called the defendant.  A civil action can be classified into various stages that include: pleading stage, discovery stage, trial stage, and judgment stage.

Pleadings acceptable in Wisconsin courts are: complaint, answer to complaint, counter claim, reply to counter claim, cross claim, answer to cross claim, third party complaint and answer to third party complaint.  A complaint should be filed by the real party in interest… Parties may obtain discovery by depositions upon oral examination or written questions; written interrogatories; production of documents or things or permission to enter upon land or other property, for inspection and other purposes; physical and mental examinations; and requests for admission.

At the trial stage, a party may demand for trial by jury.  A judgment is passed after trial.”

To be fair, it started off promising. The basic identification of how the process begins. Definition of Plaintiff/Defendant. But then… … … ???

Let’s see if I can do better.

So someone wants to sue you.

How do they do it? When do you know it’s for real? Better yet, when should you contact an attorney?

Chill. One question at a time, please.

First of all, they can’t just text you saying, “I hate your guts, I’m suing you for $500 because you’re the worst!”… I mean they CAN do that, but it doesn’t mean anything. If you’re a fan of The Office, someone doing that to you is basically the equivalent of Michael Scott’s famous, “I. DECLARE. BANKRUPTCYYYYYYY!!!!!!”

You don’t need to get worked up yet. And unless you’re truly having a meltdown, there’s probably no need to contact an attorney.

Everything gets real when the person who hates your guts files a “Summons and Complaint” with the Clerk of Courts. It basically says two (2) things: 1) Hey, guys, this jerk is the worst! They did “X, Y, and Z” to me and those things are against the law. 2) I will give this jerk “X” days to respond to my claim, otherwise they admit guilt.

Once the Clerk of Courts receives this “Summons and Complaint”, the information will be forwarded along to you. When YOU receive it, “You’ve been served.”

At this point, you have a whole bunch of options. The ball is in your court:

  • “Yep, I did it.”
  • “Nope, didn’t do it.”
  • “Yep, I did ‘X’ but I didn’t do ‘Y’ and ‘Z’”
  • “Hey, I don’t like you either! I want to sue you back!”

Unless you know beyond the shadow of a doubt how you should respond, this is a very good time to contact an attorney.

DISCOVERY

Short of you admitting guilt or not responding to the claims, the next step is for your case to go into discovery. It is what you’d expect: both sides ask each other information about the case, trying to discover as much factual information as possible, with the goal of building the strongest possible case. The length of the discovery period can vary dramatically, but usually lasts several months.

MEDIATION

After the discovery phase is over and all the facts are out in the open, the sides may decide to avoid trial by seeking to resolve the case in mediation. Mediation is heard by an unbiased 3rd party, who will offer a nonbinding verdict (meaning if either party disagrees with the verdict, the case will continue on and be heard by a judge/jury). However, if both parties DO agree, the case will be resolved without going to court! Pursuing mediation makes a TON of sense if you feel the individual(s) opposing you have some sense of rationale. Mediation, in general, offers the advantages of being much less time consuming, stressful, and costly than the standard Civil Court process.

One could say that pursuing mediation is the “mature” way of handling a dispute. “Hey, man, I see where you’re coming from. You see where I’m coming from. Let’s just get this over with so we can get on with our lives.”

Rather than waiting months – sometimes years – to have your case heard by the court system, a hearing with a mediator can often be scheduled within a couple of weeks.

SUMMARY JUDGEMENT

If the facts clearly support one side over the other, a motion for summary judgement may be filed. “Hey, Mr. Judge, just take a look at these facts. It’s obvious what happened here. We don’t need to waste our time with a trial. Just make your decision.”

PRETRIAL HEARING(S)

The judge and both sides discuss the facts of the case, charges faced, and what evidence will be allowed at the trial. This phase can amount to one brief hearing or several lengthy hearings, depending on the complexity of the case. This is usually a final opportunity for the sides to come to a “settlement”.

TRIAL

Each side presents evidence. Judge / Jury deliver a binding verdict. Cases that go all the way through trial normally take well over one (1) year from “complaint” to “verdict”.

Appeal

Just when you thought it was over. If you or your counterpart doesn’t like the decision the judge/jury made, that decision can be brought to an “appellate” court. “Hey, I think the judge/jury made a serious mistake in handling my case. I want someone else to look at these facts.” You should know, once the judge delivers a verdict, you are generally facing very long odds to get that decision overturned in an appellate court. But… There is always a chance.

Thanks for reading! To subscribe to our weekly content, you can enter your email on our homepage. You can also follow Epiphany Law on Facebook and LinkedIn for regular updates from the Firm. Finally, you can follow me on Instagram (@kelton.official), where I regularly post links to new blogs, as well as random pictures of my life.

An Interview with Patrick Furman

 

Bachelor of Arts: West Virginia University

Juris Doctorate: University of Pittsburgh School of Law

Married: Yes; Tiffany

Kids: Yes; Mariah, Kyarra, and Alysia

Practice Area: Estate Planning

DiSC Profile: DC Style

 

Summary

“People with the DC style prioritize CHALLENGE, so they want to explore all options and make sure that the best possible methods are used. As a result, they may be very questioning and skeptical of other people’s ideas. They also prioritize RESULTS, so they’re often very direct and straightforward. Finally, they prioritize ACCURACY. Because they want to control the quality of their work, they prefer to work independently, and they may focus on separating emotions from facts.” – Excerpt from Pat’s DiSC Workplace Profile.

Key words and phrases: Explores all options, skeptical, direct, accurate, separates emotions from facts.

Dang. That’s good stuff right there. Definitely the kind of person I want handling my most important affairs. Here is what I will add: I would imagine that many people with this personality type tend to come across very dry, arrogant, or even rude because they have so much knowledge about topics that their clients – well – don’t. Pat manages to overcome that. I don’t know if it’s just a natural gift of his or if it’s something he’s worked on over the years, but he really has this great way of being relatable and knowledgeable, without making you feel dumb for not knowing nearly as much as he does.

 

Interview

KOD: “Thanks for doing this, I really appreciate it.”

PDF: “Are you kidding? It’s my pleasure!”

KOD: “So how long you been doing this for?”

PDF: “Being an attorney?”

KOD: “Yeah.”

PDF: “Since 1997. No wait… ’98. 1998.”

KOD: “So almost 20 years. Take me back through your journey, because if I remember correctly you started out in undergrad at West Virginia and then went on to Law School at Pitt?”

PDF: “Uh-huh“

KOD: “How did you end up here?”

PDF: “Took a wrong turn in Indiana.”

KOD: Laughs.

PDF: “What had happened was… My parents moved to WI at some point while I was going to school to work for Badger Mining. After I finished school, my fiancé decided we should follow them out there. So we did. And – funny story – the night I took the bar exam she told me she didn’t want to get married.”

KOD: In shock.

PDF: “But luckily I passed the exam on my first try, fell in love with the area, and met Tiffany somewhere along the way. It all worked out in the end.”

KOD: “Wow. Amazing how life goes.”

KOD: “Who’s your favorite NFL team and why?”

PDF: “It’s the Steelers. I grew up in Pittsburgh, around the greatest team that’s ever existed – the Steelers of the ‘70s. I met pretty much all of them in one shape or another – “

KOD: “– How did you meet all of them?”

PDF: “I went to training camp every year with my dad and we would wait around between their dorm and the field. A lot of the guys would stop and talk or say hi or whatever. It was really awesome. I always remember during one of the camps, Theo Bell, who was a wide receiver, took my hat and wore it around.”

KOD: “That is incredibly cool. What a great memory!”

KOD: “If you could go back in time and relive one Steelers moment, what would that be?”

PDF: “Super Bowl 40 when we beat the Seahawks. I was actually at that game, and it was a close game until the end. Really fun to be at. The stadium was mostly Steelers fans because it was played at Ford Field in Detroit, which obviously is pretty close to Pittsburgh. Just a great time. That would be a fun one to relive.”

KOD: “So as a die-hard Steelers guy, do you hate the Eagles?”

PDF: “Yes… I hate the Patriots too… … …”

KOD: “You gonna watch the Super Bowl this weekend?”

PDF: “Yeah. As a football fan I have to.”

KOD: “Who are you cheering for?”

PDF: “The Eagles. I want to see the upset. Also, this Eagles team is a lot more likeable than some Eagles teams of the past. They are the underdogs. If they win, it would be a miracle. So I’m good with that outcome.”

KOD: “Date 1 – Marry 1 – Punch 1: Tom Brady, Bill Belichick, Rob Gronkowski.”

PDF: “Ummm… Probably marry Tom Brady cuz he has all that money. Punch Belichick because we can’t beat him. And date Gronk because he would be a lot of fun.” Laughs.

KOD: “Truer words never spoken. Gronk would be fun to hang out with!”

KOD: “Did you watch cartoons growing up?”

PDF: “I was a big Scooby-Doo fan growing up, but I hate it now.”

KOD: Confused. “What? Why do you hate it now?”

PDF: “I don’t know. I think it’s the special appearances that they throw into the show. The cameos. Like all of a sudden KISS would show up on the show. It’s just annoying to me now.” Laughs.

KOD: “What’s your favorite ‘90s jam?”

PDF: “Can I pick an album?”

KOD: “Sure.”

PDF: “Radiohead: Ok Computer. Best album of the decade.”

 

Here you go >>> Radiohead – Airbag.

 

KOD: “How many pennies do you think would fit into this room?”

PDF: “None because there shouldn’t be any pennies. They should be discontinued.” Laughs.

KOD: “A penguin walks through that door right now wearing a sombrero. What does he say and why is he here?”

PDF: “He says, ‘I’m Sidney Crosby and I’m going to give you season tickets to the Pittsburgh Penguins games.”

KOD: “Wow. Greatest response ever. I love it.”

KOD: “Tell me about 1 person outside of your immediate family that you love.”

PDF: “Hmmm… Kevin Eismann – Epiphany Law.” Laughs.

KOD: “Oh brother. Barf.” Laughs.

KOD: “Why are you an attorney?”

PDF: “I like helping people. Usually they will come in with some sort of problem that they don’t think can be fixed, and when you can fix it for them it’s the best feeling.”

KOD: “What is one thing that you are proud of yourself for?”

PDF: “My kids. It sounds sappy maybe, but I’m really proud of the way they act. They are really well behaved and I’m proud of them for that.”

KOD: “Pretend I’m thinking about hiring you as my attorney to do some legal work for me. What do you bring to the table? What can I take to the bank? Something you know you will deliver on every time.”

PDF: “A great amount of knowledge. I’m going to genuinely care about your problem. And we are going to find a solution.”

KOD: “Pretend I’m a young attorney, fresh out of Law School. Tell me why I should apply at Epiphany Law.”

PDF: “The environment allows you to be yourself. It allows you to feel comfortable. And you get genuine support from others.”

KOD: “How is that different from other places?”

PDF: “It’s usually not a ‘real’ team at other places. People might work in the same building, but nobody is going to go out of their way to help you. It can be pretty cutthroat. Like, you’re on your own, figure it out. That sort of thing. It’s a lot easier to be successful at Epiphany, just because the culture is different.”

KOD: “Give me one thing that people miss or do incorrectly a decent amount of the time when they try to do Estate Planning on their own?”

PDF: “They gift things to their kids without understanding what the consequences really are. So… they don’t understand capital gains, or they don’t think potential liability they are creating by gifting.”

PDF: “The other thing is that when people create a trust or will on their own, they often do it with just one possible outcome in mind. For example, they create the trust assuming that the husband will die first, and the wife second, and that’s it. They don’t take the time to think through all the possibilities. So they plan it all for one scenario, and if things work out that way it will be fine. But if, for some reason the wife dies first, the plan doesn’t work.”

KOD: “That’s really smart advice.”

KOD: “Alright lets finish this off with a little rapid fire.”

KOD: “Cookies or Cake?”

PDF: “Cookies.”

KOD: “Cats or Dogs?”

PDF: “Dogs.”

KOD: “Coke or Pepsi?”

PDF: “Coke.”

KOD: “Superman or Batman?”

PDF: “Batman.”

KOD: “Blonde or Brunette?”

PDF: “Blonde.”

KOD: “Horror or Comedy?

PDF: “Comedy.”

KOD: “Bud Light or Miller Lite?”

PDF: “Absolutely neither.”

A huge thank you to Pat for taking some time to chat with me! A super smart guy, and clearly has an awesome personality! I am a bit skeptical of his Coke/Pepsi response, however. If you look closely you will see that he was drinking a Diet Pepsi during our interview…

Thank you once again to all the readers of this blog. B@E continues to march on! To subscribe to our weekly content, you can enter your email on our homepage. You can also follow me on Instagram (@kelton.official), where I regularly post links to new blogs, as well as random pictures of my life.

Exit Planning: Emotions Matter

“75% of owners who successfully exit their business ‘profoundly regret’ their decision to exit within 12 months of their retirement.” – Exit Planning Institute

Why do business owners so often regret their exit?

In reality, there can be any number of reasons for regret following such a monumental occasion. Of course, the most obvious source of regret applies to owners who make mistakes/oversights prior to an exit that negatively impact their financial well-being (they don’t get as much money as anticipated). It may surprise you to know, however, that just as frequently the main source of pain for the departing owner is purely non-financial.

At Epiphany, we seek to predict and eliminate mistakes that would otherwise result in “profound regret” for business owners. It’s a big part of what we do. We feel strongly that emotional preparedness in Exit Planning is JUST AS IMPORTANT as growing business value. Why?

Business owners who aren’t emotionally prepared for life after work end up sitting on a pile of money – miserable.

The following are common areas in which departing owners are emotionally unprepared for an exit:

Control issues. 

Many business owners have a difficult time delegating authority. Owner dependence is a major limiting factor when it comes to valuation of a business entity. Owner dependence refers to the amount of time an owner-operator must spend working in the business, as well as the unique knowledge, skills, and relationships the owner-operator has that are not documented, repeatable, and/or transferrable. An owner who is unwilling to begin relinquishing control will face a disappointing fate as they begin to navigate purchase offers.

Doing your planning in a vacuum. 

Departing business owners are notorious for wanting to handle their planning behind closed doors – and it makes sense. There are certain risks that can be avoided by using discretion with sensitive information. In this case, employee retention, supplier/customer relations, and market timing are all valid reasons to keep your intentions closely held.

At the same time, a plan is no plan at all when it is not communicated to the key stakeholders that it depends on. A classic example of this is the family business owner who assumes their kids are set to take over the family legacy, only to find out later that the kids want nothing to do with it. In this light, don’t be overly-paranoid about limiting information to everyone. People aren’t stupid; your suppliers, customers, and employees are probably wondering about your retirement already. Certain situations may lend themselves to being open and honest with many of these people; they may be extremely grateful for your honesty.

All in all, safe and open communication can prevent exit planning disaster. The conversations may not be easy, but then again, those things that are worth doing are rarely ever easy.

Not defining your purpose in life after work.

MANY people attach their self-worth to their work. Business owners are no different. If anything, they are more prone. The countless hours spent building, the struggles and sacrifices made, and the good times enjoyed are extremely difficult – nay, impossible – to say goodbye to. It’s who you are. Saying goodbye to who you are is a daunting task at any stage of life. It’s a task that should not be taken lightly.

Business owners who don’t take the time to understand and accept the loss of identity are very likely to experience a stage of depression after selling their business. Only after the owner has accepted a new reality can they begin to define a new purpose in life. Some will know immediately and some will take time to discover it, but all need to seek and discover a new purpose in order to truly experience a happy, healthy, and productive next stage of life.

“Business owners who aren’t emotionally prepared for life after work end up sitting on a pile of money – miserable.”

Not creating bucket list.

Nondescript ideas rarely come to fruition. As an example, the person who says “I’ll travel more” is likely to end up sitting at home pondering the past. By contrast, the person who says, “I want to see the Grand Canyon with my grandchildren in 4 years; at that time, the youngest will be able to remember the trip and I’ll still have the energy to do it!” will experience a much happier retirement. Whether or not they achieve those activities is irrelevant. The victory is in the thought, planning, and excitement to do something more in life.

Creating a bucket list is a fun way of kicking off your retirement. It can help you build excitement for the next chapter of your life. Further, it is something that should be referenced frequently in the future when you need to re-energize.

Not creating a detailed list of activities.

Similarly, you should take the time to think through the day-to-day activities that will get you through the “quieter” periods of life. What will you do on your typical Tuesday morning? If you are satisfied sipping coffee and watching day shows with your spouse, great! If you would rather be out to brunch with a group of friends, be intentional about organizing it and making it happen!

Not involving the spouse.

We are huge advocates for heavily involving your “better half” in this process. Why? 1) They know you better than anyone else – including, perhaps, yourself. 2) You will be spending a lot of time together in the next chapter of life. 3) They often help to keep things in perspective during what can be a complex and difficult process.

Ignoring your conscience.

It happens more often than people know – a business owner will feel some level of guilt related to their retirement, and promptly ignore it. Maybe it’s an employee that they made a promise to or a loyal supplier that they know will be in a bad spot after the sale. Whatever the feeling is, a common tendency is: ignore – proceed – regret. That is no way to begin your next chapter. We encourage you to listen to your own intuition in these matters and do what you can to make them right. You will be very glad that you did later.

Not defining key non-financial outcomes.

Business owners who do not engage in an exit planning process have a tendency to ignore or de-value outcomes that are not directly related to “cash in hand”. Frequently, these outcomes are only uncovered after the sale process has completed, becoming a substantial area of regret for the recently retired owner. Examples may include:

  • Protect / reward employees
  • Keep business in the community
  • Continue commitment to sponsorships / charities
  • Provide a job for a family member

You can learn more about Epiphany Law’s Exit Planning Services, and find a registration link to our FREE Exit Planning Webinars by clicking here.

If you have questions or comments, feel free to get in touch!