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BUSINESS GOALS

FAMILY GOALS

OWNER GOALS

BUSINESS GOALS

FAMILY GOALS

OWNER GOALS

BUSINESS GOALS

OWNER GOALS

FAMILY GOALS

BUSINESS GOALS

FAMILY GOALS

OWNER GOALS

June 2012 BUSINESS GOALS ____________________________________________________________ Plan Before You Sell

OWNER GOALS ____________________________________________________________ Small Business Owners Still Think Economy is in Recession

Letter from Partner

GLOBAL ECONOMY & POLITICS


Contents June 2012

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2 G L OB A L E C O N OM Y & P OL I T IC S As uncertainty continues to plague Europe on both the political and economic fronts, it is a good time for all business owners to step back and evaluate what impact this actually has on them.

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5 P L A N BE F OR E YOU SE L L Special Contribution by: Robert Strauss, Esq. Weinstock Manion Every year, many business owners decide the time has come to sell their businesses. Accountants, independent corporate counsel, financial advisors, and especially the business owners themselves need to know that the sale of a business may constitute the single most valuable and important estate planning opportunity they will ever encounter.

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7 SM A L L BUS I N E S S OW N E RS S T IL L T HI N K EC O N OM Y IS I N R E C E S S IO N Seventy-one percent of small business owners still believe the U.S. economy is in a recession, according to a new survey.

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GLOBAL ECONOMY & POLITICS BY DAVID KRAJANOWSKI | MANAGING PARTNER dkrajanowski@singerlewak.com | 949.261.8600

As uncertainty continues to plague Europe on both the political and economic fronts, it is a good time for all business owners to step back and evaluate what impact this actually has on them. First, does what happens in Greece, Spain or wherever, really matter to me? The answer is…..it depends. If you are doing business in Europe either by buying or selling products, it could have a direct effect on your business. Now is the time to pull out your profit plans (or otherwise known as budgets) and review them. Maybe it’s time to prepare a conservative, alternative plan for the remainder of the year. What happens if Europe goes into a recession? Will your sales slow down? What changes need to be implemented as soon as you see a slow down? Second, I don’t do business in Europe, so it will not affect me. Really? The next question to ask then is -do your customers or their customers do business in Europe? Any slow down they feel will surely be felt by you. Third, I’m still feeling good as none of the first two points apply to me. But will one of your other competitors or an unknown competitor try to increase their market share in your market because they are feeling the pinch? Do

you have a defensive plan should desperate competition appear on your doorstep? Again, now is the time to step back, review your plans, and challenge yourself to discover both threats and opportunities (in every crisis, opportunity can come knocking). By doing this, many business owners can minimize the stress of the unknown because a rational view has been taken. Now is not the time to arbitrarily halt any plans for buying new equipment, adding people, developing new products, etc. Sometimes, a golden opportunity avails itself and it takes a bold move to capture a market, product line, customer, etc. when competitors are frozen by uncertainty. Lastly, review your personal investments to be sure you are also comfortable. Ask questions of your advisor. It is your money and you must understand your position. Let’s talk politics! What is one of your major expenses? Purchases, labor, insurance or rent? Add up all of the taxes you pay (called taxes including income, payroll, property or sales, license fee, permits, regulatory fees regulatory compliance costs, etc.) and I bet

the amount will astound you! As a business owner, you have an obligation to get involved and control this expense. Understand your tax environment. Don’t get hung up on labels (Republican, Democratic, Independent, etc.). Listen to the issues and determine your views, take a stand without the labels and vote your view without labels. Make it a point to visit your politicians and let them know your views (City, County, State or Federal). Divide up the responsibility with other partners or family members. Yes, it will cost you dollars for the meeting, a small price of doing business. Don’t send your contribution ahead of time. Give it at a meeting after you air your views (mentioning you have a contribution to give). Educate your employees on key issues that affect them and your business. We are running out of time, allowing politicians to continue to create such expenses without accountability. The tipping point is near! Be active or allow your fate to be determined by others. It’s your choice.

June 2012

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PLAN BEFORE YOU SELL SPECIAL CONTRIBUTION BY ROBERT E. STRAUSS WEINSTOCK, MANION, REISMAN, SHORE & NEUMANN 310.553.8844 | www.WeinstockLaw.com

Every year, many business owners decide the time has come to sell their businesses. Accountants, independent corporate counsel, financial advisors, and especially the business owners themselves need to know that the sale of a business may constitute the single most valuable and important estate planning opportunity they will ever encounter. However, since many business owners engage separate corporate counsel to assist them in connection with the sale of their businesses, estate planning counsel may be among the last to learn of the sale. In fact, we may not learn of the sale until a client, during an estate planning strategy session, offhandedly drops this bomb: “Oh, I sold the business last year. Didn’t I tell you?” By then, it’s too late. The opportunity has passed. The balance of this article explains in general terms how business owners can save significant gift and estate tax dollars by seizing this unique opportunity.

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BUSINESS GOALS

OWNER GOALS

FAMILY GOALS

BUSINESS GOALS

FAMILY GOALS

OWNER GOALS

residence trusts, and irrevocable life insurance trusts.

LEVERAGE THROUGH DISCOUNTING “Leverage” is the term we use to describe how clients can make gifts of assets with a “real world” fair market value that is greater than the discounted fair market value of such assets for gift and estate tax purposes. The most effective estate planning leverages a business owner’s use of his or her lifetime exemption from gift and estate tax. Typically, clients are able to make discounted gifts by utilizing one or more advanced estate planning techniques. These techniques include family limited partnerships, grantor retained annuity trusts, intentionally defective grantor trusts, qualified personal

A business owner can achieve leverage by creating two types of discounts. The first discount relates to the transfer of a minority interest in the business. For gift tax purposes, the fair market value of a minority interest often should be discounted to reflect that its recipient usually has little

Since many business owners engage separate corporate counsel to assist them in connection with the sale of their businesses, estate planning counsel may be among the last to learn of the sale control over the management or affairs of that business and, further, usually would have great difficulty finding a buyer for the minority interest (it “lacks marketability”).

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Depending upon the nature of the business and the size of the minority interest, a minority interest/lack of marketability discount of as much as 35% or more might be appropriate. The actual amount of this discount must be confirmed by a professional appraiser. The second discount results from the client’s transfer of a minority interest to an intentionally defective grantor trust, a grantor retained annuity trust, or another appropriate estate planning vehicle. These advanced techniques often create significant additional discounts, ranging from 25% to 90%, depending upon which technique is utilized and factors such as the business owner’s age, prevailing interest rates, and the size and nature of the minority interest transferred. EXAMPLE OF LEVERAGE The following example illustrates all three means of achieving leverage. Assume that, well in advance of any sale, the appraised fair market value of the business, organized as an 5 corporation, is $40 million. The owner could achieve the first layer of discount by transferring a minority interest, say 40% of the corporation’s outstanding stock, to a grantor retained annuity trust. Although 40% of the stock

would have a fair market value of $16 million prior to any discount, following the application of an assumed 35% discount, 40% of the stock would have a fair market value for gift tax purposes of only $10.4 million.

The owner could achieve the second layer of discount by virtue of the manner in which the grantor retained annuity trust works The owner could achieve the second layer of discount by virtue of the manner in which the grantor retained annuity trust works. During the term of that trust, the owner would retain the right to receive annuity payments from that trust. The longer the term of the trust and the greater the annuity payments from the trust, the greater will be this second layer of discount. It is possible to achieve an additional 90% discount or even more, depending upon the facts and circumstances of the particular matter, as well as the owner’s needs and desires. Thus, following the application of an assumed additional 90% discount, 40% of the stock would have a discounted fair market value of only $1 million.

Consequently, the owner could transfer assets with an underlying value of $16 million (40% of $40 million) with a gift tax value of only $1 million. The remaining $15 million in value would forever escape transfer (gift and estate) taxation. To this point, the owner would achieve a combined discount of 94%. The owner might achieve even more leverage. Suppose that in the year following the valuation, the owner sells the business to a competitor with a strategic interest in the acquisition, not for $40 million but for $60 million: Since the grantor retained annuity trust would also sell its 40% interest in the business, it would receive its pro-rata shares of the proceeds from the sale $24 million. This means that the business owner will have removed $24 million of assets from his or her estate (net of capital gains taxes due following the sale), all with a net gift tax value of only $1 million. Based upon the foregoing, the owner could achieve a combined discount of 96%. Simply by engaging in estate planning before they sell their businesses, business owners can leverage their lifetime exemptions by 90% or more. Shouldn’t every business owner take advantage of this unique opportunity?

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SMALL BUSINESS OWNERS STILL THINK ECONOMY IS IN RECESSION

BUSINESS GOALS

FAMILY GOALS

OWNER GOALS

Seventy-one percent of small business owners still believe the U.S. economy is in a recession, according to a new survey.

lingering concerns about the economy,” said U.S. Bank vice chairman of consumer and small business banking Rick Hartnack in a statement. “Business is rebounding, especially among businesses with at least $1 million in annual sales and five or more employees. For those businesses, prospects for growth are particularly strong, as are their plans to hire.”

The survey, by U.S. Bancorp, found that more small business owners consider the financial health of their company

Sales volatility is less of a concern now than in years past, and the number one business issue on the minds of small business owners in the 2012 election is health care reform as “good” to “excellent.” Sales volatility is less of a concern now than in years past, and the number one business issue on the minds of small business owners in the 2012 election is health care reform. The survey was released today on Connect, the small business Web site from U.S. Bank.

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The U.S. Bank Small Business Annual Survey polled 3,220 small business owners with $10 million or less in annual revenues. Owners were surveyed between March and April 2012 in the 25 states where U.S. Bank provides small business banking services, primarily in the Midwest and Western part of the country. The questions centered on economic conditions, business conditions, business challenges, 2012 election issues, work/life balance and banking relationships. “Small business owners are creating ways to succeed, despite

Business is rebounding, especially among businesses with at least $1 million in annual sales and five or more employees. For those businesses, prospects for growth are particularly strong, as are their plans to hire Overall, 69 percent of respondents said the financial health of their business was “good,” “very

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good” or “excellent,” up from 64 percent in 2011. This year, 29 percent said they saw a revenue increase over last year, which is up slightly from 26 percent in 2011. Less than half expect to see the revenue at their business improve next year. However the numbers differed among businesses with at least $1 million in annual sales. For these larger businesses, 40 percent saw an increase in sales over 2011, 58 percent expect revenue to grow next year and 34 percent say they plan to hire in the next 12 months. “Economic uncertainty” remains the number one concern cited among respondents. “Poor sales,” the second biggest challenge for the past two years, is less of a concern this year, with only 12 percent citing sales as a challenge. Health care reform is a growing

concern, with 60 percent of the small business owners polled saying they believe it will negatively

cerned about healthcare reform than the national average include Washington, Oregon, California and Illinois.

“Economic uncertainty” remains the number one concern cited among respondents. “Poor sales,” the second biggest challenge for the past two years, is less of a concern this year, with only 12 percent citing sales as a challenge.

The five top business issues on the minds of small business owners in the 2012 election are health care/Medicare, jobs and unemployment, taxes, the federal deficit/debt and Social Security. When asked which issues are more important this year versus the 2008 election, most said health care/Medicare, followed by the federal deficit/debt, jobs/ unemployment, energy costs and taxes. When asked what they would do if they were the president of the United States for one day, small business owners said they would lower taxes, reduce regulations and tackle health insurance issues.

impact their business, up from 57 percent in 2011 and 55 percent in 2010. States where small business owners are less con-

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OUR FIRM

THE SKILLS YOU NEED. THE SERVICE YOU EXPECT.

ENTREPRENEUR-OWNED BUSINESSES

We understand the inter-relationships between the Goals of the Family, the Owner and the Business. Any one of these may impact the others in a significant way. We represent this with our FAMILY BUSINESS GOALS MODEL:

SingerLewak knows the importance of relationships to excel and meet the needs of entrepreneurs and their businesses. Our client service relationship stresses client strategy and sound advice in all aspects of business - including the transfer to a new generation, the sale, or the operation of the company in perpetuity.

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Family-Owned Businesses have been the drivers of our economy for a long time. We understand the significance of the family business structure, as well as the day-in, day-out efforts that have made an OWNER OWNER OWNER economic impact on both your local and the national community. GOALS GOALS GOALS

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dkrajanowski@singerlewak.com | 949.261.8600 dkamath@singerlewak.com | 949.261.8600 rschlener@singerlewak.com | 949.261.8600 jpitrat@singerlewak.com | 310.477.3924

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Entrepreneur & Family-Owned Businesses - June 2012  

Entrepreneur & Family-Owned Businesses - June 2012

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