By Associate John Howe, Director of our BTS Division

Through the years I have found golfers to be among my best connections, both personally and professionally. I also believe the game offers insights for business.

A few years ago a fellow member of the local golf league I participate in was diagnosed with a terminal illness. In order to survive, he needed to find a bone marrow donor. A testing drive was launched and held in a local industrial park building. I decided to go since Terry was someone I had always liked. Though competitive during matches, he was quick with a handshake and words of encouragement. He was the kind of guy you didn’t mind losing to, because he treated you like a winner.

I figured I would be all alone, the only one who would be there from the golf league. But when I got to the testing center, everywhere I looked were other members of the same golf league! These were business people from all levels, ranging from executives to production floor workers. It turns out, the league of golfers produced dozens of potential donors. We were all there to support a brother in golf. Respect matters.

Golf has a way of leveling the playing field.

I have played in countless charity scramble events. Teams are often composed of an executive and several lower level employees. Invariably, there is someone who rarely golfs and gets down in the dumps because they aren’t contributing to the team’s success.

That all changes when that same individual makes an important putt or hits one great shot. In other words, everyone contributes. And looking back at the event, those on the team soon realize how much they needed each other.

Golf demands honesty.

I remember playing in an event where I hit a big drive. The ball sailed over the hill, but we never saw it land. When we got to the rise of the hill and looked down, we could see a ball off in the distance.  It was very close to the green, a spectacular shot! Everyone was sure that it was mine. But when we got to it, I could see that it lacked the normal marking I put on my golf balls. Although it would have been tempting to not say anything, I declared that it was not my ball… and to groans and complaints from the team, we went back and played a much shorter shot from the rough.

Later that year I had occasion to be asked a challenging question by one of the golf team members regarding a business matter. The answer I gave was not what he wanted to hear. But he added this comment: “I know from golf that you are true to your word.” Honesty is not optional.

In business, we can learn from golf:

·         Relationships matter.

·         Everyone contributes.

·         Honesty is the best rule.

            The seller, Toufic Farhat, was represented by, NH Business Sales Associate Broker, Ed Settino. The buyers were represented by Arthur Pappas of Prudential Verani Realty. 

For instance, Interest rates are as low as they are ever going to be, banks are starting to lend money, business values are lower and good deals area available.   Sellers are being told they should market their businesses now because of the pent up demand of people out of work looking to “buy a job”.  Also, Capital Gains taxes may go up next year.  These are all valid observations.

However, while these things are all good reasons to buy, buyers right now should have the same concerns they always should have.  The right time to buy is when it makes sense in terms of your current situation.  For sellers the same advice is appropriate.

If a buyer has an appropriate down payment, and finds a business they feel comfortable they can take over and run, and they can see themselves making good money and a return on their investment, then “it is the right time to buy”, whatever other factors are involved.

Likewise, is a seller has reached the point where they have to sell, either for reasons of health, or because it is time to retire, or other circumstances making it appropriate to leave, then the challenge is to arrange a sale, under current conditions, that gets them the best deal they can arrange.

In other words, any time can be the right time to buy or sell, totally depending on the individuals circumstances and whether a deal can be structured for a win-win purchase or sale.

The situation is well described by Monty Walker in his January newsletter copied here:

Federal Capital Gain Tax Rates:  Where are they headed? Since 2003, the top tax rate on most capital gains has been 15% for people in the 25% or higher tax bracket. Although a lower level tax rate has also been in place since 2003 for people in the 15% or lower tax bracket, this rate is only applicable until a person has enough income to cause him / her to enter the 25% tax bracket. As a result, for people incurring a capital gain from selling a business, most of them are in at least the 25% tax bracket so the top 15% rate is generally the rate they experience.   The current capital gain rates are scheduled to expire effective December 31, 2010 due to a time lapse built into the regulations associated with the 2003 gain reductions. This time phase-in is known as a sunset provision. Thus, starting in 2011, the top 15% rate is scheduled to revert to its former pre-May 6, 2003 level of 20%.   President Obama made a pledge to the American people that he and his administration would not raise taxes. Well, he was able to make this pledge with confidence regarding the tax on capital gains because the sunset provision was already going to cause the rate to increase.  Preview » The big question now is; Will the top rate only rise to 20% or will congress raise it higher?   Background:   For the past 30 years, the top tax rate on long-term capital gains has been below 30%.   The top tax rate on most long-term capital gains was reduced from around 35 percent to 28 percent in 1978 and was further reduced to 20 percent in 1981. It was raised to 28 percent in 1987, reduced to 20 percent again in 1997, and further reduced to 15 percent in 2003.   The Tax Increase Prevention and Reconciliation Act of 2005 (TIPRA) extended the 15% rate through 2010. But, in 2011, the top long-term capital gain rate for most long-term capital gains is scheduled to revert back to the 20% rate that applied prior to the Jobs and Growth Tax Relief Reconciliation Act of 2003 (2003 Tax Act).   The pending tax change is well within the range of changes experienced in the last 30 years.

What to Expect   On September 25, 2009, in a letter to Representative Brian P. Bilbray (R-CA), the Congressional Budget Office (CBO) stated that when assessing the impact of the increased tax rates on economic growth, it is important to keep in mind that taxable capital gains account for a small portion of all capital income. Much capital income is paid as dividends, interest, rent, and proprietors’ profits. In addition, most capital gains are not taxable because they are held in tax-exempt accounts or are held until death. As a result, CBO does not anticipate that the pending increase in the capital gains tax rate alone will have a large enough impact on the rate of return to capital overall to change significantly the magnitude of saving and capital investment.   But the CBO did further state that higher capital gains taxes could have an additional effect by discouraging innovation and risk-taking, but there is insufficient evidence on which to base a quantitative estimate.   Congress depends on the CBO to help corroborate the financial and tax results of congressional decisions. In this case the CBO is uncertain as to the full impact to be realized by an increase in capital gain rates. This indecisiveness is exactly what Congress wants in order to support that an increase in capital gain rates will not be harmful.   Also it is important to keep in mind that with the pending Health Care Reform, people classified as wealthy will experience an additional tax levy or surtax. In the House Bill, the surtax will apply to families earning more than $350,000 a year and individuals earning more than $280,000. The surtax will start at 1 percent and rise to 5.4 percent on income exceeding $1 million. In the Senate Bill, families of more modest wealth - over $250,000 - will experience a payroll tax hike of 0.5 percent.   Take notice that the surtax in the House’s Bill of 5.4%, when combined with the Year 2011 expiration of tax cuts enacted during the Bush administration, the surtax will drive the top federal tax rate to 45%, the highest level since lawmakers rewrote the tax code in 1986. That’s right, in Year 2011, along with an increase in capital gain rates, the top federal tax rate returns to 39.6%.   As previously stated, the sunset provision on capital gains will cause the top capital gain rate to increase to 20% on January 1, 2011. When considering the financial impact resulting from the War on Terrorism and the overall increase in congressional spending, it is very likely that the issue of raising capital gain rates even higher will be introduced by some member of Congress.   Assuming a final Health Care Reform bill is submitted to the President, which it certainly appears will be happening, and likely before the end of January 2010, a person with a capital gain which causes his / her total income to be above $280,000 will already pay more that 20% because of the surtax.  So, should a person trigger a capital gain in Year 2010, such as selling a business, if at all possible?   Since most business sales include a blend of capital gain and ordinary income, when considering the known capital gain rate increase, the potential for additional capital gain increases, the pending surtax and the fact that the top federal tax rate returns to 39.6% in Year 2011, a clear answer certainly emerges.  If an entrepreneur wants to experience the lowest tax impact possible from selling his / her business, selling before the tax rates increase is the way to go. Based on current regulations, 2011 capital gain tax rates will be at least 20% with the health care surtax likely causing some people to exceed a 25% aggregate rate. If congress decides to implement further increases, anyone who waited until 2011 to sell a business will wish they could go back in time to 2010.     If you need additional information, have questions, or need assistance navigating the sea of business confusion, call your Business Transaction Strategist, Monty W. Walker at (940) 322-5086.   Sincerely, Monty W. Walker, CPA, CBI, BCB Walker Business Advisory Services

We now have a Certified Exit Planning Advisor, John Howe, on our team, and he is building a team with some of our other Associates to work as our Business Transition Strategies Division.  This will be a group working with a broader focus than just simple exit planning, and looking for opportunities to help across a broad spectrum of business development and value enhancement issues.

 John Howe has written the following piece to describe what that is all about and give you an understanding of the approach the new group will be taking.

  A good time to look ahead

Prepared by John H. Howe, CEPA

Over the next 15 years, the U.S. economy will see an unprecedented increase in the number of businesses for sale as baby boomer entrepreneurs begin to retire and venture out in search of their next challenge. Just as the Boomers have had an impact on everything from education to health care, the same generation will inspire an unprecedented shift in private business ownership.

The baby boomer generation has been one of the most entrepreneurial in the history of our country.  During the last 30 years over 5 million businesses with annual revenues ranging from $1 million to $75 million were founded. The owners of most of these businesses are now 52 years old or older and beginning to think about retirement. Studies by PriceWaterhouseCoopers, MassMutual and Marquette University showed that one out of two businesses will change hands between now and 2016.

The American Family Business Survey sponsored by MassMutual showed that approximately 30% of these owners plan to sell their business to a third-party buyer; another 30% plans to sell to a family member; 18% plans to sell in some manner to current employees. Others are considering transferring to a trust, while the remainder are considering closing and liquidating.

For those business owners who intend to sell to a third-party, it will become increasingly important that they position their business effectively to attract buyers in a competitive market.  Owners accustomed to calling all the shots are often not the best ones to evaluate whether their businesses are in shape for a transaction. And considering that for most owners, their business is their nest egg, it is important to seek experienced advice to maximize their return.

Business Transition Strategies is a division of New Hampshire Business Sales, Inc., a New Hampshire company with over three decades of experience. It can help the business owner focus on doing everything he or she can to increase the attractiveness, value, and salability of the businesses. Our team of advisors will help owners as they prepare for what could be their biggest challenge ever: life after business. We do this through a thorough exit planning process that helps owners consider the personal, business and market factors necessary for a good transition. Our engagements can be scaled to the business, and adjusted to the specific situation faced by the owner. And we will bring their businesses to market in the same confidential and thorough way used successfully through the decades. Our careful and methodical approach is not flashy, but it is effective in getting value for owners.

Surprisingly, the PriceWaterhouseCoopers study showed that approximately 75% of private business owners have no strategic plans in place for what to do as they approach retirement age.  An additional 25% have done little or no estate planning.  This is a recipe for disaster. 

A transition plan from Business Transition Strategies is a comprehensive, integrated review that asks and answers all of the personal, business, legal, financial, tax and estate issues that are involved in exiting from a privately owned business.  This plan shows business owners how to begin positioning themselves and their businesses so that they can accomplish their goals.

Given the number of companies coming to market, business owners will need to focus on improving profitability, developing management talent and growing revenue in order to make their companies more attractive and to maximize the proceeds they receive at the time of exit.

Transition planning delivers tangible results for savvy business owners.

Owners who commit to the process often are able to identify opportunities previously overlooked, and find significant ways to enhance the value of their companies. This can result in a higher value, and a smoother transition when the time comes for sale. It also can help identify problems that could emerge as deal-breakers at time of a transfer.

In addition, with good planning, business owners learn about tax consequences that lie ahead and adjustments they might consider to maximize retained earnings.  As any owner knows, the net earnings are more important than the gross receipts.

The most often overlooked component of transition planning, and perhaps the most important, is the peace of mind that comes when a business owner knows that he or she is being proactive and taking charge of the future, rather than waiting passively to let the future take care of itself  – after all, deciding how and when to exit a privately owned business is perhaps the single most important financial and personal decision in a business owner’s lifetime.

GOOD REASONS TO BEGIN TRANSITION PLANNING NOW

*  The oldest of the baby boomers was born in 1945 and is now over 64 years old.  The youngest of the baby boomers was born in 1961 and is now 48.

*  By 2010 the number of business owners wanting to sell their businesses each year will have increased fivefold over 2004.  This trend will continue for the next 10-15 years.

*  While the oldest boomers may be ready for retirement, the companies they exit are viewed as desirable “new opportunities” for younger boomers seeking work independence. The youngest members of this generation are active buyers. They are very entrepreneurial, and are eager to take charge of their careers.

*  The economy has been through an historic disruption, but the picture is improving and there is pent up demand.

*  It can take as little as 6 months and as long as 36 months to get positioned for a transaction.

*  We are currently experiencing some of the lowest capital gains tax rates in decades. But how long will this tax climate last?

There is another reality to consider.

What would happen if you were unable to continue in your current role?

We have seen this tragic development recently when owners figured they would always have time “tomorrow” to think things through, but were wrong, and others ended up saddled with doing it for them. Consider the potential burden you would leave on your family and employees as they struggle to piece together an action plan without you in the picture. Often they lack the resources and skills to do this.

To get started on the transition planning process, get informed. Seek information from the best independent and objective sources possible. One good place to start is to talk with trusted advisors like your attorney, accountant, financial advisor, or insurance professional or an investment banker who focuses on privately held businesses. And remember to work with us; we try to think of the entire picture, not just one piece of it.

Business Transition Strategies is ready to help. We collaborate with other experts, such as the one who gave this article to you, to make sure you get the thorough advice you deserve. Call us today for a confidential evaluation.

>John Howe, CEPA, is credentialed through the Exit Planning Institute of Chicago. He has run businesses on his own, and served for over 30 years as general manager for a family owned company. He knows the special challenges faced by owners. He works as part of a team of business advisors and transaction specialists who work with him in Business Transition Strategies, a division of New Hampshire Business Sales, which has an exceptional record of effectively working with business owners for nearly four decades. A confidential diagnostic can be performed to evaluate your readiness. It will help determined what is needed for an effective transition. We can be contacted through the offices of New Hampshire Business Sales in Portsmouth, Meredith and Henniker, 603-279-5561, and affiliated offices in Portland, Maine and Vermont. Inquiries can be made in complete confidence to jhowe@nhbizsales.com, or NHBS@nhbizsales.com

A  good source of information is the International Business Brokers Association (IBBA) web site, particularly the article at:

http://www.ibba.org/Buyers/BuyingProcess/tabid/265/Default.aspx

Attend our seminar and learn how businesses are analyzed, valued, marketed, and how sales are negotiated and financed. These seminars are being held at various venues around the state. We’ve already have several which have been well received. The next one is scheduled for October 8th at the EF Lane Hotel in Keene from 6-8PM. The last seminar of 2009 will be on October 29 at Franklin Savings Bank in Franklin from 6-8PM. Seminar is at no cost, but advance reservations are requested. To register, or for more information, contact us at 603-279-5561 or by e-mail at nhbs@nhbizsales.com .