Little Known Strategies to Increase Profitability for Family Owned Businesses

Posted on September 28, 2011 by Bill Faiferlick

The ownership transition phase affected by the global economy

Over the next decade, 40 percent of family owned businesses are expected to change hands – whether it is in the form of a sale or transfer to family members. It has been written about extensively that this transfer of wealth was expected to be one of the largest in U.S. history in terms of actual dollars changing hands.

Considering current events, many may find transferring their business increasingly difficult. With questionable economic trends, many would-be-sellers and successors will increasingly struggle with the question of are buyers and/or successors willing to or are they financially capable to take on a decade worth of debt with decreasing chances they’ll ever be able to recoup their investments in this global economy?

Increasingly, we are seeing that the much discussed globalization is regularly putting into question the viability of well-run one hundred year old enterprises. As emerging markets continue to enter the marketplace, domestic companies are forced to compete with companies half way around the world for profits.

What are the solutions for businesses?

Converting expenses into tax deductions provide immediate returns

The first solution is to make sure internal profits are maximized as much as possible by adapting financial strategies which create new tax deductions turning expenses into new capital for savings and investments. This will cause you to rethink what is perceived as “fixed expenses”.

I can practically guarantee that there are measures which can be adopted in 99 out of 100 situations to allow the owner(s) to save at least another $40,000 per year or more  (even up to the year in which you decide to sell). Pre-funding health careexpenses is an example of expenses that can be converted to tax deductible expenses to save cash and provides an immediate return.

Orchestrating the sale or transfer using specific strategies unveils hidden wealth

The second solution is how to orchestrate the sale or transfer of the business so that the expected sale’s value is preserved and the sale delivers another $80,000 or more – predicated on the actual sale’s price. This is about more than simply finding a suitable buyer and an agreed sales price. These structures need to be put in place prior to the business going up for sale. On the eve of a sale in all  but a few instances is too late to adapt relevant little known beneficial ideas.

The basic model reduces years of after-tax loan payments for the buyer by making 30-40% of the purchase price a deductible event; whereas conventionally, the purchase price is entirely paid with after-tax income.

The other part is to secure a reduced tax obligation for the seller. Every dollar retained works to enhance and support increasing years of comfortable, affordable retirement.

Reducing your tax obligation on the sales of your business by 20-30% is crucial and just good business practices. This type of strategic planning is seldom discussed as few professionals are aware these are viable options since implementing these types of strategies require a specialized skill set greatly varying from most of the industry today.

Transferring in-kind benefits to family members 

When businesses are transferred to other family members, providing in-kind benefits to other non-participating family members creates taxation and valuation issues. The financial ramifications to not dealing with these issues are huge. Valuing and transferring assets strategically can provide alternatives otherwise not available. Based on my experiences with business owners, I would argue that the correct method of valuing in-kind benefits is their fair market value, rather than the cost to the employer or the subjective value of the benefit to the employee or family member.

Multiple Owner Succession

For businesses with multiple owners, business succession rarely comes at the most opportune time. It becomes more complicated if a death or major medical event occurs to a pivotal partner.

While optimism reins initially, one of the largest causes of business failure is not having the necessary time to seek outside advice about the most efficient manner to provide for a departing partner or their family without causing long-term financial strain on the enterprise.

Until any financial obligation to your partner or their beneficiary is completely satisfied, you will discover your new partner may be your partner’s or his family’s attorney. Unfortunately, accounts can be – and in many cases are- frozen. Paying bills will require prior approval and agreement from their attorney. Hiring even a temporary replacement may not be an option since the partner or his family may still be receiving his income leaving little if any additional cash to hire a competent senior executive. In fact, typically owners work for less money than an outside employee.

We work and toil. We insure our cars against the unexpected, and we plan for sudden situations when we have children; yet eight out of ten of us are casual about how we protect one of our most precious assets; our income. Creating succession plan strategies evolve over time; however, there are risks in not putting into place early on the necessary buy-out arrangements should sudden illness, death, divorce or other unexpected life events occur.

The difference between making a living and creating wealth

Small to medium businesses are the back bone of the US economy. The vast majority of businesses regularly fail to save. The majority of owners do very little to financially look over the horizon to plan for self-sufficiency. Business owners need to work smarter not harder and need to consider that you’re working harder than you need to and here’s why.

Business owners actively need to structure their business affairs in a manner so that they are contributing some meaningful sum each year to savings. If you are not actively saving and I’m not talking about five thousand dollars a year, my question is why be in business if all you are doing is working to support the government, (both state and federal), employees, suppliers, the list goes on? You are risking capital, long hours, taking risks and yet you are no better off than many of the employees you hire. If you are in business, your priorities should be for profit for yourself as a return on your investment!