A Great Way to Sell Your Business

by Kevin Jennings | Aug 10, 2020 | Business Owners, Transition Planning

“Studies show ESOP companies are more productive, faster growing, more profitable and have lower employee turnover”

Kevin Jennings, President- JBVal

The challenges and demands involved with running a business prevent business owners like you from planning their exit strategy. After decades of hard work, a successful owner will sell his/her business for a fraction of its worth. An outside buyer may change everything from your company’s name, to your management to your employee base and more. All you strived to build is now very different.

Employee stock ownership plans (ESOPs) can be your ideal solution for exiting your business. ESOPs offer companies a smooth transition, continuity of management, employee ownership incentive and often carry tax benefits. The company you created remains whole.

What is an Employee Stock Ownership Plan (ESOP)?

Simply stated, ESOPs are a regulated retirement plan in which employees, through the ESOP, become company owners. There is no change in management. Employees do not become the boss. While they are typically represented by a trustee, that trustee’s fiduciary duty is to ensure the company does not act in any way detrimental to the ESOP or to the ESOP’s participants.

What Are the Benefits of an ESOP?

A Smooth Transition

The ESOP can be an ideal business transition plan for you. You can sell as little as 1% of your company or any amount all the way up to 100% to the ESOP. A sale can occur all at once or in stages over time. Your decision.

Your company, its philosophy, its management, its employee base, and its way of doing business stay intact. This rarely happens with an acquisition.

Tax Advantages

Employee Stock Ownership Plans can offer great tax benefits for the selling shareholder and for your company. Congress has enacted tax incentives for ESOPs that make it a very attractive option for business owners like you.

For certain types of corporation, if the sale is at least 30% of total outstanding shares, you can defer federal (and often state) tax payments on their capital gains. Simply invest the proceeds in qualified replacement property (typically US stocks and bonds). As long as you hold onto those investments, no income taxes are due. Your tax basis in your company is probably very low. The savings here can be enormous.

S-Corporations and other pass through tax entities pass the company’s tax burden to its owners. ESOPs are exempt from federal and most states’ income taxes. The cash previously distributed to owners to help them pay their income taxes can now be invested in company growth.

ESOP companies often can deduct contributions and dividends. Contributions can include payments to repay loans financing the purchase from the owner. Naturally, there are IRS and other regulatory limits.

Better Company Performance

Studies show ESOP companies are more productive, faster growing, more profitable and have lower employee turnover. An ESOP gives employees-owners an added incentive to work hard.

An Important Employee Benefit

The ESOP is an exceptional retirement plan for employees. When they retire, they are paid out at fair market value for the shares credited to their ESOP account. Often, an ESOP is a supplement to a 401(k) and other retirement plans.

Is an ESOP a good idea for me?

ESOPs work best if your company consistently produces a positive cash flow. Like all good things, there is a price tag attached. There are one-time setup costs. There are annual expenses ranging from funding the plan for employee withdrawals to administering the plan.

For expert guidance on Employee Stock Ownership Plans, contact JBVal at 1-(516)-882-4878 or @KevinJ@JBVal.com

JBVal is a boutique valuation firm with a proven record of assisting clients to realize their dreams.

“Opting Out of the PPP? There Are Some Tax Benefits to Consider” By Lou Vlahos

by Kevin Jennings | May 12, 2020 | Business Owners, SBA Loans

Lou Vlahos, an attorney with the firm Farrell Fritz, has continuously supplied valuable information to JBVal, my clients and to all readers of his blog. Farrell Fritz provides “Legal Updates & Commentary for Tax & Estate Planning”.

His latest is an eye opener on PPP loans and the IRS’ position on taxes. Let us know in the comments below what you thought of his blog post. Have you taken advantage of the PPP loans? Is your loan forgivable? Have you returned the money?

Opting Out of the PPP? There Are Some Tax Benefits to Consider

“I am not embarrassed to say that I was excited at the introduction of the bill that would eventually be enacted as the CARES Act.[i] In particular, I viewed the Paycheck Protection Program[ii] as a practical means of getting funds into the hands of those closely held businesses that needed them to survive the present economic downturn”

By Lou Vlahos on May 11, 2020

PPP Loan Application Survey Results

by Kevin Jennings | Apr 22, 2020 | All Blog Entries, Business Owners, SBA Loans

“The current pandemic led to a quick response by the federal government in providing low-cost funding to small businesses. However, each bank processing the applications seemed to have different requirements on what backup data they required. The order in which applications were processed varied greatly.

This survey is to see a bit more scientifically what really happened and to see how we can learn from this experience should the promised second round of funding materialize. “

Kevin Jennings, President- JBVal

The results of our very unscientific survey are in. The answers are far from surprising based on what I am seeing in the media.

Almost 84% of respondents see the program as unfair. Many commented larger small businesses seemingly were given preference over the smaller applicants. Over 62% of respondents noted their bank never submitted their application. The balance of respondents was approved, most for the requested funding.

Several respondents commented on the confusion surrounding what backup data was needed. From my speaking to several bankers, they, too, were unclear. When they asked questions of the SBA, they got contradictory answers. In fairness, these bankers noted their SBA contacts, too, were presented contradictory information from their higher-ups. One banker noted they had to manually enter each application into the SBA system. Is that 1970 on the phone?

Respondents noted issues ranging from what could and could not be considered “payroll” to their bank’s online application system freezing to contradictory instructions on the additional backup data the bank required. Many noted that even the largest banks had issues with data submission.

In almost all cases where the loan was not fully funded or the loan was not processed, the applicant did not know why. Over 86% of respondents whose applications were not filed will apply again. Of these, about 29% will use a different bank. Some noted they were ‘stuck’ with applying with their bank because that was the SBA requirement. Others noted they applied through either a service or with a bank they never used before. Over half of approved loans were funded within a week.

Just under 2/3 of respondents noted the funding was very important or crucial to their business. A higher 95% saw the funding was very important or crucial to the economic recovery.

Time: A Four-Letter Word or Your Best Friend?

by Kevin Jennings | Mar 4, 2020 | Business Owners

“You built your business by ignoring time, letting the clock tick while you worked to midnight and beyond, setting aside the other demands in your life.”

Kevin Jennings, President- JBVal

In clicking around the Internet for inspiration for an article to write that will be useful to business owners, I was struck by the number of sites that want to take a slice of your time with the honest intent of helping you. These sites suggest ideas ranging “50 great blogs small business owners should be reading in 2020,” (50 blogs to read? Really?) on how to best manage your time. Are these helpful? A bit. But probably not a lot.

Doesn’t the clock tick on, regardless of how we spend our time? Everyone is flooded with demands from their job, family and charitable and other pursuits, often in loud and demanding tones. What about you? As a business owner, do you have the added responsibility of running a business? A business that supports employees and their employees’ families? Not a trivial responsibility!

You built your business by ignoring time, letting the clock tick while you worked to midnight and beyond, setting aside the other demands in your life. Those days may be long in the past, but haven’t the demands on your time grown?

Being the lonely exec at the top means everyone is accountable to you. And it means you are accountable to everyone. No one is by your side to run ideas by, to brainstorm with.

What happens? Burn out. Business brokers receive calls from owners saying they’re done. Sell the business and sell it today.

If you sell fast, will you get the money you and your family deserve or pennies on the dollar?

Today’s business buyers demand a company that can almost run itself. A business dependent on a single exec making all the decisions has a significantly lower market value. Is that you?

There is a solution, one that requires an investment on your part but will also build cash flow for you and your business and ultimately increase the market value of your business.

Intrigued? We’ve assisted many owners.

516-882-4878 or KevinJ@JBVal.com

Millennial Employees and Your Business

by Kevin Jennings | Feb 4, 2020 | Trends, Business Owners

“Millennials want to work from home, they want flex time, they don’t want to work overtime, I’m told.”

Kevin Jennings, President- JBVal

In my dealings with business owners and the professionals that work with them, I frequently hear of their difficulties in retaining staff. This often is directed at their employees who are millennials. Millennials want to work from home, they want flex time, they don’t want to work overtime, I’m told.

In a recent lunch with an entrepreneurial millennial, Jason Hershkowitz, the CEO of Beyond the Staff*, I heard a very different, and informative, perspective.

Jason says these “complaints” are all true but are really to the benefit of the business. Millennials crave challenge and accountability. They seek employers who will test their abilities by assigning to them responsibilities beyond what their age and resume may tell the employer they can handle. They want mentoring from their employer when needed, not a boss who looks over their shoulder and directs their every move.

In return, the millennial will do his/her best to deliver. They will seek input when stumped. Millennials don’t see the need for a 9 to 5 presence at the office. Their belief is “If I can get the job done effectively and timely, it doesn’t matter where, when or how I work.” It struck me that this is the attitude of the typical entrepreneur. Shouldn’t we employ people like us? The ongoing success of our businesses when we move on depends on it.

Our generation was trained to work at the office. Is that the best and only answer? In starting your business or professional practice, didn’t you fit in work hours whenever and wherever you could? Yet, we expect our employees to work as if they are employed by a large corporation where punching the timeclock is more important than getting the job done.

Millennials don’t measure their worth by the hours they put in. If they accomplish their responsibilities in 30 hours, the shortfall from the 40-hour standard week is theirs to spend as they like. Overtime is not an issue though they want to control the location and timeframe.

Millennials treasure their personal time, whether it is time spent with family, friends or on solo ventures. They need the flexibility to take time off for these events, whether it’s going to a kid’s soccer game after school or doing charity work at 10:30 am on a Tuesday. Ironically, I often hear business owners and professionals lament they didn’t invest the time in these activities when their families (and they themselves) were younger.

Most importantly, who raised this millennial generation with this attitude so different from ours? WE DID!

For other perspectives on this topics check out Forbes – Wow, what a pessimistic but informative article! It reinforces the idea put forth in my article that we, as employers and business owners, need to look at Millennials in a different light. We must remember though that generalizations that surveys and insights reveal are just that, they are not a roadmap for treating any individual.

Food for thought. Comments are welcome. Simply click Comments to state your position.

Beyond the Staff has proven success in helping small business owners realize superior employee acquisition and retention while achieving significant cost savings. Jason can be reached at 631-258-9479

ESOPS and the Smaller Business

by Kevin Jennings | Oct 15, 2019 | Business Owners

How Does an ESOP Work?

Updated October 2019. The original article was updated for clarity and relevance.
An ESOP is an employee benefit plan which, through a trust, owns stock in your company for the benefit of the employees. It is seen as a great motivating tool for employees to be more productive and to share in the wealth of your company. For companies, it can become a method of lowering tax burdens. For owners, it is a means to sell their interest often at a great tax advantage and on their own timeframe.

An ESOP is one of the only business transition tools that allows an owner to sell their interest in their company over time or all at once. An ESOP can work in conjunction with other succession planning techniques. You can decide to retain an ownership interest for yourself, sell ownership interests to management, gift ownership interests to your kids and still sell an ownership interest to an ESOP.

ESOP Contributions

Contributions to ESOPs can be tax deductible. There are limits, as with most plans. If an ESOP is leveraged, the deductibility may be even higher. With leverage, the ESOP or its corporate sponsor borrows money from a bank or other qualified lender. The company typically guarantees that it will make needed contributions so the trust can repay the loan. A company can potentially deduct from taxable income both principal payments and interest payments. Dividends paid on ESOP stock passed through to employees or used to repay the ESOP loan may be tax deductible.

S-Corporation ESOPs

A further advantage exists for an ESOP in an S-corporation (where profits are passed through to the shareholders via a K-1). As a tax-exempt entity, the ESOP pays no federal (and possibly local) income taxes on its share of the sponsor’s income. In a 100% ESOP owned S-corporation, there are no federal corporate taxes due.
For the employee, federal income taxes are paid when ESOP participants receive a distribution from the retirement plan. The same tax advantages and rollover opportunities that are available on distributions from all other types of qualified retirement plans like 401(k)s are available with ESOP distributions.

C-Corporation ESOPs

Owners of closely held C-corporations can sell their stock to the ESOP and defer federal income taxes on the gain from the stock sale. However, there are additional requirements that must be met. The ESOP must own at least 30% of the company’s stock immediately after the sale and the seller must reinvest the proceeds in securities of domestic operating companies within a set timeframe. Other restrictions exist.

Considerations for ESOPs

An ESOP is not for everyone. ESOP implementation and maintenance can be costly. A properly designed plan using qualified professionals can mitigate these costs. Annual filings with the IRS and the Department of Labor are required. As with any legal entity, attorneys who are expert in this area should maintain up-to-date paperwork. An outside administrator will send benefit statements to employees, file the various regulatory papers and answer questions from your employees. An annual valuation is also needed.

An attorney and an ESOP specialist should design the Plan with your guidance to avoid any legal or tax consequences. Click here to access the professional association’s website The ESOP Association.

At JBV, we are here to assist with any of your ESOP or transition planning needs. If you have questions, please don’t hesitate to contact us.

Business Owners

A Great Way to Sell Your Business

What is an Employee Stock Ownership Plan (ESOP)?

What Are the Benefits of an ESOP?

Is an ESOP a good idea for me?

“Opting Out of the PPP? There Are Some Tax Benefits to Consider” By Lou Vlahos

PPP Loan Application Survey Results

Time: A Four-Letter Word or Your Best Friend?

Millennial Employees and Your Business

ESOPS and the Smaller Business

How Does an ESOP Work?

ESOP Contributions

S-Corporation ESOPs

C-Corporation ESOPs

Considerations for ESOPs

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