HOW LOW CAN YOU GO?

The current business valuation climate may be a goldmine for keen business owners.

by John Fye

Surviving the recent recession has required business owners to utilize all of our most exceptional entrepreneurial and financial skills. But the recession and recent tax legislation have also provided those with a keen eye some unprecedented opportunities. A climate of low business valuation, coupled with recent changes in tax legislation, could serve as a gold mine for those business owners who have not lost sight of the most critical decision of their business lives, what we at The Beringer Group call "the Keep, Sell or Grow" decision:

Now that I have built it, do I keep the business in the family and transfer it to the next generation? Do I sell it to management, employees or a third party? Or should I grow it first?

Business values for most companies have taken a serious hit as a result of our recent economic turmoil. While most experts feel the economy may have hit bottom in 2010 they have forecasted a slow but steady recovery beginning sometime in 2011. Coincidentally, the predicted recovery has coincided with the passing of new tax legislation.

Many believe that the economic recovery will help rise company valuation levels, and over the next several years those values will reach or surpass the pre-recession valuations for many privately-held or family controlled businesses. Once you have made the decision to either Keep, Sell or Grow the business you must immediately review the incredible opportunities that were created for you, the company and your family by the extension of the 2001 Bush tax cuts and the new Federal estate tax regulations implemented in December 2010 that will expire December 31, 2012.

If your decision, after careful analysis and evaluation, is to keep the business and pass it to the next generation, then you might consider taking advantage of the lowest valuation your business may ever have to transfer equity now to the next generation. The new tax regime has increased your allowable lifetime gift five-fold, from $1,000,000 to $5,000,000 in 2011 and 2012.

This increase allows you to gift significant equity to the next generation without incurring a current gift or transfer tax. In addition, the increased lifetime exemption permits transfers by sale or GRAT to be leveraged significantly, thereby reducing the financial capital needed to pay the burden of increasing estate taxes on the transfer of the company to the next generation.

If the decision is to keep the business for the family and grow it for future benefit, these strategies transfer a significant portion of the future value to the next generation, thereby conserving as much family wealth as possible while avoiding increased estate taxes. This way you and your family may more effectively manage the future cost of a transfer of the business to the next generation.

During a meeting with the majority owner of a very successful family enterprise over the recent holiday, we discussed a previous decision to sell the company to a third party before the economic decline. The family decided instead to prepare for a future sale by shoring up the non-family key management personnel to avoid a sizable valuation discount by the buyer for loss of key talent when the ownership exited after the sale. The second step was to plan for the transfer of equity of the business to the next generation prior to the sales transaction.

Taking advantage of gifting and lifetime sales, the ownership of the company was restructured to transfer stock to the next generation at a significant discounted value in early 2010 when a business valuation analysis revealed the value of the family enterprise was at a price lower than it was prior to the recession. This owner is a "Baby Boomer" and is anticipating selling the company in about five years when he reaches 70 years of age.

His biggest fear during the last two years was that Congress would not keep the capital gains tax at 15%, thereby increasing the income taxes on his sales transaction. You can only imagine his delight on December 19, 2010 when President Obama signed into law the new tax bill that extended the capital gains tax at 15% and increased the lifetime gifting to $5,000,000 through 2012.

As the owner of a successful privately-held or family controlled business, you also have at least two years to take advantage of this gift of 2010. Whether you are keeping, growing or selling your company, act now before you, your family enterprise, and the economy recover from the current recession. Take advantage of "The Boomer Gift" whether or not you are one!