What You Need to Know about Buy-Sell Agreements

Business partnerships can be beneficial, but they can also be messy. When someone else shares in your business success, having a formal written partnership agreement is a proven avenue for avoiding stressful conflicts. One crucial topic to cover in these agreements: buy-sell events. It is essential to detail what happens when a partner separates from the partnership enterprise.

Buy-Sell Definition

A buy-sell agreement outlines transfer of a partner’s interest in the business. It describes when and how the departing partner redeems his ownership. A number of occurrences may activate implementation of the buy-sell agreement. Each of these events is expressed in the agreement.

The agreement should also specify conflicts that compel any partner to tender his ownership. Examples include failing to allocate a specified amount of time to the business, and taking excess draws of profits relative to ownership percentage.

Triggers of Buy-Sell Events

Most commonly, the death of a partner will trigger the buyout of the decedent’s business ownership from his heirs. In addition, buy-sell agreements often come into play in the event of disability or bankruptcy. A disability is generally defined as one that impairs the partner’s ability to perform his duties to the business. In bankruptcy situations, the solvent partners need protection against an unknown party suddenly becoming a partner by purchasing the liquidating business interest in the bankruptcy process.

Some buy-sell agreements become effective in the event of a partner’s divorce. This prevents an ex-spouse from becoming a partner with the remaining business owners. Additionally, a buy-sell agreement is often implemented simply because a partner retires or no longer wishes to participate in the business.

Buy-Sell Accounting

Essentially, buy-sell agreements identify how remaining partners acquire company shares owned by the departing partner. Purchase of an exiting partner’s ownership is typically not made by the partnership; rather, the individuals who will continue owning and operating the business make the acquisition. Company cash isn’t used unless it’s first distributed to the remaining partner, who then uses it to buy out the selling partner. Correctly accounting for these steps is essential, and the tax implications are tricky.

Price is usually determined by a business valuation conducted by an independent third party. The value determined for the departing partner’s ownership is often too expensive for the remaining owner to pay with cash. Consequently, seller-financing terms are commonly arranged.

A buy-sell agreement may contain stipulations that the partner who’s leaving must provide financing to the buying partner, or a discounted price based on a present value calculation at the time of the partner’s departure can be embodied in the agreement. This makes procurement of outside borrowing easier on the remaining owner.

Frequently, insurance is obtained for funding the purchase price when executing a buy-sell agreement – especially in the event of a partner’s death.

With much to consider in the structure of these agreements, professional counsel in these matters is vital. It is highly recommended business owners contact their financial adviser before entering a partnership or arranging any buy-sell agreements.

Simple Budget-Reducers for the Micro Business

An entrepreneur’s competitive thirst isn’t quenched until every angle has been maximized. This includes control over expenses. Every cost-cutting measure results in more money for the business owner, and this is especially true for micro enterprises, where small expenditures represent substantial overhead percentages. Each business owner must examine the intricacies of his or her operations to determine how to trim the fat off the budget. Here are four list toppers:

Phone savings: Ditching your landline is an ideal expense reduction technique for solo operations providing remote or mobile services. Typically, a cell phone is the only line you need.

Storage savings: Switch to paperless documents. Storing electronic documents rather than cabinets full of paperwork saves space, ink, envelopes, stamps, and sheets of paper. Send invoices electronically, use accounting software to keep your bookkeeping in order, communicate via email, and save correspondence in virtual folders on your computer.

Marketing savings: Online marketing – often more effective than traditional advertising – is commonly a do-it-yourself endeavor. Free online guides and tutorials are available that provide instructions for website maintenance, blogging, and sending e-newsletters.

Rent savings: If your business has physical space for serving customers, rent is likely your largest recurring expenditure. A delicate balance of priorities is required to attain a convenient site for the public while reducing long-term cost. If you have flexibility with location, consider sharing space with other businesses or renting space away from pricey main boulevards.

Simple Steps to a Simplified Financial Forecast

Operating a small business is like a hike in the woods where the trail is mostly familiar, but sometimes referring to a compass is key.

The entrepreneur’s compass is the financial forecast. These projections guide you in the course you want to take. And when the path twists you in a different direction, the forecast shows where you’re offtrack and how to get your bearings back.

Your forecasts allow you to set goals and milestones. More importantly, they permit you to measure progress toward your objectives. Many entrepreneurs avoid making financial forecasts because the process entails a lot of numbers, which seem cumbersome to calculate. However, forecasting can be a simple process. Use a spreadsheet to identify a few basic factors, with which you’re probably already familiar. These factors create your financial forecast.

1. Resources

The top line in your financial forecast is sales revenue. But determination of this figure requires an initial step of identifying your available resources. These elements are cash and time.

Cash: Assess available funds for inventory and other costs that must be paid before you collect from customers. The money on hand for these things represents a curb on how much you can sell.

Time: Your revenue is limited by the time you have to contribute to the business. Selling more than you can deliver individually means adding staff, and that brings you again to a cash need.

2. Direct Costs

Once you’ve determined your resources, start identifying direct costs. Begin with all direct costs, such as inventory or materials. Labor cost is also commonly a major direct factor in generating sales. For solo-operated service providers, the only direct cost is typically the entrepreneur’s time. The key dynamics are how much output the individual can accomplish every month and the amount of personal income desired for the effort. This owner compensation target is the major direct cost in many basic business models.

3. Sales Revenue

When your direct costs are identified, sales revenue is projected as a multiple of those expenditures. All you need is your ratio of direct costs to sales revenue. This may be calculated using historical data. Or you might simply identify a markup you aim to achieve. For example, you might have prices that are twice your direct costs – yielding a ratio of 0.5, or 50%.

Divide your forecasted costs by the ratio. The product is your sales revenue forecast. Subtracting direct costs from sales revenue results in an amount for gross profit.

4. Overhead Expenses

Every business has general overhead expenses. Even the solo entrepreneur working from home must at least cover the cost of internet and cell phone use. Larger organizations of course incur expenses for rent and office administration. Don’t forget costs for advertising and marketing, even if that’s only website development and maintenance. Subtract these expenses from your gross profit to obtain net profit.

Over time, update your financial forecast. Poor results will necessitate cutting overhead and capital expenditures. On the flip side, beating expectations gives you extra funds for expansion.

Make Bookkeeping Changes to Comply with New US Tax Law

Few things in life are more complicated than US congressional attempts at making things simple. This principle holds true for the latest tax simplification. To adhere to newly established standards, business owners must make some straightforward adjustments and some less-than-clear changes.

  • Businesses may no longer deduct expenditures primarily connected to entertainment or recreation (ballgames, theater tickets, fishing outings).
  • Manufacturing businesses no longer receive a domestic production activities deduction.
  • Enterprises with $25 million or more of gross receipts now have a limit on deduction of interest expense to 30% of taxable income.

The good news is that businesses will also benefit from new allowances in 2018. Specifically, bonus depreciation of 100% is allowed on purchases of both new and used assets placed in service from 2018 through 2022. Additionally, the Section 179 deduction for property purchases is now allowed for items costing up to $1 million. When applying these deductions, entrepreneurs would be wise to rely on the judgment of their tax professionals for accurate reporting.

Tax experts will certainly aid in handling the new 20% deduction of pass-through income from business entities. Company owners must navigate income threshold limitations, disregard shareholders’ salaries, and weigh business assets and wages paid-all to determine deduction limitations. Accurate accounting is now more crucial than ever for tax planning. To keep up with congressional efforts, business owners should stay in close communication with their accounting professional.

What You Need to Know about Capital Gains

No one likes to pay taxes, especially on an appreciated investment.

With careful planning, you could avoid or minimize capital-gains taxes. Here are three tips.

Hold investments for at least 366 days

How long you keep investments in your portfolio before selling them determines the taxes you pay on your gains. Short-term capital gains are taxed as ordinary income. Long-term capital gains are taxed at rates of 0%, 15%, or 20%, depending on your tax bracket.

Invest in a low-turnover fund

Mutual funds realize capital gains just as individual investors do. Any time your fund sells a security at a gain, that gain is taxable. Since the law requires mutual funds to pass most of their net gains on to investors, you realize a capital gain. This is either long-term or short-term, depending on how long the mutual fund held the securities. You can avoid these types of gains by investing in a low-turnover mutual fund.

Use capital losses to offset capital gains

Do you have a losing investment in your portfolio? You might want to sell it and use the loss to offset gains. For example, if you have $4,000 in capital gains, and you take a $4,000 capital loss, the two will negate each other, and your tax liability on the gains will be eliminated.

Plus, if your investment losses for the year exceed your gains, you can use the balance to offset your ordinary income, up to a $3,000 limit.

Business Expenses: Get Reimbursement Right

If a business owner is the main or only employee of the company, it’s important to implement a judicious policy of expense reimbursement that’s similar to that of major organizations. Solo enterprises are, in fact, the most likely operations to incur business expenses paid with personal funds. This often occurs when the owner uses a personal credit card for company purchases.

The business should treat reimbursed expenses as if it had paid for them directly. The reimbursement is recorded in an expense category of the company’s accounting system that describes the type of expenditure. Creating nebulous categories with such names as “Reimbursements” or “Credit Card Payments” obscures the actual business purpose. Instead, use an expense account that classifies the cost exactly as you would for nonreimbursed, directly paid expenditures.

A sound reimbursement policy ensures that you don’t miss claiming valuable tax deductions, improperly classify business expenses, or suffer cash drains of uncertain origin.

Limit the Episodes

It’s best to limit the occurrences of expense reimbursement. The easiest solution is to have a single credit card devoted entirely to business purchases. Bookkeeping accounts for each credit card charge as it occurs. Since all the charges are company costs, the credit card bill is simply paid by the company. The bill payment is allocated to the credit card liability account on the balance sheet to which the charges were applied.

A credit card provider that supports a business account will issue secondary cards if you have employees. This allows tracking of charges by each worker.

In an era where almost anything may be purchased with a credit card, cash advances are generally unnecessary. Company policy should prohibit cash advances – even to the owner. If you must spend cash for a small item, place the receipt in the business records and collect a reimbursement. This is the same procedure you would utilize with an employee. In these cases, bookkeeping should record the expense in the same category it would have if the expense had been directly paid by the business.

Avoid Complications

Personal expenditures inadvertently charged on a company credit card are not business expenses. An owner may easily make the mistake of charging something like a personal dry-cleaning bill on the company credit card. Account for these charges as owner distributions. With all credit card charges recorded on the books – even these owner distributions – the liability balance in the bookkeeping system will match the eventual credit card bill.

Setting a standard of recording every charge exactly as it will appear on the credit card bill ensures easy reconciliation of the books to the credit card statement. Avoid the temptation to make a bookkeeping entry for a group of charges. This technique is suitable only when reimbursing multiple expenses paid with cash or a credit card not dedicated exclusively to business. A single charge may be divided into multiple expense categories. For instance, meals while traveling for business must be distinguished in the company’s accounting from lodging and transportation. Additionally, personal entertainment during a business trip is not tax-deductible, despite the allowable deduction of travel costs.

What You Need to Know about Capital Gains

No one likes to pay taxes, especially on an appreciated investment.

With careful planning, you could avoid or minimize capital-gains taxes. Here are three tips.

Hold investments for at least 366 days

How long you keep investments in your portfolio before selling them determines the taxes you pay on your gains. Short-term capital gains are taxed as ordinary income. Long-term capital gains are taxed at rates of 0%, 15%, or 20%, depending on your tax bracket.

Invest in a low-turnover fund

Mutual funds realize capital gains just as individual investors do. Any time your fund sells a security at a gain, that gain is taxable. Since the law requires mutual funds to pass most of their net gains on to investors, you realize a capital gain. This is either long-term or short-term, depending on how long the mutual fund held the securities. You can avoid these types of gains by investing in a low-turnover mutual fund.

Use capital losses to offset capital gains

Do you have a losing investment in your portfolio? You might want to sell it and use the loss to offset gains. For example, if you have $4,000 in capital gains, and you take a $4,000 capital loss, the two will negate each other, and your tax liability on the gains will be eliminated.

Plus, if your investment losses for the year exceed your gains, you can use the balance to offset your ordinary income, up to a $3,000 limit.

Business Expenses: Get Reimbursement Right

If a business owner is the main or only employee of the company, it’s important to implement a judicious policy of expense reimbursement that’s similar to that of major organizations. Solo enterprises are, in fact, the most likely operations to incur business expenses paid with personal funds. This often occurs when the owner uses a personal credit card for company purchases.

The business should treat reimbursed expenses as if it had paid for them directly. The reimbursement is recorded in an expense category of the company’s accounting system that describes the type of expenditure. Creating nebulous categories with such names as “Reimbursements” or “Credit Card Payments” obscures the actual business purpose. Instead, use an expense account that classifies the cost exactly as you would for nonreimbursed, directly paid expenditures.

A sound reimbursement policy ensures that you don’t miss claiming valuable tax deductions, improperly classify business expenses, or suffer cash drains of uncertain origin.

Limit the Episodes

It’s best to limit the occurrences of expense reimbursement. The easiest solution is to have a single credit card devoted entirely to business purchases. Bookkeeping accounts for each credit card charge as it occurs. Since all the charges are company costs, the credit card bill is simply paid by the company. The bill payment is allocated to the credit card liability account on the balance sheet to which the charges were applied.

A credit card provider that supports a business account will issue secondary cards if you have employees. This allows tracking of charges by each worker.

In an era where almost anything may be purchased with a credit card, cash advances are generally unnecessary. Company policy should prohibit cash advances – even to the owner. If you must spend cash for a small item, place the receipt in the business records and collect a reimbursement. This is the same procedure you would utilize with an employee. In these cases, bookkeeping should record the expense in the same category it would have if the expense had been directly paid by the business.

Avoid Complications

Personal expenditures inadvertently charged on a company credit card are not business expenses. An owner may easily make the mistake of charging something like a personal dry-cleaning bill on the company credit card. Account for these charges as owner distributions. With all credit card charges recorded on the books – even these owner distributions – the liability balance in the bookkeeping system will match the eventual credit card bill.

Setting a standard of recording every charge exactly as it will appear on the credit card bill ensures easy reconciliation of the books to the credit card statement. Avoid the temptation to make a bookkeeping entry for a group of charges. This technique is suitable only when reimbursing multiple expenses paid with cash or a credit card not dedicated exclusively to business. A single charge may be divided into multiple expense categories. For instance, meals while traveling for business must be distinguished in the company’s accounting from lodging and transportation. Additionally, personal entertainment during a business trip is not tax-deductible, despite the allowable deduction of travel costs.

Automation Requires More – Not Less – Outside Support

Business owners know that to stay on top of conditions impacting their companies, they need to become one with their financial reports. However, this isn’t easy; wringing useful information from financial reports needs to be the result of tireless bookkeeping work.

In the start-up phase, pieced-together data in a spreadsheet may deliver adequate information. But a business owner expecting to thrive over the long haul needs better numbers. Fortunately, there is accounting software to automate the process. Unfortunately, automation is also the bane of small-business owners with limited bookkeeping knowledge.

Why? Because not everything in an automated system is automatic. Individuals lacking experience with double-entry bookkeeping commonly make data entry mistakes. Some events, such as purchases and sales of capital assets, depreciation expense, and borrowing arrangements, pose real problems.

If you enter data yourself, you may make mistakes – which can slow you down or throw you off track. If you expect a family member or college intern to handle the function, well, more of same.

Truth is, there’s no substitute for an expert. Whether you’re a do-it-yourselfer or you opt to hire someone for data entry, you still need professional assistance to check for errors and record complex transactions. Skilled accountants and experienced bookkeeping services deliver crucial value. In return for the cost, you have the security of reliable financial statements to aid in managing your business.

The takeaway: Automating your accounting doesn’t relieve you of the need for outside assistance tailored to your needs and budget. In fact, it may make it even more crucial.

How to Limit Those Nasty Financial Surprises

We all know people who are quick to respond. But thought leaders, entrepreneurs, and mega-successful business owners don’t wait to respond. They’re proactive. And it pays off for them – big time.

Some people are born with a “proactive personality.” But research shows that no matter where you are in your life cycle, you can develop a proactive mind-set. Even if you weren’t born with this trait, you too can improve your chances of success by choosing to look – and act – ahead.

The list below comes from an Inc.com article written by David Van Rooy, Walmart Canada’s vice president of talent and organizational capability. In it, Van Rooy outlines seven tips to help you become more proactive. They are:

  • Focus more on the future. Learn from the past, but look toward the future.
  • Take personal responsibility for your success. Don’t wait for others to lead you.
  • Think big picture. Consider your ultimate goals and determine how to achieve them.
  • Focus on what you can control; let go of the stressors you can’t.
  • Prioritize. Not everything is important. Choose what is and focus on it.
  • Think through scenarios. Anticipate what could happen in your industry and stay ahead of your competitors.
  • Make things happen.

Reactive people respond to events after the fact, and, as we all know, sometimes that just needs to happen. But those who look ahead, anticipate what may happen, and take steps to capitalize on opportunities create their own reality.

What kind of business owner do you want to be? It’s your choice.