Buying Out Your Corporation Co-owner

You may think of your joint shareholder as a business partner, but an incorporated business is a tax entity that is different from a partnership. This arrangement comes with specific tax consequences if you decide to buy out your corporation co-owner.

First, it’s important to understand that buying the company’s shares of stock from someone does not impact the corporation. Rather, this is an arrangement between you and the other shareholder. You are buying his shares. The number of shares issued by the company doesn’t change.

If the departing shareholder merely takes some money from the corporation, that is not a payment from you for your stock purchase. It’s simply a taxable dividend to the other shareholder. Or, if the business has a tax classification as an S corporation, the departing shareholder is taking a distribution, which is likely not taxable.

The fulfillment of your stock purchase agreement occurs with payment of your personal money to the departing shareholder. If your source for this cash is the company, then you have the tax consequence of receiving a dividend (or distributions, in the case of an S corporation). Again, this process has no tax impact on the company.

The tax consequences of the buyout fall entirely on the individual shareholders. As the buyer, you have a cost for the stock shares you’re acquiring. The selling shareholder has a gain or loss that’s the difference between what you pay him and his cost basis in the shares he’s selling.

If you’re unsure about this money flow, consult with your business accountant, who can guide you through the process.

How to Create a Useful Budget for the New Year

Entrepreneurs rarely find anything enjoyable about devising a budget for the year ahead. Consequently, the budgeting exercise is commonly neglected. Yet budgets offer advantages by facilitating planning, guiding cash management, and providing comparison to actual results.

Of course, professionals reap these benefits only if the budget is useful. Giving attention to a forecast that results in gross inaccuracies and misjudgments is even worse than no budget at all. The key to making the budget process easy and accurate is to focus on six basic factors.

Expense Limits, Revenue Timing, and Capital Goods

Always begin your budget with projections of expenses. Fixed expenses are the simplest to address. These are recurring items such as telephone and internet service, office rent, professional liability insurance, and licensing or certification fees.

Next, examine variable costs, which fluctuate with revenue. After paying fixed expenses, you have limited cash available for variable costs, such as inventory, materials, and staff needed to complete sales. Your revenue is then based on your markup of these variable costs.

An additional factor to consider is how long it takes to get paid for sales. This could happen immediately, as in the case of a retailer, or a few months after project completion, if you provide billed services. Be sure to place your revenue collections in the appropriate periods of your forecast. You might need to pay another month of expenses before receiving the income from sales a month prior. And the initial months in next year’s budget may have incoming funds from jobs in your pipeline that you complete this year.

Don’t forget to include expenditures for capital goods such as machinery, equipment, and computers. For example, rising sales may at some point necessitate adding both a new worker and a new piece of equipment.

Substantiating, Duplicating, and Assessing

Verify your budget accuracy by comparing the numbers to the facts. These are crucial elements such as the number of potential customers in your market and how likely you are to connect with them based on your marketing costs. Identify how many potential customers turn into buyers. Determine the average purchase size. Overall, your aim is to ensure that your sales goal is realistic.

Turning optimism into pragmatism is achieved by forecasting multiple growth scenarios. The numerous factors at play are easily manipulated in a spreadsheet application on your computer. One scenario might modify the overall growth rate for next year. Another could change the pace at which your business grows. That is, you might end the future year at your optimistic sales level but get there more slowly.

Constant reassessment of your budget is vital. Maintain your forecast in a spreadsheet that allows you to recalculate upcoming projections as you enter each month’s actual results. Follow up each entry with a re-evaluation of the approaching period. Modify the forecast with a revised projected growth rate to match your recent activity. Change variable expenses and capital goods costs accordingly.

Lastly, review whether sales are rising faster or slower than expected. Based on this trend, consider whether you should expand or slash the fixed costs over which you have control. These adjustments will help keep your budget balanced and keep your business on track for success.

Make Financial Spreadsheets More Meaningful

The explosive proliferation of spreadsheets has brought with it an unfortunate byproduct: complexity. This quality is not bad in and of itself. However, some financial analysis reports have increased in complexity to the point where they are indecipherable. In some cases, creators fail to incorporate appropriate information, rendering the report useless.

If developed and used properly, forecast spreadsheets can facilitate projections for in-house use and allow lenders or investors to better comprehend the future expectations of your business. With this in mind, use the following principles to craft your data.

Make assumptions. In other areas of life, you’re told never to assume. When it comes to financial spreadsheets, however, assumptions are a good thing. In fact, spreadsheets are worthless without them. Your spreadsheet must have a listing of assumptions. These reflect how much you can deliver with the given level of personnel, equipment, and working capital. You must correlate projected revenue with the time, people, and tools available to complete the work, and with the cash on hand for marketing and sales.

Place your assumptions right in the spreadsheet. Use color-coding to distinguish assumption constants from formula financial results. Assumptions should appear in front of dollar figures – on top or to the left of the money numbers – for easy access and instant adjustments.

Crack your code. If you use any abbreviations, define them. If, for example, you operate a fleet of trucks delivering construction materials, make sure to convey the unit of measurement – like square yards or board feet. Or, if you sell items through a website, make it clear whether your measurement of daily active users reflects site visitors or purchasers.

Learn from the past. Sensible financial projections are bridged to past results. The initial month in a forecast should indicate where the business already stands. Projected outcomes then flow from this historical base.

Cover all the bases. For each period, a financial forecast summary should show the beginning cash, the addition of revenue collected, the subtraction of every expense category, and the ending cash. Don’t forget to subtract the costs for new capital goods like machinery and equipment.

You must also remember to consider any lag time between selling and getting paid. Reduce incoming revenue by a reasonable percentage of sales that are not paid upon delivery; add that revenue to a future period in the forecast, when those customers will pay.

Tab it. Organize spreadsheet tabs in a logical order from left to right. For instance, the first tab is typically a summary sheet that tallies the results from subsequent sheets of projected revenue, variable expenses, fixed costs, and asset purchases.

Separating these elements on distinctive sheets is often necessary for comprehending detailed connections. You may also need to apply different sets of assumptions to various sheets.

Keep it neat. Cosmetic factors on spreadsheets matter. Make your spreadsheets readable with numbers that have commas and a consistent number of digits after the decimal point. Align all column headings over the numbers. And give your eyes a break: use at least 10-point font.

Business Growth: Are Your Projections Realistic?

Entrepreneurs with unrealistic business growth projections are like sprinters in a marathon. They’re in the wrong race, because their objective doesn’t correspond with ability. Don’t make the same mistake. To avoid depleting all of your business oxygen, set reasonable goals that you can strategically achieve.

An especially common error in growth forecasts is a hockey stick pattern. This predicts rapid growth after initiating a marketing strategy, followed by a steady upward trajectory thereafter. But growth doesn’t magically continue simply from momentum. Projecting a fixed percentage of rising revenue masks the actions and costs associated with expansion.

The foundation for a genuinely realistic growth projection is a focus on inputs. Inputs are what you actually control. Time, capital, and equipment are inputs that result in output. These elements dictate growth in the near future. Tie the sales forecast to assumptions about these available resources. Let the output – and its rate of growth – simply fall into place as your input plan unfolds.

Keep in mind, the rate of growth will not be constant. It will rise as your business scales and then reach a ceiling where revenue is capped. To break through this ceiling, you must continue to increase inputs. Hiring more people, automating more tasks, and outsourcing administrative duties are common steps. Of course, these measures require money, which is generated by growth. Consequently, your projections should reflect periodic dips in cash flow to fund renewed expansion, allowing the healthy cycle of growth to continue.

What’s Next When Your Business Grows Beyond a Start-Up?

Vigorous work is necessary to build a small business. When that tenacious effort pays off in a successful operation, you wonder what’s next for the enterprise. After achieving your maximum output, you can’t open the floodgates to new growth because your time is not unlimited. You need a plan that provides the foundation for a sustainable upward trajectory – one that addresses new opportunities to seize and the resources needed to do so.

When you move beyond the solo start-up phase, you already have some business history. You’ve proven that you have something to sell, and your experience delivering to customers gives you some financial data to measure performance.

Now you simply need a plan to judge expectations from new investment, whether from outside funding sources or by reinvesting some of your own profits.

Getting Started on a Business Plan

As the old expression goes, the best place to get started is the beginning. Summarize what your business has accomplished, where it stands regarding future prospects, and how you intend to achieve new goals. A business plan doesn’t need to become an unwieldy treatise. Rather, in a few sentences, you can state your market of customers, how much you have sold since starting, and the time and money that were required to attain those sales.

Describe the composition of your industry – whether it’s comprised of a few large organizations or is mostly numerous small enterprises. Convey whether the market is growing, shrinking, or stable. Do you expect your business to grow from an expanding market, or by attracting customers away from competitors?

Identify new products or services you intend to provide for the market, or simply give details about how you differentiate your business from the competition. What are your selling points to prospective customers? Explain how you attract customers, the amount of new business you seek over a specified future period, and the cost to accomplish that growth.

The Business Team

Growing organizations demand teamwork. Your business plan must convey who is focused on sales management, who manages delivery logistics, and who is tracking financial results. The latter may be outsourced to bookkeeping and accounting firms, but you need a system for timely examination and analysis of the financial reports produced.

Accounting professionals are also crucial to preparing the financial elements in your business plan. The capital and expense requirements necessary to attain your projected revenue are displayed in a cash flow forecast. In the future, this projection of cash flow will be compared with actual financial results compiled by your accounting pros.

Accountants, however, do not create the financial features in your business plan out of whole cloth. Your input is essential.

Only you know what your team can achieve with the available resources of money and time. You have the track record. You developed the product or service. You know the selling process. You know the risks and the ratio of costs to revenue.

The key factor moving forward is establishing strategic objectives that can be accomplished with a given amount of funds in a given amount of time.

Direct Costs Should Directly Affect Pricing Strategy

Entrepreneurs experience stark differences in costs among clients. The old 80/20 rule – that 20% of customers take up 80% of your time – may be an exaggeration, but it should not be ignored. It is integral to several factors that should be taken into consideration when developing your pricing strategy. Properly weighing and tracking each of these elements is essential to getting paid for every minute of work you do.

First, be sure to account for all costs directly associated with specific projects, to recapture them in client billing. Your fees should be high enough to recoup all costs for every single client. Don’t forget supplies, postage, and credit card fees, as well as travel costs, including local travel using your own vehicle.

A second, less obvious element is the time spent with a prospect identifying the scope of work and providing a cost estimate. Although this time is freely given until the engagement is agreed upon, you do want your fee to ultimately cover this time. Also, frequently overlooked is time spent researching and thinking about the optimal approach to a job. Projects of greater complexity call for greater fees.

Last, but certainly not least, is the overall mental anguish with which some clients burden you. These clients are the people who alter their demands after the project commences. They fill your inbox with new information and continual status update requests. By tracking client time history, you will uncover true cost.

By appropriately considering each of these aspects, you can bill accordingly and assure optimal earnings from each client.

Measuring and Controlling Customer Acquisition Costs

A large and expanding customer base is the foundation of success for any business.

The first step in laying this foundation is determining where to find prospects. The next is to understand the procedure for turning them into paying customers.

A key in this process is optimizing your costs for acquiring customers. After an initial period of upward growth during the early stages of business operation, obtaining new customers becomes more expensive.

Business owners must evaluate the costs of their endeavors to ensure the effort produces the desired results.

How is this accomplished? By measuring customer value. It is important to periodically take these measurements to understand your marketing effectiveness.

Too many business owners fail to make these calculations. Often, the lack of effort is simply due to lack of understanding, but the process is actually quite simple when broken down into five steps.

1. Calculate your revenue per customer sale. If you perform contract services, simply measure your average revenue per customer project. If you make sales to a variety of random customers, you may rely on a sales software application to identify the average sale per customer.

2. Determine your gross profit margin. This is the percentage of revenue that you retain after paying direct sales costs, such as inventory, materials, and labor. As an example, having a sales price that’s twice your direct costs renders a gross profit margin of 50%.

3. Identify repeat customers. Determine what percentage of your customers make repeat purchases. For instance, if three-fourths of your customers make future purchases, your repeat rate is 75%. Of course, this percentage is often a bit of a guess, especially if you deal with a large number of customers. But you only need to estimate the percentage of new customers who will make at least one more future purchase. Often, merely asking customers if they will return is sufficient to identify a degree of commitment.

4. Determine your gross profit per sale. Multiply the revenue per customer sale by your gross profit margin. Then multiply this figure by 1 plus the repeat customer percentage. The result is the value of each new customer. If none of your customers do repeat business, the value of each new customer is only your gross profit per sale.

That’s because you’re multiplying gross profit per customer sale by 1.0 rather than, say, 1.75 if your repeat rate is 75%.

Sample equation: Suppose your revenue per customer sale is $200 and your gross profit margin is 50%. You have a $100 gross profit per sale. If three-fourths of your customers do repeat business, each new customer brings you on average $175 of value ($100 multiplied by 1.75-since your repeat rate is 75%).

5. Apply the results. The pragmatic conclusion in this sample case is that spending up to $175 to acquire a single customer results in a break-even situation. That’s a sound general spending goal because repeat customers deliver ongoing profits. Regularly reevaluating these acquisition costs will keep marketing efforts and repeat business on track for long-term success.

Are Sales Increasing? Make Sure Funds Reach Your Bottom Line

An entrepreneur who only pays attention to cash inflow is like a driver who is alert on the freeway but closes his eyes on the exit ramp. Both are on a collision course with trouble.

Judicious oversight of cash outflow is vital. Monitoring the handful of variable expenses that tend to significantly contribute to cash drains can help uncover any spending zones that are getting out of control. Five areas in particular deserve focus.

  1. Travel expenses. Meals and travel are a category of frequent excess spending. Track these carefully. This assures that cash from rising sales is not thoughtlessly devoured by business meals or travel, including local transportation costs.
  2. Technology. You don’t need brand-new devices every year to operate your business efficiently. Reducing cash outflow for computers, smartphones, and software contributes substantially to profit.
  3. Office enhancements. You don’t need expensive furniture, especially if you seldom or never meet customers at your location. And spending a lot on finishing off rented space is a mistake that’s unfortunately quite common.
  4. Excessive outsourcing. Although legal and accounting work is best left to professionals, internal handling of many common tasks minimizes cost. Website maintenance, social media presence, document shredding, and office cleaning are duties every entrepreneur can allocate time to complete.
  5. Training expenditures. Training may be required to internally accomplish some activities. However, entrepreneurs should be selective about professional development. Avoid the temptation to attend multiple conventions and seminars. The fees can quickly eat away at your bottom line.

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.