Month: June 2022

Preface: Future cash flows must be transferable and sustainable in order for the business to have value in the marketplace. – https://keystonebt.com/

Building an Advisor Team That Works for You (Not Against Each Other)

Credit: Don Feldman

Building a business is challenging enough as it is. With the right Advisor Team, you can focus on business challenges while your advisors create strategies that help you compound your success in the future. But how do you build an Advisor Team that works for you instead of against each other?
Consider the story of a fictional but representative owner who learned how important it is to have an advisor who can lead the charge.

Animus at AniMals

Annie Mahl was in a bind. Her company, AniMals, which produced specialty dog toys under the tagline “Tough Chew Toys for Rough-Chewing Boys,” had grown into a pet-care powerhouse over the last 20 years. Her financial advisor Grover and business-growth consultant Oscar had served her for most of the company’s history.

When Annie told each advisor that she wanted to sell her business in the near future, they had vastly different reactions. Grover began researching what Annie would need to sell her business within three years and gain financial independence. He presented Annie with spreadsheets of information about the best strategies to pursue, many of which Annie found overwhelming.

Oscar tried instead to convince Annie to stay at the business longer. “You’d be leaving right before the biggest boom. Let me show you how much more you could make if you stay longer.” The deeper Annie got into planning with each advisor, the less comfortable she became about their strategies. She loved her business and wanted to find a buyer who loved its mission just as much as she did, but she also wanted to sell for enough money to retire comfortably.

Grover and Oscar began openly butting heads, with Grover trying to help Annie sell as soon as possible and Oscar trying to help Annie make as much money as possible. Though she initially felt a little guilty (Grover and Oscar were always her go-to guys), she decided to seek the advice of a professional business-and-exit planning advisor, Burt.

Follow the Leader

Annie shared her goals with Burt. She wanted to sell within six years, but she wasn’t sure what her business was worth. She told Burt that it was hard to plan with her trusted advisors disagreeing about strategies so vehemently.  “I trust them and could never let them go. I want them to be a part of this planning. I think they have good intentions, but I’m not sure which strategy is the right one,” she said.

“The right strategy is the one that helps you achieve your goals, not what they assume is best for you,” Burt said.
Annie let out an exasperated laugh.
“Try telling them that,” she responded sarcastically.
“I’d love to,” Burt said. “Can I show you what I have in mind?”

Pulling the Advisor Team Together

Over the next month, Burt met with Annie, Grover, and Oscar. With Annie’s input, Burt laid out Annie’s goals and what it would take to help her pursue them.

“She wants to sell her business within six years. We need to figure out how to make that happen so she can achieve all of her goals.”
“We can do it in three if she would just . . .” Grover began.
“Three years? There’s so much more money to make!” Oscar interjected.
Before they began fighting again, Burt stepped in.
“Our job is to help Annie achieve her goals. And neither of you can help her do that if you think you know what she wants better than her.”
Grover and Oscar sat in silence before Burt continued.
“The first thing we need to do is figure out what this business is really worth. Then we can talk about timelines and payouts.”

Burt presented each step of his planning process, showing Grover and Oscar how they fit into it, and what they’d need to do to fulfill their obligations.
With Burt leading the charge and finding all of the appropriate advisors for Annie’s team, Annie felt more confident in her direction. She hired a business valuator, a tax professional, and an attorney based on Burt’s recommendations.

While she continued to run the business, Burt and the Advisor Team worked together toward Annie’s goals. Grover and Oscar focused on what they needed to do instead of trying to control the process themselves.
The result was a successful sale on Annie’s timeline to a buyer Annie trusted for the amount of money she needed and wanted.

You Aren’t Alone in This

Your advisors must work toward your goals to help you achieve your vision of success. One of the best ways to position your Advisor Team to do so is to work with a dedicated business-and-exit planning advisor. These advisors can guide the process based on what you want and need, and assure that your team works for you, not against each other.

We strive to help business owners identify and prioritize their objectives with respect to their businesses, their employees, and their families. If you are ready to talk about your goals for the future and get insights into how you might achieve those goals, we’d be happy to sit down and talk with you. Please feel free to contact us at your convenience.

Don Feldman is the founder of Keystone Business Transitions, LLC, a Lancaster, PA firm devoted to helping business owners smoothly exit their companies. He has been a CPA for over 25 years and a valuation professional for 20 years. For the last 15 years, Don’s practice has focused on succession and exit planning, including transfers of business interests to family members and key employees, as well as sales to outside buyers.

Preface: “Don’t listen to what they say, go see” – Chinese Proverb

Revised IRS Mileage Rates July 1 to 62.5 Cents Per Mile

Effective July 1, 2022 “The IRS is adjusting the standard mileage rates to better reflect the recent increase in fuel prices,” said IRS Commissioner Chuck Rettig. “We are aware a number of unusual factors have come into play involving fuel costs, and we are taking this special step to help taxpayers, businesses and others who use this rate.”

US Senators. Catherine Cortez Masto, D-Nev., and Michael Bennet, D-Colo were both key influencers of the IRS decision. The belated mileage rate increase as of mid-year 2022 to $0.625 raises the deductible business expense per mile $.04 from the beginning year $0.585. The IRS sees the mileage rate increase necessary when cost accounting for a May average of $4.50 per gallon of gasoline, an increase of nearly 34% since December of 2021. The IRS business mileage rate data since 1991 has increased from $0.275 per mile to the most recent $0.625 per mile, effective July 1, 2022. Of note is 1991 gasoline priced at an average $1.14 per gallon.

The average driver in the US consumes approximately 650 gallons of fuel per year, so an estimated 2022 budget per auto owner for 2022 could be above $3,000 in gasoline purchases.

Although other factors include depreciation, insurance, tires, repairs, and maintenance are computed into this rate, it is noted that actual costs may be more reflective of true costs for business mileage. Rate increases have only occurred three times mid-year since the early 1990s. Taxpayers deducting business mileage rates must keep detailed records and a logbook, or use a mobile app to track beginning and ending mileages to obtain a tax deduction.

Preface: A Banker is a fellow who lends you his umbrella when the sun is shining, but wants it back the minute it begins to rain – Mark Twain.

Umbrellas in Sunny Weather

In recent news, JPMorgan Chase CEO Jamie Dimon remarked that he is preparing the most prominent US bank for an economic hurricane on the horizon and advised listeners [investors] to do the same.

You know, I said there’s storm clouds, but I’m going to change it … it’s a hurricane, Dimon said. While [economic] conditions seem fine at the moment, nobody knows if the hurricane is a minor one or Superstorm Sandy, he added. Dimon continued to tell the roomful of analysts and investors; You’d better brace yourself. JPMorgan is bracing ourselves, and we’re going to be very conservative with our balance sheet. 

What was left unsaid in JPMorgan Chase’s publicized preparations for a financial hurricane is that some banks loan to borrowers on callable terms, i.e., the bank can call you and demand full payment of the remaining loan balance if they deem necessary.  A Banker is a fellow who lends you his umbrella when the sun is shining, but wants it back the minute it begins to rain. Mark Twain understands callable debt. What about you?

Before you become alarmed, this risk is more substantial for business loans and business real estate than home mortgages. So if you are an entrepreneur and haven’t checked the call features on your outstanding business bank debts, you’re advised to do so. Typically banks don’t call a loan if you’re meeting all the payment terms, but Jamie Dimon said he is preparing for significant financial risk(s). So it is plausible in the banking industry that it includes distressed business loans. 

If you pay your debt timely, the bank will likely never call your loan(s). So, for any entrepreneur who wants to plan for the imminent storm, here are a few suggestions. 

Firstly, do you know if you have any demand loans or term call options on your bank debt? Demand loans are often lines of credit that are renewed, say annually. This is the classic cause of business bankruptcy – a non-performing line of credit called when business cash flow is tight. After all, the bank needs to protect its equity. Typically, the prevention formula is to term or amortize your line of credits if unpayable in full after 6 to 9 months. 

A term call option loan is reviewed at specific intervals with a lender review process. If the review process occurs during exceptional cash flow duress, the bank can immediately demand full payment. The purchase of a loan call feature gives the bank protection of its asset(s). If the bank decides that having their money from you is safest, they can demand full payment when call provisions are in the loan terms. Often loans are called when your credit score is deteriorating, but could also remotely occur in an instance if a bank merely assesses your debt as perhaps a developing hurricane risk, to quote Jamie Dimon.

If you have callable debt, take extra precautions to keep your credit rating strong. Make all payments timely, and above all else, build a strong servant relationship with your banker(s). Proverbs 22:7 says, “the borrower is servant to the lender.” Servants have always benefited from a good or great master, so you will benefit from a good or great banker if your business has debt. 

Additionally, “The way to crush the bourgeoisie [middle class] is to grind them between the millstones of taxation and inflation” is a quote from Vladimir Lenin. In the Great Depression of 1929, when banks called loans, there wasn’t much of anything remaining after taxes were paid on the gains for some servants. Typically, inflation aligns with a higher tax environment, the likes of which would be a financial hurricane with present conditions. It’s not just interest rates. Higher taxes reduce cash flow for debt payments too.  

While home mortgage debt terms differ from business debt(s), this is written for entrepreneurs with any business debt level. As Jamie Dimon has warned, The US is approaching an economic environment of volatility and elevated risks. You now know what you should do to prepare. Invest the time to count the cost(s) of your business debt terms, and consult with necessary legal advisors if you have bank debt to assess any pending financial risk(s). 

Preface: Control your expenses better than your competition. This is where you can always find the competitive advantage. – Sam Walton

Arrangements that Recharacterize Taxable Wages as Nontaxable Reimbursements or Allowances

The IRS has provided guidance which clarifies that an arrangement that recharacterizes taxable wages as nontaxable reimbursements or allowances does not satisfy the business connection requirement for accountable expense reimbursement plans.

In general, employee business expense reimbursements that are paid through an employer’s accountable expense reimbursement plan are excluded from the employee’s adjusted gross income. An accountable plan basically requires employees to submit receipts for expenses and repay any advances that exceed substantiated expenses. Amounts paid to employees through an accountable plan are not taxable compensation. Thus, they are not subject to federal or state income taxes or Social Security taxes, or employer payroll taxes and withholding.

On the other hand, business expense reimbursements paid through a system that does not meet the specific requirements for accountable plans are considered paid under a nonaccountable plan, and are treated as taxable compensation. An employer can have a reimbursement plan that is considered accountable in part and nonaccountable in part.

A reimbursement plan must meet three requirements in order to be considered an accountable expense allowance arrangement:
• reimbursements must have a business connection;
• reimbursements must be substantiated; and
• employees must return reimbursements in excess of expenses incurred.

An arrangement satisfies the business connection requirement if it provides advances, allowances, or reimbursements only for business expenses that are allowable as deductions, and that are paid or incurred by the employee in connection with the performance of services as an employee of the employer. Therefore, not only must an employee actually pay or incur a deductible business expense, but the expense must arise in connection with the employment for that employer.

The business connection requirement will not be satisfied if a payor pays an amount to an employee regardless of whether the employee incurs or is reasonably expected to incur deductible business expenses. Failure to meet this reimbursement requirement of business connection is referred to as wage recharacterization because the amount being paid is not an expense reimbursement but rather a substitute for an amount that would otherwise be paid as wages.

The IRS guidance includes four situations, three of which illustrate arrangements that impermissibly recharacterize wages such that the arrangements are not accountable plans. A fourth situation illustrates an arrangement that does not impermissibly recharacterize wages. In this arrangement, an employer prospectively altered its compensation structure to include a reimbursement arrangement.

Because of the difference in tax treatment of reimbursements under an accountable plan versus a nonaccountable plan, it is important to review your reimbursement policies. Please call our office with questions on your options under this IRS guidance.