Planning

THIS IS THE FINAL 2018 ISSUE of Upsize Magazine.

Soon, we turn the page on a new calendar year.

We’ve been reminiscing about client situations we were drawn into the past 12 months. Many of them remind us of the wisdom of the very first recommendation we deliver to every new client — make time to work on the business, not just in it.

Working on your business is time spent creating strategies to increase business value, adding new revenue streams, and plotting the future direction of your company and is what we call “Aha!” time. Dealing with avoidable problems while working in the business are often what we call “Uh-Oh” time. Many of these “UH-OH” moments are truly avoidable.

Examples of 2018 “UH-OH” moments:

A client registered a trade name (doing business as) and built a strong business brand under that name, but failed to file the $25 annual renewal of the trade name with the Secretary of State. Another business, even a competitor, can find the name available in Minnesota, and file for the use. The result? Significant expenditures to litigate or even greater costs to “re-brand” using a new name.

The IRS, upon audit, ruled that the rent paid to a shareholder for use of his building, based on a 20-year-old lease agreement, was valid, and the annual increases in rent paid to him by the company, not documented in the original lease, nor in corporate minutes, were deemed by the IRS to be dividends, taxable on his personal return, and not deductible on his company’s return. The result is a significant additional tax liability.

A company, owned two thirds by one spouse, one third by the other, nearly implodes when the minority ownership spouse files for divorce, and demands a full value buy-out, in cash, for shares owned.  The result is massive legal fees and considerable time taken away from the majority owner to manage the business.

The devastating effects on the value of business could have been avoided with a solid buy-sell agreement, even between husband and wife, to spell out how shareholders are bought out and avoid damaging business value during the process.

A company deferred compensation plan was adopted years ago. Sloppy record keeping and failure to amend the plan to comply with current regulations results in IRS disqualification of the plan and current taxation of each employee participant’s entire balance. The results of employer neglect results in a hit to employee morale, litigation against the sponsoring employer, and diminished business financial results.

So, what gives? You! You either get too busy or too lazy and ignore basic business hygiene. The situations described above were avoidable and so this is a sermon about business hygiene.

  [A note to our friends in other professions — these are sample to-do lists, and are not intended to be all-inclusive; we do encourage all of you to proactively initiate annual meetings with your significant clients with specific agendas.]

Attorneys:

1. Review your Inc., LLC, LLP documents, and business trade name registrations to ensure they are current and amended, if necessary, to comply with current law and business circumstances
2. Create or update owner buy-sell documents to ensure they are current and relevant to current business conditions; a solid buy-sell agreement is essential
3. Review and update employment contracts, including non-compete/non-solicit provisions
4. Ensure that leases and contracts with vendors and customers are current and relevant
5. Ensure patents, trademarks and all intellectual property are protected
6. Engage lawyer, accountant and wealth adviser in a collaborative update of your estate plan

Accountants:

1. Request a projection of current tax liabilities and recommendations to mitigate the amount
2. Explore possible changes in current accounting methods (LIFO) and potential credits and incentives (R&D, energy, ICDISC, etc.), to reduce or defer future income taxes
3. Obtain an estimate of the business’ value to help craft a relevant buy-sell agreement and to assist with creating or updating your personal financial plan and estate plan
4. Ask for recommendations on internal controls
5. Request assistance with cash flow projections, to assure current financing is adequate and avoid surprising your banker when you run out of liquidity
6. Help determine if waivers of bank covenants are likely, also to avoid surprising your bank at the last minute

Wealth advisers:

1. Create or update personal financial plan
2. Reset risk tolerance profile and rebalance portfolio
3. Seek advice regarding adequacy and ownership of disability and life insurance

Banks:

1. Inquire about the bank’s credit evaluation of your business and recommendations to improve it
2. Discuss your business plan and any changes that may impact the bank
3. Explore options to improve cash flow through restructuring long-term debt or terming out short-term debt
4. Learn about the bank’s capabilities for helping your business with cash management and treasury functions

Group plan administrators:

1. Ensure all plans meet current regulatory requirements, pertinent participant elections are on file and all required filings have been made with IRS and the Department of Labor
2. Discuss how plans can be modified to reduce cost, enhance benefits, and/or increase employee participation

Property and Casualty Advisers

1. Request a risk assessment, to determine if all exposures (i.e., umbrella liability, employee business use of personal vehicles, employee theft, cyber, etc.) are adequately considered and covered with appropriate limits
2. Review workers’ compensation claims history and classifications and seek recommendations to reduce cost of coverage
3. Ask for recommendations from the insurer’s underwriter to reduce risk and thus reduce premiums

Technology consultants

1. Request a security/intrusion review and recommendations to close gaps.
2. Determine that all user software licenses are current

With the holidays approaching, make a resolution to improve your business hygiene. It will help avoid time spent on the “Uh-Oh!” and create more time for the “Aha!”