McKonomics

Buff Up Your Business Before Putting it on the Market - Positioning Your Business For a Future Sale

 
As the economy rebounds, the Merger & Acquisition markets will continue to heat up. Although some buyers remain cautious, others are scooping up businesses -- in some cases, at a premium. If the thought of selling your company has crossed your mind, now is the time to begin positioning your business for a future sale.

 

In a best-case scenario, preparations should begin months, even years, in advance. Even if you must sell quickly, it's important to avoid the appearance of a distress sale. You should begin as soon as possible to get your business in shape so you can maximize the price.

 

Here are a dozen questions to consider:

The 2010-2011 Pennsylvania State Budget

Less than a week after the due date, Governor Ed Rendell signed his final Pennsylvania state budget at Elmwood Elementary School in Mechanicsburg, Pennsylvania, emphasizing the Commonwealth's continued commitment to education. His budget displayed this fact in that it brought about a $250 million increase in basic education spending. However, overall spending for many programs was significantly decreased due to lower revenue expectations.

 

The 2010-2011 enacted state budget is built on a few assumptions. Pennsylvania anticipates an additional $850 million from the federal government for Pennsylvania's Medicaid program. Currently, the U.S. Congress has not yet allocated these funds. The General Assembly and the Rendell administration agreed to meet this October to pass a severance tax on the extraction of natural gas from the Marcellus Shale which would be effective January 1, 2011. 

Does Your Organization Qualify for the New Health Tax Credit?

The recently enacted healthcare legislation includes a new tax credit for qualifying small employers. The credit can cover up to 35 percent of employee health insurance costs. It is available for tax years beginning in 2010, and can be claimed for eligible costs incurred before the healthcare legislation became law.

 

Does your company qualify for the credit? As with most tax topics, there's no simple answer. Here are the qualification rules.

 

Basics About the Credit

Hiring Summer Help? Tax Breaks and Rules to Keep in Mind

With the summer now here, you may be expanding your workforce to accommodate increased seasonal demand. Fortunately, there's usually a good source of available labor, including high school and college students, workers recently laid off, and retirees looking to pick up some extra cash. You might even keep summer interns on board longer if they work out to your satisfaction.

 

Be aware that certain legal requirements apply when you add summer help to the staff. In particular, your business must comply with federal and state laws regarding minimum pay standards, workers' compensation and discriminatory practices (see right-hand article). However, if you stay within the legal boundaries, you can realize extra tax benefits for hiring certain workers this summer.

 

The three main tax breaks for employers are the Work Opportunity Tax Credit (WOTC), the payroll tax exemption for previously-unemployed workers and the new tax credit for retaining those workers:

Think You Know What Your Business is Worth?

Many business owners believe they know what their business is worth. Some may have a solid foundation for that belief. However, this belief is often derived from third party information on what they "heard another business sold for." They apply some multiple of revenue or earnings before interest, taxes, depreciation, and amortization (commonly referred to as EBITDA) or other benchmark derived from a transaction to their business and...VIOLA...they know what their business is worth!  In most instances this could not be further from the truth.

 

Without specific knowledge of the facts and circumstances and timing of the transaction, as well as the motivation of BOTH the buyer and seller, you will have a cloudy picture of value at best. We firmly believe that the value of any business cannot even begin to be determined until you can answer a few simple questions we all learned in our elementary school English classes: Who, What, Where, When, and Why.

Let's look at these questions briefly and see how they can potentially impact the value of a business.

Two Valuable Hiring Incentives

Keeping money in the family is always a worthy goal. If you're a business owner, one way to accomplish this is to hire relatives. As an added bonus, if you act quickly, you might qualify for two temporary payroll tax breaks. Here is what you need to know.

 

Social Security Tax Break for New Hires

 

The Hiring Incentives to Restore Employment (HIRE) Act grants a temporary employer Social Security exemption for wages paid by a qualified employer to an eligible new employee between March 19 and December 31, 2010. Specifically, such wages are exempt from the 6.2 percent employer portion of Social Security tax that your business pays as part of the FICA tax.

SEP IRA - The Basics

Over the past few years, many taxpayers have made the switch from employee to self-employed. Although much can be gained from that change, there are also a few things that can be lost, including being covered by an employer's retirement plan.

 

The SEP IRA is a retirement plan designed to benefit self-employed individuals and small business owners. Sole proprietorships, S and C corporations, partnerships and LLCs qualify.

 

SEP IRA contribution limits

 

In 2010 a SEP IRA has a contribution limit of $49,000. Contributions to a SEP IRA are generally 100% tax deductible and investment earnings in a SEP IRA grow taxed deferred. Withdrawals after age 59 1/2 are taxed as ordinary income. Withdrawals prior to age 59 1/2 may incur a 10% IRS penalty as well as income taxes.

Easing into Retirement

For most of your working life, you've looked forward to the day when you can quit your job and start enjoying retirement. But in recent years, talk of longer life expectancies, uncertain Social Security benefits, declining pension benefits, unknown inflation rates, and low retirement savings made retiring at a relatively young age seem difficult. Then, in the past couple of years, declining investment and home values made it seem even more difficult to retire at any age. More and more people are coming to the conclusion that either retiring later or continuing to work during retirement is necessary.

 

Working doesn't necessarily mean that you have to stay with your current employer. Rather, many individuals are taking on totally different jobs, which can allow them to try something new, provide more free time by working less, or ensure less stress. Besides the nonfinancial reasons for working, there are several financial reasons:

 

· You have more time to save. Each additional year you work is an additional year you can continue to save for retirement. Those age 50 and over have additional means for saving, with annual catch-up contributions of $1,000 for individual retirement accounts and $5,500 for 401(k) plans in 2010.

· You shorten your retirement period. The longer you work, the less time you'll spend in retirement, which means you need less money to fund that retirement.

· You can delay Social Security benefits. Each additional year you wait to take Social Security benefits, up to age 70, will permanently increase your monthly benefit.

· You keep health insurance benefits. One of the most significant costs in retirement is health care, and you can delay that cost by working at a job that provides this benefit.

Watch Out for Unexpected Tax

Stockholders who lend money to their C corporations are expected to charge interest on the loan at the market rate. Those who charge less -- or nothing -- can be taxed as if they charged interest at a rate that is periodically determined by the IRS under federal law.

 

You already know that taxes can be imposed on money taken out of your C corporation. But not all business owners know they can also be taxed on money put into the corporation in the form of a loan.

 

Specifically, the difference between that interest rate and the lesser (or zero) rate actually charged by a stockholder is taxable to the stockholder as interest income. The corporation is also allowed a corresponding deduction.

 

This "below market loan" rule is triggered once the total loan balance goes over $10,000. Paying your corporation's bills, without getting reimbursed, also counts as a loan.

 

The IRS is alerted to these type of loans by the corporation's tax return, which asks about "loans from stockholders." Here are three quick tips to avoid problems:

 

· Review any loans or expense advances made to your corporation. Consider whether the outstanding balance should be reduced to $10,000 or less.

 

· You may want to convert all, or part, of the loan to a capital contribution or purchase of stock. Consult with your tax adviser about the best way to capitalize your business.

 

· Consider formalizing the transaction by fixing an interest rate and payment schedule. Your tax adviser can suggest an acceptable interest rate that will stop the IRS from taxing you at a higher rate later if interest rates rise while the debt is outstanding.

 

· Keep good records showing that loan payments were made on schedule.

Corporations: Good Time for Tax-Wise Transactions (Take Advantage of Historically Low Rates Now)

If you own shares in a closely-held C corporation, you probably know the 2010 federal income tax rate structure is quite favorable for these reasons:

 

· If your company pays you a taxable dividend this year, the maximum federal income tax rate is only 15 percent; and

 

· That same 15 percent maximum rate applies to 2010 corporate payouts or stock sales that generate long-term capital gains. 

 

Dividend and Capital Gains Taxes Are Almost Certain to Go Up

 

With the passage of the massive healthcare bill, odds are the current taxpayer-friendly picture will only last through the end of this year. Unless Congress takes action to extend the status quo, higher taxes on dividends and long-term gains will kick in on January 1, 2011, when the "Bush tax cuts" are scheduled to expire.