How can a business owner incentivize without giving up equity?

This question has been asked by thousands, if not millions of business owners. We all have that key employee, the one that if we lost them, the business would falter, even possibly fail, without their influence and activity in our business. This makes us very vulnerable and sometimes a little desperate to show our love.

The usual answer is to give them a piece of the pie—but that is like marriage, and we all know how most marriages end up. Giving just one percent of an ongoing business gives the new shareholder the right to harass, interfere, and annoy the majority business owner endlessly. So why do it?

Introducing the phantom buy sell. Instead of giving away real equity through a buy sell agreement, try having the legal contract effect the following: Give away participation in the percent change in the profit of a company from year to year and the change in value.

For example, John is my key employee who has been pushing for recognition that he is valuable through ownership and money. I decide to give John a 50 percent interest in the profit and change in business value, calculated every two years. The first step is to quantify the value of the business through a third party valuation. This is a tax deductible expense that can be used for estate planning or sale of the business at some point in the future. Let’s say the value is set at $5,000,000. The profit from 2010 was $500,000. In 2012 the company is evaluated again (much quicker and cheaper this time) and the value is $5,400,000. John now has value of $200,000 plus half of two years’ profit. He is actively participating in the growth, has more money, and is recognized for his importance in the business and I retain total and complete control of my business. Everyone wins!

FIVE TYPES OF INSURANCE EVERY BUSINESS OWNER NEEDS BUT MAY NOT BE SOLD. . .

Insurance Brokers are everywhere it seems, especially if you network so this may seem like the most unlikely article ever…

How could it be that there are insurance policies available that a broker does not always sell to you, but you actually need it?  Amazing but true…  I have reviewed 100’s of businesses over my tenure as an advisor and here are a few types of insurance that are extremely useful and often missing…

Here we go!

•  Business Interruption Insurance – This type of contract, purchased from a business insurance (property and casualty) broker allows a business owner to open a new office / shop / location when the place where the business is maintained becomes damaged due to fire, power outage etc. over a long period.   Very useful and quite cheap
• Umbrella Insurance, personal and business - This type of contract, purchased from a business insurance (property and casualty) broker covers litigation amounts in excess to your liability coverage.  For example, if your vehicles coverage in NY is 300,000/500,000 and you are successfully sued for $1,000,000, the balance ($500,000) would come from the umbrella policy, not your savings or income over decades.
• Business Overhead Expense Insurance - This type of contract, purchased from a disability insurance broker will pay upon claim all of the pre-approved regular the monthly expenses of a small business up to $50,000 a month, in the event that the business owner is disabled from an illness or accident for up to two years.
• Short Term Disability Voluntary Insurance – This type of contract, purchased from a disability insurance broker (not all sell this) is paid for by the employee through payroll deduction and pays cash to the insured within 10 days for loss of work due to illness or accident thus preventing that same employee from coming in to work sick (hiding it), claiming they got injured or sick on the job and hurting your workers comp premiums.  This is very very useful, especially with blue collar employees, but must be offered non-discriminatorily to all employees.

See you next week for another blog just for small business owners.  Please join me every Wednesday at 8 PM EST for a 13 part Teleseminar About Financial Planning FREE for Readers of the New York Enterprise report…  Go to www.askjeannebrutman.com to register.   The only thing worse than paying for financial advice, is not paying for advice because you may be “sold” something that may or may not be in your best interest.  Take care and make some profit!  Warmly, Jeanne

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PLANNING CAN HURT US

This can really hurt us, and our families when we embark on large planning that impacts the people in our business and personal lives.

A few examples...

• Estate Planning
• Buying, selling or transferring part of our business / intellectual property to another
• Financial Planning
• Real estate purchase or transfers
• Divorce or separation
• Retirement Asset Management

 
An example from 8 years ago:  I was referred to a business owner in construction several years ago who owned several real estate properties here in NYC.  His son was graduating college, and to give him a boost in his credit score and as a graduation gift, he transferred part of the ownership to his son.   Four years later the son got married, and four years after that filed for divorce.  The soon to be ex-wife now owns half of the son's property (no pre-nup) and that property specifically housed one of the businesses.   It was not a friendly divorce and caused major havoc on the business and stress to the other partner of the business. This business owner would have been best served by telling his CPA, Lawyer when gifting, when his son was getting married and when the marriage was slipping into dysfunction.

Because we (business owners) tend to be take charge kind of people, we do not often think through how our actions, though done at the time with great intentions, impact the people and assets in our life.  All that we do is intertwined with our family, professionals, business partners, and assets.  Keep this in mind, in all of your actions as these mistakes cause wasted time, money, resources, attention and stress for yourself and those who surround you...

See you next week for another mistake to avoid.  Every Wednesday at * PM EST I have a teleseminar  on  Financial Planning Complimentary for Readers of the New York Enterprise report…  Go to

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TOP 7 STRATEGIES TO INCREASE YOUR CREDIT SCORE

1.  It may seem like a hassle to monitor your credit report every year because you have to contact the three agencies separately. Well, you can just call the Federal hotline at 877-322-8228 or complete the Annual Credit Report Request at www.ftc.gov/bcp/conline/include/requestformfinal.pdf and mail it to: Annual Credit Report Request Service, P.O. Box 105281, Atlanta, GA 30348-5281. Much easier!

2.  If you are going to be late on a payment, pay it before the 30 day late point as it will be reported if not received after that point.

3.  The game of transferring balances on new cards with 0% or low teaser interest rate actually hurts your credit rating as you are increasing your available credit without your income going up proportionately.

4.  Do not cancel old credit cards that you have had for a long time, even if you have not used them in a long time. The length of time you have had a credit history is just as important as some other pieces. If you feel you have too many open, cancel the newest cards.

5.  The key to a healthy credit score is having different types of credit. For example, a mortgage is long term, car or student loan is intermediate and credit cards are usually considered short term. It is the balance of these different types of credit, and their consistent payment that builds a really strong credit rating over time.

6.  If your credit score is less than desired, try to get a secured line credit card from a vendor. This is a type of card where you have deposited cash to back up the credit limit. Over time with consistent paying you can build trust back to get a more traditional type card that is not dependent on cash to secure the credit limit.

7.  Avoid store credit cards that are offered usually at checkout for quickie discounts while shopping. The interest rates are often quite high as are the credit limits, which can lull shoppers into a false sense that they are saving money. They also have shorter billing cycles, thus the consumer is prey to falling behind easier, which of course impacts your credit score negatively, all for a one time limited discount!

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40 COMMON RETIREMENT MISTAKES, NOT NECESSARILY IN ORDER. . .

• Using a 10.2% rate of return
• Market Definition of Diversity
• Assuming you have to invest aggressively to make money last
• Assuming Estate Planning is about Taxes
• Avoiding Annuities – The value of a personal pension
• Not Planning for Medical Custodial Needs
• Relying upon Pensions – Federal / State / Corporate
• Assuming inflation is 3 – 5%, trusting the CPI
• Buying Term that lasts just until the kids are out of the home
• Not owning Real Estate outright by age 60
• Assuming retirement is at age 65 or later
• Forgetting to plan for financial dependents
• Not understanding the power of grandchildren
• Not planning for age 100
• Assuming you will be in a lower tax bracket at retirement
• Avoiding Roth Conversions
• Thinking bonds are conservative
• Not Respecting the raw power of market downturns
• Assuming the worst is over for the debt  / real estate crisis
• Forgetting still living parents
• Assuming your Business will sell
• Ignoring team work
• Allowing clients to avoid annual planning
• Assuming you can retire, especially type A’s
• Remember frugality
• Trusting historical market trends – the speed of communication and information
• Not planning for out of pocket medical costs
• Not keeping up to date – New blended products
• Baby Boomer Optimism
• Assuming cost of living goes down in retirement
• Forgetting lawsuits, asset protection in a litigious society
• Paying for college before locking up retirement savings
• Using price to make financial product purchasing decisions
• Trusting in the stability of the US government
• Avoiding bankruptcy to remove debt
• Planning for men and women in the same manner
• Using contemporaries for your professionals – Go younger
• The power of the voting class and entitlements
• Assuming the rich do not need to plan for custodial medical costs

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THE 7 TIPS TO BUILD A HEALTHY SAVING ACCOUNT & YOUR PERSONAL WEALTH                                         

I have often been told how difficult it is to save money, whether you live in Topeka Kansas or New York City. 

Here are a few steps that if taken will absolutely put you on the path to excess cash and personal savings. 

It takes a little work and faith, but it always works!  Instead of being managed by your bills and living check to check you will become a money manager and have savings of your own! 

• This is the yuckiest part: I need you to do a budget, a real budget. Consider the usual:  Housing, Electricity, garbage, water, landline phone, cable, internet, cellular phone, child care or support, food (grocery, eating at work, ordering in), transportation (car payments, gas, tolls, parking or bus, subway, transit, cab), insurance outside of deductions from paycheck (renters, home, umbrella, car, health, dental/vision, life, disability, Medicare, long term care etc…) debt (car, student loans, credit cards, personal) drug store, prescriptions, pet supplies, home or car maintenance, clothing, dry cleaning, laundry, and lastly charity, entertainment (movies, eating out, plays, books, classes gifts etc…).  Please account for 5 or 10% if possible to go towards savings.  We will get to this in a later step.  Whew!  There may be more but you get the idea!  Note: Do not spend more than 20% of what you make on debt.  If you only focus on paying off debt, you get what you focus on!

• Open a bank account where you have your checking account where you can easily transfer funds monthly without monthly charges. This new account will be for deposits only. Every time you get money, either by paycheck, rebates, tax returns gifts or cash, deposit all of that in this account.  Let us call it the Deposit Account!

• In your present checking account, use for writing bills and only writing bills.  In step one you discovered your monthly expenses.  Let us say it is $4000 a month. Only transfer from your deposit account $4000 dollars.  Not a penny more.  This is now your Monthly Account!

• Remove from your wallet all the following:  all credit cards but one for emergency (defined as life threatening need such as need to get towed because of car accident), all cash except for $40 that you only use when you cannot use a debit card. For all spending use a debit card linked to your Monthly Account. Thus you can only spend the $4000 that month and every month. 

• Open an account with a high yield savings bank like Emigrant, ING or Smartypig.com. This is where the 5 or 10% gets deducted from your monthly account for savings. This is done automatically like a payment so you do not have to think about it. Treat it like another bill, but you are paying yourself!  This is your 6 month account, or your Freedom account. Think of how free you will feel if you have 6 months cash saved in case you lose your job, want to travel or want to move somewhere new...  Once you have 6 times what you spend in this account, you can allocate your 5 or 10% to other uses like investing, buying real estate, starting a business or perhaps collectibles. Who knows, but you will become an investor, not a consumer only!

• If you have one time annual expenses that are fixed and budgetable here is a great idea!  Use ING or Smartypig.com to budget that annual expense by setting up a separate savings account. For example, let us say you want to take a vacation for $1500in 8 months. Smartypig will calculate based upon present interest rates how much to deduct monthly from your savings account you need to save in order to reach your goal.   It will automatically deduct ~$180 a month for 8 months so that Voila! With 8 easy deductions, plus interest, you have your vacation money when you need it! This can be done for anything, taxes, Christmas, a car… you get the idea!  It is not a bad thing to have many accounts.  In fact it shows that you know how to manage your money, not be managed by your bills!  Isn’t that what we all want?

• This is the Wow factor…  If you follow the above steps, you will notice that your Deposit Account will have excess money in it over time. This can be added periodically to savings, or as you progress, put towards your new investments! You are building wealth!

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*All investment advice given by Jeanne Brutman is just opinion. Please consult with your financial professional for a more thorough discussion of what is appropriate for you.

Jeanne Brutman is a fully independent Financial Planner in the New York area who advises people on how to grow their personal net worth through Easy, Step by Step Education and Decisions that build their wealth and security over the short and long term.  Jeanne can be emailed at jeanne@jeannebrutman.com or visit her at her website www.askjeannebrutman.com for useful tools and tip