RISKY BUSINESS: DON’T LOSE YOUR LIFE’S WORK BECAUSE YOU DO NOT HAVE A BUY SELL AND PROPER INSURANCE; ROB SLEE OF THE MIDAS NATION

Rob Slee and MidasNation. Many of you know that we are great fans of Rob Slee and the Midas Nation, a nationwide group of private business owners dedicated to promoting the American dream for private businesses. Privately owned businesses provide most of the growth in employment, represent a larger portion of the economy than the companies on the stock markets and are the key to our economic prosperity. But, most of the discussion of business in the media is about publicly owned companies and it is very difficult to obtain reliable and usable information about what to do in a privately owned business. Rob Slee is the number one expert on what is happening in privately owned businesses in the U.S. Rob Slee is a private business owner himself who has successfully operated, bought and sold many businesses over the years; his expertise is founded on actual experience and research meeting the highest standards. If you want help with your small business you should sign up to be a member of the Midas Nation. Go to http://www.midasnation.com/. His MidasNotes of this week are so timely and to the point, we needed to share them with you. This week’s MidasNotes was written in cooperation with an expert in the field of business succession planning.

Slee MidasNation Notes for February 22, 2010:
As a Member of MidasNation™, you are cordially invited to read MidasNotes – the written voice of MidasNation, updated weekly at MidasNation.com. MidasNation Founder Rob Slee is widely recognized as the country's foremost authority on the capitalization and financial management of privately owned companies. And that is just the beginning. Read Rob and other Midas Managers' views on marketing, operations, skill leverage and the legal and economic environments affecting private business.
Following is the 21st Note from MidasNation, written by Rob Slee:

February 22, 2010: Risky Business
I’ve been yapping a lot lately about risk. I’ve always believed that most business owners are a single phone call away from oblivion. Let’s spend some time today on what we can do to minimize risk of ownership.

What’s next? What other risks can possibly blindside business owners today? Beyond the economic threats, competitive pressures and increasing taxes business owners face, there are other contingencies equally out of our control, but can be planned for and, thereby, mitigated. Risk management is more important than ever. As we lay in our foxholes and wait for the private capital markets to follow their 10 year transfer cycle, there are important steps to take immediately to protect business value and make the business ready when the timing is right.

Risk Management
What would happen to your business if your partner or co-shareholder met an untimely death? Do you have a Shareholders Agreement (aka Buy/Sell)? Is it up to date? Does the price reflect today’s valuation? Unless your agreement has been reviewed in the last 12 to 18 months, it may pose a serious threat to you, your business and your family. Is the agreement funded with life insurance to give it teeth and make it operative? Without proper funding, the burden of additional debt assumed by you, your partner(s) or the business could be crushing. A properly structured and funded buy/sell agreement protects the business, the family of the deceased shareholder and the surviving shareholders and investors from losing value.

Cost of Insurance
Business Owners have found that the cost of insurance (COI) has come down substantially over the years and that a review of all corporate and personal life insurance policies is essential. Policyholders have saved thousands of dollars (in some case hundreds of thousands of dollars) over the life of their policies by consolidating and restructuring their existing insurance and making sure that critical gaps do not exist.

Loss of Key People
Another potential risk is the loss of a key employee. Without the talent, loyalty and ongoing contribution of business executives, CFOs and high level operations people, the business cannot run. By insuring the lives of these key people for their replacement value, it will ensure that the business will continue to run smoothly and maintain value.

Similarly, what will happen if the banks call in loans and mortgages that owners have signed for and guaranteed personally? An infusion of cash at a critical point in time (such as the death of the borrower or guarantor) can make the difference between business survival and failure.

Non-Equity Performance Package
How do you attract, retain and reward key employees? Everyone offers the typical package of 401(k), medical, dental, etc. An employer can make a difference by offering special incentive programs to reward long-term retention. This can be an excellent alternative to giving up equity or cash now. These non-equity performance packages can also be designed creatively to align with corporate growth goals and increased revenues and profitability. The better the employee performs, the bigger the payoff in the end. These programs can also serve as a sort of “golden handcuffs” in that if the employee leaves before an agreed upon timeframe, benefits will be reduced or forfeited.

Policy Reviews
Last but not least, any personal or trust-owned life insurance should be reviewed for cost effectiveness. In a decreasing interest rate environment, many of these policies are not performing as originally expected. Even the finest insurers invest their reserves in fixed income investments that have experienced the same declining interest and dividend rates we all have.

An experienced financial professional can help you understand your options. Should you skip a premium, borrow or withdraw against cash value? Reduce the amount of coverage? Utilize a tax-free exchange? Surrender the policy? Sell the policy? A qualified insurance professional can help answer these questions and potentially save you money while protecting your family and your business.

Value enhancement is also about avoiding risk. Loss of life is, arguably, the biggest risk out there. Don’t let it cause you to miss your window of opportunity to maximize sales price during the next transfer cycle. Plan ahead and address these contingencies. If you have addressed them in the past, now is the time to review and get a second opinion to make sure your dollars are spent effectively and business value is protected.

-Rob

Visit MidasNotes weekly to read the latest from MidasNation Founder Rob Slee and discover other Midas Managers' views on various issues affecting private business.

Pay Lower Taxes Now, Higher Taxes Later: President Obama’s Tax Proposals and Expiration of the Bush Tax Cuts

Obama’s Tax Proposals. Many will pay lower taxes now and higher taxes later whether or not President Obama’s Fiscal Year 2011 Revenue Proposals (translated: tax changes) becomes law. Outlined in generalities in more than 150 pages, President Obama proposes tax increases and tax decreases for businesses and individuals and many complex provisions whose precise impact and details will not be known for years.

Increases for Higher Income Tax Payers. Overall, the revenue changes produce a net increase in tax revenue to the federal government from 2011 to 2020 of $1,103,250,000,000 dollars. Of this, $969,467,000,000 or almost 88% of the new tax revenue comes from upper income individuals. This is done by exempting high income tax payers from the Bush tax cuts set to expire at the end of this year. The President proposes to reinstate the maximum rate of 39.6% on earned income from the Clinton administration as opposed to the 35% rate under the Bush tax cuts. This maximum rate would apply to taxable incomes over $373,650 for married persons filing jointly and single fliers. This 39.6% rate is projected to produce about a third of the new revenue to come from the increase of taxes on upper income people. There will be a top 36% rate, up from 33%, which will apply to married filed jointly with $250,000 of annual income (less the standard deduction and two personal deductions) and $200,000 for single filers, less the standard deduction and one personal exemption. In addition, for the $250,000/$200,000 income and above group, there will limitations on itemized deductions, phase out of the personal exemption, a 20% capital gains rate and limitation of the value of a deduction to a maximum of 28%. These items raise $642 billion over the next ten years, the other two thirds of the new $970 billion of revenue from upper income tax payers. Many people who think that they will not be in the $250,000/$200,000 brackets will be shocked when they find that when they sell real estate or stocks at a profit that this could move them into these brackets in the year they make these sales.

Extension of the Bush Tax Cuts. In a short paragraph on page 147 of the Revenue Proposals, President Obama proposes an extension of the Bush tax cuts for those below the $250,000/$200,000 and above brackets. As promised by him during his campaign, he said he would not raise taxes on the middle and lower classes. This extension of the Bush tax cuts, together with indexing of the Alternative Minimum Tax, will cost about $3.8 trillion of lost revenue over 2011-2020, or a loss of nearly four times the revenue increase from all of the other provisions in the 146 pages before the one page on the AMT and the Bush tax cuts. The largest item is a revenue loss of about $1.6 trillion resulting from the Bush tax cuts for middle and lower income tax payers. The Bush tax cuts took millions off of the tax roles and provided large tax rate reductions for lower and middle income earners; President Obama plans to continue these tax breaks. This results basically in an income transfer of about $970 billion from upper income taxpayers and $2.8 trillion from government deficits to middle and lower income taxpayers of about $3.8 trillion over ten years.

Will it Pass. Congress will have their own ideas about tax changes and there is a lot of talk about an omnibus tax bill. Such a bill will have tax increases, tax loopholes, closing of tax loopholes and hundreds of pages of nearly indecipherable tax talk. Republicans will probably vote as a block against the bill as a “tax increase” and the Republicans who vote for it will fear a tea party challenger in their Republican primary. Many Democrats will worry about reelection if they vote for a large tax increase. Of course, the fear of voting for a tax increase ignores that the President’s proposal is really the continuation of the Bush tax cuts for most people and these large tax cuts contribute substantially to the increasing deficit.

Best Guess. The bigger the tax bill, the more likely it will fail. From the standpoint of the budget deficit, if Congress is not able to agree on a tax bill in 2010, then the Bush tax cuts will expire at the end of 2010 and in 2011 and thereafter, there will be a huge increase in projected federal revenue. Unless there is a substantial decrease in the rate of increase in federal spending and a boom in the economy, the Bush tax cuts can not be sustained. Members of Congress can point out that they voted against the proposed tax increase bill. My best guess, based upon years in politics, is that no major tax bill will pass this year and the Bush tax cuts will expire at the end of the year.

Action Item. Whether the President’s proposals pass or the Bush tax cuts expire, you will be paying a lot more taxes in the future. If you have capital gains or income over which you have the option to be taxed in 2010, it may be a good bet to pay taxes now, rather than later. This is completely different from the usual advice that it is best to postpone paying taxes. Contact us and we will assemble your team of advisors to implement a tax strategy designed around your needs.