What Is Your Business Worth?

The market for selling small businesses improved slightly last year, but buyers typically still had the upper hand. The median selling price rose 3.3% to $155,000, while the median revenue for firms sold in 2011 rose by 6.7%.¹

Lenders generally require a professional valuation before extending credit to owners and buyers. But even if a loan or a sale is not in your immediate future, a precise valuation could be useful for effective business, tax, and retirement planning.

Preparing for potential changes. When a firm with several owners has negotiated a buy-sell agreement, the buyout value should be updated regularly to reflect market conditions and the company’s financial position.

You may also need to seek a business valuation if you plan to implement an employee stock ownership or profit-sharing plan, or for litigation support in the event of a divorce or other type of legal dispute. For tax purposes, it may be necessary to use one of the specific valuation approaches considered acceptable by the IRS.

Conserving your estate. One way to help reduce exposure to potential future estate taxes is to begin transferring ownership of a family business to the next generation during your lifetime. An accurate valuation may be needed to help ensure that gifts of partnership shares conform to the annual federal gift tax exclusion (currently $13,000 per year, per person).

Protecting your wealth and your retirement. It’s generally considered risky for investors to hold more than 20% to 30% of their net worth in a single asset, but many entrepreneurs don’t think twice about having a much larger proportion of their personal wealth in their own businesses.² Investing outside your firm could help insulate your total financial picture from risks associated with your business’s distinct market.

Understanding the true market value of your company may help you make more informed decisions about how much of your income you should save and invest for retirement. It might also lead you to adjust your portfolio in light of the performance of your enterprise and/or your retirement goals.

1) BizBuySell.com, January 4, 2012
2) The Wall Street Journal, December 17, 2011

The information in this article is not intended as tax or legal advice, and it may not be relied on for the purpose of avoiding any federal tax penalties. You are encouraged to seek tax or legal advice from an independent Naperville Business advisor. The content is derived from sources believed to be accurate. Neither the information presented nor any opinion expressed constitutes a solicitation for the purchase or sale of any security. This material was written and prepared by Emerald. Copyright © 2012 Emerald Connect, Inc.

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Is Your Business Ready for a Structure Change?

Three-fourths of CEOs running small and mid-size businesses reported in 2011 that they were anticipating higher revenues in the year ahead, and nearly 60% expected rising profits. Among those who expressed confidence in their futures, 54% expected to hire more employees and 50% were planning to invest in their facilities.1

Growth is often accompanied by change. In fact, the U.S. Small Business Administration has found that increased employment and faster growth are factors that often lead businesses to change their legal form of organization.2

For business owners seeking to reduce their exposure to risk, a popular entity in recent years has been the limited liability company (LLC).3 Here are some additional benefits associated with LLCs.

Legal protection — An LLC offers many of the legal advantages of a corporation and may help shield the business owners’ personal assets from lawsuits brought against a firm’s products or employees. In theory, financial losses would be limited to the owners’ stake in the company, but exceptions may include any business debt they personally guarantee or misdeeds (such as fraud) they carry out.

Simplicity — In most states, an LLC is easier to form than a corporation, and there may be fewer rules and reporting requirements associated with operating an LLC. The management structure is less formal, so a board of directors and annual meetings are not usually required.

Tax efficiency — An LLC is a pass-through entity for tax purposes, so a firm may avoid tax liability by passing profits or losses on to the members (owners), who declare them on their personal tax returns. Members are allowed to choose whether the company is taxed as a sole proprietorship, a partnership, an S corporation, or a C corporation, provided it would qualify for the particular tax treatment.

Flexibility — The structure of an LLC may help facilitate growth because it’s possible to add an unlimited number of owners and/or investors to the business, and ownership stakes may be transferred easily from one member to another. LLCs may also be owned by another business.

Owners who aspire to expand their operations may want to explore whether an LLC, or another type of business structure, would better suit the company’s particular needs.

1) USA Today, April 8, 2011
2) U.S. Small Business Administration, 2011
3) The Wall Street Journal, March 28, 2010

The information in this article is not intended as tax or legal advice, and it may not be relied on for the purpose of avoiding any federal tax penalties. You are encouraged to seek tax or legal advice from a Naperville Business advisor. The content is derived from sources believed to be accurate. Neither the information presented nor any opinion expressed constitutes a solicitation for the purchase or sale of any security. This material was written and prepared by Emerald. © 2011 Emerald Connect, Inc.

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Another Economic Stimulus

Temporary Incentives Could Affect Naperville Businesses of All Sizes

Although Congress was unable to tackle the controversial issue of future income tax rates before the 2010 midterms, it quietly passed a little-noticed tax package: the Small Business Jobs Act of 2010 (H.R. 5297). Here’s a roundup of some of the bill’s major provisions.

Lending support — A $30 billion lending fund was created to make inexpensive credit available to small businesses. The loans will be made available through community banks.1

Bonus depreciation — The 50% first-year bonus depreciation, which expired at the end of 2009, was extended through 2010. It allows 50% of the cost of a depreciable item to be deducted as an expense in the first year of ownership. The additional year of bonus depreciation for equipment with a recovery period of 10 years or longer, and for tangible property used to transport people or equipment, was extended through 2011.2

Maximum first-year depreciation caps for new vehicles increased to $11,060 for passenger automobiles purchased and put into service in 2010. The maximum deduction for light trucks and vans remains at $11,160.3

Section 179 expensing — The maximum deduction related to qualified Code Sec. 179 property doubled to $500,000 for tax years beginning in 2010 and 2011. The law also temporarily modified the definition of qualified Section 179 property to include up to $250,000 of qualified real property (qualified leasehold improvement property, restaurant property, and retail improvement property).4

Small-business income tax credits — The law extended the carryback period on general business tax credits to five years, and they can be applied to both regular tax liability and AMT tax liability.5

Start-up expense deduction — In 2010 only, start-up costs related to the creation of a new business can be expensed instead of having to be amortized. The maximum expense that can be claimed is $10,000.6

Self-employed tax break — In 2010 only, self-employed people are allowed to deduct their health insurance premiums before computing their payroll taxes.7

1) U.S. Small Business Administration, 2010
2–7) CCH, 2010

The information in this article is not intended as tax or legal advice, and it may not be relied on for the purpose of avoiding any federal tax penalties. You are encouraged to seek tax or legal advice from a Naperville accountant. The content is derived from sources believed to be accurate. Neither the information presented nor any opinion expressed constitutes a solicitation for the purchase or sale of any security. This material was written and prepared by Emerald. © 2011 Emerald Connect, Inc.

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Why You Want to Know How Much Your Business Is Worth

Business Valuation Can Be Valuable Even When No Sale Is Planned

If you have no plans to sell your business, an up-to-date valuation may seem like an unnecessary expense. But you might be surprised at how important the current value of your business can be to achieving your long-term goals. The current value of your business can affect how you approach everything from retirement to estate conservation and your succession strategy.
Your Retirement Lifestyle

The typical business owner has 50% to 70% of his or her net worth in the business.1 If you expect your business to help fund your retirement, a significant change in value might mean you need to adjust the amount of income you are investing for retirement. A shift in value might also affect the date at which you expect to retire, which could influence the timing of your decisions about the kinds of preparations you expect to make to get the business ready to sell or pass on.

Estate Conservation and Succession

It’s understandable if you would rather not spend too much time thinking about whether your business has lost value, but there could be an upside to knowing. If you are expecting to transfer ownership to the next generation, lower asset values may help you transfer a larger share of the business without tax consequences.

If your business has a buy-sell agreement that values the business too highly, a more reasonable valuation may help the survivors or successors take over without paying more than the business is actually worth.

If you discover that your business is responsible for more of your net worth than you realized, it could indicate that it’s time to diversify away from the business. It’s rarely a wise move to let your financial future hinge on the fate of a single asset — even if it is your own business.

Given the events of the past few years, you may be more inclined to focus on today’s problems than on what could happen years from now. But a precise valuation may provide you with valuable information that you didn’t realize you needed.

1) Financial Advisor, August 27, 2010

The information in this article is not intended as tax or legal advice, and it may not be relied on for the purpose of avoiding any federal tax penalties. You are encouraged to seek tax or legal advice from an independent Naperville business advisor. The content is derived from sources believed to be accurate. Neither the information presented nor any opinion expressed constitutes a solicitation for the purchase or sale of any security. This material was written and prepared by Emerald. © 2011 Emerald Connect, Inc.

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