Accounting

Accounting Business Estate Financial Planning Tax

Leaving a Business: Which Exit Plan is Best?

Selecting your business successor is a fundamental objective of planning an exit strategy and requires a careful assessment of what you want from the sale of your business and who can best give it to you.

There are four ways to leave your business: transfer ownership to family members, Employee Stock Option Plan (ESOP), sale to a third party, and liquidation. The more you understand about each one, the better the chance is that you will leave your business on your terms and under the conditions you want. With that in mind, here’s what you need to know about each one.

1. Transfer Ownership to your Children

Transferring a business within the family fulfills many people’s personal goals of keeping their business and family together, but while most business owners want to transfer their business to their children, few end up doing so for various reasons. As such, it’s necessary to develop a contingency plan to convey your business to another type of buyer.

Transferring your business to your children can provide financial well-being for younger family members unable to earn comparable income from outside employment, as well as allow you to stay actively involved in the business with your children until you choose your departure date.

It also affords you the luxury of selling the business for whatever amount of money you need to live on, even if the value of the business does not justify that sum of money.

On the other hand, this option also holds the potential to increase family friction, discord, and feelings of unequal treatment among siblings. Parents often feel the need to treat all of their children equally. In reality, this is difficult to achieve. In most cases, one child will probably run or own the business at the perceived expense of the others.

At the same time, financial security also may be diminished, rather than enhanced, and the very existence of the business is at risk if it’s transferred to a family member who can’t or won’t run it properly. In addition, family dynamics, in general, may also significantly diminish your control over the business and its operations.

2. Employee Stock Option Plans (ESOP)

If your children have no interest or are unable to take over your business, there is another option to ensure the continued success of your business: the Employee Stock Ownership Plan (ESOP).

ESOPs are qualified retirement plans subject to the regulatory requirements of the Employee Retirement Income Security Act of 1974 (ERISA). There’s one important difference, however; the majority (more than half) of their investment must be derived from their own company stock.

Whether it’s due to lack of interest from your children, an economic downturn or a high asking price that no one is willing to pay, what an ESOP does is create a third-party buyer (your employees) where none previously existed. After all, who more than your employees has a vested interest in your company?

ESOPs are set up as a trust (complete with trustees) into which either cash to buy company stock or newly issued stock is placed. Contributions the company makes to the trust are generally tax deductible, subject to certain limitations and because transactions are considered stock sales, the owner who is selling (you) can avoid paying capital gains. Shares are then distributed to employees (typically based on compensation levels) and grow tax-free until distribution.

If your company is a stable, well-established one with steady, consistent earnings, then an ESOP might be just the ticket to creating a winning exit plan from your business.

If you have any questions about setting up an ESOP for your business, give the office a call today.

3. Sale to a Third Party

In a retirement situation, a sale to a third party too often becomes a bargain sale–and the only alternative to liquidation. But if the business is well prepared for sale this option just might be your best way to cash out. In fact, you may find that this so-called “last resort” strategy just happens to land you at the resort of your choice.

Although many owners don’t realize it, most or all of your money should come from the business at closing. Therefore, the fundamental advantage of a third party sale is immediate cash or at least a substantial upfront portion of the selling price. This ensures that you obtain your fundamental objectives of financial security and, perhaps, avoid risk as well.

If you do not receive the bulk of the purchase price in cash, at closing, however, your risk will suddenly become immense. You will place a substantial amount of the money you counted on receiving in the unpredictable hands of fate. The best way to avoid this risk is to get all of the money you are going to need at closing. This way any outstanding balance payable to you is “icing on the cake.”

4. Liquidation

If there is no one to buy your business, you shut it down. In liquidation, the owners sell off their assets, collect outstanding accounts receivable, pay off their bills, and keep what’s left, if anything, for themselves.

The primary reason liquidation is considered as an exit plan is that a business lacks sufficient income-producing capacity apart from the owner’s direct efforts and apart from the value of the assets themselves. For example, if the business can produce only $75,000 per year and the assets themselves are worth $1 million, no one would pay more for the business than the value of the assets.

Service businesses, in particular, are thought to have little value when the owner leaves the business. Since most service businesses have little “hard value” other than accounts receivable, liquidation produces the smallest return for the owner’s lifelong commitment to the business. Smart owners guard against this. They plan ahead to ensure that they do not have to rely on this last ditch method to fund their retirement.

If you need assistance figuring out which exit strategy is best for you and your business, please don’t hesitate to call. The sooner you start planning, the easier it will be.

Accounting Quickbooks

Preventing Data Theft in QuickBooks

Data breaches of personal information increased dramatically over the past several years. You’ve probably read about–or perhaps experienced first-hand–what happens when major corporate entities like Target and Home Depot get hacked.

As a small business owner, your customers trust you enough to provide you with private information like email addresses and credit card numbers. And while you may not have hundreds of thousands of customer information files, it’s still possible to be targeted by external hackers or even your own employees.

Are you taking the necessary measures to ensure that the data stored on your hard drive and/or in the cloud is protected?

Your Inner Circle

The last thing you want to imagine is that one of your own employees has been tampering with your QuickBooks company data. It happens, though, and you need to protect yourself from potential internal attacks.

One of your internal controls, then, should include the establishment of boundaries for every employee who has access to QuickBooks. You can restrict each staff member to specific areas of the program instead of sharing a master password and giving everyone free rein. Go toCompany | Set Up Users and Passwords | Set Up Users to do this.


Figure 1: If you click on Selective Access in this window, you can restrict your employees’ activities to specific areas and actions.

The User List window opens, which will display all users who have been set up already, including you as the Admin. Click Add User and enter a name and password. Click the box in front of Add this user to my QuickBooks license, then click Next. Click on the button in front ofSelected areas of QuickBooks. Click Next.

The next 10 screens break QuickBooks down into separate activities and activity areas, like Sales and Accounts Receivable, Checking and Credit Cards, and Sensitive Accounting Activities. On each screen, click on the button in front of the correct option:

    • No Access

 

  • Full Access

 

  • Selective Access (lets you specify what areas and actions will be allowed for that employee)

Other Internal Controls

QuickBooks’ Audit Trail is your friend. It records everything that is entered or changed in the software, by whom, and precisely when. To view it, open the Reports menu, then click on Accountant & Taxes, then Audit Trail. Like all QuickBooks reports, it can be customized to display the entries you need to see.


Figure 2: QuickBooks’ Audit Trail provides a detailed history of all activity in the software.

There are other reports that you should review frequently, and some that we should create and analyze for you at least every quarter if not monthly. We can suggest reports that would help you look for fraud and tell you what to look for.

Common Sense Practices

  • It goes without saying that protecting your entire hardware/software/cloud configuration will help keep your QuickBooks company file safe from external marauders. You must employ state-of-the-art antivirus and anti-malware applications and keep them updated. Talk to us if you need recommendations and/or help implementing them.
  • If you’re a sole proprietor or you work from your home, restrict the computer where QuickBooks resides to business software and websites only. Never let anyone install applications, play interactive games, etc. on it.
  • Change your own QuickBooks password at least every 90 days and do backups to secure drives or websites.
  • When you run into problems with QuickBooks’ functioning, please let us help. Even a computer troubleshooting specialist will not understand the program well enough to solve problems, and he or she may compromise your data file further.

As security software and systems get smarter, so do the hackers. Don’t let your company and its customers be victims of data theft.

Accounting Quickbooks

Make Your Preferences Known in QuickBooks

There are some features that all small businesses need in their accounting software. Everyone needs a Chart of Accounts and a good set of report templates. There must be tools to bill customers and to document income and expenses. Some companies need payroll management, and some need the ability to create purchase orders. These days, many businesses want to accept payments online.

But what does your company need? It’s unlikely that you would use absolutely every feature that QuickBooks offers, but you need to make sure that every tool you want to use is set up properly.

If you’ve been using QuickBooks for a while, you may have been directed to the Preferences window already (accessible by clicking on Edit | Preferences). If you’re just starting out with the software, it’s a good idea to acquaint yourself with the most important elements contained there. Here are some of them.


Figure 1: QuickBooks’ Preferences window. Some features are already turned on or off by default, but you can change their status. 

Accounting

Click on the Accounting tab in the left vertical pane, then on theCompany Preferences tab. Here, QuickBooks wants to know whether you plan to use account numbers. It also offers the option to turn onclass tracking, which lets you define classes like company locations or divisions, or salespeople. Not sure what you should do here? Please ask.

Desktop View

Options here involve usability and visibility issues. Getting them right can save you time and frustration. For example, under the My Preferencestab, you can choose between a VIEW that displays only One Window, or one that keeps Multiple Windows open. Click on the Company Preferences tab to turn specific features–like Payroll and Sales Tax–on and off.

Finance Charge

Should you decide to apply Finance Charges to late payments, for example, please let us go over this feature with you. We’ll explain how it is set up and how it works in day-to-day accounting.

Items & Inventory

This is critical: you must visit this screen if you will be buying and selling products. First, you need to make sure that the box in front ofInventory and purchase orders are active has a check mark in it. If not, click in the box. Also important here: QuickBooks can maintain a real-time inventory level for each item you sell so that you neither run short nor waste money by stockpiling. Check the box in front ofQuantity on Sales Orders if you want the software to include items that appear on sales orders in the count. Also, do you want a warning when you don’t have enough inventory to sell (as you’re filling out an invoice, for example)? Call if you need help understanding the difference between Quantity on Hand and Quantity Available; it’s rather complex.


Figure 2: Some inventory concepts may be unfamiliar to you. If you’ll be buying and selling items, let us walk you through this section. 

Payroll & Employees

Payroll is integrated with QuickBooks, but it’s so complex that it almost acts as another application. If you’re planning to take this on yourself, some training will be necessary.

Reminders

Unless you have a very simple business or an extraordinarily good memory, you’ll probably want QuickBooks to remind you when you need to complete certain tasks. Click Reminders | Company Preferences to see the lengthy list of events that QuickBooks supports, like Paychecks to Print, Inventory to Reorder, and Bills to Pay. You can have the software display either a summary or a list of what needs to be done, and you can specify how many days in advance you want to be alerted.

Sales & Customers, Sales Tax, and Time & Expenses

If your accounting workflow includes tasks in any of these areas, you’ll need to visit them to turn features on and make other preferences known.

You probably won’t need to have absolutely every feature turned on from the start. But as your business grows and changes–and we hope it does–you can always revisit the Preferences window to let QuickBooks know about your new needs.

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