Cliff Duffield

This issue brought to you by:

Cliff Duffield
cduffield@businessdesign.cc (mailto:cduffield@businessdesign.cc)

Business Design, LLC
6900 College Boulevard
Suite 820
Leawood, KS 66211
913-971-0123 (tel:913-971-0123)
Picture of Cliff Duffield

** WHAT IS ACCOUNTS RECEIVABLE FACTORING AND WHY WOULD I WANT TO USE IF FOR MY BUSINESS?
————————————————————

Very simply stated, Accounts Receivable Factoring, (AR) is where a third party funding source, the Factor, buys a company’s accounts receivable in exchange for the company receiving immediate cash. From an accounting view, the company has now replaced the current asset known as accounts receivable with cash. There is no effect on the balance sheet other than to re categorize current assets. Factoring does not increase a company’s debt, there is no equity created or given up, there is no mezzanine financing and no intrusive new management.

AR financing is done to expedite and improve a company’s cash flow. Factoring is usually done either as recourse or non-recourse factoring. Recourse Factoring means if the Factor is not paid back on the original invoice the Factor purchased, the Factor resells the invoice back to the original seller, (company). In some cases, the Factor may further require a notice of assignment be executed in favor of the Factor in order to notify the marketplace that the Factor has taken a security interest in that invoice and that the invoice is now to be paid by the buyer (debtor) direct to the Factor.

Why would I want to consider Factoring?

A Company’s needs and access to capital are unique. Clients need funding for a wide range of uses and each company has its own diverse background. Some of the reasons why a company may factor include:
* Financing current Working Capital Needs
* Speed to deal – factoring account set up and processing can be faster than traditional funding sources
* Startup Businesses have limited credit histories and thus, traditional financing options are limited.
* A business or individual may have had a past credit impairment that prevents them from obtaining more traditional means of funding
* Business Growth may outstrip current credit availability
* Bridge Financing
* Realization of Supplier Discounts
* Preparation for High Season or higher volumes
* Crisis Management
* Debtor-in-Possession (DIP) Financing may be required
* Current Federal Tax liens may restrict usual funding sources

Sometimes the first place a company approaches for funding is a financial institution. For a variety of reasons, a lender may have to deny the request for credit. However, a lender and client should understand that saying “no ……but there is an alternative solution!” is an option. Using a Factor may still keep the rest of the referring institution’s relationships intact.
* The referring financial institution can retain other retail, consumer, and private banking relationships because factoring AR proceeds can be returned to the institution via wire or ACH. The referring party can also still take a first – or second secured position and/or subordinate to the AR factor.
* The commercial AR Factor acts in many ways as a collateral monitor agent because they collect, account and report on receipts and disbursements. Upon client authorization, this can be reported to the referring institution.
* AR financing does not have to be that expensive and it can function as an intermediate solution. A financial institution may season and later migrate the commercial prospect to their commercial portfolio.

The information contained in this article is general in nature and is not legal, tax or financial advice. For information regarding your particular situation, contact an attorney or a tax or financial advisor. The information in this newsletter is provided with the understanding that it does not render legal, accounting, tax or financial advice. In specific cases, clients should consult their legal, accounting, tax or financial advisor. This article is not intended to give advice or to represent our firm as being qualified to give advice in all areas of professional services. Exit Planning is a discipline that typically requires the collaboration of multiple professional advisors. To the extent that our firm does not have the expertise required on a particular matter, we will always work closely with you to help you gain access to the resources and professional advice that you need.

This is an opt-in newsletter published by Business Enterprise Institute, Inc., and presented to you by our firm. We appreciate your interest.

Any examples provided are hypothetical and for illustrative purposes only. Examples include fictitious names and do not represent any particular person or entity.

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This issue brought to you by:

Cliff Duffield
cduffield@businessdesign.cc (mailto:cduffield@businessdesign.cc)

Business Design, LLC
6900 College Boulevard
Suite 820
Leawood, KS 66211
913-971-0123 (tel:913-971-0123)
Picture of Cliff Duffield

** Value Doesn’t Grow On Trees…Or Does It?
————————————————————

We all know that “money doesn’t grow on trees.” And neither does business value. You can’t just wait until you are ready to leave your business to find out how much “value” you need or want and how much “value” exists in your business. By then it will be too late. The tree metaphor is relevant, though. Value is something that you can grow, nourish and ultimately harvest in your business. Let’s look at an example.

Picture three identical companies each engaged in moving time-sensitive freight for customers. All have a national presence, $2M in EBITDA (Earnings Before Interest, Tax Depreciation and Amortization) and about $25M in annual sales. It would be logical to assume that they all have about the same value.

In fact, one had little value, one sold for 3.5 times EBITDA and one sold for 5.5 times EBITDA. The difference in value was $3M to $7M to $11M.

Neither gross sales nor EBITDA alone determined the price and terms of these deals. The key to the variation in purchase prices was the presence or absence of value drivers in the companies as well as the ability of these value drivers to survive the owner’s departure.

Value drivers are internal characteristics of a company that buyers look for in acquisitions. You’ll see that it doesn’t matter if you plan to keep your business forever, transition it to family members, sell it to your management team or find an outside buyer – value drivers can give you more options, more flexibility and more money from your ownership interest. Strong value drivers are those that are effective and will continue to operate once the original owner departs. Consequently, those are the value drivers that increase both EBITDA and the multiple of EBITDA buyers may be willing to pay.

We may measure the effectiveness of value drivers in two ways: 1) their positive contribution to cash flow and 2) their ability to continue to contribute to cash flow under new ownership.

Think of it this way: why would anyone want to buy your business if its continued success is dependent on you-the departing owner? Buyers are more likely to pay top dollar for businesses that will not miss a beat when the original owner is no longer in charge.

Success in business is determined not by how well you run the business, but by how well the business runs without you.

Let’s look at the three freight-moving companies more closely to see what motivated buyers either to open their wallets or walk on by.

Company A: The owner/operator was responsible for management, operations and his personal and industry contacts were the source for new business. All roads ran through the owner so without him, the business had little value.

Company B: This company had a capable management team. Many of its systems and procedures were state-of-the-art. There was, however, one glaring weakness: the major customer, responsible for over 50 percent of the company’s revenue, had a decades’ long relationship with the company’s owner, not with the company.

Buyers are much less likely to pay millions for customer accounts that can, and indeed often do, go elsewhere the day after they find out the owner has sold the business.

Company C: Finding the owner of Company C wasn’t easy. She spent weeks on vacation or visiting grandchildren and when she was in town, was engaged in a variety of civic and charitable activities. She made workplace appearances only sporadically and left operations in the hands of her stable, effective management team.

She had deliberately created plenty of diversification in her company’s customer base knowing that one day she’d sell the business. She had thought about what she would look for in an acquisition so had included customer diversification as one of many attributes or value drivers she wanted in her company. She understood that value drivers were necessary to maximize sale-ability as well as the sale price and amount of cash she could demand from a buyer.

Interested buyers were delighted that she had changed her role in the company over the years so that a new owner could step in, almost unnoticed.

There are a number of value drivers that are critically important to today’s buyers. The value drivers that are most important to your business may or may not be the same as those that were identified for Company C. What we can say with some certainty is that value drivers can help your business value grow to bring you closer to the value that you need. If you are interested in learning more about them, we will be happy to sit down with you and talk about how value drivers might improve your business value.

The information contained in this article is general in nature and is not legal, tax or financial advice. For information regarding your particular situation, contact an attorney or a tax or financial advisor. The information in this newsletter is provided with the understanding that it does not render legal, accounting, tax or financial advice. In specific cases, clients should consult their legal, accounting, tax or financial advisor. This article is not intended to give advice or to represent our firm as being qualified to give advice in all areas of professional services. Exit Planning is a discipline that typically requires the collaboration of multiple professional advisors. To the extent that our firm does not have the expertise required on a particular matter, we will always work closely with you to help you gain access to the resources and professional advice that you need.

This is an opt-in newsletter published by Business Enterprise Institute, Inc., and presented to you by our firm. We appreciate your interest.

Any examples provided are hypothetical and for illustrative purposes only. Examples include fictitious names and do not represent any particular person or entity.

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This issue brought to you by:

Cliff Duffield
cduffield@businessdesign.cc (mailto:cduffield@businessdesign.cc)

Business Design, LLC
6900 College Boulevard
Suite 820
Leawood, KS 66211
913-971-0123 (tel:913-971-0123)
Picture of Cliff Duffield

** Death And Taxes vs. Preserving Wealth – The Final Exit Planning Contest
————————————————————

Full disclosure: Wealth preservation planning can’t help any of us cheat death, but it can help business owners to avoid taxes and achieve financial security. Read on.

The ideal Exit Plan (one that provides the business exit you desire) includes a strategy to help you preserve your hard-earned wealth from unnecessary taxation when it is transferred to your family. But to preserve wealth, business owners must take steps before they actually have it. In other words, to realize all of the potential benefits of various wealth preservation techniques, owners must make plans before they convert the value of their businesses to cash.

The foundation for wealth preservation planning is found in the answers to two of the questions you answered in Step One of this Exit Planning process:
1. How much wealth do you want when you exit your company? And, for parents, the follow-up question: How much wealth do you want your children to have?
2. How long before you leave your company?

Using your answers as guideposts, you (and your advisors) can then choose the planning technique that will best preserve your wealth, provide for your family and minimize your tax bill. Let’s look at how one fictional owner used wealth preservation techniques to do exactly that.

George recognized that he’d waited too long to begin gifting part of his company to his kids. A week before, George’s CPA had told him that, based on the company’s pre-tax cash flow of $2 million per year, his company could be worth as much as $12 million to a third party.

After recovering from that shock, George realized first that he didn’t need nearly that much cash to retire in style and second, that if he didn’t transfer at least half the value of his business before a sale, his family could be looking at millions in gift or estate taxes!

To remedy this situation George and his Exit Planning advisors:
1. Hired a Certified Business Appraiser to assign a conservative, but supportable value to the company.
Result: Based on current tax case law and valuation principles, the appraiser valued the transfer of a 49% minority (less than controlling) interest at $4 million. In her opinion, the appropriate minority discount was 35 percent of the full fair market value (assumed to be $12 million) of the stock.
Result: Using the 35 percent discount, George could give away half of the company to his children (a gift valued at approximately $4 million) and would pay no gift tax based on 2011 law which provides for a $5 million lifetime gift tax exemption.
While George was happy with the idea of not paying tax, he didn’t relish using most of his lifetime gift and estate tax exemption, and wanted a better answer. So he took another step to avoid needlessly wasting this most valuable exemption.
2. Created a GRAT—a Grantor Retained Annuity Trust. (See “GRAT Note” at the end of this article for more detailed information.)
Result: Using a GRAT—perhaps the biggest lever in the Wealth Preservation Game—George would avoid using a significant part of his $5 million lifetime gift tax exclusion, and would still give almost 50 percent of the company to his children.

Through wealth preservation planning performed well in advance of George’s exit George was able to:
* Transfer one-half of a business with a fair market value of $9-$12 million to his children in four years (a timeframe George chose) using little or none of his lifetime exemption.
* Receive all of the cash flow from the company during that four-year period, because the annuity payment to George was designed to equal the amount of cash flow expected from the stock transferred into the GRAT. And George needed this income to achieve his financial security exit objective.
* Transfer (after four years, or at the termination of the trust) the trust asset (one-half of the company) to trusts for his children, completely free of any gift tax.

George had established these trusts when he created the GRAT to carry out his wishes regarding when, and if, his children would receive money from those trusts.

Techniques such as GRATs and the careful use of minority discounts (as well as many other estate tax avoidance techniques), only work as intended if they are put in place well before you exit your business. These techniques also work well when two objectives, in this case George’s financial security and his desire to provide for his family, must be achieved in tandem.

If you wish, we can provide you with additional information about transferring wealth to children and/or protecting as much wealth as legally permissible from unnecessary taxation.

GRAT Note:

We provide here additional details about how and why a GRAT can help to achieve an owner’s twin objectives: the need for financial security and to provide for one’s family.

A GRAT is an irrevocable trust into which the business owner (and the Trustee of the GRAT) transfers some of his stock. The GRAT must make a fixed payment (annuity) to the owner each year for a pre-determined number of years. At the end of that period, any stock remaining is transferred to the owner’s children.

Stock transferred into a GRAT is treated as a gift. The amount of that gift is the value of the asset transferred minus the present value of the annuity that the owner will continue to receive. (George’s advisors made sure that the present value of the annuity paid out over four years almost equaled the value of the stock transferred into the GRAT. In doing so, George made only a nominal and non-taxable gift.)

The key to a GRAT’s success is to transfer to it an asset that appreciates in value and/or produces income in excess of 120 percent of the federal mid-term interest rate, which fluctuates monthly.

The information contained in this article is general in nature and is not legal, tax or financial advice. For information regarding your particular situation, contact an attorney or a tax or financial advisor. The information in this newsletter is provided with the understanding that it does not render legal, accounting, tax or financial advice. In specific cases, clients should consult their legal, accounting, tax or financial advisor. This article is not intended to give advice or to represent our firm as being qualified to give advice in all areas of professional services. Exit Planning is a discipline that typically requires the collaboration of multiple professional advisors. To the extent that our firm does not have the expertise required on a particular matter, we will always work closely with you to help you gain access to the resources and professional advice that you need.

This is an opt-in newsletter published by Business Enterprise Institute, Inc., and presented to you by our firm. We appreciate your interest.

Any examples provided are hypothetical and for illustrative purposes only. Examples include fictitious names and do not represent any particular person or entity.

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