by Greg Caruso | May 19, 2025 | ESOP Business Valuation
For closely-held business owners, a buy-sell agreement is a cornerstone of succession planning and business continuity. It’s the “pre-nup” for business partners, outlining what happens if an owner departs, whether due to death, disability, retirement, or other triggering events. A critical component of these agreements is the mechanism for valuing the departing owner’s interest. But what happens when the economic landscape shifts dramatically between when the agreement is drafted and when it’s triggered?
Many business owners treat their buy-sell agreement as a “set it and forget it” document. This can be a costly mistake, especially when economic tides turn. Fluctuating economic conditions can significantly impact the fairness and feasibility of a buy-sell agreement, potentially leading to disputes, financial strain, or even the unraveling of the business itself.
Proactive Steps to Weather the Economic Storm:
So, how can business owners ensure their buy-sell agreements remain fair and functional regardless of the economic climate?
- Regular Reviews are Non-Negotiable: Don’t let your buy-sell agreement gather dust. Review it annually, or at least every 2-3 years, and specifically after any major economic shift or significant change in your business.
- Flexible Valuation Mechanisms: Avoid fixed values for extended periods. Consider using a formula that incorporates current financial data and perhaps industry-relevant multiples. Better yet, stipulate a process for valuation at the time of the trigger, such as an agreement to hire one or more qualified, independent business appraisers. This ensures the valuation reflects the conditions at the time of the buyout.
- Multiple Funding Options & Contingencies: Regularly review life insurance coverage to ensure it aligns with the business’s current value. Consider a sinking fund or other savings mechanisms. Outline provisions for seller financing, including how interest rates will be determined (e.g., tied to a benchmark prime rate).
- Consult Your “A-Team”: Work with experienced legal counsel, a CPA, and potentially a business valuation expert when drafting and reviewing your buy-sell agreement. They can help you anticipate various scenarios and build in appropriate flexibility.
A buy-sell agreement is a living document that must adapt to the evolving realities of your business and the broader economy. By proactively addressing the potential impacts of economic conditions, you can protect your business, ensure fair treatment for all own owners, and maintain the stability you’ve worked so hard to build.
by Greg Caruso | Apr 10, 2025 | ESOP Business Valuation
Colorado is making significant strides in promoting employee ownership with a new bill that introduces substantial tax benefits and expands existing programs. Starting in 2027 and running through 2037, the legislation offers two key income tax subtractions:
- Capital Gains Subtraction: Taxpayers who convert at least 20% of their qualified business to employee ownership can subtract the state capital gains realized from this conversion.
- Worker-Owned Cooperative Subtraction: Worker-owned cooperatives can subtract their federal taxable income, up to $1 million.
Furthermore, the bill extends and enhances the existing tax credit for employee business ownership conversion costs. Key changes include:
- Extending the credit through 2037.
- Increasing the credit percentage from 50% to 75% starting in 2026.
- Adjusting the annual aggregate credit limits to $3 million (2026-2031) and $4 million (2032-2037).
- Expanding eligibility by revising definitions and allowing qualified support entities (nonprofits aiding conversions) to claim the credit.
These changes aim to incentivize business owners to transition to employee ownership, empower workers, and strengthen local economies by fostering a more equitable business landscape.
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by Greg Caruso | Mar 18, 2025 | ESOP Business Valuation, Estate and Gift Tax Business Valuation, SBA Business Valuation and Appraisal
Running a business during uncertain times can be challenging, but it’s not impossible. Changes in the economy, politics, unexpected events, and new technologies can make planning and successful operations hard. However, businesses that stay flexible and adapt quickly have a better chance of surviving and growing. To do this, business owners must be ready to change their plans and respond to new situations rapidly.
One key strategy is to review and adjust business plans regularly. This includes thinking out contingency plans for unexpected but possible change. Markets and customer needs can shift quickly, so businesses must keep an eye on trends and be ready to pivot (and you thought pivot ended with Covid) when needed. Being open to change allows companies to take advantage of new opportunities while limiting potential risks. Staying informed and making small adjustments over time can help businesses remain stable and competitive.
Another important factor is building a strong foundation. This means planning, building your balance sheet to survive emergencies, and ensuring business operations can continue even when problems arise. Building a management team that works together provides resilience and internal forums for problem-solving. Companies should also have a variety of suppliers and customers to avoid concentrations that increase risk and can quickly put a firm out of business. Planning can help companies to stay strong, even when unexpected challenges occur.
Finally, good leadership is crucial during uncertain times. Business owners and managers should communicate openly with their teams and encourage problem-solving. Employees who feel supported and valued are more likely to stay motivated and help the company succeed. Leaders should also take care of themselves, as making good decisions under pressure requires a clear mind.
With the right mindset and approach, businesses can not only survive tough times but come out stronger.
by Greg Caruso | Feb 22, 2025 | ESOP Business Valuation, Estate and Gift Tax Business Valuation, SBA Business Valuation and Appraisal
You need a business valuation or a business appraisal. You might need the business valuation for Estate and Gift business taxes, applying for an SBA loan, ESOP stock value, or a host of other reasons. How can you make sure that you obtain the most accurate business valuation possible?
The business valuation is going to tell a story about your business. This story will contain a narrative backed up by statistics, facts, and figures. This story must make sense when it is complete. Your job as a business owner obtaining a valuation is to make sure the story, facts, and figures are clear and sensible to the experienced valuation professional appraising the business.
Below are 5 steps business owners should take to make sure your business valuation is as accurate as possible.
THE 5 STEPS
- Be able to explain why your product or service is so desirable you can continue to make a high profit
The most important thing in valuing your business is understanding how you create and keep a market of customers that will pay enough for your product or service that you can be expected to continue making a profit. Do you have patents keeping others out? Do you have a unique distribution channel? Do you have better internal systems and people? This is the core of the business valuation. How your business makes money and how it will continue to do so. The ability to clearly and succinctly explain that is key to the valuer understanding your business and getting the valuation correct.
- Have quality financial information.
You must have quality financial information. A business valuation is, to a large extent, a review of your past financial results and a projection of your future financial expectations. Without clear data it is very difficult to see the details necessary to make correct assumptions and calculations. In addition to historic financial information, business plans and useful projections consistently kept will add to the valuer’s understanding of the business.
- Have leases and major contracts in good order
Leases, customer contracts, loan documents, and the like may not make a business, but if they are not in good order a business may suffer major losses quickly. These documents in good form reduce risk which increases value. Have the major legal documents your business relies on updated and accessible, so you can provide them when asked.
- Have systems outlined and resumes of key people
Simply put, a business is a series of systems that produce a product or service, hopefully at a profit. Most businesses have many systems that are run by people. True high-quality systems are where “normal people obtain extraordinary results every time.” This requires great systems, great training, and very good people. Make sure you can document all of these.
- Hire an experienced valuation professional.
Clearly, the valuer must have the background to understand how actual businesses on the ground work and how that translates into value. Business valuations are performed for specific purposes – sales, SBA loans, ESOP structuring, divorce, Estate and Gift Tax. While it might sound crazy, it is a fact that the purpose can often significantly change the correct business value found. Make sure the valuer understands and has performed valuations for your purpose. Finally, make sure they have sufficient background and training in the fundamentals of business valuation.
These five steps lead to a consistent well-run business and obtaining a correct business valuation. Business valuation does have an element of the old saying, “garbage in – garbage out.” As a business owner you do play an important role in obtaining a proper business valuation.
by Greg Caruso | Feb 21, 2025 | ESOP Business Valuation
In January 2025, the Trump administration’s executive order imposed a regulatory moratorium, freezing the Department of Labor’s (DOL) proposed guidance on Employee Stock Ownership Plans (ESOPs). The DOL had intended to release new rules on January 22, 2025, which would have introduced guidance on establishing fair market value for ESOP stock transactions and proposed a new safe harbor for initial ESOP transactions. These proposals were designed to bring more clarity and protections to ESOPs, but now they are on hold.
The moratorium means that any new regulations under the DOL’s proposals will be delayed until further review or modification by the administration. This move is part of a broader effort to reevaluate and potentially roll back regulatory changes set by the previous administration.
For businesses and ESOP trustees, this means they will continue to follow existing rules until any new guidance or regulatory updates are confirmed.
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by Greg Caruso | Nov 17, 2023 | ESOP Business Valuation
Humans have a natural desire for autonomy and independence. When management’s style consists of only telling employees what to do, this can lead to lower self-esteem, resentment, and anxiety in employees.
ESOPs (Employee Stock Ownership Plans) can lead to a better management style that can positively impact both employees and profit. ESOP managers often use a more employee-centric style.
With an ESOP in place, employees become co-owners of the company, and their success is tied to the company’s performance. This shared ownership instills a sense of purpose and commitment among employees, as their efforts directly contribute to their financial well-being.
Management in an ESOP company often seeks input and feedback from employee-owners before making significant decisions. There is a greater emphasis on empowering employees to take ownership of their work and make decisions that impact their departments or roles. This empowerment enhances job satisfaction and company loyalty.
ESOP managers often share financial and operational information with employees to keep them informed about the company’s performance. This transparency builds trust and encourages open dialogue between management and the workforce.
ESOP companies often invest in employee development and training. By empowering employees with the knowledge and skills they need to excel in their roles, management fosters a culture of continuous learning and improvement.
By aligning employees’ interests with those of the company and promoting shared ownership and decision-making, an ESOP can create a positive work environment where employees feel valued, empowered, and motivated to contribute to the company’s success. This results in higher productivity and more profit for both the company and the employees.
