Business Owner's Playbook - The Hartford

The Emerging CompanyThe Topic of Conversation: Important Questionsand Steps to Consider as You Start OutQuestions. You may have many in your head as you embark on the journey of runningyour own business. Whether you’re thinking about funding or compensation, taxes orinsurance, this section will help you find answers and identify the types of advisors withwhom to have these conversations.Congratulations. You’ve madeone of the most important – andone of the most difficult – decisionsof your life: to pursue your businessdream. This guide is intended tohelp you to start having the rightconversations – with the rightadvisors – to help you increase theodds of your success.No doubt there are many questionsat this point. Why did you startyour business? You may have seenan opportunity to make money byserving a market with potential thatis not being served adequately byothers. Or, it simply fulfills adream. Whatever the reason, nowis the time to ask these importantquestions. And, it’s also the righttime to find the right experts tohelp guide you along this journey.These questions will help youdetermine the types of advisorsyou’ll need.Important Questions■ What needs to happen beforeyour business will be strongenough to give you a decentliving, and how long will it taketo get to that point?■ How much money does yourbusiness need to operate, andwhere will it come from, beforethe business is self-sufficient?Seeking AdviceNearly half of smallbusiness owners wishthey had more time tofocus on personalfinancial planning.■ Do you need financing, andwhere will you get it?■ Can you operate the businessalone or do you need a partneror employees?■ What compensation andbenefits must you offer to attractthe employees you need?Your answers to these questionswill help you plan for short- andlonger-term needs – for yourbusiness and your own personalfinance goals. While advisors areimportant to help with businessfinance, they’re equally (or more)vital to your own personalfinancial health.The right conversations with theright advisors are crucial at thisstage. They can help ensure thatyou keep the right focus on yourpersonal and business goals andsuccess.That said, onlyone-third rely onadvisors to help makesuch significant personalfinance decisions.Source: The HartfordBusiness Owners Survey,October 20063

The Emerging CompanyFinanceConversationStartersHelp your advisors helpyou by asking them . . .■■■■How do I best structuremy company for success?How do I estimate startupexpenses and identifysources of funding?Do I need to separatepersonal and businessfinances to limit personalrisk, including legal andtax risk?How do I plan for cashflow crunch times andmajor contingencies?Business = AssetsMore than half ofbusiness owners agreethat their business istheir greatest personalasset and the primarysource of familyincome.Source: The HartfordBusiness Owners Survey,October 2006A business owner’s firstconsideration is usually verystraightforward – what type ofcompany do I want to create?Are you in business by yourself,or do you have co-owners? Arethese partners in the family?Structuring your company willhave a significant impact onyour taxes, planned financing,compensation, insurance, etc.Different companystructures(more detailed information onthese can be found on page 38)Sole ProprietorshipIndividual or married couple.Business income is taxed aspersonal income and is subjectto self-employment tax.General PartnershipTwo or more owners (who aren’ta married couple). Set-up costsare minimal with no state feesor documentation, and businessproceeds are taxed as thepartners’ personal income.Limited PartnershipSimilar to a general partnership,but has two classes of partner:limited and general. Limitedpartners’ liability is based onthe percentage of their investment;the general partner(s) bearsremainder of the liability andis responsible for day-to-dayoperations.CorporationA corporation is a legal entitywith a charter granted by thestate in which it is headquartered.It can sell shares of stock to raisemoney; shareholders becomepart-owners based on the sizeof their investments. Either anS or C corporation.Start-Up Costs WorksheetOne-Time CostsFixtures &EquipmentRemodelingLegal FeesLicenses & PermitsComputers &SoftwareTransportation(e.g., vans)$ ______$ ______$ ______$ ______$ ______$ ______Total One-Time Costs $ ______Limited Liability CorporationA hybrid entity that shieldsowners’ personal assets frombusiness liability, but allows thereturns they earn to be taxedonce, as personal income.You’ll want to speak to an advisorwhen determining your businessstructure, especially an attorneyor accountant. Also rememberthat you’re not locked into onebusiness entity for the life of yourbusiness.Calculate the cost of yourstart-up, for both you andthe business.Emerging businesses might notsee income for a while, and youas owner, might not be able towrite yourself a paycheck rightaway. It’s critical to determineyour essentials – which thingsyou can give up in the short term(e.g., vacations) and which arethose things you absolutely need,both for your life and for thebusiness.Monthly CostsSalariesRentUtilitiesTelephonePostage/Delivery$ ______$ ______$ ______$ ______$ ______Advertising/Promotion $ ______InsuranceTaxesMaintenanceInventory$ ______$ ______$ ______$ ______Total Monthly Costs $ ______The myriad costs during thisphase can be daunting. It’simportant to establish a checklistof business essentials – and try tokeep to that guide. The checklistwill allow you to present anaccurate picture to the advisorswith whom you will meet.Pay Yourself BackAny Start-up CostsIf you’ve borrowed fromyour own assets to startyour business or to coveran emergency, remember topay yourself back. Maintainaccurate records and don’tlet it escape your memory.Once the business is operatingsmoothly and profitably,start paying yourself back.Your accountant can workwith you to determine anaffordable amount of moneyto put away each month forcontingencies, and to helpyou keep track of payingyourself back.4

EmergingTake steps to protectpersonal assets.Are you “betting the farm” onyour new business? It’s good tobe passionate and optimistic,but it’s unwise to sink all of yourpersonal assets into your newbusiness, especially if you havedependents. The size of yourpersonal investment will dependon what you have to spend(savings, inheritance and spousalsupport) and how much debt youcan assume. Some entrepreneurshave used credit cards or homeequity loans, or borrowed againstinsurance policies or retirementfunds, but these sources put yourpersonal assets at risk. Talk toyour accountant about a wiseamount of personal assets to use,based on your individual situation.Remember the differencebetween equity and debt: equityis money you (or someone else)puts into the business in returnfor an ownership stake, whiledebt is money you borrow toput into the business (whichyou pay back with interest).If you need more start-upfunds, consider friends andfamily financing.Family and friends are oftenthe small business start-up’s firstchoice. Professional lenders,venture capitalists and otherinvestors are usually not interestedin start-ups; they prefer a businesswith a track record, but familyand friends can provide youwith invaluable capital. Familyand friends financing can,however, be fraught with potentialcomplications, so it’s best toapproach carefully. Manyentrepreneurs favor a debt-andequityapproach: family andfriend funders become bothminority-stake owners and lenders,so their eventual compensation,if any, will be based on bothconcepts. However, take care toexplain to them the risks associatedwith investing in a small business.It’s worth the money to have alawyer draft your agreement withfriends and family investors.Investigate other fundingsources.Look into government- andorganization-backed loans andgrants. (See chart below.)Plan for cash flow crunches.Setting aside precious capitalmight seem like the last thing youcan afford to do during start-up,Additional Funding SourcesU.S. Small Business Administration (www.sba.gov)but every new business needs asource of funds to cover contingencies.You’ve already calculatedbottom-line personal and businessexpenses; work with youraccountant to figure out whatyou’ll need for a three-monthemergency fund.Home Equity Line of CreditIf you can’t come up with allthe cash, you can apply for ahome equity loan or personalline of credit. Unlike loans, linesof credit make it possible toborrow money when you need it;you don’t pay interest until youactually borrow the funds. Don’twait until you’re desperate; applynow, when your finances arestable and it is easier to qualify.• Assists and protects the nation’s small businesses; while not a lender,it facilitates programs that can help emerging companies get funding:– SBA Basic Loan Guaranty Program: SBA acts as guarantor ofloans made by banks and other lending institutions after carefullyreviewing the borrower’s business plan and assets.– Certified Development Companies: SBA-certified nonprofit that aidslocal economic development. Each CDC works with commerciallenders to create financing packages for small businesses.– Micro-loans: SBA-designated nonprofit lenders who offer loans upto $35,000 for inventory, equipment and supplies (but not debtrepayment or real estate).– Small Business Investment Companies: Licensed by thegovernment to act as venture capital firms for small businesses.State Economic Development Agencies• Check with your own state’s agency; it may have helpful financingprograms.• Also look into the U.S. Commerce Department’s EconomicDevelopment Administration (www.eda.gov).Minority and Women’s Business Development Groups• Various agencies and organizations that promote businesses ownedby women and members of minority groups. The U.S. Department ofCommerce operates the Minority Business Development Agency(www.mbda.gov).Shop around, as interest ratesvary. And read the fine print,because low promotional interestsmight be valid for a limited timeonly. Try not to tap your homeequity line unless you’re facinga real emergency.Your 401(k) Retirement PlanAnother source of emergencyfunding might be your 401(k)retirement plan from a previousjob, or if your spouse has one.Read the fine print; borrowingfrom one can incur penalties.For more information on 401(k)borrowing, you can visithttp://www.irs.gov/retirement/participant/index.html.However, it’s important to keepin mind that Congress gavefavorable tax treatment to 401(k)plans so that employees wouldhave something other than SocialSecurity when they retired. Ifyou tap your retirement funds foryour business, and the businessfails, what will you have forretirement?Avail yourself of potentialtax advantages.You might think you havenothing to deduct at this stage ofthe game, but you’d be surprised.Talk to your accountant aboutthe many legitimate businessdeductions available to you: officeequipment and supplies, phone,Internet, postage and deliveryand the like; the cost of producingyour product or service –marketing, distribution, payroll,retirement savings (see Your Life,Your Future, later in this section)and more.5

EmergingThe Emerging CompanyInsuranceConversationStartersHelp your advisors helpyou by asking them . . .■ What type of coveragedo I need to have inplace at this time?■ What coverages arerequired by law, bylenders and/orcustomers?■ How do I add affordablecoverage for me and myemployees?■ Do I need specificcoverage for doingbusiness with majorcorporations?■ How can I avoid claimsand higher premiumsthat accidents andinjuries can create?Insurance DecisionsNearly 40 percent ofsmall business ownersfind it difficult toprioritize insuranceoptions through thevarious stages of theirbusiness development.Source: The HartfordBusiness Owners Survey,October 2006Regardless of the stage of yourbusiness, having the right typesof insurance coverage is vital toprotect the business you arebuilding and safeguard you andyour family along the way.Protecting your businessand personal assets.Some coverages are required bylaw; other types of insurancemay be required by a lender or acustomer with which you wish todo business. Others are essentialfor protecting you and yourfamily’s health and livelihood.In every case, you should viewinsurance as a strategic asset. Youneed to understand your exposure,review all of your business assetsand have an in-depth consultationwith your advisors to determinethe appropriate coverage. Aninsurance professional can beextremely valuable here, but youmight also want to involve youraccountant or your lawyer. They’llhave insights into how much andwhat kinds of risk you face—andthey can often recommend agood insurance agent.Be sure you have coveragesmandated by law.Workers’ compensation insuranceis a legal requirement in moststates, if you have one or moreemployees. This coverage paysfor the medical, pharmaceuticaland other healthcare costs ofemployees’ work-related injuries,as well as a portion of the worker’ssalary while out of work.Workers’ compensation coverageis not a substitute for healthinsurance, as employees are onlycovered for work-related injuries.Failure to purchase coveragewhen it is required can resultin severe penalties; thesepunishments can range fromfines of $10,000 to one-yearprison terms to STOP WORKorders. It’s important to talk toyour insurance professional to makesure you have the right coverage.Workers’ compensation premiumsare based on many factors,including your industry, thenumber of employees you haveand your company’s safety record.It’s important to work with yourinsurance agent to be sure youremployees’ jobs are rated properly,as higher-risk classifications carryhigher premiums.Don’t neglect healthcarecoverage (for you).Health insurance can seem like acostly extra expense to a healthyTwo Primary Types of Health InsuranceFee-for-ServiceManaged CarePay-As-You-GoWorkers'CompensationPremiumsNew products allow a businessowner to have workers’compensation premiumsbilled automatically througha third-party payroll systembased on actual payroll. Thiseliminates the need for alarge down payment andallows a business owner tobetter manage their cash flow.Ask your accountant, payrollprovider or insurance agentfor more details.entrepreneur managing all thecosts of a start-up. But when youconsider the impact to you, yourfamily and business if you were tobecome ill or injured, it’s clear thatsome type of health insurance isessential; obtain it through aworking spouse, extend coveragethrough COBRA (if availablethrough current coverage) orpurchase a high deductible majormedical policy to cover catastrophicillness (will keep your premiumslow, but you should expect to coverroutine doctor visits and othermedical out-of-pocket expenses).Professional and trade organizationscan also offer another cost-effectiveway to get group health insurance.Ask about a consumer-drivenhealth plan, which has higherdeductibles but enables you to payfor out-of-pocket medical expenseswith pre-tax dollars, while alsoallowing you to accumulatepre-tax money for future medicalexpenses.When purchasing ahealth insurance policy, yourinsurance advisor can help youdetermine your best option.There are two primary types:Fee-for-Service and ManagedCare. Both cover a range ofmedical, hospital and surgicalexpenses, and can also coverprescription drugs. Some mayalso offer dental coverage.These plans pay a medical professional of thepatient’s choice a fee for each service providedto him or her. The claim can be filed by eitherthe medical provider or the patient.More common and there are a range ofplans that all vary slightly. Plan types includehealth maintenance organizations (HMOs),preferred provider organizations (PPOs) andpoint-of-service (POS) plans. These morecomprehensive plans offer financial incentivesto use providers that are part of the plan.For more detailed information on healthcare plans, see The GrowingCompany on page 18.7

The Emerging CompanyInsurance (continued)Disability Reality CheckThree in 10 of today’s20-year-olds will suffera disability beforereaching age 67.75 percent of workersin the private sectordo not have long-termdisability insurance.Source: The Social SecurityAdministration 2003A more detaileddiscussion of thedifferent types ofinsurance can befound in TheGrowing Companyon page 21.Know the value of disabilitycoverage.What would happen to yourbusiness if you became disabled?What would happen to your family,your home and other personalassets? Approximately 30 percentof all people ages 35 to 65 willsuffer a disability for at least 90days, and about one in seven canexpect to become disabled forfive years or more.*Unless your spouse or personalresources could fill the gap forwhat might turn out to be along time, you would likely needdisability insurance to replaceyour lost income. Disability causesnearly 50 percent of all mortgageforeclosures, compared to2 percent caused by death.**As with health insurance, youcan buy disability insurancethrough professional and tradeorganizations and local businessgroups. Look for long-termrenewable, non-cancelable plansthat replace at least 60 percent ofyour income, pay benefits untilyou are 65 and include a cost-oflivingadjustment. Your insuranceprofessional can help you designa plan that best meets your needs.Insuring the Business:Coverages that can meansurvival in the event of aliability claim or loss.As a small business owner, you’llwant to have coverage for yourproperty. A lender may require it.You’ll also want a general liabilitypolicy in the event that yourTypes of Business InsurancePropertyInsuranceBusinessInterruptionInsuranceGeneralLiabilityProtectioncompany causes injury to someoneelse. And you may want businessinterruption coverage, which isdesigned to replace lost income dueto a covered loss that forces thebusiness to close for a period oftime. These three coverages areoften sold together as a singleBusiness Owner’s Policy, alsoknown as a BOP. Buying thesecoverages together is generally lessexpensive than buying each coverageseparately. Your insuranceagent can explain BOPs in detail.Insures physical assets the business owns(buildings and contents, computer system,valuable papers, etc.) for a covered loss.There is standard coverage and morecomprehensive special coverage.A type of property insurance that covers theloss of income resulting from a covered loss(such as a fire) that disrupts the operation ofthe business. This policy may also cover theexpenses of operating your business from asecondary or remote site.Covers your company in the event that it causescertain harm to others, whether that harm isto person and/or property. Such causes ofharm might include defective products, faultyinstallations and errors in services provided.* Disability Insurance: “A Missing Piece in the Financial Security Puzzle,” America’s Health Insurance Plans, 2004** Health Affairs, The Policy Journal of the Health Sphere, February 20058

EmergingCustomers may requirespecific coverages.If your business plan relies onyour doing business with majorcorporations, many of themrequire bidders to haveProfessional Liability coverage,also known as “Errors andOmissions” insurance. Thiscoverage protects the businesswhen your action, or failure totake action in your professionalcapacity, results in injury orfinancial damage to a customer.It’s particularly important forcompanies with professionalswho give advice, make recommendations,design solutions orrepresent the needs of others,CommercialAuto InsuranceIf you use your personalvehicles for businesspurposes, you’ll want totalk to an insuranceprofessional aboutcommercial auto coverage.Many personal auto policiesexclude coverage if a vehicleis used primarily forbusiness. Commercial autoinsurance covers automobiles,trucks and vans used forbusiness. Most policies alsocover your business for theliability incurred whenemployees use their owncars for your business.such as attorneys, accountants,real estate brokers, consultants,software developers, ad copywriters,Web page designers, or jobplacement services. It typicallycovers the cost of legal defenseplus the final judgment, upto a set amount, if the businessowner does not win the case.Such policies can take time toobtain; if you are targeting majorcorporations as your market,work with your insurance agentto get coverage sooner, not later.You also may want to requireyour own vendors and/orsuppliers to provide a Certificateof Insurance, to prove that theyhave the proper coverages asthey do business with you.Create a workplacesafety program.A safe workplace not only allowsemployees to feel safe andproductive, but also keeps youin business. Taking proactivemeasures to prevent accidentsand injuries can lower insuranceclaims, maintain operations,improve employee morale andreduce overall costs. (There’smore than insurance at stake;think about the cost of recruitingand training a replacementworker.) The time to addresssafety is the day you open yourbusiness. Talk to your insuranceadvisor about specific steps youcan take.Reduce InsurancePremiumsOften, you can reduce thepremium you pay for healthor auto insurance by optingfor a higher deductible, orthe amount you’ll have topay out-of-pocket beforeyou can receive benefitsagainst a claim. If you havecash reserves or accessto low-cost funds, it maybe a good idea to ask yourinsurance professional howmuch you can save on yourpremium by accepting ahigher deductible.9

The Emerging CompanyYour Life, Your FutureConversationStartersHelp your advisors helpyou by asking them . . .■ How do I prepare my willand a succession plan?■ How do I plan for myretirement and taxadvantages at this stagein my company’s life?■ How can I structure aretirement plan for myselfand my employees?Can I afford it?Prepare for “What If”Only one-fifth ofsmall business ownershave drafted a legalagreement detailingtheir company’sownership in case ofmarital dissolution.Source: The HartfordBusiness Owners Survey,October 2006Plan for your own andyour family’s future –and the company’s.At this point, you probably aren’tconsidering what your companywill look like after you leave, butyou’ve also come to know andappreciate the power of planningfor the future.Whether or not most of yourresources are tied up in thebusiness, your plan shouldinclude your will, and a buy-sellagreement if you have co-ownersand life insurance. Either way,work with your attorney todetermine how you want yourassets handled in the event ofyour death (and also who willserve as guardian for any minorchildren). It should also detailhow you’d like your businessassets handled.Part of your planning needs tofocus on who takes over after you– if you have determined that thebusiness will continue. Is it yourspouse? A child/children? Oneor more co-owners? Would a keyemployee do the job better andwould a buy-out, or partialbuy-out, be preferable? Discussall of this with family members,co-owners and/or key employees,if any, to gauge their interest incontinuing the business. If there’snobody available or willing totake over the business, you canspecify that the company shouldbe sold and/or how its assetsshould be disposed of (assetsshould be listed individually).All of this should be spelled outwith the help of your attorney.Buy-Sell AgreementIf you have co-owners, andthey wish to continue thebusiness without you,how will your family becompensated for your share?You can work with yourattorney to set up a buy-sellagreement, stipulating thatthe surviving co-owner(s)immediately buy your share,possibly with proceeds ofKey Person Insurance (seeThe Growing Company,Insurance) so that your familywon’t be burdened withconflicts at a later date.This kind of plan should takeinto account the type ofbusiness entity involved(i.e., whether it’s a soleproprietorship, corporationor partnership).10

EmergingMake an effort to set asidefunds for your retirement,even if your compensation islimited and your assets aretied up in the business.In most cases, the money youput into a qualified retirementplan (a plan that qualifies forspecial and generally favorableincome tax treatment under thetax laws) can reduce your taxableincome for the current year andthe tax on any investment growthis deferred until the year youwithdraw the money. So startinga retirement fund isn’t just apotential boon for your future;it’s a way to reduce your incometaxes for the current tax year.Individual RetirementAccount (IRA)There are traditional IRAsand Roth IRAs. Contributionsto a traditional IRA generallyare deductible on yourpersonal income return; taxeson any investment growth aredeferred, and you are taxedwhen and as you makewithdrawals. Contributionsto Roth IRAs do not reduceyour current income taxes,but any investment growthis exempt from income taxif the distributions are“qualified distributions”(made after five years andage 59 1 /2).In 2008, you may contribute upto $5,000 ($6,000 if your 50thbirthday is in 2008 or earlier) toa traditional IRA or a Roth IRAor a combination of the two,provided you have at least $5,000($6,000) of earned income forthe tax year. If you are married,you may contribute an additional$5,000 ($6,000) for your spouse.If you are covered by anotherretirement plan at any time duringthe tax year, your deductionfor contributions to a traditionalIRA depends upon your adjustedgross income (AGI). If contributionsto a traditional IRA are notdeductible, a Roth IRA may be abetter alternative, provided yourAGI does not exceed the limitsfor Roth IRA contributions forthe particular year. Check withyour accountant or tax advisor.If you want to contribute to aretirement plan for you onlyand the $5,000 ($6,000) limit issufficient, an IRA may be youranswer. You can decide howmuch to contribute to an IRAeach year, and you can make thecontribution any time before thedue date for your personalincome tax return (generallyApril 15).To discourage withdrawals froman IRA prior to retirement, anytaxable amounts withdrawn priorto age 591 /2 are subject to a 10percent penalty tax unless anexception applies. You cannotborrow from an IRA. However,like certain other retirementplans, IRAs may be protectedfrom attachment by creditorsdepending the laws of your state.Your accountant or financialprofessional can assist you insetting up an IRA.Divorce-ProofYour CompanyThe unfortunate fact is thatmany marriages end indivorce. If your marriage orrelationship were to go badsomeday, what wouldhappen to your business(especially if you and yourspouse are co-owners)? Askyour lawyer what steps youcan take today to protectyour company. You hope itwill never come to that, butif it does, you’ll be prepared.Protect YourFamily with LifeInsuranceTalk with your insuranceprofessional about personaland business life insurancepolicies, from which proceedscan be used to provide foryour family (especially usefulif most of your assets havebeen invested in the company).The proceeds from a personallife insurance policy shouldcover your family’s short- andlong-term needs; they mightalso cover the worth of thepersonal assets you investedin the business. The proceedsfrom a personal life insurancepolicy can also prevent familysquabbles if you’ve designatedone person to inherit thebusiness; the others can splitthe insurance proceeds. Abusiness life insurance policyshould provide cash to payany immediate debts andhelp the business continueuntil it is stabilized undernew management or sold. Itcan guarantee that lenderswill be reimbursed.11

The Emerging CompanyYour WorldConversationStartersHelp your advisors helpyou by asking them . . .■ How can I best seekadvice from keyprofessionals?Emerging Company Key ProfessionalsProfessional Why You Need One Additional InformationCertified PublicAccountant(CPA)InsuranceProfessional• Prepare taxes• Control cash flow for profitability• Prepare, analyze & explain financial data• Access to multiple insurance products• Analyze and recommend appropriate coveragewww.aicpa.orgwww.goodaccountants.comwww.iiaa.orgLawyer• Navigate legal labyrinth• Complete and file business structurepaperwork• Prepare contracts and agreements• Write wills and succession planswww.abanet.orgwww.smallbusinesslawfirms.comBanker• Set up accounts• Business loans• Cash management advicewww.entrepreneur.com/bestbanksChoose a few key professionals towork with during your start-up.Your budget for expert advice islimited at this time, so it’s a goodidea to stick to the basics andyour most pressing needs. If youdon’t know whom to call, askpeople you respect for a referral,and then set up an appointmentto introduce yourself, askquestions, check fees and get afeel for whether the person isright for you. Here are a fewkey individuals you’ll need tohave on call.Certified PublicAccountant (CPA)An accountant can help you withmuch more than taxes. He or shecan help you control your cashflow and grow a profitable business.Your accountant can prepare,analyze and explain yourfinancial data, and also serve asa valuable resource, providingprofessional services that businessesneed all year – not juston March 15 or April 15.There are several kinds ofaccountants, but a certified publicaccountant has passed a stringentexam and must pursue continuingeducation.Accountants might chargehourly fees or flat rates forspecific services. Their fees forservices rendered to your businesscan be tax deductible. Look forthe straight-arrow type whoadheres strictly to the rules, toavoid costly tax audits andother problems.As with most advisors, it’s bestto “help them help you.” Beforemeeting with an accountant, getyour books and plans in the bestshape possible. The few hoursyou spend doing this will saveyour accountant time – andyou money.12

EmergingInsurance ProfessionalThere are several types ofinsurance professionals – captiveagents that work for, and sellthe products of, one company;independent agents that workwith multiple carriers; and brokersthat represent clients needingmore specialized coverages.While their roles may differ,independent agents and brokerstypically have access to a widearray of insurance products, andcan recommend coverages basedon a particular customer’s needs.A good insurance agent, one whomakes sure you're covered whereyou need to be, can mean thevery survival of your business. It’svital to find one who understandssmall business issues – and yourparticular situation and business.LawyerOwning a business can be a legallabyrinth. The right attorney canhelp you navigate the maze andkeep you on the path to success.This is especially important ifyou choose a partnership orincorporation as your businessstructure, as you’ll need a lawyerto complete and file all thepaperwork that will get youlaunched properly. Attorneyscan also draw up and reviewcontracts and agreements (forequity investments, leases andother matters), and help you writeyour wills and succession plans.Lawyers’ fees for handling yourbusiness affairs may also be taxdeductible. They typically chargeby the hour, plus expenses, butsome ask for an up-front retainerfrom which they deduct hourlyfees and expenses. Ask for awritten agreement detailingthe fee structure, and ask foritemized bills.BankerWhether or not you’re using abank right away for funding, youshould cultivate a relationshipwith a key banker. You stillneed checking accounts andother services, and it doesn’thurt to make friends now toset the stage for more complextransactions later. Bankers canalso offer advice on cashmanagement and otherbanking services.Tax Preparervs. AccountantShould you spend the moneyon an accountant for yourtaxes or a tax preparer?Probably the least expensiveway to have your taxes doneis to use a tax preparer. Heor she might work for a taxpreparation firm or in a smallbusiness. However, tax preparersare usually uncredentialed.There’s no standardtraining required or exams topass in order for someone touse this title. You might get agood one, but you might alsofind one who is unfamiliarwith small business issuesor current changes to the taxlaws. Also avoid preparers(or other types of advisorsyou may encounter) who hityou with a hard-sell to buyinvestments.13

The Growing CompanyThe Topic of Conversation: Important Steps to Protect Your Businessand Assets as They GrowYour business is on the road to success. But that doesn’t mean the questions end here.In fact, you may have more now than ever. In this section, you’ll learn more about additionalsources for financing; benefit and retirement plans for you and your employees; and varioustypes of insurance your expanding business may need. You’ll also be introduced to newadvisors to consider as your business and needs grow.The growing small business isone that has achieved a degreeof stability, dependable revenuesand is earning consistent (or fairlyconsistent) profits. In other words,there’s actually money left overonce the costs of marketing andselling your product or servicehave been covered. At this stage,you’re probably one of the44 percent of small businessesthat have made it to four yearsin operation.*At this stage, you, the owner, canfind ways to further boost salesand profits, improve employee(and your) compensation andbenefits, and expand staff andfacilities as appropriate or desired.Common traits among thosebusinesses that continue to thriveare an enduring focus on innovation,effective and rigorous management,diversification, customer service andemployee satisfaction/productivity.How long this growth stage lastsis up to you and the marketplace.“Whenever yousee a successfulbusiness, someoneonce made acourageousdecision.”Some entrepreneurs are happytending to the same small businessthey’ve developed for the rest oftheir working lives and give up thebusiness only upon retirement.Others become restless after just afew years and get an itch to tacklea new and different challenge.Still others run their businesses inthe hope of cashing in by beingacquired by a large corporation assoon as the business is on its feet.Only you know which approach isright for you. In any case, there’s anew set of big-picture goals andchallenges to consider at this stage,which is all the more reason for asolid, experienced team of advisors tohelp you through this dynamic phase.Peter Drucker(1909 - 2005),Business andManagementExpert* U.S. Small Business Administration and Monthly Labor Review, May 200515

The Growing CompanyFinanceConversationStartersHelp your advisors helpyou by asking them . . .■ How can I secure moreresources for businessgrowth? How do I reachprofessional investorsand lenders, as well asmore partners andinvestors?■ Do I need a greaterfocus on limiting risk andmitigating exposure topotential emergencies?Do you need greater sums ofmoney or more sophisticatedinvestors?If your business is making aprofit and you’re thinking aboutyour next step, you may need morecapital. Perhaps you’re movingfrom small, rented quarters to alarger space, or you’re buyingreal estate. You may need newequipment to increase productionor boost your IT capability. Youcould simply need more people.Or, all of the above.Now may be the best time tobegin redirecting your debt awayfrom personal assets (credit cards,home equity lines, personalloans). Beyond reinvesting yourprofits as fuel for growth (whichyou should always discuss withyour accountant), it may makesense to seek funding from moresophisticated lenders. There’s agood chance these potentialbrokers made themselves scarcewhen you were a start-up, butthey might now offer access tolarger sums than were availableto you previously.It’s also wise to wean yourcompany from the family andfriends who helped you start up.They were invaluable to you, butprofessional lenders tend to shyaway from small businesses withtoo many family and friendsinvestors. Start to pay your friendsand family as soon as yourincome allows, and pay them atleast as much as they’d earn fromcommercial investments. They’llfeel fairly compensated for theirgood deed of helping you getProfessional Lending SourcesLending SourceBanksStrategicPartnersAngel InvestorsVentureCapitalistsstarted, and you’ll be free to seekother sources of capital. And,you’ll stay on good terms withthose closest to you.Some professional lendingsources to consider:ConsiderationsBanksAn obvious source of capital andmany from which to choose.You’ve probably cultivated a goodrelationship with a local bank bynow.Strategic PartnersThese are usually companieswhose businesses mesh withyours (a vendor, distributor orlarger, well-capitalized companyin a related business). Thesepartners can work with you inseveral ways: they might make anoutright loan to your business,act as a guarantor of your bankloan, invest in your company inreturn for an equity stake, or acombination of these.• Obvious source of capital• Probably cultivated good relationship already• Usually mesh with your business• Work with you in several ways– Outright loan– Guarantor on bank loan– Invest for equity stake• Deep pockets inclined to invest• Successful small business entrepreneurs• Often have knowledge of your field• Equity investments and equity debt deals• Often want to be involved in business• Specialize in financing start-ups, earlystagebusinesses and turnarounds• Higher risk with greater returns• Often require some equity ownership“Angel Investors”These are individuals or groupsof people with deep pockets andthe inclination to invest in smallbusinesses. These investors aretypically successful small businessentrepreneurs or businesspeople,often with an interest in orknowledge of your field, who canmake equity investments, orequity-debt deals to help you payoff other debts or act as guarantors.With such a backer, you can lookmuch more attractive to otherlenders, strategic partners andbusiness. “Angels” often want tobe involved in your company’soperations – a good thing if theycan offer a lot to your businessbesides money, and if you “click.”A bad thing if they threatenyour authority or want to makedecisions without your levelof insight.16

GrowingVenture Capitalists‘VCs’ are institutions specializingin the financing of start-up andearly-stage businesses, as well asbusinesses in turnaround situations.Generally, venture capitalinvestments are higher-riskinvestments, but they offer thepotential for above-averagereturns. For taking the higherinvestment risk, VCs are usuallyrewarded with some combinationof equity ownership rights in thebusiness, and are often involvedwith companies that have a goalof becoming publicly traded.Beware ofUnknownInvestorsBeware of unknown investorsand always check theirreferences carefully (pastrecipients, attorneys andaccountants), as scamartists are lurking, lookingfor their next victim. Lookinto the Small BusinessAdministration’s AngelCapital Electronic Network(ACE-Net), which is a list ofaccredited small businessinvestors with net worthgreater than $1 million ornet income greater than$200,000.Prepare for ongoingcash flow crunches.Growing businesses, like thosein the emerging stage, can alsoexperience shortages in actualcash on-hand (which, contraryto what many people believe,often have little to do with thecompany’s actual profitability).A major customer who suddenlystarts paying bills late, a shift inthe economy, a health scare thataffects your product – a variety ofscenarios can pull cash outof your business.Growing businesses usually needreserve funds to help managethese situations. However, themost important and immediatething to do is discuss with youraccountant why these cash flowcrunches are taking place, andwhat you can do to prevent orlessen them in the future.Since you probably have atrack record now, you havemore leverage with lendersand can set up accounts totap during these crunch times.Some options include:Company Credit LineLike a home equity line, it makescredit available on demand. Butit relies on your business collateral,not your home or other personalassets. Like a home equity line,it’s best to apply for one whenyou don’t need it. Shop around,however, as some lenders requirethat you borrow something fromyour company credit line whetheryou need funds or not; thenyou’ll pay interest on what youborrow. Talk to your accountantor banker about what’s best foryour business situation.Corporate CashManagement AccountAt the same time, a CorporateCash Management Account witha bank or investment brokeragecan be a very useful tool. Thisaccount allows you to link yourcompany checking account to aliquid interest-bearing savingsaccount (typically a moneymarket fund). Any companycash that isn’t being used can gointo it and earn interest, but itwill be completely liquid whenyou need it.17

The Growing CompanyCompensation & BenefitsConversationStartersHelp your advisors helpyou by asking them . . .■ How often should Ireview how I compensatemyself?■ Are there advantages todeferring compensation?■ When should I considerintroducing company--wide benefits?Health BenefitsAccording to a2004 survey ofemployer healthbenefits, nearly 87percent of firms withbetween 25-49employees offeredhealth insurancecoverage.Source: 2004 survey byThe Kaiser Family Foundationand the Health Research andEducational TrustA good time to review yourself-compensation policy.Once you have progressed to aconsistently positive cash flowsituation, you may want to raiseyour own salary. Before you do,however, consider your taxsituation and gear your pay tothe health of your business. Youraccountant can advise you onhow best to do this and balancethe interests between yours andthe company’s financialconsiderations.Deferred CompensationIf your company is doing wellenough that you’ve been able toincrease your compensation andbenefits package (includingretirement funding), you mightwant to consider an additionalsource of saving for the future: adeferred compensation plan. Youpick the amount and the timing(you can defer compensationevery year or just for one year–or whenever you like). Deferredcompensation plans usuallyinclude qualified retirement plans,such as pension and profit-sharingplans (must be non-discretionary),as well as non-qualified planslimited to highly compensatedand management-level employees.Stock options are another possiblecomponent of an overallcompensation strategy.The primary benefit of mostdeferred compensation is taxdeferral.What About anESOP?Is your business right for anEmployee Stock Option Plan?Talk to your accountant orlawyer about ESOPs, whichare not only an employeeretirement benefit, but also aperformance incentive.ESOPs can be key in thecompany’s future transition,as well (see The TransitioningCompany). The businessfunds employee retirementaccounts that invest in yourcompany’s stock; employeesown a stake in the companyand are motivated to see itprosper. An employee maysell stock starting at age 55.The year after the employeeretires, the ESOP must issuedistributions to the employee.ESOPs can be expensiveto set up and are typically forlarger companies.ESOPs increasesales by about2.3% to 2.4%per year.Source: 2001 Rutgers University‘School of Management andLabor Relations Study byDr. Douglas L. Kruse andDr. Joseph R. BlasiAnother Lookat DisabilityInsuranceThere are pros and cons tobuying disability insurance forthe entire company versusjust for yourself. A companypolicy will be easier to getand the premiums will bedeductible, but it will requirea bigger cash outlay. Benefitsare considered income andare subject to personal tax.There are two options fordisability insurance: pre-taxcontributions with taxablebenefits, or taxed contributions,for which benefits arenot taxed.An individual plan, if youcan get one, will be proportionatelymore expensive,but any benefits you receiveare not taxable.Consider adding newbenefits.The health of your business mayallow for the expansion of yourcompensation package and enableyou to begin to offer additionalbenefits, from childcare subsidies,college savings plans, life insuranceand long-term care insurance tosmaller, but popular, items likehealth-club memberships andwellness programs. These benefitshave become important to manycompanies in recruiting andretaining key employees. Take alook around at what competitorsand successful companies inother areas are doing.18

GrowingComparing the Three Major Types of Healthcare PlansPlan Costs Benefits ConsiderationsHealth Maintenance Organization (HMO)• Contractually agrees with healthcareproviders to form a “provider network”• Providers supply discounted services inexchange for referrals• HMO members are required to stay withinthe network• Members select a Primary Care Physician(PCP), who provides care and makesreferrals for specialists• Members pay aco-payment forin-networkoffice and hospitalvisits, regardless ofservice cost• Relatively simple, withno claim forms• Agreed upon chargescan be relatively lowto members• The least flexibility: limitedto enrolled doctors• Need referral from primaryphysician for specializedservice and hospitalization• If the member receivescare from non-networkprovider, HMO typicallywon’t pay unlesspre-authorized ordeemed an emergencyParticipating Provider Option (PPO)• Similar to a HMO, but employees canchoose the physician they want insteadof being restricted to HMO providers• An employee can choose between anin-network or non-network provider• “Richer” benefits such as financialincentives to use network providers• Members pay someportion of the cost(co-insurance) forin-network office andhospital visits, suchas 10% of the cost• Members pay higher costsfor care from providersoutside the network• Members can seeany healthcareprofessional in thenetwork, includingspecialists• Members seeing aphysician outside theestablished PPOnetwork will pay a higherportion of the costsPoint-of-Service (POS)• Often considered an HMO/PPO hybrid withmembers choosing which option they willuse each visit• POS has contracted provider networks andencourage, but don’t require, members tochoose a PCP who acts as a “gatekeeper”when making referrals• Members who choose not to use PCPs forreferrals (but still seek care from an in-networkprovider) receive benefits but payhigher copays and/or deductibles• Members may visit an out-of-network provider,but member copays, and coinsurance anddeductibles, are substantially higher• Members pay someportion of the cost(co-insurance) forin-network office andhospital visits, suchas 10% of the cost• Members pay highercosts for care fromproviders outside thenetwork• Least restrictive optionof the three main plans• Members can seeany licensed healthcareprofessionalsfor anything coveredby the insurance• You choose deductibleand other optionswhen you enroll, andthose apply to youand any dependentsyou enroll in the plan• Care received by out-of-planproviders is reimbursed,but you have to pay asignificant co-payment ordeductibleConsider a companysponsoredhealthcare plan.The introduction or expansionof a company health benefitspackage will enhance life for bothyour employees and you, andwill offer tax deductions for yourcompany. As the company growsand your need for top-qualityemployees increases, a healthplan is an important recruitmentand retention tool, particularlyin fiercely competitive industrieslike technology, healthcare andfinance.As important as healthcareplans are, so is carefulshopping.The three major types ofhealthcare plans are comparedin the chart above.Other healthcare optionsinclude:Health Savings AccountsHSAs were created by theMedicare bill signed in 2003,and are designed to helpindividuals save for futurequalified medical and retireehealth expenses on a tax-freebasis. The account, usually tiedto high-deductible health plans,is designed to pay for routinemedical expenses and/or providesavings for the future. Moneyput into the account can be usedeither during the year oraccumulated. Allowable medicalexpenses are defined by the IRS,and are much broader than mostinsurance carriers. Individualscan deduct dollars contributedto the HSA account from theirgross income, resulting in tax-freemedical dollars. The accountis similar to an IRA account;however it is for qualified medicalexpenses only.Flexible Spending AccountsFSAs let employees set asidepre-tax dollars to pay for qualifiedmedical expenses, subject to IRSguidelines, saving money in taxesfor both the individual and thecompany, which deducts a businessexpense. However, unlike anHSA, funds earmarked for theseaccounts must be used in the yearthey are contributed; they can’tbe used as a retirement fund.These are truly a “use them orlose them” item.19

The Growing CompanyInsuranceConversationStartersHelp your advisors helpyou by asking them . . .■ Do I need to expandcoverages as mybusiness grows? Howcan I best prioritizecoverages?■ How about acomprehensive riskmanagement program?■ Do I need to considerKey Person Insurance,Employment PracticesLiability Insurance andDirectors & OfficersLiability Insurance?Protecting Key EmployeesOnly one-quarterof companies withfewer than 100employees have keyperson insurance.Source: The HartfordBusiness Owners Survey,October 2006Prioritize and expandyour coverages.As your company grows, youshould have more resources todevote to insurance – and youmay find that you need additionalcoverages to protect your businessagainst the increased risk thatoften comes with growth.Whether your growth has takenthe form of investment inexpensive equipment or thehiring of key staff people, youneed to understand the value ofyour expansion and plan to protectit. And be sure you know whatcoverages your clients, investorsor creditors require. Some mightinsist on higher limits than youmight choose on your own.As you add employees, it becomesincreasingly important to haveemployment practices liabilityinsurance, which can help protectyour business from certainemployment-related claims; andkey person insurance, which canhelp protect against a significantloss resulting from the death ordisability of a key employee. Ifyou have investors, customers,suppliers or others with a significantfinancial stake in the successof your company, you may wantto consider directors and officersliability insurance, which canhelp protect the company and itsleadership against allegations ofbreach of fiduciary duty in themanagement of the company.Devise a comprehensiverisk management program.Managing risk is about morethan just having the rightcoverages, although that’s whereit starts. You need to be sure youknow where your risks lie andwhat steps you can take—beyondinsurance—to limit them. You canhelp your insurance agent thinkabout risk in a holistic fashionand build a plan to address it. Atypical risk management programhas many aspects, such asemployment screening, proactiveloss control, comprehensive safetyand ergonomic training, a formalreturn-to-work program forinjured employees (with light-dutyjobs pre-determined), specialequipment (such as a state-ofthe-artfire suppression system),business contingency planningand, increasingly, technology andinformation protection. To theextent that other professionalexpertise is required to implementYour AnnualInsuranceCheckupIt’s wise to sit down withan insurance professionalfor a yearly review of yourpicture. Make sure youreview all of your coverages –even if some were purchasedthrough another professionalor carrier. Also prepare anoverview of changes thatoccurred in your businessover the previous year –fluctuations in revenue,increases or reductions ininventory, new or upgradedreal estate or facilities,physical plant and equipmentor office equipment, fleetchanges and additions tostaff. Add an up-to-dateinventory of your assets—real estate, physical plant,inventory, office equipmentand furnishings andstaff. Then your insuranceagent will have a full pictureof your business that willhelp you get the protectionyou need.Insurance asCredit ProtectionOwning the proper type ofinsurance can accomplishother goals, such asprotecting your credit ratingwhen earnings are impairedand funding deferred compensationarrangements.With certain coverages, if anemergency strikes, you haveaccess to your policy’s cashvalues through loans andwithdrawals; the cash valueof the policy is a companyasset. Speak to aninsurance professionalabout the details.your program, your insuranceadvisor can help you arrangefor these services. And don’tforget to ask him or her aboutcredits that might be available fora comprehensive risk managementprogram in a business like yours.Ensure that your businesscan carry on in the event ofdisaster.Be it from the wrath of MotherNature or man-made threats, youneed to protect your company’sphysical and intellectual assets.Work with an IT professionalto ensure that you have securestorage of important records andsufficient backup of sensitivecompany data. Proper planningcan get your company back onits feet in short time.20

GrowingDemystifying Business InsurancePolicy Typically Covered (subject to policy terms) Who Generally Purchases ItBusiness Owners Policy (BOP)Usually more cost-efficient topurchase bundled coverages asopposed to individually.Property Insurance(repair or replacement)Property Damage, Business Interruption Insurance andComprehensive General Liability.(See next three entries)Your physical assets: building, equipment, furnishings,fixtures, inventory, computers, valuable papers, records,and more. Can also provide income if business isforced to suspend operations after a covered loss.All companies.All companies.Business InterruptionInsuranceLost earnings if business is forced to shut down dueto fire, windstorm, explosion or other insured loss.May include coverage of expenses incurred to keepoperating, such as renting temporary office space.All companies.Comprehensive GeneralLiability (CGL)Your business assets if company is sued for somethingit did or even didn’t do that resulted in bodily injury orproperty damage to someone else.(See next six entries)All companies.Bodily Injury LiabilityInjuries or deaths that happen on company property orarise from your operations. Often limited to bodily injuryliability as a result of negligence. Under ComprehensiveGeneral Liability Insurance, this coverage, coupled withProperty Damage Liability (below), is often referred toas Premises and Operations Exposures.All companies.Property DamageLiabilityLiability for damage to others’ property not in the care,custody and control of the insured.All companies.Product and CompletedOperations ExposuresBodily injury or property damage to others caused bythe company’s finished work or manufactured goods.All companies.Advertisers PersonalInjuryLawsuits brought against the company alleging libel orslander as a result of company advertising.All companies.Fire Legal LiabilityCompanies that rent their business property. It protectsthe landlord against fire damage to the property by thelessee company.All companies.Medical PaymentsVisitors’ minor injuries sustained while on companyproperty.All companies.Workers’ CompensationMedical bills, rehabilitation and drugs to treatemployees' work-related injuries, as well as lostwork time.Most states require it for companieswith one or more employees andimpose severe penalties on employerswho don’t purchase this coverage.Demystifying Business Insurance continues on pages 22 and 23.21

The Growing CompanyInsurance (continued)Demystifying Business InsurancePolicy Typically Covered (subject to policy terms) Who Generally Purchases ItCommercial AutoUmbrella LiabilityCars, trucks and vans owned by the company forbusiness purposes. Most policies also cover the liabilityof employees using their own vehicles for your business;however, the employees' personal auto policies mayprovide primary coverage for damage to theirautomobiles.Catastrophic losses that exceed the limits of a generalliability policy.Companies that own vehicles forbusiness use or often use employees’vehicles for business. If employees’vehicles used only occasionally, theCommercial General Liability may besufficient.All companies.Professional Liability(Errors & Omissions) CoverageClaims alleging that something your company did orfailed to do on behalf of a customer was in error andcost him/her money or caused harm in some way.Anyone who gives advice, makesrecommendations, designs solutionsor represents the needs of others.Directors and OfficersEmployment Practice LiabilityFiduciary LiabilityFiduciary BondCrime CoverageCyber CoverageKey Person InsuranceBusiness ContinuationCoverage/Buy-Sell PlanningDirectors and officers of your company if they or thecompany is sued as a result of the performance oftheir company duties.Certain claims by government regulators, competitors,investors and shareholders alleging mismanagement,unfair competition, violation of state or federal law andother wrongful acts.Claims of illegal or discriminatory hiring and firing; sexualharassment; discrimination; mental anguish and otheremployment-related claims.Claims of a breach of the responsibilities or dutiesimposed on a benefit administrator in your employ;or negligence, error or omission of the administrator.Same as Fiduciary Liability, but for companies thatoutsource their benefit administration.Employee and non-employee theft, forgery, computerfraud, and theft of goods on premises or in transit.(*You may choose on, off or both)Losses from computer hackers, virus attacks,denial-of-service attacks, copyright infringement andcustomer claims arising from your Web site.Loss resulting from the death or disability of a keyemployee.Transition of ownership in the event of death or disabilityof a business owner. Helps avoid conflicts betweensurviving family members and remaining owners.Any publicly traded companywith a corporate board or advisorycommittee. May also be necessaryfor non-profit organizations andprivate companies.All companies with at least twoemployees. While employmentpractices lawsuits are usuallybrought against larger companies,all businesses with employeesare vulnerable.All companies that employ anin-house bookkeeper or accountantand provide 401(k), pension orother financial plans.All companies that outsourcepayroll/benefits administration.All companies, but especiallycompanies that deal with lotsof cash.Any company that keeps sensitiveinformation on a network or doesbusiness online.Any business, but especially smallbusinesses in which the key personis the customer-supplier contact oris so crucial to the business thathis/her loss would cause a severedrop in efficiency and loss of capital.Small business owners are particularlyin need of business continuationplanning.22

GrowingDemystifying Business InsurancePolicy Typically Covered (subject to policy terms) Who Generally Purchases ItDisability InsuranceGroup Life InsuranceGroup Retiree Health BenefitsGroup Travel InsuranceAccidental Death &DismembermentCovers a person’s income when he/she is unable to workbecause of an accident or illness. Most coverages provideabout 60 percent of a person’s income.Sold as either Group Disability through an employer, or IndividualDisability, purchased directly from a provider (or as part of agroup, such a professional association or civic group [e.g.,trade group, Chamber of Commerce, etc.])There are two primary types of Disability Insurance:• Short-Term Disability: benefits equal to a portion of theemployee's wages when he/she can't work because of non-workrelateddisabling illness or accidental injuries. Usually have awaiting period of 0 to 14 days and most run out within 2 years.• Long-Term Disability: benefits equal to a portion of theemployee's wages when employees can't work becauseof long-term disabling illness or accidental injuries thathappen on or off the job. Waiting period of severalweeks to several months, and a maximum benefit durationfrom a few years to the lifetime of the employee.Typically offered as Basic, Supplemental or Voluntarycoverage and can be paid for by the employer, the employeeor shared. The coverage is usually offered as a flat dollaramount or a percentage of the employee's salary, althoughemployers can choose the plan design and other details.Most employer group plans are term insurance, i.e., availableto the employee as long as they remain eligible through theiremployer. The coverage is often available for employees,spouses, dependent children and retirees. During enrollmentperiods, some plans offer levels of coverage that are“guaranteed” without having to show proof of good healthor a medical exam.Costs are determined by the industry, the number of employees,the average employee age and gender of employees.Designed to integrate with Medicare plans, cover manyof the deductibles, co-payments and out-of-pocket medicalexpenses not covered by Medicare. Plan designs include avariety of employer and retiree paid solutions, basedon the needs of the employer.Sponsored by employer groups with a minimum of two retirees,eligible persons include retirees, spouses, widow(er)s anddomestic partners, aged 65 or older, and entitled to Medicare.Covers employees and families against accidental injuriesduring business trips. Can protect all employees or particularclasses of employees, and specify whether coveragepertains to entire trips or only the business portion. Manypolicies contain travel assistance services, including tripplanning and 24-hour emergency medical assistance.Provides benefits to employee's family if employee suffersinjury or death as a result of an accident. AD&D coveragealso pays a certain amount for loss of a limb or certain vitalfunctions as a result of an accident.Similar to group life insurance, AD&D is offered as Basic orVoluntary coverage and can be paid for by the employer, theemployee or shared. Unlike life insurance, AD&D coveragedoes not pay benefits if employee's death is due to illness.Most states require companiesto carry some amount of STD.In some states (including Hawaii,New Jersey, New York and RhodeIsland), state law requiresemployers to provide disabilitybenefits for up to 26 weeks.No laws require companies tocarry LTD.More common amonglarger companies, but smallercompanies are starting to seethis coverage as a recruitmentand retention tool.All companies with a minimum oftwo retired employees.All companies whose employeesregularly travel for the business.All companies.23

The Growing CompanyYour Life, Your FutureConversationStartersHelp your advisors helpyou by asking them . . .■ Can I enhance mycompany’s retirementbenefits?■ How should I bethinking about myown investments inthis phase?Retirement PlanningTwo-thirds ofbusiness ownersworry about havingenough moneyfor retirement.About one-fifth ofsmall businesses(fewer than 100employees) offera 401(k) plan.Source: The HartfordBusiness Owners Survey,October 2006A retirement plan is probably onyour radar screen at this point.Companies establish differentplans for different reasons – whyare you establishing yours? Toget maximum tax benefit foryourself and your key employees?To attract and retain employeeswith the skills you need?Answers to these questions willhelp you decide what type ofplan and features you need.Consider a qualified companyretirement plan that willenhance your future andthat of your employees.There are a variety of plans availabletoday, including straightforward,economical plans designed forsmall business owners. Byoffering a retirement plan, youstand to gain several benefits.Small businesses may be eligiblefor a three-year tax credit of upto $500 for setting up a newretirement plan. Your employees,too, might be eligible for taxincentives for their contributionsto the plan. A retirement plancan also be a valuable recruitmentand retention tool. Today, thereare more plan and investmentoptions than ever; speak to youraccountant or financial planner.Qualified vs. non-qualifiedplans . . . “qualified” plans areeligible for special tax treatment;however, you must satisfy certainnon-discrimination requirementsintended to provide benefitsfor rank-and-file employees.Non-qualified plans allow youto pick and choose the benefitsfor selected employees, but theymay not have all the benefits oftax-qualified plans. Talk to youraccountant for specifics.Defined Benefit PlansA plan in which the employerputs aside and invests retirementmonies. Employees are guaranteeda defined benefit at retirement.These can be expensive foremployers and are falling outof favor.Defined Contribution PlansMost current retirement plansare defined contribution plans, inwhich employer and/or employeecontribute to the employee’sretirement account and theparticipant bears the investmentrisk. Within this category ofplans, there are many variations,each one appropriate for differentkinds of businesses in differentcircumstances. You have severalchoices. The chart on page 25is representative of many but notall the choices.Take advantage of otherways to save for the future.If you can put away other moniesfor retirement, all the better.Business owners need to diversifytheir investment risk away fromtheir business, and they need toassess this in determining how tobalance their portfolio. Workwith your accountant or financialplanner to look into investmentsthat balance risk and growth.The first step is to tally up yourassets and determine their relativesecurity, what they’re worth nowand how much income they canproduce annually, now and overtime. Then, fill in the gaps.Consider saving for yourchildren’s education.It’s often recommended thatyou fund health insurance andretirement before college, asthere are other resources – loans,scholarships, jobs, help fromrelatives – that may be availableto your children when theyreach college age.Section 529 CollegeSavings PlanIf you have sufficient funds, thisis one tax-advantaged educationsavings plan. It differs from stateto state; you can start onethrough your own state’s plan orthrough the several states thatoffer their product interstate.Don’t Neglect YourOwn RetirementBenefits for your entireworkforce might still befinancially out of reach foryour growing company, butyou should discuss your ownretirement with your accountantor financial planner. Don’tforget that as a self-employedentrepreneur, you are allowedto fund an IRA for yourselfand your spouse. You canalso grow your assets in a lifeinsurance policy and beprotected at the same time.24

GrowingEmployer-Sponsored Defined Contribution PlansPlan Benefits ConsiderationsThe Simplified Employee Pension IRA (SEP IRA)Employer-sponsored IRA, meaning that contributions are made by theemployer rather than the employee. A SEP IRA has higher contributionlimits than a traditional IRA. However, the employer’s contribution mustbe allocated to all eligible employees, based on specific formulas.Generally, a SEP IRA allows you to set aside up to 25 percent of your netearnings (but no more than $46,000 per employee) in a qualified (tax-advantaged)retirement fund, (effectively reduced to 20 percent if you’re a soleproprietor because the contribution itself reduces qualifying income, butcompensation in excess of $230,000 [2008] is not taken into account).Money you set aside is both tax-deductible in the current year andtax-deferred until you receive a distribution.**Distributions are subject to ordinary income tax and if taken prior to age 59 1 /2, the distributionmay also be subject to a 10 percent federal tax penalty.• Great option for asmaller business.• Fairly simple toimplement; doesn’trequire a third-partyadministrator or filingof tax forms.• Does not requireongoing contributions.• Can be expensive to fund.• Employee contributions arenot allowed.• Employer contributions areimmediately vested.The Savings Incentive Match Plans for Employees IRA (SIMPLE IRA)IRA-based plan that gives small employers a simplified method to allowemployees to contribute, and to make employer contributions toward theiremployees' retirement and their own retirement. Under a SIMPLE IRA plan,employees may choose to make salary reduction contributions and theemployer makes matching or non-elective contributions.Eligible employees may contribute up to $10,500 in 2008 ($13,000 ifage 50 or older in 2008) with no percentage limit. Generally, the employermust make dollar-for-dollar matching employer contributions on the first3 percent the employee contributed.• Simple to operate andadministrate. Minimalpaperwork, expenseand tax filing.• May be established onlyby employers that had nomore than 100 employeeswho earned $5,000 or morein compensation duringthe preceding calendaryear (the "100-employeelimitation"), and do notcurrently maintain anotherretirement plan.401(k)Popular option for companies with more staff. Taxes on accrued earningsare deferred until retirement. The employee can elect to set aside apercentage of salary up to $15,500 in 2008 ($20,500 if age 50 or olderin 2008). The employer may make matching contributions to the employee’saccount based on a percentage of the employee contribution.• Many companies matchemployee contributions,and can make discretionarycontributions,up to $46,000 peremployee.• Higher employeecontribution limit thanSIMPLE plans or IRAs.• Administrative fees maymake them less attractiveto smaller firms.• Subject to annual IRSreporting.Qualified Profit-Sharing PlansMay be attractive to those businesses whose profits might vary from year toyear, since they allow annual contributions to fluctuate with the company’sfortunes. Some allow employee contributions of after-tax income.• Permits employers tomake discretionarycontributions, up to$45,000 per employee.• Subject to annual IRS andDOL reporting.Age-Weighted Profit-Sharing PlansRetirement plans that usually let older workers accrue benefits faster thanyounger employees. The plan assumes that younger employees have moretime to save for retirement.The company contributes to each employee’s retirement fund based on ageand compensation level.Solo Defined Benefit PlansFunded by the employer and pay a defined benefit at retirement. Undera typical defined benefit plan, a participant’s accrued benefit is notdetermined by the investment results of an individual account but insteadis a fixed benefit determined by a plan formula, typically based on years ofservice and level of average pay. May be most appropriate for high-incomeearners looking for the highest tax deduction.• Appropriate forbusiness owners whohave increased theirown compensationsignificantly and havemostly youngeremployees.• The employer’scontribution obligationto fund the plan isdetermined with thehelp of an actuary.• Must be carefully structured,so not to violate the government’s"non-discrimination"rules for retirement programs.Subject to annual IRS andDOL reporting.• Can require the employer tocontribute large sums over arelatively brief period of time.• Can be costly to administerbecause an actuary isrequired.• Subject to annual IRS andDOL reporting.25

The Growing CompanyYour WorldConversationStartersHelp your advisors help youby asking them . . .■ How do I grow myprofessional network asmy business grows?■ Does a small businessneed an advisory board?■ I’ve heard a lot aboutfinding a mentor. Why isthat important and howdo I find one?■ Is it time to shop for amore sophisticatedprivate wealth manager?Review existing relationshipsand develop new ones asneeded.At this stage, you’ll build yourexisting network. For financingand expert assistance with growthstrategies, seek strategic partners,investors and/or venturecapitalists.While you may have some or allof the following advisors as partof your team, what you requireof them may have grown ornow differ:Certified Public AccountantAs you find yourself with moredeductible business expenses andas you have more cash to fundhealth, retirement and otherbenefits for yourself and youremployees, you’ll need expertadvice to set all these up andachieve maximum tax benefits.LawyerYou’ll need your lawyer if youchange your business structure,enter into more complex equityrelationships, strategic partnerships,employment issues, realestate transactions and other contracts.Consider switching to oradding a specialist if your currentlawyer lacks the knowledge toguide you through a new venture.Insurance ProfessionalsAs your cash flow improves andyour assets grow, there will bemore to your business that you’llwant to protect—and you’ll havemore resources to do so. Aninsurance professional who isknowledgeable about smallbusinesses, and not tied to sellinga single carrier’s policies, may bein the best position to help guideyou to the coverages that aremost important now.Protect YourGrowing AssetsAt this stage your businessis growing and, most likely,so are your personal assets.Be sure to shop for a wealthmanager that offers personalfinancial planning and abroad variety of investmentproducts. The most valuableadvisors are usually thosethat represent a range ofcompanies and products,and are not tied into onesource.26

GrowingInvestment Advice: Whereto turn for help.Depending on your situation,you may find it helpful to workwith a financial professional whocan provide guidance aboutinvestments and other financialplanning needs. At various timesin your life, you might consult aninvestment advisor, a financialplanner – or both. An investmentadvisor can help you make andmanage your investments. Afinancial planner can help youwith insurance, retirementplanning, and estate planning aswell as investments. However,beware: not all financial plannerstake such a comprehensive view,and anyone can use the title.It’s important to seek helpfrom someone with verifiablecredentials.Registered representatives,often known as stockbrokers orbrokers, must pass exams to belicensed to sell securities andmust be registered with theFinancial Industry RegulatoryAuthority (FINRA). It may alsobe a good idea to look for anadvisor that holds either of thefollowing designations:Certified Financial Planner professional can offer adviceon retirement, taxes, investing,employee benefits and real estate.A CFP ® professional must havea bachelor’s degree and threeyears’ experience, and must passa 10-hour exam overseen by theCertified Financial Planner Boardof Standards to use the trademarkedCFP initials or logo. Youcan find a CFP professional inyour area, or verify credentialsat www.cfp.net.Chartered Financial Consultantis a financial advisor with advancedknowledge in wealth accumulationand retirement planning. AChFC ® must have at least threeyears’ experience in the financialservices industry and pass anexamination on the fundamentalsof financial planning, includingincome tax, insurance, investmentand estate planning.When choosing a financial professional,it’s important to:1. Seek help from someone with verifiable credentials.2. Meet with a potential advisor to make sure he or sheunderstands your needs and objectives.3. Find out up front how payment works, whether it is an hourlyor fixed fee, commission-based, a combination, or anotherarrangement.For more information about selecting a financial professional, visithttp://www.sec.gov/investor/pubs/invadvisers.htm orhttp://www.finra.org/InvestorInformation/index.htm.You may want to createan Independent AdvisoryBoard.While not required, many smallbusiness owners have also begunto assemble a board of advisors, agroup of people who cometogether to share their knowledgeand experience. Your board canbe made up of the network ofspecialists whose services youalready use or others, includingsome in your own field ofbusiness and a customer or two.The advisory board has nolegal responsibilities or rights,but can be as much of a valuableresource or sounding board asa (legally required) board ofdirectors is to a public company.The key is to sharply define whatyour board will do – what adviceyou need, what you don’t need,when you will meet, etc. Avoidhaving employees on youradvisory board; they might deferto your opinion, even if youencourage them to speak freely.Seek out a mentor orprofessional coach.At this stage, you’ll often findyourself in need of someone withwhom you can talk about businessand issues in a confidential,peer-to-peer way – a mentor (whenyou’re at the top of the company,it’s hard to have such conversationswith associates). A mentor istypically a more experiencedowner of a small business whohas faced the same challenges thatyou are facing now. He or shemight be someone you’ve met at aprofessional gathering, or in thecourse of your work. Or it mightbe someone you’ve found througha mentoring program sponsoredby the local entrepreneursassociation, a trade group oreven a retired businessperson’sorganization (such as SCORE).However, make sure that assuccessful as these individuals havebeen in building companies, theyare also good in advising others inthe growth of a business. You canlook for such a professional coachat www.coachfederation.org/ICF.27

The Transitioning CompanyThe Topic of Conversation: Important Considerations as You Prepare to Sellor Pass Your Company to Heirs, and Plan for What’s NextYou’re ready to start a new chapter in your life. You probably have questions about the nearfuture and beyond. This section outlines various options for your business transition, and howthe right advisors can help you make the right choices for your business, employees, co-ownersand for your own personal financial health.The transitioning business isone that may be in its last fewyears under the current owneror owners.Regardless of whether the transitionis triggered by the owner’s impendingretirement, a change in businessconditions or the owner’s decisionto move on to another venture, thesteps taken during this time will becritical to the company’s health andowner’s future finances.A major factor in how to treatthis phase depends on the actualtransition – whether the companyis to be sold to another businessentity, another individual, employeesor passed to the owner’s family.Whatever the reason for the transitionor the nature of the ownershipchange, maximizing your advantagesand minimizing potential pitfallswill require a high level of businessReaping the RewardsMore than 40 percentof small business ownerssay their top long-termpersonal-finance concernis how to leave theirbusiness and realizethe monetary benefitsof their hard work.savvy, and greatly benefit fromyour current – or expanded –group of advisors.This is also the time to askwhether this core group of advisors– those that have provided valuableadvice to get you to this point –is the same group suited to helpyou through this time of transition.Greater risk and complexity mayrequire professionals with morespecific skills and experience.As with the previous stages ofyour company’s life, there are manyfinancial, insurance and life issuesto think about.Source: The HartfordBusiness Owners Survey,October 200629

The Transitioning CompanyFinanceConversationStartersHelp your advisors helpyou by asking them . . .■ How do I determine if mybusiness is ready for atransition? How do Imake it look mostattractive for sale?■ Should I expect toreceive a lump sum orearn out?■ How can I retain keyemployees during thetransition?You might be ready to sell or pass your company to your heirs; what typeof transition is right for you and your business?Type of Business TransitionsTransition Possible Benefits Some ConsiderationsSale to Another CompanySale to Employees (ESOP)Many small business ownersdevelop strong ties to theiremployees; If you feel this way –or if your company looks like itwould be a hard sell to outsidersbased on market conditions orthe kind of industry you’re in –you can sell it to your employeesthrough an Employee StockOption Plan (ESOP) (see TheGrowing Company, Compensation& Benefits.) You can transact thesale through an existing ESOPor set the plan up expressly forthe transition.• Usually a company familiarwith, and successful in, yourindustry.• Financial benefits to you andyour employees.• You’ll realize tax benefits withthe ESOP using tax-deductiblecorporate earnings to buystock from the owner.• Capital gains tax on the saleis deferred.• Employees know the businesswell and usually have strongties to the company.• What happens to youremployees? Are theyabsorbed, moved or outof a job?• Most such transitions takeseveral years.• Employees can be reluctantto make changes.• Not for small mom-and-popshops; usually forcompanies whose salestotal in the millions.Sale to Family Member(s)• You know the buyer – littlerisk for surprises.• Usually someone who knowsthe business well.• Often difficult to mixfamily and finances,especially when thereis not an equitabledistribution betweenfamily members.Sale to Co-owner(s)• You usually know thebuyer(s) very well.• Usually someone who knowsthe business well.• More difficult transactionwhen co-owners are familymembers.Can change friendships/relationships posttransaction.But, first, find out if yourbusiness and you are ready.As much planning as it took tostart your business, that much –if not more -- planning should beput in during a time of transition.There are many things to reviewwith your accountant before thefinal disposition of your business,whatever it might be. An accuratevaluation of privately ownedcompanies largely depends onthe reliability of the company’sfinancial information. And, assimplistic as it may sound, youmust be absolutely ready to turnthe business over.Is the business ready?Valuation of BusinessIf you are selling, a valuation willshow the market worth of yourbusiness – a general idea of howmuch you can expect to get froma buyer. A valuation is typicallydetermined by an accountant, alawyer specializing in businesstransitions, an investment bankeror a business appraiser. Whoeveryou use, make sure they belongto, and adhere to the policiesof, one of the three major U.S.valuation societies: the American30

TransitioningSociety of Appraisers (ASA), theInstitute of Business Appraisers(IBA) and the NationalAssociation of Certified ValuationAnalysts (NACVA).There are several methods todetermine the accurate valuationof your business – your accountantor a valuation specialist will knowthe best way for your specificsituation and goals. Factors thatplay into these formulas includethe state of the economy, growthprospects of the industry, thecompany’s outstanding obligationsand/or its need for capital expendituresto stay competitive or, ifapplicable, a pressing need to sell.When you have precise valuation,work with your accountant orfinancial planner to compare it toyour total annual compensationand what you determine you’llneed after your transition. If yourprobable sale price won’t meetyour needs, it’s time to work onimproving performance beforeselling. If you’re determined tocut back on your own involvementwith the business rightaway, a good manager might beable to achieve the needed growthspurt before a sale.Tie up all the loose endsto make your businessattractive to buyers. Achecklist should includethe following elements:Loose End ChecklistAll company financials areready to be auditedAudits and other recordsshould be ready forinspection by prospectivebuyersAll taxes are paidVerbal contracts withvendors and key employeeshave been put in writing(non-compete or “retention”agreements for employeesare key in some fields)Leases and other contractsthat are due to expirehave been renegotiated(although the buyer mightwant otherwise). Ensurethat all contracts will behonored, no matter whoowns the businessYou have developed aselling memorandumdetailing the business’sfinancials, its assetsand its potential; thememorandum summarizeswhat it is you are offeringto prospective buyersAre you ready?What do you want/needfrom the transition?After determining that the company’svaluation supports thetransition and that the businessis ready to sell, you’ll need tocalculate your personal financialneeds. First, consider what it coststo support your lifestyle (now andin the future) and what obligationsyou have (or will) have (help foran aging parent or subsidy of achild in college, for example).Then ask yourself one of thehardest questions you’ll ever face:what do you want to do now?And be honest with yourself:■ Will you retire?■ Start a new business (whichwill require capital)?■ Get another job?■ Stay on as a consultant tothe business you are selling?Each option will come with adifferent expense and incomeprofile.Once you’ve figured out yourlife’s next chapter, consider yourincome needs. You’ll need to factorin the long-term income you cancount on from the proceeds fromthe transition, your savings andany future income. Then you canwork with your accountant orlawyer to structure your transition– and payout – in a way that suitsyour needs.If you sell to an individual,chances are you’ll get cash, eitherin a lump sum or in installments.But you might also negotiate aplan to lease some of your assetsto the buyer, so you’ll haveongoing income. (This couldease the upfront burden on thebuyer, as well.) If you sell to youremployees or to a corporation,you might receive cash plus stockor options. Whether you sell toan outside party or an employee,you might negotiate a contract tostay on as consultant for a set feefor a period of time. Work withyour advisors to structure a dealthat will meet your future needs.Focus on Debt, Notthe Big ProjectsDon’t assume that you need toundertake major capital projectsto correct all the business’sflaws. Buyers want to see highprofits, not debt, and they mighthave the resources, such asunderused real estate, forexample, that will enable themto correct your company’sflaws on their own. Speak toyour accountant or lawyerabout the best course of action.Don’t be tempted to changeaccounting practices to makethe business look more attractive.Professionals are trained to easilyspot such actions, which canseriously derail your transitionplans.31

The Transitioning CompanyCompensation & BenefitsConversationStartersHelp your advisors helpyou by asking them . . .■ How do I account for myincome and benefitsaround the transition?■ How can I safeguardmy interests if I’m notreceiving full paymentup front?■ What kind of financialplan do I need for theproceeds from the deal?Base your income on yourpost-transition plans.With a realistic vision of yourbusiness, your future financialneeds and your life goals, youcan structure a compensationplan that can make your visiona reality. If you are passing yourcompany to your heirs, yourcompensation once the transitionis done will depend largely onyour savings from salary, bonuses,retirement and other benefitsthat you have established overthe years. Unless you plan toretain an equity stake or othertie to the company once yoursuccessors take over.If you are selling the company,your compensation can bestructured in any of several ways.You might receive the sale pricein one lump sum; however, mostsmall businesses owners don’treceive full payment up front.Many transactions are structuredso that part of the payment isdeferred or paid as equity in thebuyer’s company. You might holdan installment note under whichthe buyer agrees to pay you setamounts over time. Or youmight retain ownership of keyreal estate or equipment andlease it back to the buyer; thiscan afford you additional incomeafter the sale. Work with aprofessional – typically anaccountant, investment bankeror lawyer -- who specializes insuch sales to create a compensationpackage that will rewardyou fairly and securely and beadvantageous to the buyer,as well.Make Sure theBuyer’s FinancesAre in OrderIf you’re not getting full paymentfor your company up front, askyour accountant or lawyer toinvestigate the buyer’s financesand history thoroughly.Understand that if you hold anote for part of the sale priceand the buyer encountersfinancial problems, you mighthave to compete with othercreditors for repayment. Insuch cases, there are differentclasses of creditors; be surethat you are in the securedcreditor class—that the debt toyou is secured with some kindof valuable collateral.If You StayOn . . .The buyer might ask thatpart of your compensation, ifyou take on a consulting roleor have some involvement inthe business, be tied to thecompany’s future performance.Any such offer, whether itinvolves stock or otherarrangements, should beexamined carefully becauseof the risk it carries.Prepare a financial plan forthe proceeds from your sale.Whatever the terms of the sale,it makes sense to plan what youwill do with the money. First,you’ll have to pay capital gainstaxes on any cash proceeds fromthe sale in any year in which youreceive them (unless you’re sellingthrough an ESOP). Then, you’llneed to protect the remainderand help it grow to provide foryour future needs. Do youalready have a well-fundedretirement plan? Have you doneyour estate planning? The plansand instruments you have inplace might need to be updatedbased on the terms of yourtransition. It’s worth your whileto consult your accountant orfinancial professional well inadvance of the sale. You shouldalso consult a financial professionalregarding employeecompensation and the securityof retirement and other benefits.32

TransitioningThe Transitioning CompanyInsuranceConversationStartersHelp your advisors helpyou by asking them . . .■ How do I ensure that mycoverages are sufficientand up to date, both asan attraction for buyersand in the event thatinsurance will be part ofthe transition?Be sure prospectivebuyers find your companyadequately covered.If you are transitioning via a sale,review your insurance situationwith an insurance professionalto be sure there are no red flagsthat will scare off a prospect. Ifyou are underinsured, this couldsignal mismanagement of thecompany or artificially highprofit margins. Key personinsurance can be important toa buyer when certain employeesare integral to a company’scontinued success.Make sure your riskmanagement program isongoing and effective.A comprehensive risk managementand safety program can help ina sale. And lack of one can be adeterrent to buyers. Clean upany obvious safety hazards, andimplement and enforce safetyprecautions if necessary.Depending on your business,prospective buyers will want tolook at your accident and injuryhistory, and you want as clean arecord as possible. A well-trainedworkforce with a solid history ofmanaging risk and maintainingsafety will be much more attractivethan one that will have to startfrom square one.If an insurance policy willbe part of your transaction,be sure it is in place.In some cases, and if yourpolicy has built up sufficientfunds, a company might borrowagainst the cash value of a policyto enable a partner or employeeto buy all or part of the owner’sstake. If this kind of arrangementwill be part of your transition,work with your insurance advisorto make sure you have thecoverage and flexibility wellbefore you need it.If you will be staying on withthe company, make sure youhave all necessary insuranceprotection.If you plan to retain an ownershipstake in the company or if youare staying on in a managementcapacity, you’ll want to be sureall of your coverages are adequateand up to date. That way, youcan be sure your investment isprotected, even if you’re notinvolved on a day-to-day basis.Start theInsurance BallRolling EarlyIf you are working with aninsurance professional toupdate your coverage, keep inmind that some policies takea while to implement. Applyfor these early enough so thateverything is in place whenyou are ready for prospectivebuyers to come calling.For a more in-depthdescription of thevarious business-relatedinsurance policies, seeThe Growing Companyon pages 21–23.33

The Transitioning CompanyYour Life, Your FutureConversationStartersHelp your advisors helpyou by asking them . . .■ Can I use estate-planningtrusts to ensure thefinancial security of myheirs?Family MattersNinety percentof U.S. businessesare family-owned.However, only30 percent offamily-runcompanies todaysucceed into thesecond generation.An even smaller15 percent surviveinto the third.Source: U.S. Small BusinessAdministration, BusinessDevelopment SuccessSeries, 2001If your assets warrant,set up trusts to protectyour hard-earned wealth.Your will has probably beendrafted, you’ve planned for yourretirement and other financialneeds and obligations, and structuredyour transition. But ifyou’ve accumulated significantassets, it’s time to consider whatwill become of them when youdepart this world. If you’re notcareful, the tax collector couldwind up with a bigger chunk ofyour estate than necessary.True, federal estate taxes arescheduled for a one-year repealfinal phaseout in 2010; butthey will exist until then, andare also scheduled to return in2011. What’s more, current lawsdictate a somewhat confusingand changing schedule of estatetax exemptions. Despite whatCongress may enact before then,it’s vital that you consult yourtax advisor to plan for you andyour family’s future.If your business and other assetsare substantial enough to exceedany applicable estate tax exclusions,current tax rates can require yourheirs to pay one-third to one-halfof the remainder of your estate.Fortunately, there are steps youcan take to reduce your heirs’tax burden, and trusts are chiefamong them.TrustsA Trust is simply composed ofassets given over to a trustee.You can create a trust withpersonal and/or business assets.Testamentary trusts are createdDifferent Types of TrustsTrustCredit ShelterTrustGrantor RetainedAnnuity Trust(GRAT)Life InsuranceTrustCharitableRemainder TrustDynasty TrustConsiderationsthrough your will and activatedon your death. Living trusts arecreated while you are alive, butthey can continue after yourdeath if you stipulate that theyshould.• Assets above and beyond the exclusionamount pass directly to spouse estate-taxfreedue to unlimited marital deduction• Assets equal to the exclusion amountdirected into a Credit Shelter Trust withno tax due• Can purchase life insurance policy forsurvivor upon death of insured• Living trust where grantor retains aninterest in assets, and is paid income forspecified time period• Often suitable for single, divorced orwidowed people• At end of term, assets in trust pass to oneor more named beneficiaries• Death benefit paid by life insurance policyis placed in trust and excluded from thetaxable estate• Can purchase a policy insuring either husbandor wife, or a policy insuring both husbandand wife; benefits would be paid out onlyupon death of second person• Donate money or property to a charitableorganization, but donor receives incomewhile living• Beneficiaries receive any income and thecharity receives the principal after a specifiedperiod of time• Grantor avoids capital gains tax on the donatedassets, gets an income tax deduction andasset is removed from the estate, reducingsubsequent estate taxes• Long-term trust planned to last a specificor unlimited generations into the future• Often used to fund higher education formultiple generations34

TransitioningSeveral kinds of trusts toconsider include:Credit Shelter TrustA Credit Shelter Trust is onekind of trust that can shelter yourestate from taxes. Many spousesleave their estates to their survivingspouse in the form of two trusts.Assets above and beyond thedeceased spouse’s applicableexclusion amount either passdirectly to the surviving spouseor are directed to a Marital Trust,or A trust, for the benefit of thesurviving spouse. In either case,the assets are received estatetax-freedue to the unlimitedmarital deduction; however,they will be included in thesurviving spouse’s estate.Assets equal to the deceased’sapplicable exclusion amount areoften directed into a CreditShelter Trust, or B trust, resultingin no tax due. Assets withinthe trust and any appreciationof those assets should not beincluded in the surviving spouse’sestate, thereby reducing the estatetax incurred at the second death.The Credit Shelter Trust can alsopurchase a life insurance policyon the life of the surviving spouse;upon death of the insured, thelife insurance proceeds are receivedby the trust income and estatetax free.Grantor Retained AnnuityTrust (GRAT)The Grantor Retained AnnuityTrust is another way to shelterassets. It’s a living trust in whichyou, the grantor, retain an interestin the assets in the trust for aspecified time period. Thesetrusts are often suitable forsingle, divorced and widowedpeople who won’t have twoestate exclusions at their disposal.GRATs let you place a portionof the stock in your company intrust for your heirs. You retain aninterest in the company and thetrust pays you an income streamfor a specified time period.Because you hold an interest inthe stock owned by the trust, itsvalue is discounted and its gifttax liability is reduced.At the end of the trust term, anyassets in the trust pass to one ormore named beneficiaries (e.g.,specific family members or even alife insurance trust, which can usethe assets to help fund the lifeinsurance held by that trust).Life Insurance TrustsLife Insurance Trusts are anothertax-advantaged method for passingwealth to the heirs of a large estate.With this arrangement, the deathbenefit paid by the life insurancepolicy is placed in trust andexcluded from the taxable estate.You can use shares in the companyor other assets to set up the trust,and you can buy one life insurancepolicy insuring either husbandor wife, or a policy insuring bothhusband and wife; the benefitswould be paid out only on thedeath of the second person,when estate tax would be due.Take care to have it done bya knowledgeable professionalto make sure it conforms toIRS rules.Charitable Remainder TrustsCharitable Remainder Trusts area way to support a worthy causewhile helping to secure your ownfuture. An arrangement is madeto donate money or property toa charitable organization, but thedonor continues to use the property,and/or receive income fromit while living. The beneficiariesreceive any income and the charityreceives the principal after aspecified period of time. Thegrantor avoids any capital gainstax on the donated assets, andalso gets an income tax deductionfor the fair market value of theremainder interest that the trustearned. In addition, the asset isremoved from the estate, reducingsubsequent estate taxes. Whilethe contribution is irrevocable,the grantor may have some controlover the way the assets are invested.There are three primary typesof CRTs: a charitable remainderannuity trust (which pays afixed dollar amount annually),a charitable remainder unitrust(which pays a fixed percentageof the trust's value annually),and a charitable pooled incomefund (which is set up by thecharity, enabling many donorsto contribute).Dynasty TrustsDynasty Trusts are long-termtrusts that are planned to last forspecific or unlimited generationsinto the future. They are alsoknown as “legacy” or “perpetual”trusts. Dynasty trusts aredesigned to last beyond the timeperiod allowed by the RuleAgainst Perpetuities, which haslimited trust durations by mostU.S. states (about half of thestates follow the UniformStatutory Rule AgainstPerpetuities). Dynasty trustsare often used to fund highereducation for multiplegenerations.35

The Transitioning CompanyYour WorldConversationStartersHelp your advisors helpyou by asking them . . .■ How important is myprofessional networkduring the transition?Continue to build yournetwork as you preparefor your transition.As you transition out of yourbusiness, or into a lesser role init, it might seem like you haveless need for the network youhave created. On the contrary,you need them more than ever.In addition to those early contacts,you should also seek out aprofessional who can consulton valuation, a business brokeror investment banker who willinvite the submission of bidsfor your business and, mostimportant, a buyer/successor.The following key individualswere addressed in the previoussection, but you may need themfor different purposes duringyour transition.Certified Public AccountantYour accountant is a key playerduring your transition. Now isthe time to make sure taxes andother bills are paid, receivablesare collected or written off, andall is in order. The accountantcan audit the books and help youdecide if you are in a favorableposition to sell, compile otherdocuments for presentation toThe Professional Network’s Role in the Transitioning CompanyProfessionalCertified Public AccountantInsurance ProfessionalRole in Transition• Help decide if you’re in a favorable position to sell• Compile documents for presentation to potential buyers• Make a valuation of your company that’s used to set asking price• Help structure deal to avoid negative tax consequences and putestate planning instruments in place• Verify all coverages a buyer would want to see are in place• If insurance policy is part of transaction, they can ensure thatit is in orderLawyer• Draft any contracts, leases or employee “retention” ornon-compete agreements that will be in effect after the transition• Draft the transition agreement• Help qualify potential buyersBusiness Appraiser• Help secure the best and most realistic price for business• Itemize the value of various components of the businessInvestment AdvisorStrategic Partner/AngelInvestor/Venture CapitalistIndependent AdvisorsBusiness Broker/InvestmentBankerBuyer/Successor• Help you plan what to do with the proceeds from the transaction• If still involved, must sign off on the impending transition• Offer insight on how they structured their wealth, and may haveideas on opportunities or businesses in which to invest• Help assess the prospects and timing of a transition• Invite businesses to submit bids to buy your company• Need to assess whether they are qualified to run the business36

Transitioningpotential buyers, and make avaluation of your company thatwill be used to set the askingprice. (Be sure to use anaccountant who has experiencein valuations.) He or she canhelp structure the deal to avoidnegative tax consequences andput estate planning instrumentsin place.Insurance ProfessionalYour insurance professional canverify that all the coverages abuyer would want to see are inplace, and if not, can bring youup to date. If an insurance policyis to be part of the transaction,he or she can ensure that it is inorder, as well.LawyerYour lawyer is the person whowill draft any contracts, leasesor employee “retention” or noncompeteagreements that will bein effect after the transition. Heor she will also draft the transitionagreement, whether it is an outrightsale or other arrangement, andhandle the closing. It’s importantto use an attorney who specializesin such transactions. The attorneyshould be able to spot any contractterms that could work againstyou. Your tax and estate planshould be worked out before thesale goes through, so you canachieve maximum benefits. Thelawyer can also help to qualifypotential buyers to be sure theycan live up to the terms of the deal.Business AppraiserYou can ask your accountant fora valuation of your business, buta professional business appraiser –who specializes in businessvaluations in your particularindustry – can be invaluable inyour effort to secure the best andmost realistic price. (Overpricingcan be a deterrent to the sale,while underpricing means lostmoney.) Business appraisers canalso itemize the value of variouscomponents of the business –equipment and real estate, forexample – or they can work withother appraisal specialists to doso. Be sure your appraiser hasearned accreditation from abusiness appraiser or valuationtrade association. (There areabout half a dozen or so, andall are acceptable.) Legalproceedings typically recognizeonly valuations and appraisalsmade by credentialed appraisers.Investment AdvisorAn investment advisor can helpyou plan what to do with theproceeds from the transactionand how best to safeguard it,particularly if you are retiringand it will be a major sourceof income in retirement.Strategic Partner/AngelInvestor/ Venture CapitalistAny of these players who arestill involved with your businessmust sign off on the impendingtransition. In some cases, debtrepayment or distributions oninvestments will be due. (Insome cases, they might be thebuyers.) At the same time, theycould offer valuable insight onhow they structured their ownwealth, and may have great ideason opportunities to consider orbusinesses in which to invest.Use their expertise, but also learnfrom their own experiences.Independent AdvisorsAdvisory boards can help assessthe prospects and timing of atransition, whether sale orsuccession.Business Broker/InvestmentBankerA business broker will invitebusinesses to submit bids to buyyour company. An investmentbanker will do the same, butusually works with only thebiggest deals. He or she has accessto potential buyers beyond yourlocal area and they’ll often havedeeper pockets. A deal handledby an investment banker oftencommands a higher price.Investment bankers can alsomake a business valuation andhelp structure the deal.Buyer/SuccessorIf you are planning to pass yourbusiness to a family member, youneed to assess whether he or sheis qualified to run the businessyou spent years to build. Ideallyyour successor will have workedwith you and gained experiencein the company so that you bothcan make an informed decision.Make Sure theTeam Plays WellTogetherSome of the functions of thetransition can be performedby more than one type ofadvisor. Valuations can bemade by accountants,business appraisers orinvestment bankers, and ifyou can afford it, it’s not abad idea to get valuationsfrom more than one source,because they’ll approach thequestion from different viewpoints,and proper valuationis key to getting the bestdeal. If you do use differentadvisors whose expertisemight overlap, be sure thateveryone understands whowill be the key negotiator, sothat you don’t have a lawyerand an investment bankerboth trying to negotiate termsindependently and inadvertentlyweaken your side.More ThanMoneyRemember the importanceof your “psychic income”during the transition. Moneyis a factor, but your personalsatisfaction and happiness isanother. If you are staying onafter the sale, make sure thechemistry between you andthe buyer is good. It’s alsovital that the roles andresponsibilities are clear, andthat what you are being askedto undertake is personallyinteresting to you and worksto your strengths. On theother hand, if you’re planningto hit the beach, make certainyou are ready for that, as well.37

Discussion GuideStructuring Your CompanyWhether you’re juststarting out, expanding/changing your businessor looking to sell,it’s important thatyour understanding ofbusiness structuresis sound.You’re Not LockedInto One BusinessEntityOnce the company’s operationsare well under way, growthstrategies might be betterserved by a different businessstructure. As a sole proprietor,you might want to take on apartner to ease the workloador reward a key employeewith a stake in the company.Or your company might enjoygreater growth than you envisionedand you might opt toincorporate and issue stock.Be aware that some changesare more difficult thanothers, but they can beaccomplished with the helpof lawyers, accountants orother professionals.Guide to Structuring Your CompanyStructureSole ProprietorshipAn individual or married couple.General PartnershipHas two or more owners (who aren’ta married couple).Limited PartnershipSimilar to a general partnership, buthas two classes of partner: limitedand general.CorporationA corporation is a legal entity, with acharter granted by the state in which it isheadquartered. It can sell shares of stockto raise money; shareholders becomepart-owners based on the size of theirinvestments.S Corporation is intended for businessesthat don’t call for massive amounts ofcapital; they are legally allowed to haveup to 100 shareholders (up from 75beginning with tax year 2004) and toissue just one class of stock. Incomeearned by the corporation is taxed asshareholders’ personal income.C Corporation status allows for anunlimited pool of shareholders. Stockcan be issued in different classes, withdifferent rights for shareholders. Thecorporation itself must pay taxes;business proceeds are taxed again whenpaid to shareholders as dividends.Limited Liability CompanyA hybrid entity that shields owners’personal assets from business liability,but allows the returns they earn to betaxed once, as personal income.Key Elements• Set-up costs are minimal; there’s no complexdocumentation to go through and no state fees.• Business income is taxed as personal income andis subject to self-employment tax.• Insurance can mitigate the liability to some extent.• Set-up costs are minimal with no state fees ordocumentation.• Experts recommend a written agreement spelling outthe partners’ responsibilities, how decisions will bemade, how money will be spent, how profits will besplit and how these terms will be adjusted if onepartner is unable to meet his or her responsibilities;how new partners will be added; and how thepartnership will end.• Business proceeds are taxed as the partners’personal income.• The general partner(s) bears the remainder of theliability and is responsible for day-to-day operations.• The limited partners’ liability is based on thepercentage of their investment.• Besides the partnership agreement, many statesrequire the partners to file a Certificate of LimitedPartnership, as well.• The corporation, not shareholders, is liable for itsobligations.• Incorporation requires start-up fees and complexdocumentation.• Corporate entities are monitored by variousgovernmental agencies and must comply witha variety of rules.• The law allows for an unlimited number of owners,called members, to invest in an LLC.• The relationships between an LLC’s members aredocumented in its Operating Agreement.38

Additional InformationBusiness Resources on the WebPlaces to Go for Additional InformationThe Business Owner’sPlaybook Web Sitewww.thehartford.com/businessownerThe Hartford Web Sitewww.thehartford.comBankingEntrepreneur.comwww.entrepreneur.com/bestbanksBusinessU.S. Small Business Administrationwww.sba.govwww.business.govMinority Business DevelopmentAgencywww.mbda.govNational Federation of IndependentBusinesseswww.nfib.comU.S. Economic DevelopmentAdministrationwww.eda.govBusiness AppraiserAmerican Society of Appraiserswww.appraisers.orgInstitute of Business Appraiserswww.go-iba.orgBusiness BrokerInternational Business BrokersAssociation, Inc.www.ibba.orgCertified Public AccountantsAmerican Institute of CertifiedPublic Accountantswww.aicpa.orgGood Accountants.comwww.goodaccountants.comFinancial AdvisorsCertified Financial PlanningProfessionalswww.cfp.netFinancial Planner Networkwww.financialplannernetwork.comFinancial Industry RegulatoryAuthoritywww.finra.orgInsuranceThe Hartfordwww.thehartford.comIndependent Insurance Agents &Brokers of Americawww.iiaa.orgInsurance Information Institutewww.iii.org/smallbusinessInvestingThe Hartfordwww.hartfordinvestor.comMorningstar, Inc.www.morningstar.comThe Investors Clearinghousewww.investoreducation.orgU.S. Savings Bondswww.publicdebt.treas.govU.S. Securities and ExchangeCommissionwww.sec.govInvestment AdvisorsInvestment Advisorwww.investmentadvisor.comInvestorsVenture Capitalist Associationwww.nvca.orgvFinance, Inc.www.vfinance.comLabor/EmploymentU.S. Department of Laborwww.dol.govLegalAmerican Bar Associationwww.abarnet.orgProfessional Coach/MentorInternational Coach Federationwww.coachfederation.org/ICFSCORE – Counselors to AmericanSmall Businesswww.score.orgRetirement PlanningAARPwww.aarp.orgSocial Security Administrationwww.ssa.govRetirementPlanner.orgwww.retirementplanner.orgTaxesInternal Revenue Servicewww.irs.govThe Internet addresses of othercompanies' Web sites are providedin this guide for users' convenienceonly. The Hartford Financial ServicesGroup Inc. and its affiliatedcompanies (collectively, “TheHartford”) do not control or reviewthe listed sites or any contentappearing on the sites, nor doesthe provision of any address implyan endorsement or associationof non-Hartford Web sites. TheHartford is not responsible for,makes no representation orwarranty regarding, and does notendorse, certify, approve, orwarrant the quality, reliability, orperformance of any goods orservices associated with, used in,marketed through, made availablethrough, or provided throughthe listed sites, or the contents,completeness, accuracy, orsecurity of any materials on suchsites. If you decide to access suchnon-Hartford sites, you do so atyour own risk and Hartford shallnot be liable for any damages,losses or liabilities of any kind ornature related to or arising out ofany content on the listed site.39

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The Hartford Financial Services Group, Inc.The Hartford, a Fortune 100 company, is oneof the nation’s largest diversified financial servicescompanies, with 2007 revenues of $25.9 billion.The Hartford is a leading provider of investmentproducts, life insurance and group benefits;automobile and homeowners products; andbusiness property and casualty insurance.International operations are located in Japan,Brazil and the United Kingdom. The Hartford'sInternet address is www.thehartford.com.

For additional information visitwww.thehartford.com/businessowner.These materials are provided “as is” and for informationpurposes only. The Hartford makes no representations orwarranties that the materials are suitable for your needs,are complete, timely, reliable, or are free from errors,inaccuracies, or typographical mistakes. The Hartforddisclaims all warranties, express or implied, including, butnot limited to, implied warranties of merchantability orfitness for a particular purpose or non-infringement ofothers’ rights. These materials provide general information,and should not be construed as specific financial, insurance,tax, legal, or accounting advice. This information is writtenin connection with the promotion or marketing of thematter(s) addressed in this material. The information cannotbe used or relied upon for the purpose of avoiding IRSpenalties. As with all matters of a tax or legal nature, youshould consult with your own tax or legal counsel andqualified advisor. The Hartford shall not be liable for anydirect, indirect, special, consequential, incidental, punitive,or exemplary damages in connection with the use by youor anyone of the information provided here or for link toor use of any Web site referenced herein.The precise coverage afforded by any policy of insurancedescribed herein, is subject to the terms and conditions ofthe policies as issued.The Hartford Business Owners Survey was conductedonline by Impulse Research Corporation in October 2006,with a random sample of 504 small business owners(with fewer than 100 employees) and a margin of errorof +/- 4 percentage points.Distributed by Hartford Security Distribution Company, Inc.You may copy this brochure only for non-commercial,personal use. You may not otherwise copy, sell, or distributeor modify the contents of this brochure for any commercialpurpose without prior written consent of The Hartford.“The Hartford” is The Hartford Financial Services Group,Inc. and its subsidiaries, including the issuing companies ofHartford Life Insurance Company and Hartford Life andAnnuity Insurance Company.© 2008 The Hartford Financial Services Group, Inc.02/08