As the U.S. population ages, many leaders are beginning to think about preparing their business for the next generation. The business can be sold to a third party, gifted to heirs, or sold to management or employees through an employee stock ownership plan (ESOP). While ESOPs are not the most widely used option — there are only about 10,000 throughout the U.S. — they can be very beneficial for both business leaders and employees.

“Employees benefit from the increasing value of the business because they’re partial owners,” says Brian Bornino, CBA, CFA, CPA/ABV, director of valuation services with GBQ Consulting LLC. “There’s a lot of uncertainty about how people will retire, with the lack of pensions and Social Security being questionable. So having control of your own retirement and owning part of the company where you work is good for employees.”

Smart Business spoke with Bornino about why an ESOP is a good option and how to determine if it’s right for your business.

Why is an ESOP a good option to consider?

There’s a strong desire to try to keep jobs local. When you sell the business to your employees, jobs are locally controlled, whereas a third-party buyer may move the jobs across state lines, to a different city or even a different country.

Owners who built their business also have a pride factor and want there to be a legacy for the business. They would prefer an option other than selling to a third party that will integrate their business into the third party’s business, in which case their life’s work goes away.

There are also many tax advantages to an ESOP. A handful of academic studies has shown that employee-owned companies tend to outperform those not owned by employees.

What are the tax advantages of forming an ESOP?

The most powerful tax advantage of an ESOP is the ability to create an income-tax-free entity. If the ESOP owns 100 percent of an S corporation, the tax liability arising from corporate income flows through to the shareholder, which is a tax-exempt trust. That’s a very powerful advantage for savvy management teams, as a business that doesn’t have any income tax liability can invest that savings — which is often about 40 percent — and redeploy those dollars to grow the business through acquisitions, investment in equipment, hiring new people or paying dividends. That’s where a lot of the incentive is for management. They’re trying to build and grow the company, so if you can take out the largest expense item on the company’s profit and loss statement, that’s a major motivator.

Another key tax advantage is tax-advantaged financing, as the principal payments on ESOP transaction debt can be structured to be tax deductible (whereas typically only interest on debt is deductible).

These tax advantages also benefit the selling shareholders. To the extent that the selling shareholder is the one financing the deal, these advantages often result in the shareholders geting repaid quicker because the company has more cash to repay them. It becomes a lower risk proposition for the selling shareholder.

How do you determine if an ESOP is the best option for your company?

It starts with defining your goals for the transition of the business. The typical options are the outright sale of the company to a third party, selling or gifting it to your heirs operating in the business, or selling it to management or employees through an ESOP. You have to decide which of those you want to pursue. If you don’t have heirs in the business, that obviously eliminates that option. The sale to a third party makes the most sense if the company doesn’t have adequate management to run on its own. There also may be a strategic buyer that could help you maximize the purchase price, which makes a third-party sale more attractive.

The decision of whether to pursue an ESOP starts with the selling shareholder. If there is a desire to preserve a company’s legacy by keeping it independent, as well as reward employees who helped build the business, then an ESOP is often an attractive option. Because employees don’t put up their own money to buy the shares, virtually all employees will likely be on board, as they’ll get the benefit of owning the business. Obviously there will be skeptics, but by and large, most employees will be excited about an ESOP.

You also need to convince management of an ESOP’s benefits. On occasion, management may prefer to buy the company without involving employees, but the economics of management buyouts are different and management often cannot compete against the ESOP option.

What types of companies are most favorable to an ESOP?

Employee-oriented companies are often the best candidates for an ESOP, such as service companies, engineering or architectural firms, consulting firms or other companies where employees are critical assets to the business. ESOPs also make sense from an employee morale standpoint because you’re trying to attract, retain and motivate highly skilled employees, and employee ownership is a way to do that.

It also works for more traditional manufacturing and distribution businesses. Many times they have an easier time financing the transaction because they have the equipment and assets to borrow against, compared with service businesses that have to raise money for the transaction. Any business with a strong team, consistent cash flow and an interest in rewarding, attracting and motivating employees is a great candidate for an ESOP.

Brian Bornino, CBA, CFA, CPA/ABV, is director of valuation services with GBQ Consulting LLC. Reach him at (614) 947-5212 or

Insights Accounting & Consulting is brought to you by GBQ Partners LLC

Published in Columbus

If you are a business owner, key manager or employee of a company going through an organizational transition, such as a merger or leadership change, it is likely you will experience performance disruption caused by confusing messages, speculation or lack of information. And you are not alone.

Often the planning for these important events happens behind closed doors with only the owners and advisers, leaving everyone else to speculate about the future.

Ricci M. Victorio, CSP, CPCC, managing partner for Mosaic Family Business Center, says business owners can avoid these challenges by being more transparent about upcoming changes and engaging everyone in the process.

“The key is communication, communication, communication. It’s important to identify what you can control and learn how to be flexible with all the rest. When you’re getting ready for a transition or succession, you might feel like you’re surfing a tidal wave. There’s an art to keeping your balance in an ever-changing world,” she says.

Smart Business spoke with Victorio about how to prepare yourself and your company for major business transitions.

What are the most common stumbling blocks that occur when a company is heading for change?


The most common stumbling blocks typically center on communication. Today’s older generation grew up learning to keep financial affairs close to the vest. So sometimes even a spouse doesn’t get involved in the planning until asked to sign papers.

Other times, people don’t feel comfortable sharing their ideas and concerns during shareholder meetings because they’re afraid of disrupting the artificial harmony that’s been established. They may have private conversations outside of the boardroom, but during meetings there’s often a fear of disrupting the delicate balance.

Further, business owners involved in a transition can be so overwhelmed by either the fear of confrontation or the lack of planning, the project begins to loom large and they’re stopped in their tracks. They feel as if there’s no way they can get through it; it becomes so daunting they often just hope it goes away.

How can these stumbling blocks be avoided?


Instead of keeping all conversations behind closed doors, when appropriate include key players such as family members, managers and those who will be most involved in the strategic design of the transition plan before you start actually planning. In these conversations, ask the group, ‘If we could do anything without worry of failure or confrontation, what would be best for our family and company?’ At this stage, there should be no pressure of commitment; it’s just brainstorming and idea building.

Engaging a succession coach can help facilitate dialogues that are creative, innovative and energizing, and potentially serve as the foundation of solutions to what might seem like an impossible endeavor.

Once you have a vision, you can develop an implementation plan. Break it down into a timetable and get key players involved to determine who spearheads specific initiatives and what the outcomes should be. Document the vision and itemize each step to be executed on a schedule for all involved.

Owners and other decision makers in a business likely won’t find it easy to facilitate these discussions, so consider using an experienced adviser to guide and focus the conversations and break the task into manageable segments. It can be difficult and even intimidating for groups to internally identify and discuss their own problems, but it’s helpful to have someone from the outside keep discussions open, comfortable and inclusive.

It’s also important to reach out to the overall organization, including employees, clients, customers, franchisers and vendors to communicate the vision of the plan — not the intricacies, but the expectation of the fulfillment of the plan and how it affects each party. This will help clarify what each can expect and what their roles will be.

What are the red flags that tell you a transition is going badly or not as planned?


Confusion or dysfunction within the management team is one of a few signs of difficulty that typically arise during a transition. Often it’s revealed that management is unsure where the company is going or what the plan is. Additionally, departments that are not cooperating well with each other — also called ‘silos’ — can typify dysfunction.

If management isn’t confident that the transition will include them, their productivity will slow and they’ll likely start looking around for something more stable and secure as a backup plan. A high level of turnover in management might prompt others to start abandoning ship.

When is a good time to seek outside counsel?


The best time is when you know or others are imploring you to consider that it’s time to begin succession planning. For any business owner between the ages of 45 and 75, if you have a business that is worth perpetuating, you need a long-term strategic succession plan and a short-term contingency plan to protect it. It’s worth bringing in an adviser who can help you with both kinds of plans. You’ve got to think beyond your own needs because your business has so many people tied to it who count on its success.

All of the planning responsibility doesn’t have to be on you. You can pull people into the transition process and get them enrolled so you’re no longer alone in the endeavor. If or when you do step aside, you can do so knowing you have people there to maintain and even grow the business. The hearts of those involved in the company might be broken when a founder passes or moves on, but that creation, built lovingly, does not have to crumble.

Ricci M. Victorio, CSP, CPCC, is managing partner for Mosaic Family Business Center. Reach her at (415) 788-1952 or

Insights Wealth Management & Family Business Consulting is brought to you by Mosaic Financial Partners

Published in Northern California

For business owners and entrepreneurs, wealth management and planning is not a project, it is a process.

“It’s something you never complete; it’s ongoing in nature,” says J. Harold Williams, CPA/PFS, CFP, president and CEO, Linscomb & Williams, an affiliate of Cadence Bank.

He says that too many people approach wealth management erroneously, thinking, “I’ll get a financial plan done and check that off my list.” However, financial planning is much like designing a blueprint for a house, building it and maintaining it — a process that never ends.

Smart Business spoke with Williams about how to lay the foundation of your financial future while transitioning out of business ownership.

What actions are important for entrepreneurs before year-end in light of the expiring tax provisions such as the $5 million gift and estate tax exemption?

There is a unique condition in 2012 where you can gift, during your lifetime, tax free, just over $5 million. Business owners generally have some complexity to their estate planning, in that ownership of their business is their predominate asset and it is illiquid, which makes it difficult for estate planning purposes.

This special provision in 2012 allows you to transfer a significant portion of your wealth during your lifetime in a way that the future growth on the amount that you gift is not going to be counted in your estate.

For example, if you have a successful family business worth $20 million and you expect that its value will grow, it is possible to take a partial interest in that business this year, as much as $10 million of the value, and gift it into a trust for your heirs. If you gift half of it in 2012 and the business value doubles, the doubling of value in the half that you gave away would not be counted as part of your estate when you die.

There have been a lot of discussions about what the estate tax rate will be in the future. Right now, the estate tax rate is 35 percent, so if you can move appreciation to the next generation and not have it taxed, the result could be a savings of 50 percent of the amount that is transferred. That is a powerful planning concept.

If business owners are considering selling their business, how do they gauge financial security to be sure the income they had previously been earning is adequately replaced?

It is common for business owners who are about to sell, or have just sold their business and are walking away from an attractive paycheck, to begin wondering how they will replace that paycheck.

Before you sell the business, do some planning to confirm that you can sustain the lifestyle you have enjoyed while relying upon a more traditional portfolio of investments. When the business is liquefied, you pay some tax and need to invest the money.

It is likely not possible to get the same returns on an investment portfolio that you got from the business, so it is important to run the numbers and recruit someone who can help you determine the various contingencies. Doing this before you sell the business will allow you to engineer some things into the structure of the selling contract to enhance your ability to sustain your lifestyle.

Are Family Limited Partnerships (FLP) still being used as an estate planning tool, and what is the IRS’s attitude about this?

They are being used, and most cutting-edge estate planning attorneys recommend them as a viable vehicle. FLPs are not particularly loved by the IRS, but they are effective if done right. The main thing is to stay involved with your FLP; don’t just begin one, make a file and put the file away. The IRS could potentially scrutinize an FLP because it gives you a discount on the business interest connected to the estate or gift tax return. It will look to see if this has substance and form.

It is important to be diligent about keeping your records and following proper procedures when creating an FLP. When FLPs are not generating the estate tax savings that are desired, it’s often because the originator paid for a lot of documents to be created and didn’t live with them and make them part of the ongoing planning.

To do it properly means careful coordination with the lawyer who will draft the documents, the accountant who will advise you on tax law and other tax matters, and the wealth manager or planner who helps design the plan on the front end and maintains it on an ongoing basis.

Considering all the new 401(k) plan disclosure rules being issued on plan fees and expenses, how can a business owner avoid the risk of personal liability and make sure they don’t unintentionally violate these requirements?

For business owners, this is a bit of a minefield. In some cases, you might not realize you’re walking through it until it blows up. Generally, regulators look for a good-faith climate of compliance. The important thing is to document everything appropriately and leave a clear trail that shows you are trying to be in compliance.

The government often has a more favorable attitude if it can see you are trying to comply. It doesn’t want to see neglect, so intent goes a long way. It’s an area where, depending on the size of your 401(k) plan, you may need legal counsel to advise you on those policies and procedures.

J. Harold Williams, CPA/PFS, CFP, is president and CEO, Linscomb & Williams, an affiliate of Cadence Bank. Reach him at (713) 840-1000 or

Insights Banking & Finance is brought to you by Cadence Bank

Published in Houston

In one way or another, life is always in flux. Transitions sometimes bring opportunity and sometimes pain and sadness. The more thoughtfully we experience them, find the good in them and prepare for the next life phase, the more satisfying life can be. Transitions happen throughout our lives — graduation, a new career, getting married, having children, a sudden increase in wealth, the death of a parent, serious illness or accident, your retirement and the sale of your business, to name a few.

Each transition requires you to adapt to new circumstance, as it can change the way you think, the way you approach taxes and investments, your lifestyle, your advisers, your circle of friends or your lifestyle choices.

“Some people have a real hard time with that,” says Norman M. Boone, founder and president of Mosaic Financial Partners Inc. “When a significant change occurs, some stick close to what they’re used to, while others refuse to acknowledge the change and others simply embrace it.

“Points of transition happen to everybody,” he says. “How you think about, plan and prepare for them and how you adapt your behavior is best done by being intentional, by considering the implications of your decisions, by thinking about your new circumstances and by determining what you need to do to optimize your new situation. Getting good advice can be critical.”

Smart Business spoke with Boone about how to deal with life’s major transitions without compromising your financial future.

Is transition a bad thing? Why or why not?

Transitions themselves aren’t good or bad. The issue, from a financial planning perspective, is how you approach them. Regardless of the type of change, allow yourself time before you make any major decisions.

Having the right professional assist you can help you avoid mistakes and take advantage of opportunities. The best adviser is one who has helped many people with situations similar to yours. People don’t often go through the same major life transitions twice. If you only have one time to experience something, it’s likely you’re going to make mistakes, sometimes minor and other times with important consequences. An experienced adviser can help you avoid those mistakes.

As a caution, be sure to ask yourself, ‘What is this person’s incentive?’ For example, the wrong insurance agent might think more about how much he or she will be paid, rather than what is best for you. You need to ask questions when you’re working with an adviser and understand if he or she has something to gain from the advice being offered.

When you’re going through a transition, you’re typically more vulnerable than at other times in your life. It’s critical to choose your advisers carefully.

Is there reason to be cautious when talking with advisers?

Be open and freely share information with your advisers, once you’ve chosen them. They need the whole picture. However, initially, when you are interviewing advisers or looking for the right one, you can and should be discreet about how much information you share. It’s important to find someone who has the experience, knowledge, capabilities and good chemistry with you, if he or she is going to serve you well.

What is a good way to research potential advisers before meeting them?

Go to your smartest and most objective friend and ask him or her to help you create qualifying questions. Almost every wealth manager, attorney, accountant or insurance agent wants you to pick them, and most are skilled at convincing you that they’re likeable and knowledgeable. You need to be able to get beyond that. It’s important to ask a similar set of questions of each so you can compare their answers — see how they treat your questions, how thoughtful their answers are and who appears to have your best interest in mind.

What are some important characteristics of a wealth management firm helping someone who is in transition?

At minimum, a wealth management firm should be able to clearly explain its investment philosophy and discipline. It also needs to offer proactive advice about taxes, insurance, charitable strategies, debt management and expertise in the full range of personal finance issues.

Perhaps even more critical are the firm’s values and characteristics. Are advisers fiduciaries — do they accept a legal obligation to put your best interests first — and if so, are they willing to put that in writing? Do they disclose all potential conflicts of interest? Do they treat all your questions with seriousness and respect? Are they rushing you to make decisions? Do they offer alternatives and allow you the time to understand, consider and make a choice? Transitions can be unsettling and take adjustment. A good adviser will help you get through that period rather than push you into something prematurely.

It can also be helpful to work with a firm large enough to have a team that offers the skills and resources needed to apply to today’s questions and the needs you’ll have tomorrow. You’ll eventually have more than one kind of transition, and a team is more likely to be able to offer a solution for each, thanks to a greater depth of resources.

What should you keep in mind when entering a life transition that could impact your financial future?

Don’t assume that you understand the situation you’re in, especially when it comes to a major transition, because your choices can have long-term implications. Mistakes can significantly cost you without first getting expert advice. Most times, it’s important to not make a decision until you’ve done research and gotten expert advice. Before acting, ask yourself, ‘How might this impact my life today and in the future?’

Norman M. Boone is founder and president of Mosaic Financial Partners Inc., which is celebrating, this year, its 25th anniversary. Reach him at (415) 788-1952 or

Insights Wealth Management & Family Business Consulting is brought to you by Mosaic Financial Partners

Published in Northern California