mike wrote: ↑Mon Nov 27, 2023 2:49 pm
And here's another reason that reducing one's income on paper is unwise. If you ever want to sell your business, it may likely be less valuable to the buyer.
It would be more valuable, because instead of taking distributions or having retained earnings just parked in cash, you've been accumulating all kinds of business assets.
And with the extra free time from hiring those extra employees and making sure they have new problem free pickups to drive... you've probably gotten involved in starting a new line of business and investing in that too.
mike wrote: ↑Mon Nov 27, 2023 2:49 pm
And here's another reason that reducing one's income on paper is unwise. If you ever want to sell your business, it may likely be less valuable to the buyer.
It would be more valuable, because instead of taking distributions or having retained earnings just parked in cash, you've been accumulating all kinds of business assets.
And with the extra free time from hiring those extra employees and making sure they have new problem free pickups to drive... you've probably gotten involved in starting a new line of business and investing in that too.
Many/most businesses have significant value beyond the hard assets, and when you sell hoping for a nice amount of goodwill, the buyer will want evidence of those past profits. And those hard assets all depreciate, so even though you have lots of them, they are worth less than what you paid for them. A good business will need to show evidence of enough profits over time to pay owner/management salary plus additional profits in order to attract a buyer willing to pay for hard assets + goodwill.
0 x
Remember the prisoners, as though you were in prison with them, and the mistreated, as though you yourselves were suffering bodily. -Heb. 13:3
mike wrote: ↑Mon Nov 27, 2023 2:49 pm
And here's another reason that reducing one's income on paper is unwise. If you ever want to sell your business, it may likely be less valuable to the buyer.
It would be more valuable, because instead of taking distributions or having retained earnings just parked in cash, you've been accumulating all kinds of business assets.
And with the extra free time from hiring those extra employees and making sure they have new problem free pickups to drive... you've probably gotten involved in starting a new line of business and investing in that too.
Many/most businesses have significant value beyond the hard assets, and when you sell hoping for a nice amount of goodwill, the buyer will want evidence of those past profits. And those hard assets all depreciate, so even though you have lots of them, they are worth less than what you paid for them. A good business will need to show evidence of enough profits over time to pay owner/management salary plus additional profits in order to attract a buyer willing to pay for hard assets + goodwill.
Anyone buying a business should be doing a very thorough examination of the books and should be able to distinguish gross revenues or cash flow from net income and know what the operating expenses of the business are (payroll, rent, wholesale costs, etc.) And also account for the value of capital assets.
Good businesses should sell themselves, bad businesses you sometimes can't even give away.
0 x
A fool can throw out more questions than a wise man can answer. -RZehr
Most these people aren't planing for any business sale except of an eventual one to their children. Usually when some of the children aren't interested in inheriting it, so the ones who are have to buy the rest out.
Josh wrote: ↑Mon Nov 27, 2023 5:12 pm
Most these people aren't planing for any business sale except of an eventual one to their children. Usually when some of the children aren't interested in inheriting it, so the ones who are have to buy the rest out.
Yes, usually the problem is when no one wants to take over the family business but the parents want to retire. Then they often find out how little value the business actually has.
0 x
A fool can throw out more questions than a wise man can answer. -RZehr
Josh wrote: ↑Mon Nov 27, 2023 5:12 pm
Most these people aren't planing for any business sale except of an eventual one to their children. Usually when some of the children aren't interested in inheriting it, so the ones who are have to buy the rest out.
Yes, usually the problem is when no one wants to take over the family business but the parents want to retire. Then they often find out how little value the business actually has.
I've seen the opposite happen when the next generation wants to buy the family farm. One son has interest in buying it and gets it appraised... only to find out its worth way more on the open market than anyone imagined.
0 x
I self-identify as a conspiracy theorist. My pronouns are told/you/so.
Josh wrote: ↑Mon Nov 27, 2023 5:12 pm
Most these people aren't planing for any business sale except of an eventual one to their children. Usually when some of the children aren't interested in inheriting it, so the ones who are have to buy the rest out.
Yes, usually the problem is when no one wants to take over the family business but the parents want to retire. Then they often find out how little value the business actually has.
I've seen the opposite happen when the next generation wants to buy the family farm. One son has interest in buying it and gets it appraised... only to find out its worth way more on the open market than anyone imagined.
Yes. Farms and ranches are usually worth more on the open market than can be justified by their income. Farmers and ranchers “live poor, and die rich”, meaning they may not have a lot of cash in their lifetime, but their holdings end up becoming very valuable.
Other small businesses usually just wither up and die, because the owner thinks it is worth more than it actually is. So he doesn’t sell it for the low price it actually is worth. Then he gets old, competition moves in, and his business further declines in value. So many just end up closing down, rather than selling, because of the disparity between what the owners perceived value and the real market value of the business.
In conservative Mennonite circles, sometimes the desire for the farm or business to remain in family hands is high enough that the farm or business is heavily discounted. Particularly if a descendant has shown both the desire and ability to operate it successfully long term, and isn’t simply looking for a steal in terms of wealth.
Farms tend to have a liquidation value that is way out of line with their return on capital. At current interest rates, a total liquidation and dumping it into bonds or just the bank (it's all 5% right now) would probably come out ahead. Farmers with land worth $1m, equipment worth another $500k, often are not generating profits in excess of $85k, which would be the equivalent to equal that interest income. Or consider someone in a place where land prices are a bit high, like northern California, at $20k/acre, so that ¼ section property is worth $3.2m, which would generate $160k standing still. (Of course, I'm leaving out the fact that if they don't liquidate, those properties will continue to increase in value, which cash in the bank doesn't, particularly with inflation being as bad as it has been the last few years).
A business that is an operating/going concern is a whole 'nother ball of wax. Oftentimes what made it "tick" was the original owners.
It would be more valuable, because instead of taking distributions or having retained earnings just parked in cash, you've been accumulating all kinds of business assets.
And with the extra free time from hiring those extra employees and making sure they have new problem free pickups to drive... you've probably gotten involved in starting a new line of business and investing in that too.
Many/most businesses have significant value beyond the hard assets, and when you sell hoping for a nice amount of goodwill, the buyer will want evidence of those past profits. And those hard assets all depreciate, so even though you have lots of them, they are worth less than what you paid for them. A good business will need to show evidence of enough profits over time to pay owner/management salary plus additional profits in order to attract a buyer willing to pay for hard assets + goodwill.
Anyone buying a business should be doing a very thorough examination of the books and should be able to distinguish gross revenues or cash flow from net income and know what the operating expenses of the business are (payroll, rent, wholesale costs, etc.) And also account for the value of capital assets.
Good businesses should sell themselves, bad businesses you sometimes can't even give away.
So I guess we're talking about businesses that have good profit margins but where as much of that as possible is made to disappear on the owner's personal tax returns. I still think that this is a risky proposition.
0 x
Remember the prisoners, as though you were in prison with them, and the mistreated, as though you yourselves were suffering bodily. -Heb. 13:3
mike wrote: ↑Tue Nov 28, 2023 1:28 pm
So I guess we're talking about businesses that have good profit margins but where as much of that as possible is made to disappear on the owner's personal tax returns. I still think that this is a risky proposition.
I'm not aware of many business owners who don't do this. I have run into a few who do. (There are myriads of ways to reduce that income, SEPP, SIMPLE, executive deferred compensation, non-qualified deferred compensation, "adjusting" distributions vs wages paid for S corp owners, enrolling various family members as non-equity partners and paying them out distributions, and on and on.)
