Vol. 21 Issue 2 Spring 2011 Published by the Ohio State Bar Association Solo, Small Firms and General Practice Section

Solo, Small Firms and General Practice News Pre-sale planning for business owners The ultimate success of a closely held business can often be measured by the extent to which an exit strategy is effectively planned and executed. Whether the business owner sells, closes or transfers the business to family, the departure of the entrepreneur who created the company must be carefully considered well in advance. The decision to close the doors of a business may be an easy one, informed largely by economics. The decision to sell the business outright, or transfer it to family members, on the other hand, typically is far more complicated and involves myriad financial, familial and emotional factors. The impulse is to move quickly into action once the key decision is made: If the owner chooses to sell, then a deal is struck; if the business will remain in the family, then business interests are transferred. While the urge for swift action may be compelling, the prudent business owner should proceed slowly and judiciously to make sure that both the “deal” and the family financial structure are in place before any change in ownership. Additionally, a business owner should carefully consider the lifestyle and psychological changes that accompany the move from entrepreneur to investor. (continued on pg. 2)

INSIDE Message from the chair............................3 What is a short sale?................................4 New section members.............................5 Section council meeting summary...........7

Solo, Small Firms and General Practice News Challenges and key considerations Pre-transition analysis The factors informing the decision to sell a business or keep it in the family fall into two categories: the hard facts and soft factors. The hard facts include issues such as market conditions; stage of business lifecycle; economic conditions; opportunities for organic versus acquisitive growth; foreign competition; and a litany of other business indicators. Professional advisors can certainly assess these factors, but more difficult is the task of sifting through the fuzzier considerations. Less tangible inputs might include certain characteristics or life stages attributable to the business owner, such as a changing appetite for risk, energy and enthusiasm for running the business; a desire to pursue other interests; and a compulsion to retain control of the business. These factors require introspection, which is often a difficult task. The soft factors include evaluation of other individuals, which can be difficult, especially when those being evaluated are family members or trusted employees. Once the major preliminary decisions have been reached, the business owner enters a critical phase of information gathering and planning. At this point, acting too hastily can easily derail transactions. Common missteps include flawed notions of business value or sale proceeds; insufficient allocation of resources to the transaction process; unsubstantiated projections; inadequate due diligence; inability to juggle the demands of the transaction with the ongoing requirements of the business; and failure to assemble a complete team of appropriate advisors.

Building the right team Regardless of the industry or type of business, a business owner will need a common core of advisors when deciding

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to sell or transfer the business. The advisor dream team will likely include an investment banker, an accountant familiar with corporate and personal taxes, an attorney familiar with business law issues and wealth transfer matters, a business valuation specialist and a wealth manager. Assembling this team can be a challenge. Often, the first impulse is to engage the advisors who have been helping the business since its inception. Sometimes this can be exactly the right decision. The danger, however, is that as the business, the family and the wealth have grown, the complexities of the business and the nuances around the transfer of the business may exceed the capabilities of long-standing advisors. Prudent advisors who recognize this will be candid with the business owner about the situation and will work to stay involved in the business while also referring the owner to a specialist. It is important to remember that bringing in a specialist does not necessitate the end of a long relationship with an advisor.

Tactics for transferring assets Once the team of advisors has been assembled, the next step is to identify the appropriate techniques to carry out the business succession plan. These techniques are created, at least in part, to mitigate taxes. When transferring assets, the transferor must contend not only with Federal estate tax, which is a tax on the value of assets transferred at death, but also Federal gift tax, which is a tax on the value of assets transferred during the transferor’s life.

Transferring the business to family The techniques available to transfer assets within the family in the most transfertax-efficient manner fall generally into four categories: outright gifts, discounted gifts, gifts in trust and sales. An outright gift is a direct transfer of some or all of a

transferor’s interest, unencumbered by any other entity. The outright gift is attractive for its simplicity, but likely will not afford as wide an array of discounted valuation opportunities as do other techniques. Discounted gifts entail simply placing shares of the business in another entity (such as a family limited partnership or an LLC) and gifting interests in that new entity. As a result, the business owner might be able to take advantage of more significant valuation discounts. Creating trusts and funding them with business interests also can have tremendous transfer tax advantages. The most basic type of trust planning involves transferring assets to an irrevocable trust for the benefit of a group of beneficiaries. Dynasty trusts and grantor retained annuity trusts are common trust planning vehicles that allow the shifting of wealth in a tax-efficient manner. Finally, an alternative means of business transfer to the family is a sale. The techniques described above involve the gratuitous transfer of an asset to family members, in other words a gift. Many business owners decide for one reason or another that they are not in a position to, nor are they inclined to, make a gift of a business interest. In these cases, a sale of some portion of the business interest can be the right approach. One tool is the outright sale—a simple transfer from party A to party B for fair value. Alternatively, an intentionally defective grantor trust, which is a sale to a trust as opposed to a gift in trust, may be a prudent strategy.

Selling the business outside the family The tactics used to sell a closely held business are often dictated by the initial decision of to whom the business is being transferred to. If an employee or employees will be the new owners, the structure often takes the form of a

Solo, Small Firms and General Practice News leveraged buy-out or an ESOP. However, more often, if the transfer is not to family members, the business owner is structuring a sale to an outside buyer. The negotiations during this phase are more art than science, and experienced advisors can play a crucial role in a successful outcome. There are many ways to structure the sale of a business. Buy-outs, often by private equity groups, have been very popular in past boom eras and are reviving again with the improving economy. Alternatively, the business could undergo a tax-free re-organization such as a merger or stock swap, or it could be recapitalized. Buy-sell agreements are also a form of restricted sale.

Life after the business Prior to the sale, restructuring or transfer of a business, much attention is paid to the details of the transaction and to the subsequent structure of family finances. In most cases, however, little attention is paid

to what the business owner will do after the sale of the business. In reality, myriad issues arise when an owner transitions from running the business. Some of the most common issues are concerns about relinquishing control and the need for a continued sense of fulfillment.

Difficult decisions The decision to step back from running a business can be difficult for an entrepreneur; however, once the decision is made, the transition can be seamless if the business owner plans well in advance and proceeds in lock-step with the right team of advisors. Part of that exercise is to employ the right techniques to shift wealth tax efficiently and effectively as part of a long-term wealth management strategy. Finally, the business owner also must prepare for life after the business, with the freedom to embark on new adventures and to realize other personal goals for the future. ◆

By Karen Manning, Esq., BNY Mellon Wealth Management portfolio officer. She can be reached at (216) 593-2012, or by email at [email protected]. This article does not constitute investment advice. One should consult with investment and tax professionals before undertaking an investment strategy or changes to an investment strategy. Past performance is not a guide to future performance. IRS Circular 230 Notice: Any information pertaining to tax related matters contained in this communication including any attachments is not intended or written to be used, and it cannot be used, by any person or entity for the purpose of (i) avoiding tax penalties imposed by any governmental taxing authority or agency, or (ii) promoting, marketing or recommending to another party any tax-related matters addressed herein.

Message from the chair

Looking back and moving forward Someone once said: “Time flies when you are having fun.” It is hard to believe another bar year has flown by. As I reflect back over the past year, there are many things to be proud of, as our section has accomplished a great deal. Most significantly, our section membership has grown. This makes it possible to bring more benefits to more members of the OSBA, including, but not limited to: the longest running newsletter of any OSBA section; programming at the OSBA Solo and Small Firm Technology Conference, which has become a mainstay of our section every December; and finally, programming at the Convention co-sponsored by the Ohio Bar Liability Insurance Company. This year the section brought in nationally known author Anne Guinn to discuss strategies on running a successful law practice. Comments from the seminar have been extremely positive, and she was very well-received.

convention. Further, we have committees looking at improving other benefits, such as our section website. We are working very hard to bring value to your membership. We do not take you for granted, and we very much appreciate your membership to our section. As I look back over the past year, I am also very thankful to our council. Our section did a lot over the year, and all the work was through the combined efforts of our council. In closing, we are looking forward to another eventful year. Best wishes for a great summer! ◆ By David H. Lefton, Esq., chair of the OSBA Solo, Small Firms and General Practice Section.

The section council is already making plans for this year’s Technology Conference and the seminar at next year’s

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Solo, Small Firms and General Practice News

What is a short sale? A short sale is a sale of real estate in which the sale proceeds fall short of the balance owed on the property’s loan. It occurs when a borrower cannot pay the mortgage loan on his or her property, but the lender decides that selling the property at a moderate loss is better than pressing the borrower. Both parties consent to the short sale process, because it allows them to avoid foreclosure, which involves high fees for the bank and poorer credit report outcomes for the borrowers. This does not necessarily release the borrower from the obligation to pay the remaining balance of the loan. In a short sale, the bank or mortgage lender agrees to discount the loan balance because of an economic or financial hardship on the part of the borrower. The homeowner sells the property for less than the outstanding balance of the loan, turns over the proceeds of the sale to the lender. Banks will incur a smaller financial loss than would result from foreclosure or continued nonpayment. The short sale does not extinguish the remaining balance unless settlement is clearly indicated on the acceptance of offer. Lenders have loss mitigation departments that evaluate potential short sale transactions. The mortgage lender will order an appraisal. This will determine the amount of equity or lack of by establishing a value.

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Lenders may accept short sales or deny them. There are an overwhelming number of losses that mortgage lenders have suffered, and they are now more willing to accept short sales than ever before. For underwater borrowers who owe more on their mortgage than their property is worth and are having trouble selling, this is an opportunity for them to avoid foreclosure as a result. The IRS could consider debt forgiven as income, and there is no guarantee that a lender who accepts a short sale will not legally pursue a borrower for the difference between the amount owed and amount paid. I suggest if anyone is considering a short sale, they should obtain legal advice from a real estate lawyer and perhaps a certified public accountant. Anyone who is having a hardship and facing foreclosure should work with a licensed realtor who has a designation as a certified distressed property expert and has demonstrated expertise in short sales. ◆ By Cheryl A. Stewart, CRS, CDPE, RE/MAX Results in Mentor. She can be reached at (216) 347-6776 or [email protected].

Solo, Small Firms and General Practice News

New section members

We welcome the following members who have joined the section since March 1, 2011. Wendy K. Anderson, Aurora

Christina L. George, Blacklick

Kevin L. Newman, Fairborn

Kristan A. Ashbrook, Cleveland

Wesley W. Gilliland, Columbus

Douglas H. Nobles, Columbus

Brandon L. Azman, Gates Mills

Eric M. Gooding, Columbus

Megan B. Odell, Troy

Jennifer A. Baughman, Lynchburg

Stephen M. Grachanin, Akron

Jong H. Park, Columbus

Bethany J. Bell, Cincinnati

Lauren E. Grant, Dayton

Danielle N. Polak, Columbus

Samantha L. Berkhofer, Springfield

John L. Hagan, Deerfield

Erica L. Powers, Brunswick

Adam M. Binaut, Hamilton

Benjamin E. Haire, Fairview

Lauren M. Preidis, Pataskala

Terence J. Bizga, Westlake

Paul D. Harkleroad, Kettering

Benjamin T. Dixon Pugh, Ft. Mitchell

Edward F. Borkowski, Cleveland

Julie D. Hawk, Hinckley

Curtis L. Richardson, Blacklick

Brian D. Bremer, Stow

R S. Heasley, Cleveland

Kevin P. Riddles, Seven Hills

Matthew G. Brouse, Pittsburgh

Maria D. Hinton, Notre Dame

John Philip Milton Rutan, Westerville

Nadia Bukhari, Westerville

Benjamin H. Hoelzel, Sunbury

Robert E. Sander, Columbus

Erin E. Butcher-Lyden, Columbus

Jessica L. Holton, Somerville

Brian P. Scherf, Westlake

Kristen M. Cady, Cleveland

Nicholas J. Horrigan, Barberton

Jonathan J. Schlegel, Columbus

James D. Campbell, Columbus

Patricia G. Hughes, Farmington

Dustin A. Schock, Columbus

Richard R. Campbell, Cincinnati

Jeffrey R. Jackson, Coshocton

Kristin N. Schoeck, Barberton

Kristen E. Carl, Akron

Randall E. Jedlink, Toledo

Eric J. Scott, East Palestine

Caleb Carson, Prospect

Blake C. Jones, Columbus

Callan C. Searcy, Longview

Casey L. Cerreta, Ashland

Shawn M. Jones, Swanton

Lynnette Sequeira, Gates Mills

Alexis K. Chancellor, Columbus

Timothy E.J. Keck, Columbus

Justin C. Sheridan, Mason

Tyler P. Chirdon, Maumee

Peter S. Kim, West Chester

Sheena A. Sjostrand-Post, Newark

William B. Coleman, Columbus

Brian A. Klumpe, Akron

Keefe A. Snyder, Perrysburg

Peter A. Contreras, Dublin

Jessica S. Knight, Alexandria

Kelly A. Spring, Brunswick

John J. Coomes, Milford

Brian A. Kruse, Beavercreek

Megan E. Starrett, Massillon

Sarah J. Corney, Toledo

Joel M. Kuhlman, Bowling Green

Lindsay E. Stelnicki, Toledo

Gregory O. Cox, Dayton

Daniel D. Lenert, Columbus

Randall E. Stevenson, Dayton

Candace J. Crear, Cincinnati

John E. Lindsay, Maumee

Kenneth M. Streder, Cincinnati

Bradley L. Cromes, Ravenna

Christopher J. Liu, Sharonville

Sara H. Sudkamp, Cincinnati

Kenneth R. Crosley, Toledo

Alesa T. Lotozynski, Toledo

Brian P. Sullivan, Dayton

Sima L. Cutler, Granville

David L. Ma, Cincinnati

Melinda D. Sykes, Columbus

Cara L. Dawson, Columbus

Anthony A. Mahan, Newport

Debra L. Talley, Cleveland

Tracy L. Derteen, Atwater

Michael M. Mahon, Cincinnati

Anahid E. Thompson, Akron

Anthony J. Dimora, Cleveland

David J. Martin, Columbus

James G. Tinch, Laurel

Katharine A. Donnellan, Columbus

Marla L. Mellino, Cleveland

Dustin G. Torres, Columbus

John J. Dowell, Lakewood

Daniel L. Meyer, Westerville

Jessica Marshall Verhotz, Columbus

Michael S. DuBois, Wilder

Michael B. Mezher, Cincinnati

Gregory J. Vogt, West Chester

Aaron G. Durden, Dayton

Chelsea Mikula, Cleveland

Keesha N. Warmsby, Columbus

Gene C. Edwards, Reynoldsburg

Greg L. Mokodean, Arlington

Ivy K. Washington-Marshall, Cleveland

Nick J. Endsley, Kettering

Ashleigh E. Monroe, Westerville

Ashley A. Weyenberg, Washington

Rebecca L. Fahim, Perrysburg

Richard A. Morehouse, Akron

Matthew T. Wholey, Cleveland

John J. Feeney, Hebron

Kristin S. Marstellar Morrison, Cleveland

Andrew D. Willis, Edgewood

Kathryn M. Frombaugh, Wellington

Andrew M. Mulford, Lakewood

Catherine K. Wong, Solon

Michael Fuduric, Euclid

Kelly C. Needham, Rocky River

Alycia N. Workman, Copley

Jessica D. Gault, Hubbard

Anna K. Nereng, Enon

Andrew R. Zellers, Beachwood ◆

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Solo, Small Firms and General Practice News

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Solo, Small Firms and General Practice News

Section council meeting summary May 5, 2011

Next section council meeting

The section council held its spring meeting on Thursday, May 5, 2011 at 5:45 p.m. at the OSBA Annual Convention in the Hyatt Regency. Council members, OSBA staff and guests attended. The following actions were taken and topics discussed.

The next section council meeting will be held in September 2011 at the OSBA offices in Columbus with the specific date to be announced on the OSBA website. ◆

Treasury report

By Theodore M. Mann Jr., secretary of the OSBA Solo, Small Firms and General Practice Section.

Section financial activity through the March 31, 2011, first quarter was reviewed with fund balance and activity comparable to prior years. Budget planning for next year has started and will be further reviewed at the September 2011 section council meeting.

Membership report As of April 2011, the section is at 2,832 members, reflecting a slight decline comparable to membership levels of the general OSBA membership. The membership promotion program continues to generate members and reasonable retention rates.

2011 Annual Convention program The joint presentation by the section with the Ohio Bar Liability Insurance Company was reviewed as concluded just before the section council meeting. It was presented to a packed room with various components on law practice, disciplinary counsel and substance abuse well-received. ABA Author Ann M. Guinn participated in the section council meeting.

2012 Annual Convention program Preliminary planning for the May 3, 2012, Annual Convention program in Cincinnati has begun. The program will be a joint presentation by OBLIC and the section in a similar format and with components that have been well-received by attendees.

2011 Solo and Small Firm Conference The two-day CLE program is set for Thursday, Dec. 15, and Friday, Dec. 16, 2011, at the Embassy Suites in Dublin. Course curriculum is being developed. The section will host a reception for attendees and vendors at the end of the first day.

About Solo, Small Firms and General Practice News Solo, Small Firms and General Practice News is produced by the Ohio State Bar Association Solo, Small Firms and General Practice Section. The OSBA publishes 10 committee and section newsletters. For more information about Solo, Small Firms and General Practice News, contact the editor, Michael P. Hurley, at Nelson, Sweet & Hurley, 8 North State Street, Suite 201, Painesville, Ohio 44077, phone (440) 357-5558. Articles published in this newsletter reflect the views and opinions of the writers and are not necessarily the views or opinions of the OSBA Solo, Small Firms and General Practice Section. Publication in Solo, Small Firms and General Practice News should not be construed as an endorsement by the committee or the OSBA. For information about other OSBA committee and section newsletters, contact John Hocter, OSBA publications editor, at P.O. Box 16562, 1700 Lake Shore Drive, Columbus, Ohio 43216-6562, (800) 282-6556 or (614) 487-4402, or e-mail at [email protected]. ◆ Designed by Andrea Donahue and Natalie Zofko. © Copyright 2011 Ohio State Bar Association.

Section website Efforts to energize the use of the section’s part of the OSBA website are being explored.

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