Advising Entrepreneurs : Dynamic Strategies for Financial Growth

Preface xiii

Part One The Financial Advisor’s Role 1

CHAPTER 1 The Regulatory and Ethical Environment 3

Duties of a Fiduciary 4

Initial Interview 6

Compensation Approaches 7

Engagement Letter 9

Conflicts of Interest 10

CHAPTER 2 Financial Management and Planning 13

Pre-Start Analysis 14

Entrepreneur as Manager 16

Evaluating the Enterprise 19

Eventual Harvest 24

Part Two Shaping the Venture’s Financial Structure 27

CHAPTER 3 Using the Tools of the Accountant 29

Break-Even Analysis 29

Forecasting Models 31

Analyzing Financial Statements 32

Managing Cash 37

Managing Receivables 41

Managing Inventory 43

Managing Liabilities 44

Managing Capital Assets 46

CHAPTER 4 Entity Design Choices 49

Tax Considerations 50

Sole Proprietorship 51

Partnership 52

Corporation 56

Limited Liability Company 64

CHAPTER 5 Private Placements 69

Federal Exemptions 70

Private Placement Memorandum 74

CHAPTER 6 Venture Capital 77

Venture Capital Marketplace 78

Business Plan 79

The Venture Capitalist’s Valuation Process 80

Venture Capital Agreement 82

Employment Agreement 83

Shareholders’ Agreement 84

CHAPTER 7 Bank Loans and Debt Alternatives 87

Characteristics of Debt 87

Sources of Debt Financing 88

Creditworthiness 90

Types of Loans 91

Leasing 92

Working Capital Funding 92

Selecting a Banker 95

Negotiating a Bank Loan 97

CHAPTER 8 Government Funding 101

Federal, State, and Local Funding Sources 102

Small Business Administration 104

Other Federal Opportunities 108

CHAPTER 9 Joint Ventures and Strategic Alliances 111

Alliance Strategies 112

Licensing 114

Identifying a Strategic Partner 115

Working toward a Strategic Alliance Agreement 116

Part Three Protecting the Entrepreneur and His or Her Assets 123

CHAPTER 10 Risk Management 125

Organizational and Operational Considerations 125

Developing a Risk Management Agenda 127

Insurance Principles 127

Insurance Strategy 129

Property Insurance 131

Liability Insurance 133

Insurance Benefits for Employees 135

Self-Insurance 137

Director and Officer Liability 139

Indemnity 142

CHAPTER 11 Valuing the Entrepreneurial Venture 145

Evaluation Methods 146

Valuing Assets 148

Valuing Liabilities 156

Determining the Purchase Price 158

CHAPTER 12 Buy-Sell Designs 167

Buy-Sell Agreement 168

Triggering Events 168

Funding the Buyout 169

Stock Redemption or Entity Agreement 170

Avoiding Dividend Treatment 171

Stock Attribution Rules 174

Redemptions to Pay Death Taxes 176

Alternative Minimum Tax 177

Accumulated Earnings Tax 178

Split-Dollar Redemption 180

Disadvantages of Redemption 180

Cross-Purchase Agreement 181

Trusteed Cross-Purchase 182

Partnership Cross-Purchase 184

Split-Dollar Cross-Purchase 185

Wait-and-See Buy-Sell Agreement 188

Employee Stock Ownership Plan 189

Estate Tax Deferrals 191

Premium Allocation 192

Valuation 192

Transfers for Value 195

Combining the Life Insurance Retirement Plan and the Buy-Sell 198

S Corporation Buy-Sell Issues 199

CHAPTER 13 Asset Protection Strategies 201

Ethical Obligations 201

Exempt Assets 203

Gifting Strategies 204

Choice-of-Entity Implications 205

Part Four Compensation Planning for the Entrepreneur and His or Her Employees 211

CHAPTER 14 Cash and Deferred Compensation 213

Bonuses and Deferred Compensation 214

Constructive Dividends 215

Company Retirement Plans 217

ERISA Compliance 222

ERISA for Deferred-Compensation Plans 235

ERISA for Split-Dollar and Executive Bonus Plans 242

Related Issues: Age and Sex Discrimination 247

CHAPTER 15 Equity-Based Compensation 251

Stock Options 252

Incentive Stock Options 252

Nonqualified Stock Options 254

Restricted Stock 258

Phantom Stock Plans and Stock Appreciation Rights 259

Part Five Managing Capital Events 261

CHAPTER 16 Buying or Selling an Entrepreneurial Business 263

The Client’s Objectives 263

Financial Information 266

Guidelines for Reviewing Standard Accounting Opinion 268

Contracts and Continuing Obligations 271

Leases and Properties 273

Federal Taxes 276

State and Local Taxes 278

Internet Domain Names, Patents, Trademarks, Trade Names, and Copyrights 280

Permits, Licenses, and Franchises 281

Liens, Judgments, and Deeds 281

Employee Benefit Plans 282

Unemployment Compensation Rating 282

Stock Certificates, Options, and Records 283

CHAPTER 17 Succession Planning 289

Federal Tax Rules 290

Tax-Deferral Opportunities 291

Valuation Strategies 292

Income-Shifting Techniques 293

CHAPTER 18 Initial Public Offering 303

Public Life 303

Preconditions 305

Registration Team 306

Registration Process 307

Nontraditional Alternatives 310

Index 313