PCA Magazine 2022 Show Issue

40 PCA The Magazine | VOLUME 2 2022 PREMIUMCIGARS.ORG extend the same stability and courtesy to a new tenant?” But Khoury allayedmany of these concerns, asserting that the value of a business—meaning, apart fromthe real estate—lies in its demonstrable earnings; and to prove earnings, you need accurate accounting. Khoury told us, “I’d say 70 to 80 percent of business owners lease the property. Especially in the bigger cities, very fewpeople can afford to own their own real estate. So, there definitely is value in a business in a leased property. Thewaywe calculate the value ofmost small businesses is we look at amultiple of what we call ‘seller discretionary earnings’”—SDE, it is called in the business brokerageworld. “That’s your business’s net IRS- reportable income, plus any salary the owner takes, plusmiscellaneous benefits financed by the business— they are called ‘add-backs’—such as insurance, or a leased car, or even business lunches. These all add up to the SDE. And the business value is typically the annual SDE times two, plus inventory.” Khoury indicates that the SDEwould be used formost businesses generating sales under $1million annually. Other valuationmethods would apply to larger businesses. But the upshot is that, evenwithout purchasing the building, a personwho is buying a successful business is, in essence, buying himself a well-recompensed job. As for the lease, Khoury points out that having the buyer and the landlord negotiate a strong lease is just part of doing business. “Get a three- or five- year leasewithmultiple options for renewal and first right of refusal,” he advises. “If the business is successful, that landlord is going to bemotivated to offer a tenant-friendly lease, because the alternative can be an empty building.” It bears repeating that if a buyer requires outside financing tomake the deal go—andmost buyers do need bank financing—then the seller is going to have to objectively prove theworth of the business. Absent that proof, the prospective buyer will never surmount the gauntlet of questions posed by any lending institution. Khoury says, “We run into this a lot with restaurants, bars, pawn shops, anything that has a lot of cash running through. If you don’t claim it, youmight be savingmoney on taxes, but when it comes time to sell and you don’t have a recorded history establishing that you aremakingmoney, that justmakes it hard for someone to buy.” Themoral of that story is that you can probablymake up whatever youmight have saved in taxes through under- reporting if instead you faithfully represent your business’s income and make it a part of your valuation. This includes the need to report your own salary and fully pay the FICA tax. Once you hit retirement age for Social Security, thosemonthly infusions will bemanna fromheaven. As for bequeathing your business to an offspring, Khoury advises that you have your heir buy into the business— “so they have some skin in the game, at least a little bit.Maybe do some seller financing, have themeventually come upwith 30 percent down on their own. Otherwise the parentmight not have S U C C E S S I O N P L A N N I N G the funds needed to survive old age.” An estate planner whoworks for a bank inKansas (his employer won’t allowhimto be named in the press) told us that he regularly has to deal with cases inwhich a business ownermade no provision for orderly succession in the event of catastrophe. Adeath occurs unexpectedly; bad health sneaks into the picture; family strifeworks its dark magic. One day, youwake up and the future of your business is under threat because no succession planwas written down in black andwhite. The estate planner calls the lack of a succession plan an “unforced error—amistake that no business personneedmake.”He advises that the entrepreneur have his CPA get the business’s books in order, and that a call be placed to an estate- planning attorney for development of a succession plan. TonyKhoury can be reached through his website, tworld.com/eastern-nc/ . Even if you don’t think you need a broker, scroll down the page and click onKhoury’s blog for dozens of educational posts on retirement planning, finding the right buyer, how to value your business, howbest to transfer a business to a familymember. Start thinking these thoughts today, for tomorrow is not promised. “THE ESTATE PLANNER CALLS THE LACK OF A SUCCESSION PLAN AN ‘UNFORCED ERROR—A MISTAKE THAT NO BUSINESS PERSON NEED MAKE.’”