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LEVERAGED CAPITAL NEWSLETTER Leveraged Capital, is a free monthly newsletter that presents growth and strategy issues effecting entrepreneurs and owners of small to medium size enterprises (SME's). Leveraged Capital is published and delivered electronically to subscribers. Your privacy is strictly respected and we do not share or sell subscriber email addresses to anyone outside of Graham Financial Corporation. If you enjoy what we present, please forward a copy of Leveraged Capital to clients and associates. They can subscribe to Leveraged Capital, by clicking on this link: http://www.GrahamFinancial.com/newsLetter.htm and filling out the quick form. =============================================================== This month’s articles have a distinct focus on family-run businesses. I hadn’t intended on this focus – it may be because I am reading the Jean Strouse biography of Morgan and I have become quite fascinated with how Morgan senior structured the company and a legacy to pass on to an increasingly prudent, independent, and aware J. Pierpont ; or it may have been because (please forgive me and allow a brief moment of sentiment to slip in here) over dinner a few weeks ago I proudly looked down the table at an 18 year old son who is wonderfully finding his own path in the world, a 13 year old daughter who is growing beautiful and more confident right before my eyes, and a wife who has given such amazing love, support, and sacrifice as I have planned for growth at Graham Financial over the past 5 years. I started to think in a fresh way about how I am building my own company and what sort of legacy that I hope to leave for them. I trust you will enjoy these articles as much as I have. On another note, with unabashed enthusiasm and no apologies offered to our Carolina subscribers – GO LEAFS! Much success to you, DPG. ===============================================================
14 Years of Exceptional Service Contact Nikki Barnett (416) 367 - 1055 =============================================================== In This Months Issue: (Click on the Article Title To Go To The Full Story.)
=============================================================== Quote Of The Month: Investment Hindsight: ===============================================================
Succession from one
generation to another does not happen by accident in the family owned business
(FOB). If you are interested in succession or the continuity of your business,
you must understand that planning for that continuity is the critical factor. We
believe the failure to adequately address the topic of succession is the primary
reason that only 30%of FOBs continue into the second generation and that only
10% more continue into the third. Succession exists as an
underlying issue in all FOBs, playing a tremendously important role in the life
of the family, as well as the life of the business. Yet owners and operators of
family businesses rarely address succession, apparently because of its powerful
psychological implications, which can sometimes be overwhelming. Admittedly Succession Is A
Complicated Topic. Succession Forces
Business Owners To Make The Hard Choices. What Does A Family
Business Represent? But
in addition to giving the family an identity in the community, the FOB can
become the playing field on which many family issues get acted out. For
instance, when families start tackling the problem of succession, many of the
unresolved family and business issues begin surfacing. And because people
generally tend to avoid dealing with difficult issues, these matters build up
over time and may take on an almost mythical power. This powerful tension only
serves to discourage a family from facing up to the underlying problems. Succession
is not a decision. It is an organized process that involves discussion,
information gathering, evaluation, research, asking necessary questions and much
more. If you address the issue of succession as a process that includes all
family members, the power and the tension associated with the decision will be
significantly reduced. Nine Helpful Steps
Toward Succession.
Conclusion.
Thomas D. Davidow, Ed.D., co-founder and principal of Massachusetts based Genus Resources, pioneered the interdisciplinary approach to family business consulting with his partner, Richard Narva, Esq., in 1985. Since its beginning, Genus has worked with over 200 family businesses to resolve a multitude of issues that interfere with sound business decisions. http://www.genusresources.com . ===============================================================
When a person creates a business, they did it in most cases to create wealth. It’s unlikely they created the business to hoard wealth or leave it behind. The problem historically has been the exit strategy, or at best a tax effective exit strategy. Companies typically bonus out profit in excess of $200,000 to shareholders rather than pay 45% tax on it. But, if the company were to dividend that money up to a holding company that placed it inside a universal life contract, no tax would have to be paid. This is the new technology. Historically, tax shelters like RRSP’s, mutual funds, real estate and small business are temporary. The only permanent tax shelters are your principal residence and universal life. This new strategy is generically referred to as an insured retirement plan. The business owner pays a dividend tax-free into a holding company . The holding company owns a contemporary universal life policy on the owner and/or spouse, children. The insurance has a tax sheltered side fund linked to external indices i.e. TSE 100, S&P 500. At the end of each day , the business owner can access this tax sheltered accumulated growth through a series of tax-free loans from a major bank. Because mortality is 100% and holding, the banks know it has to work. When the last spouse dies, HOLDCO will receive the tax-free death benefit. That money would be paid out as a special capital dividend to the shareholders’ estate, which would pay out the bank. There would also be money left over for estate taxes and possibly for inheritances or charities. There are critics to the concept, some precautions and “what ifs”. For example, the shareholder must not get indebted to the bank for any other reason that would cause the bank to seize the policy. This would trigger taxes. It would also be open to CCRA to argue that by guaranteeing a personal loan, the corporation was conferring a taxable benefit on the shareholder. The professional consensus suggests that it may be prudent therefore to have the shareholder pay a commercially reasonable guarantee fee to the corporation. Suggested fees are usually in the range of .5% to 1.5%. A recent D&B survey of 1000 wealthy Canadians suggested that not one of these Canadians did tax planning based on what might happen in the future. They worked within the tax regulatory and economic conditions of the time. For those considering an IRP. The rules should be:
Mr. Franklin runs a successful business and had explored all the strategies to date. When we first met Mr. Franklin, he almost threw us out of his office because the strategy was so ahead of its time. He is now moving $10,000 a month from Opco to Holdco tax-free. Holdco owns a $5,000,000 second to die policy on he and his wife for capital gains purposes. At the end of the day, Mr. Franklin will have options as to how and when to remove the tax sheltered growth in the universal life policy. We have since shown him another strategy, described below. This one is very new and only a couple of players have it as we speak. The shareholder and the corporation enter into a formal agreement to share ownership of a universal life policy. The agreement calls for the corporation to pay the insurance costs on a pre-paid basis over 10 years. The shareholder agrees to finance the policy’s investment component over the same 10-year period. Commencing in the second year, the shareholder elects to borrow the cash value from the policy. As an investment the interest is tax deductible. It is proposed that the shareholder, in turn, invests this money back to his corporation or to another investment of his choice. Advantages to this new strategy include:
This plan can be used to enhance the after tax yield from an investment portfolio. Individuals are advised to seek independent advice from tax, legal and other such advisors as to the best course for their individual financial needs. Raymond
Soroka has 20 years of specialized experience in planned insurance estates for
business owners and professionals. He can be reached at 905-624-0905 or by
email at raymon@look.ca
. ===============================================================
By now the statistics are well known: Less than 30% of family companies survive to the second generation, business consultants often remind us. And just 10% make it to the third. For that matter, few companies of any type, family or not, survive more than 25 years. What, then, are we to make of
the remarkable group listed on the following pages—companies that, to the best
of our knowledge, can rightly claim to rank among America’s oldest family
businesses? They’ve survived in the same family not merely for decades but for
at least 125 years and in 21 cases for at least two centuries; not merely for
three or four generations but for eight or nine or 12 or, in one case, 14
generations. Many are older than the states or the nation in which they
function. They range in size from mom-and-pop farms to publicly traded companies
to the world’s largest private company: $47 billion Cargill Inc. of Minnesota.
They range in function from little known funeral homes and music stores to
household names like Levi Strauss and Coors beer. They’re scattered across 39
states and Puerto Rico. The only characteristics they truly share are their
family nature and their remarkable longevity. You might expect a list of
America’s oldest anything—companies, families, whatever—to be heavily
skewed toward the nation’s oldest section: the East Coast. Not so. The
presumably family-friendly heartland state of Iowa leads our list with eight
companies, followed closely by its Midwest neighbors Illinois (seven), Ohio
(six) and Missouri (five). The city of St. Louis alone counts five members of
our club. The best “old family company” states on the East Coast are
Pennsylvania with six and Massachusetts and Virginia with five each. As was the case with our lists
of largest domestic and foreign family companies (FB, Autumn 2000, Winter 2001),
identifying the oldest family companies is an inexact science. Family Business
first ventured such a list in Winter 1999, when family business historian
William T. O’Hara of Bryant College in Rhode Island picked the oldest family
company in each of the 50 states. The feedback he received from that article
encouraged him to proceed with his research on a book about the world’s oldest
family companies. Using Professor O’Hara’s updated data as our starting
point, the editors of Family Business set out to produce a new list—one that
identifies America’s oldest family companies regardless of state borders. To
O’Hara’s list we have added names culled from other sources. We’ve also
delved into the histories of these families and their companies to find out more
about who they are and how they survived. Like our “largest family companies” lists, what follows is certainly not the last word on America’s oldest family firms. No doubt many venerable family companies escaped our notice. And our information about companies we did list is far from complete. Again, we invite readers to consider this list a work in progress, and to alert us to omissions and corrections. What’s the secret of our
oldest hundred? Good genes are obviously one factor. Luck is another. A rural or
small-town location seems to help, too: Only 21 of the companies on our list can
be found in cities large enough to house major-league sports teams. But many on our “oldest”
list share yet another characteristic: a genuine interest in serving the needs
of a larger cause beyond the company's stockholders. Ultimately, their stories
seem to suggest, a moral imperative remains a sustaining force long after the
passion for profits has worn off. Click here to go to the listing of the America’s Oldest Family Businesses. Reprinted by permission of the publisher from Spring 2002 Family Business, Philadelphia, www.familybusinessmagazine.com , Executive Editor Barbara Spector. Published since 1989, Family Business focuses on the tough issues virtually all business families must face: succession planning, business strategy, wealth preservation, estate and tax planning and the human dynamics unique to the family-owned and -operated enterprise. Research: William T. O’Hara, Leah McClellan-Weiberle ===============================================================
The statistics are similar in
both Canada and the United States: 45%
of the Gross Domestic Product is created by family owned businesses and over 50%
of the available workforce are employed by family owned businesses.
A total of 70% to 85% of all new jobs created each year are created by
family owned businesses. These statistics are staggering
when compared to the fact that 70% of family businesses do not survive the
transition to a second generation, and 90 percent do not make it to a third
generation. In an article written for the
Wall Street Journal, Peter Drucker suggested four golden rules that must be a
part of every family owned business for it to survive through multiple
generations. DRUCKER RULE # 1. Family members must work as hard as non-family members. DRUCKER RULE # 2. Family businesses need to add non-family managers. DRUCKER RULE # 3. At least one top job in each family business must be filled by a non-family manager. DRUCKER RULE # 4. Before the situation becomes acute, the issue of succession should be entrusted to someone neither part of the family nor part of the business. =============================================================== To Advertise in Leveraged Capital: If you are interested in advertising in Leveraged Capital, email us at: ads@GrahamFinancial.com and we will contact you. Feel free to forward a copy of Leveraged Capital to clients and associates. It is free to subscribe by clicking on this link: Click Here For Your Free Subscription To Leveraged Capital. =============================================================== To Unsubscribe from Leveraged Capital: If you wish to removed from our mailing list, send an email to us at: ezine@GrahamFinancial.com with the word "Unsubscribe" in the subject field. © 2002 Graham Financial Corporation, All Rights Reserved. |
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