Advising Entrepreneurs

MARC J. LANE is a practicing business and tax attorney in Chicago. He is a ­Master ­Registered Financial Planner, Registered Financial Consultant, and Certified Investment Specialist. He has authored thirty books and is an Adjunct Professor of Business at the ­University of Illinois College of Business Administration’s Institute for Entrepreneurial Studies and an Adjunct Professor of Law at Northwestern ­University Law School.

"The entrepreneur is faced with decisions throughout the life of the company that have significant repercussions on the enterprise as well as on personal financial exposure. Addressed to financial advisers, Advising Entrepreneurs discusses the financial implications and pros and cons of decisions from the start of the business plan, through the formation of an entity, financing, operations, and eventual harvest of the company. The book maintains a useful middle ground between the superficial and the highly technical. Financial advisers will come away with an increased appreciation of entrepreneurial behavior, while entrepreneurs will be able to better manage the risks and financial assets of their businesses." (HBS Working Knowledge, Pub. Date: Oct 1, 2001)

• Preface xiiiPart One The Financial Advisor’s Role 1CHAPTER 1 The Regulatory and Ethical Environment 3Duties of a Fiduciary 4Initial Interview 6Compensation Approaches 7Engagement Letter 9Conflicts of Interest 10CHAPTER 2 Financial Management and Planning 13Pre-Start Analysis 14Entrepreneur as Manager 16Evaluating the Enterprise 19Eventual Harvest 24Part Two Shaping the Venture’s Financial Structure 27CHAPTER 3 Using the Tools of the Accountant 29Break-Even Analysis 29Forecasting Models 31Analyzing Financial Statements 32Managing Cash 37Managing Receivables 41Managing Inventory 43Managing Liabilities 44Managing Capital Assets 46CHAPTER 4 Entity Design Choices 49Tax Considerations 50Sole Proprietorship 51Partnership 52Corporation 56Limited Liability Company 64CHAPTER 5 Private Placements 69Federal Exemptions 70Private Placement Memorandum 74CHAPTER 6 Venture Capital 77Venture Capital Marketplace 78Business Plan 79The Venture Capitalist’s Valuation Process 80Venture Capital Agreement 82Employment Agreement 83Shareholders’ Agreement 84CHAPTER 7 Bank Loans and Debt Alternatives 87Characteristics of Debt 87Sources of Debt Financing 88Creditworthiness 90Types of Loans 91Leasing 92Working Capital Funding 92Selecting a Banker 95Negotiating a Bank Loan 97CHAPTER 8 Government Funding 101Federal, State, and Local Funding Sources 102Small Business Administration 104Other Federal Opportunities 108CHAPTER 9 Joint Ventures and Strategic Alliances 111Alliance Strategies 112Licensing 114Identifying a Strategic Partner 115Working toward a Strategic Alliance Agreement 116Part Three Protecting the Entrepreneur and His or Her Assets 123CHAPTER 10 Risk Management 125Organizational and Operational Considerations 125Developing a Risk Management Agenda 127Insurance Principles 127Insurance Strategy 129Property Insurance 131Liability Insurance 133Insurance Benefits for Employees 135Self-Insurance 137Director and Officer Liability 139Indemnity 142CHAPTER 11 Valuing the Entrepreneurial Venture 145Evaluation Methods 146Valuing Assets 148Valuing Liabilities 156Determining the Purchase Price 158CHAPTER 12 Buy-Sell Designs 167Buy-Sell Agreement 168Triggering Events 168Funding the Buyout 169Stock Redemption or Entity Agreement 170Avoiding Dividend Treatment 171Stock Attribution Rules 174Redemptions to Pay Death Taxes 176Alternative Minimum Tax 177Accumulated Earnings Tax 178Split-Dollar Redemption 180Disadvantages of Redemption 180Cross-Purchase Agreement 181Trusteed Cross-Purchase 182Partnership Cross-Purchase 184Split-Dollar Cross-Purchase 185Wait-and-See Buy-Sell Agreement 188Employee Stock Ownership Plan 189Estate Tax Deferrals 191Premium Allocation 192Valuation 192Transfers for Value 195Combining the Life Insurance Retirement Plan and the Buy-Sell 198S Corporation Buy-Sell Issues 199CHAPTER 13 Asset Protection Strategies 201Ethical Obligations 201Exempt Assets 203Gifting Strategies 204Choice-of-Entity Implications 205Part Four Compensation Planning for the Entrepreneur and His or Her Employees 211CHAPTER 14 Cash and Deferred Compensation 213Bonuses and Deferred Compensation 214Constructive Dividends 215Company Retirement Plans 217ERISA Compliance 222ERISA for Deferred-Compensation Plans 235ERISA for Split-Dollar and Executive Bonus Plans 242Related Issues: Age and Sex Discrimination 247CHAPTER 15 Equity-Based Compensation 251Stock Options 252Incentive Stock Options 252Nonqualified Stock Options 254Restricted Stock 258Phantom Stock Plans and Stock Appreciation Rights 259Part Five Managing Capital Events 261CHAPTER 16 Buying or Selling an Entrepreneurial Business 263The Client’s Objectives 263Financial Information 266Guidelines for Reviewing Standard Accounting Opinion 268Contracts and Continuing Obligations 271Leases and Properties 273Federal Taxes 276State and Local Taxes 278Internet Domain Names, Patents, Trademarks, Trade Names, and Copyrights 280Permits, Licenses, and Franchises 281Liens, Judgments, and Deeds 281Employee Benefit Plans 282Unemployment Compensation Rating 282Stock Certificates, Options, and Records 283CHAPTER 17 Succession Planning 289Federal Tax Rules 290Tax-Deferral Opportunities 291Valuation Strategies 292Income-Shifting Techniques 293CHAPTER 18 Initial Public Offering 303Public Life 303Preconditions 305Registration Team 306Registration Process 307Nontraditional Alternatives 310Index 313