FINANCE: Financial Planning Helps Avoid Triple Tax

A million-dollar hauling business that began 20 years ago with one truck and two carts may be more prosperous than it appears.

Many of today's waste management executives suffer from low liquidity because their net worth was earned in intangible services such as collection and hauling. Even worse, while businesses are already subject to stringent government regulations, the death of the company's owner brings even more regulations in its wake. In essence, business owners are triple-taxed - on purchases, earnings and at the time of death.

Because as much as 55 percent of an estate valued above $3 million can be assessed after death, it is important to achieve liquidity. Ways to achieve liquidity include:

* Using some debt to reduce equity. Financial institutions do not favor "cashing out," even if the company intends to take a few million dollars and is willing to leave the majority of the money.

As a result, many companies are turning to private placement of debt for medium-term financing, according to Kirk Lundblade, corporate finance partner at J. C. Bradford & Co., Raleigh, N.C. Since this option often uses a single institution, a firm can learn what a third-party investor may require without the formalities of an initial equity offering.

* Selling equity. There are alternatives to adding more shareholders or investors. For example, your firm can buy all or some of your stock. While this sale is easy to accomplish, however, it may strain the cash flow and does not allow for a corporate exit strategy.

Also, consider selling equity to shareholders or additional qualified investors. "Many firms can help with an equity private placement, but make sure you have covered all your bases with your own legal counsel to ensure compliance with state and federal securities regulations," said Jimmy Yates, a partner with Wyrick, Robbins, Yates & Ponton, Raleigh, N.C.

Starting an employee stock ownership plan (ESOP) is another viable way to add more shareholders. Employees are logical candidates for ownership, but avoid an employment contract. ESOP plans can be drafted as a "benevolent dictatorship" or as substantial shareholder participation, using your personality as a guideline. The posibility of having several small holders may be a negative aspect of this option.

Lastly, the company can organize as a partnership. Many firms annually bring in partners who remain limited. This creates a pool of capital to purchase equity. Keep in mind that legal counsel is mandatory to organize as a partnership.

Even if you have no desire to go public, it is prudent to operate in a position that allows you to do so. Following practices of public companies and creating internal valuations based on public awareness of your industry will prove beneficial in your efforts to raise capital.