2016 Tax Update and Year-End Review
2016 Tax Update and Year-End Review November 9, 2016
Thomas J. Kammerait Shareholder von Briesen & Roper, S.C. 411 East Wisconsin Avenue, Suite 1000 Milwaukee, Wisconsin, 53202 Phone: (414) 287-1413 [email protected] www.vonbriesen.com
i
2016 TAX UPDATE AND YEAR END REVIEW 1.
Tax Landscape for 2017
2.
Economic Outlook
3.
Income Tax Planning
4.
Conservation Easements
5.
C and S Corporations
6.
Disregarded Entities
7.
Agency Management; Corporate Governance
8.
Estate Taxes
9.
MANA Attorneys Forum
10.
Contract Management
11.
Year in Review
12.
Appendix a. Individual Income Tax Rates b. Standard Deduction c. Employment Tax Rates d. Biography
© 2016 von Briesen & Roper, s.c 27476190_1.DOC
1. TAX LANDSCAPE FOR 2017
• Top rate for ordinary income
39.6%
• Capital gains
20%
• Dividends
Ordinary income
• Medicare surtax on AGI above $250,000 ($200,000 single taxpayers)
0.9%
• Surtax on unearned income
3.8%
• Employee FICA taxes
6.2%
• No significant change from prior year; subject to year-end legislative activity.
© 2016 von Briesen & Roper, s.c 27476190_1.DOC
2. ECONOMIC OUTLOOK
• GDP - Slow upward trend, regardless of who was elected - Mild slowdown in 2019 • U.S. - Consumer driven economy - Boomers outnumbered by Millennials - Low interest rate environment likely to continue - Low gas prices - Manufacturing oriented - Largest economy in the world and becoming larger • Key employees in demand; immigration needed to meet demand • Know your customer’s customers • Agriculture and construction cycles
© 2015 von Briesen & Roper, s.c. 27476190_1.DOC
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3. INCOME TAX PLANNING
• Margins - Lower rate - Avoiding payroll taxes • Timing - Later - When brackets are lower - e.g. parents or children’s rates, post retirement, “soft” year • Bracket management • Deductions are more valuable applied against higher rates
© 2015 von Briesen & Roper, s.c. 27476190_1.DOC
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INCOME TAX PLANNING (Continued)
• Qualified retirement plans - Significant deferral opportunities - $20,000 to $50,000 in deferrals - Establish by year end - Fund year round - Spousal contributions • Alternative Minimum Tax (AMT) - Planning ranges over 2-3 years - Example: 2016 No AMT 2017 AMT Max out on state income taxes in 2016. • Typical deductions - Real estate taxes (watch AMT) - State income taxes (watch AMT) - Charitable deductions, maybe - Depreciation (plan it out)
© 2015 von Briesen & Roper, s.c. 27476190_1.DOC
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4. CONSERVATION EASEMENTS
• Agreement between landowner and government agency. • Permanent limitation or use to protect its conservation value. Example: $100,000 conservation easement Up to 50% of AGI (previously 30%) Carryover up to 5 years (15 years if farmer or rancher)
Comments • Typically permanent • Requires qualified appraisal
© 2015 von Briesen & Roper, s.c. 27476190_1.DOC
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5. C AND S CORPORATIONS
Use of C Corporations • First $50,000 taxed at 15% • Consider breaking S election, by March 15 • Consider: 1.
Holding Company S or C corporation
Agency S corporation
US Presence, Buy-Sell, Real Estate S or LLC
2. Agency C corporation
Management fee
• Risk management
© 2015 von Briesen & Roper, s.c. 27476190_1.DOC
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Buy-Sell S corporation
6. DISREGARDED ENTITIES
• Are “nothing” for tax purposes if 100% owned by another entity • Are legal entities and should be contractually respected Rep Agency
Dealer, distributor or agency for foreign principal.
LLC • Rep / Distribution Agreement should be put in place • Provides product liability protection (risk management)
© 2015 von Briesen & Roper, s.c. 27476190_1.DOC
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7. AGENCY MANAGEMENT; CORPORATE GOVERNANCE
• Board resolution (LLC or corporation) • Who is authorized to act in the absence of managing members or main officers? - Specifics, e.g. Payroll, payables, taxes, etc. - General Powers - Limited Power of Attorney
© 2015 von Briesen & Roper, s.c. 27476190_1.DOC
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8. ESTATE TAXES
• Exclusion 2016
2017(projected)
- per person federal exclusion
$5,450,000
$5,490,000
- per person gift tax exclusion
$5,450,000
$5,490,000
• 40% federal tax rate; no Wisconsin estate tax • Portability of exemption, and possible step up in basis • Annual Gift Exclusion 2016 $14,000
2017 $14,000
Planning Points • Step up in basis (parents) • Consider valuation strategy; possible regulatory limitations - low valuation - sale for notes • Private loans - mortgage support; minimize underwriting risk - deductible interest; acceptable rate of return • Trust consolidations, based on size and portability of exclusion © 2015 von Briesen & Roper, s.c. 27476190_1.DOC
9
9. MANA ATTORNEYS FORUM
Illustration of Commissions in Litigation:
Revenue to principal Commissions
Principals - Frequently argue non-compete/conflict of interest as an excuse not to pay - A narrow non-compete = landed business
© 2015 von Briesen & Roper, s.c. 27476190_1.DOC
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MANA ATTORNEYS FORUM (Continued)
Confidentiality - Information regarding principal vs. information regarding customer
International Principals - The rep has a higher exposure to products liability if the principal has no U.S. presence
Stock Options - Occasional for start-up companies - Be mindful of tax consequences
© 2015 von Briesen & Roper, s.c. 27476190_1.DOC
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10.CONTRACT MANAGEMENT
• Written notice; written communications • Email generally qualifies as written communication • Avoid work effort provisions (rationale to limit payment) • Mutuality of indemnification • Termination and notice provisions – timing
© 2015 von Briesen & Roper, s.c. 27476190_1.DOC
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CONTRACT MANAGEMENT (Continued)
• Permitted ownership – include current owners and employees • Call reports – as reasonably requested • Named as an Additional Insured on principal’s policy • Non-compete - Match length to termination payments - Cessation of non-compete in the event of non-payment • Assignability provisions - Implications of change in control - Consider mutuality
© 2015 von Briesen & Roper, s.c. 27476190_1.DOC
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CONTRACT MANAGEMENT (Continued)
• Proper parties:
Incorporated agency; Inc. (officer) or LLC (managing
member) • Proper signer: Officer titles and corporate designation • Protection of intellectual property - Prior customers - Industry knowledge • Confidentiality/Nondisclosure Provisions - Much more prevalent, sometimes in separate agreements - Desired by principals - Mutuality - Desirable to reps, in certain cases
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CONTRACT MANAGEMENT (Continued)
• Character/Culture - High performance requirements - Short termination provisions - Other one-sided provisions - Reps are either not valued or not compensated fairly vs. - Appropriate performance standards - Supportive termination provisions - Mutuality
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11.YEAR IN REVIEW
Agency Mergers / Joint Ventures Agency A
Agency B
Limited Liability Company (LLC) • LLC is flow through entity • Storefront, combined forces; broader coverage for principals • Commission allocation • Line conflicts • Long range contracts
© 2015 von Briesen & Roper, s.c. 27476190_1.DOC
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YEAR IN REVIEW - HOLDING COMPANIES
Holding Company
Agency A
Buy-Sell Division
• Risk management, liability protection • Accommodation for foreign principal • Disregarded entities (one tax return) • S election • S corporation - Can own 100% of S corporation - Can own C corporation • C corporation cannot own an S corporation
© 2015 von Briesen & Roper, s.c. 27476190_1.DOC
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YEAR IN REVIEW – CASES
• Life of part, life of program • When commissions are earned - On shipment - Order acceptance • When commissions are paid • Acceleration of commissions • Surcharges vs. discounts • State law problems with non-solicit provisions
© 2015 von Briesen & Roper, s.c. 27476190_1.DOC
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YEAR IN REVIEW – CASES (Continued)
• Triggering of termination provisions - Change in control - Non-assignability (key leverage provision) - Security interest in commissions - Control of over 75% of sales • High volume in succession plans - Consolidation - Demographics - Line opportunities • Institutional payors – contractual compliance
© 2015 von Briesen & Roper, s.c. 27476190_1.DOC
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YEAR IN REVIEW – AGENCY VALUATION
Book value, plus commission allocation: 1990s
100-150% of annual commission revenue
2001-04
80% of annual commission revenue
2004+
80-100% of annual commission revenue
2014-15
100% of annual commission revenue
2016
Occasional valuations in excess of 100%, frequently due to special circumstances • Tax efficiency, use of pretax dollars • e.g. 20% per year, for 5 years - Commission sharing, management fees, deferred compensation, compensation for assistance in line transition • More signs of appreciation (greater than 100%) • More “personal goodwill” transitions - Selling rep has a strong reputation - Capital gain on the sale - 15 year write-off for the buyer
© 2015 von Briesen & Roper, s.c. 27476190_1.DOC
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YEAR IN REVIEW – AGENCY VALUATION
• Ultimate “valuation” approximation Seller’s compensation
$140,000
Replacement
(60,000)
Net
$80,000 x 5 years
Total Consideration
$400,000
© 2015 von Briesen & Roper, s.c. 27476190_1.DOC
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YEAR IN REVIEW – AGENCY VALUATION
• Three-Year Commission Term - Change in control - Assignment of reps - 18 months commissions paid, plus receivables - Deductible to principal • Post Termination - Lay low until last check clears - Comply with noncompete provisions - Manage duty of loyalty - Develop contingency plan in advance
© 2015 von Briesen & Roper, s.c. 27476190_1.DOC
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VIII.
APPENDIX a. Individual Income Tax Rates for 2016 b. Standard Deduction c. Employment Tax Rates d. MANA Article, “Your Best Principal Was Just Sold. Now What?” e. Biography
© 2015 von Briesen & Roper, s.c. 27476190_1.DOC
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INDIVIDUAL INCOME TAX RATES FOR 2017 Married Filing Jointly and Surviving Spouses Taxable Income Tax -0-0$18,650 $1865 75,900 10,453 153,100 29,753 233,350 52,223 416,700 112,728 470,700 131,628 Single
% on Excess 10% 15% 25% 28% 33% 35% 39.6%
Taxable Income -0$9,325 37,950 91,900 191,650 416,700 418,400
Tax -0$933 5,226 18,714 46,644 120,910 121,505
% on Excess 10% 15% 25% 28% 33% 35% 39.6%
Head of Household Taxable Income -0$13,350 50,800 131,200 212,500 416,700 444,550
Tax -0$1,335 6,953 27,053 49,817 117,203 126,950
% on Excess 10% 15% 25% 28% 33% 35% 39.6%
Capital Gains and Qualified Dividend Rate 2016 2017 If in 15% bracket 0% 0% If in 25-35% bracket 15% 15% If in 39.6% bracket 20% 20% plus Medicare tax below Medicare Tax Additional 0.9% on wages or self-employment income >$200,000 ($250,000 if joint) New 3.8% tax on net investment income over thresholds which affects high income.
© 2015 von Briesen & Roper, s.c. 27476190_1.DOC
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STANDARD DEDUCTION Standard Deduction Married Filing Jointly
2016 $12,600
2017 $12,700
Single
$6,300
$6,350
Head of Household
$9,300
$9,350
Married Filing Separately
$6,300
$6,350
2016
2017
Deduction for each taxpayer, spouse, and dependent (phase out begins at $313,800 for married filing jointly)
$4,050
$4,050
Child Tax Credit (child must be under 17; phase-out begins at $110,000 for married filing jointly)
$1,000
$1,000
Personal Exemptions
© 2015 von Briesen & Roper, s.c. 27476190_1.DOC
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EMPLOYMENT TAX RATES Social Security Taxes Employer/Employee
Tax Rate
Wage Base 2016
Wage Base 2017
FICA Medicare Additional Medicare
6.20% 1.45% .9%
$118,500 No Limit over $200,000
$118,500 No Limit over $200,000
12.40% 2.90% .9%
$118,500 No Limit over $200,000 (single)
$118,500 No Limit over $200,000 (single)*
2016
2017
$18,000
$18,000
$6,000
$6,000
$53,000
$54,000
Self Employed FICA Medicare Additional Medicare
401k Limits Catch Up Defined Contribution Plan
*over $250,000 if married filing jointly and over $125,000 if married filing separately.
© 2015 von Briesen & Roper, s.c. 27476190_1.DOC
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$
a
Your Best Principal Was Just Sold. Now Whal? Planning for Changes in Control and Welcoming Opportunities W¡th the New Owner BY
TOM KAMMERAIT
Your best principal was just sold. Hearing those words is generally not welcome news to the established rep. In some cases, new relationships are forged and a mutually rewarding situation continues for the rep and new owner. In other cases, the new owner takes the business in a "different" direction, putting future sales and the rep's commissions at risk.
In recent years, principal ownership changes have increased consistent with the trend of increased merger and acquisition activity. The purpose of this article is to provide guidelines and a framework for addressing a change in control ofyour principal from a relationship, opportunity and risk management perspective,
5ó | AGENCY
SALES
I
APRTL
2Oló
Definition of Change in Control In general terms, many agreements will define a "Change in Control" as a greater than 50 percent change in the ownership of a company. Frequentl¡ carve outs are made for transfers to "friendly members" such as affiliates, pre-existing owners or family members. The bottom line is that if a greater than 50 per-
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Unless a contract provides to the contrary, an owner could sell a rep contract as part of the sale of his or her business.
cent interest in the company changes over a l2-month period, a Change in Control has occurred. Frequently agreements also provide that a sale of greater than 50 percent of the oper-
contract as part of the sale of his or her business. If working conditions change, opportunities are reduced, or a line conflict arises, the
ating assets would also constitute a Change in Control. Planning Point: The definition of a "Change in Control" is negotiable. The utmost care should be taken to customize the definition to cover anticipated contingencies to the fullest
contract has been terminated and post-termination commissions are due. To the extent the new owner pays commissions due under the contract on a timely basis, this will stand for ratification of the agreement in most cases.
rep has at least an argument that the
extent possible.
Assignability Provisions An assignment provision allows the rights and responsibilities under a contract to be transferred to another party. Most manufacturers are reluctant to permit reps to assign their contracts, out ofconcern for the uncertainty of the replacement reps' performance. However, most reps permit assignments in hopes of having at least an opportunity to sign on with the new owner. Planning Point: Assignability
provisions are negotiable like "Change in Control" definitions. The same care should be used to anticipate when an assignment might be permissible and even desired. It is also advisable to take steps to con-
firm that
commissions earned to
date plus post-termination commissions will be paid.
Business Implications of a Change in Control Unless a contract provides to the contrar¡ an owner could sell a rep
58 | AGENCY
SALES
I
APRTL
201ó
Mutual or Written Consent for Assignment A contract provision requiring a rep's approval on a Change in Control, from experience, might be difficult to accomplish. Most closely-held business owners would not agree to such a provision. However, one common approach is to have each side
mutually agree that the assignment of their rights and responsibilities needs to come at mutual written consent. Reps will have more leverage
in
situations where their sales
volume is substantial and movable to another manufacturer. It is important for reps to remain open-minded with respect to continuing on with new owners. This is heavily dependent on whether their opportunities are the same or greater with the new ownership, or at least "good enough" to continue with the new ownership even if some oppor-
tunity has been lost. Practice Point: If
a
rep determines
that the new ownership is less than ideal, a provision in the underþing
-
requiring consent for an assignment would provide the rep with some protection. Alternativel¡ the rep could give some thought to having alternate suppliers available on short notice.
There are some cases in which acceleration of commissions might be forthcoming. The thought process is that since the owner is about to get a payday in selling their business, they also ought to be willing or required to pay all of the commissions that go along with the sales that generated the business valuation,
Termination as a Result of a Change in Control Market conditions in many industries would point to an established rep getting 90 days' notice of a termination and one years' worth of post-termination commissions. If a contract does not permit assignment, it could mean that the seller is responsible for paying commissions earned to date and post-termination commissions. The rep, knowing of an asset transition, might have the ability to attach those assets in the
Conclusion It is important to keep a watchful eye on change in control and assignment provisions in contracts, both as a principal and as a rep. They can become important guidelines in the event ofa change in control. Understanding how these provisions work and looking for strdtegies to deal with the opportunities and challenges in the transition can have a signifi-
event these commissions are not be-
cant impact on the end results.
ing paid,
Tom Kammerait
serves as the Chair
of the Business and
Corporate Law Practice Group of von Briesen & Roper, s.c. in Milwaukee. He has been serving the legal needs of MANA members for more than 20 years ranging from the purchase, sale or succession plans of agencies to contract negotiations and commission collection cases, He maintains a "no charge" policy for
initial legal consultations with MANA members. He is a Certified Public Accountant and is listed in Wisconsin Super Lawyers
Legal Gounseling One of your benefits as a MANA member is a 30-minute consultation with an attorney known to us as being
experienced and knowledgeable about the manufacturers' agency business and laws that govern rep-principal relationships. The purpose of this short consultation is to enable you to get a quick answer to a general legal question. lt is not intended for you to get specific legal advice or services such as a contract review or even a contract clause review. The attorney you are speaking with will make the decision as
to whether the consultation falls under the no-charge member benefit category or under a fee for service category. lf the attorney believes the service is one you should be invoiced for, he should notify you and allow you to make the decision as to whether to proceed or not. Part of this notification would include the hourly rate and an estimate of the amount of time involved.
in the area of Business/Corporate Law He may be contacted at (414) 287-1413 or tkammera@vonbriesen,com.
LegollySpeokingisoregulordeportmenlinAgencyso/esmogozine ]hiscolumnfeofuresorliclesfromovorielyof legol professionolsondis
inlended to showcose their individuol opinions only, The conlents of this column should nol be conslrued os personol legol odvice: lhe opinions expressed herein ore nol the opinions of lVlANA, ils monogemenl, or ils directors
APR|L 20r
ó | AGENCY
SArES
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BIOGRAPHY THOMAS J. KAMMERAIT, ESQ. NOVEMBER 9, 2016
Education
University of Wisconsin, J.D.; University of Wisconsin, B.A. Certified Public Accountant Experience Attorney, Director, Shareholder, Treasurer, and Managing Partner of Business Practice Group (over 35 attorneys, and 25 professional staff members) at von Briesen & Roper, S.C. Over 20 years’ experience as board member of Wisconsin Association of Manufacturers Agents (WAMA) Drafting assistance to legislature for Wisconsin’s commission protection statute (Wis. Stat. 134.93, eff. 1998) Assistance in strategy for updating Minnesota’s commission statute (2014) Averaging over 20 active rep engagements at any one time; current sampling: 3 sales of agencies 5 contract reviews 5 succession plans 5 estate plans 2 expert witness and mediation proceedings on valuation and rep practices Seminars for Manufacturer’s Representatives March 1996
Succession Planning
November 1997
A Seminar for Manufacturers’ Rep – Panel Discussion
March 1998
Part II of A Seminar for Manufacturers’ Reps – Panel Discussion
May 2000
E-Commerce and E-Business
April 2002
Succession Planning
February 2003
Estate and Financial Planning (Intl. Foundation of Employee Benefit Plans)
September 2005
How to Fail at Business Without Really Trying (Waukesha Cty Technical College)
December 2005
Everything You Wanted to Know from a Lawyer, But Were Afraid to Ask (Milwaukee/NARI Home Improvement Council, Inc.)
November 2006
Mergers, Acquisitions and Divestitures (Electronic Representatives Assoc., Naperville, IL)
May 2010
How to Grow Your Business with the Independent Sales Reps (TEC Special Interest Meeting)
1996-2016
Tax Update and Year End Review (WAMA; done annually for the last 20 years)
2013-2016
Numerous TEC and YPO presentations on Maximizing the Value of Your Business
© 2015 von Briesen & Roper, s.c. 27476190_1.DOC
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Other Relevant Experience •
Active board member of Renaissance Manufacturing Group – Waukesha, LLC (foundry operation)
•
Active board member and audit and risk management committee chair to IEWC Corp., a world- wide and world class wire distributor
•
Board Member at Siebert Lutheran Foundation and GPS Education Partners, Inc.
•
Active Executive Committee member and former board member of Milwaukee/NARI Home Improvement Council, Inc.
•
Outside board member and advisor to Boehm Madisen Lumber Co., since 1996
•
Active member in The Executive Committee (TEC), a local and national best business practices organization.
•
Leader and participant in MMAC Business and CFO Roundtable groups.
•
Resource and multiple expert witness proceedings on commission claims, agency valuation industry practices, compensation, and course of conduct.
Articles Contributed to “Navigating Through Turbulent Financial Times”, The Representor (magazine published by Electronic Representatives Association), Vol. 19, Issue 3, Fall 2008. Co-Authored “Product Recommendation? How to Manage the Risks…”, Agency Sales (magazine published by Manufacturers Agents National Association), Vol 42, Number 4, April 2012. Co-Authored “Advantages of Holding Company Structures for Owner-Operated Businesses”, von Briesen & Roper, s.c. Business and Corporate Law Update, November 2013. Authored “Adding Value to Your Agency Through Long-Range and Succession Planning”, Agency Sales (magazine published by Manufacturers Agents National Association), Vol 44, Number 7, July 2014. Authored “Your Best Principal Was Just Sold. Now What?”, Agency Sales (magazine published by Manufacturers Agents National Association), Vol 46, Number 4, April 2016. Awards •
2007, President’s Award recipient, presented by NARI – National Association of The Remodeling Industry, Milwaukee Chapter, in Recognition of Outstanding Service and Dedication to the Entire Organization
•
2009, named one of thirty professionals in estate planning designated as a Five Star: Best in Client SatisfactionSM in Milwaukee Magazine.
•
2011, President’s Award recipient, presented by NARI – National Association of The Remodeling Industry, Milwaukee Chapter, in Recognition of Outstanding Service and Dedication to the Entire Organization
•
2011-2015, named one of Wisconsin’s Super Lawyers, compiled by Thomson Reuters and published in the December issue of Milwaukee Magazine
© 2015 von Briesen & Roper, s.c. 27476190_1.DOC
28
•
2012, Service Award recipient, presented by NARI – National Association of The Remodeling Industry, Milwaukee Chapter, in Recognition of Active Participation on the Board of Directors
•
2014, Nominee for the TEC Inspirational Leader Award
© 2015 von Briesen & Roper, s.c. 27476190_1.DOC
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Thomas J. Kammerait Shareholder von Briesen & Roper, S.C. 411 East Wisconsin Avenue, Suite 1000 Milwaukee, Wisconsin, 53202 Phone: (414) 287-1413 [email protected] www.vonbriesen.com
i
2016 TAX UPDATE AND YEAR END REVIEW 1.
Tax Landscape for 2017
2.
Economic Outlook
3.
Income Tax Planning
4.
Conservation Easements
5.
C and S Corporations
6.
Disregarded Entities
7.
Agency Management; Corporate Governance
8.
Estate Taxes
9.
MANA Attorneys Forum
10.
Contract Management
11.
Year in Review
12.
Appendix a. Individual Income Tax Rates b. Standard Deduction c. Employment Tax Rates d. Biography
© 2016 von Briesen & Roper, s.c 27476190_1.DOC
1. TAX LANDSCAPE FOR 2017
• Top rate for ordinary income
39.6%
• Capital gains
20%
• Dividends
Ordinary income
• Medicare surtax on AGI above $250,000 ($200,000 single taxpayers)
0.9%
• Surtax on unearned income
3.8%
• Employee FICA taxes
6.2%
• No significant change from prior year; subject to year-end legislative activity.
© 2016 von Briesen & Roper, s.c 27476190_1.DOC
2. ECONOMIC OUTLOOK
• GDP - Slow upward trend, regardless of who was elected - Mild slowdown in 2019 • U.S. - Consumer driven economy - Boomers outnumbered by Millennials - Low interest rate environment likely to continue - Low gas prices - Manufacturing oriented - Largest economy in the world and becoming larger • Key employees in demand; immigration needed to meet demand • Know your customer’s customers • Agriculture and construction cycles
© 2015 von Briesen & Roper, s.c. 27476190_1.DOC
2
3. INCOME TAX PLANNING
• Margins - Lower rate - Avoiding payroll taxes • Timing - Later - When brackets are lower - e.g. parents or children’s rates, post retirement, “soft” year • Bracket management • Deductions are more valuable applied against higher rates
© 2015 von Briesen & Roper, s.c. 27476190_1.DOC
3
INCOME TAX PLANNING (Continued)
• Qualified retirement plans - Significant deferral opportunities - $20,000 to $50,000 in deferrals - Establish by year end - Fund year round - Spousal contributions • Alternative Minimum Tax (AMT) - Planning ranges over 2-3 years - Example: 2016 No AMT 2017 AMT Max out on state income taxes in 2016. • Typical deductions - Real estate taxes (watch AMT) - State income taxes (watch AMT) - Charitable deductions, maybe - Depreciation (plan it out)
© 2015 von Briesen & Roper, s.c. 27476190_1.DOC
4
4. CONSERVATION EASEMENTS
• Agreement between landowner and government agency. • Permanent limitation or use to protect its conservation value. Example: $100,000 conservation easement Up to 50% of AGI (previously 30%) Carryover up to 5 years (15 years if farmer or rancher)
Comments • Typically permanent • Requires qualified appraisal
© 2015 von Briesen & Roper, s.c. 27476190_1.DOC
5
5. C AND S CORPORATIONS
Use of C Corporations • First $50,000 taxed at 15% • Consider breaking S election, by March 15 • Consider: 1.
Holding Company S or C corporation
Agency S corporation
US Presence, Buy-Sell, Real Estate S or LLC
2. Agency C corporation
Management fee
• Risk management
© 2015 von Briesen & Roper, s.c. 27476190_1.DOC
6
Buy-Sell S corporation
6. DISREGARDED ENTITIES
• Are “nothing” for tax purposes if 100% owned by another entity • Are legal entities and should be contractually respected Rep Agency
Dealer, distributor or agency for foreign principal.
LLC • Rep / Distribution Agreement should be put in place • Provides product liability protection (risk management)
© 2015 von Briesen & Roper, s.c. 27476190_1.DOC
7
7. AGENCY MANAGEMENT; CORPORATE GOVERNANCE
• Board resolution (LLC or corporation) • Who is authorized to act in the absence of managing members or main officers? - Specifics, e.g. Payroll, payables, taxes, etc. - General Powers - Limited Power of Attorney
© 2015 von Briesen & Roper, s.c. 27476190_1.DOC
8
8. ESTATE TAXES
• Exclusion 2016
2017(projected)
- per person federal exclusion
$5,450,000
$5,490,000
- per person gift tax exclusion
$5,450,000
$5,490,000
• 40% federal tax rate; no Wisconsin estate tax • Portability of exemption, and possible step up in basis • Annual Gift Exclusion 2016 $14,000
2017 $14,000
Planning Points • Step up in basis (parents) • Consider valuation strategy; possible regulatory limitations - low valuation - sale for notes • Private loans - mortgage support; minimize underwriting risk - deductible interest; acceptable rate of return • Trust consolidations, based on size and portability of exclusion © 2015 von Briesen & Roper, s.c. 27476190_1.DOC
9
9. MANA ATTORNEYS FORUM
Illustration of Commissions in Litigation:
Revenue to principal Commissions
Principals - Frequently argue non-compete/conflict of interest as an excuse not to pay - A narrow non-compete = landed business
© 2015 von Briesen & Roper, s.c. 27476190_1.DOC
10
MANA ATTORNEYS FORUM (Continued)
Confidentiality - Information regarding principal vs. information regarding customer
International Principals - The rep has a higher exposure to products liability if the principal has no U.S. presence
Stock Options - Occasional for start-up companies - Be mindful of tax consequences
© 2015 von Briesen & Roper, s.c. 27476190_1.DOC
11
10.CONTRACT MANAGEMENT
• Written notice; written communications • Email generally qualifies as written communication • Avoid work effort provisions (rationale to limit payment) • Mutuality of indemnification • Termination and notice provisions – timing
© 2015 von Briesen & Roper, s.c. 27476190_1.DOC
12
CONTRACT MANAGEMENT (Continued)
• Permitted ownership – include current owners and employees • Call reports – as reasonably requested • Named as an Additional Insured on principal’s policy • Non-compete - Match length to termination payments - Cessation of non-compete in the event of non-payment • Assignability provisions - Implications of change in control - Consider mutuality
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CONTRACT MANAGEMENT (Continued)
• Proper parties:
Incorporated agency; Inc. (officer) or LLC (managing
member) • Proper signer: Officer titles and corporate designation • Protection of intellectual property - Prior customers - Industry knowledge • Confidentiality/Nondisclosure Provisions - Much more prevalent, sometimes in separate agreements - Desired by principals - Mutuality - Desirable to reps, in certain cases
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CONTRACT MANAGEMENT (Continued)
• Character/Culture - High performance requirements - Short termination provisions - Other one-sided provisions - Reps are either not valued or not compensated fairly vs. - Appropriate performance standards - Supportive termination provisions - Mutuality
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11.YEAR IN REVIEW
Agency Mergers / Joint Ventures Agency A
Agency B
Limited Liability Company (LLC) • LLC is flow through entity • Storefront, combined forces; broader coverage for principals • Commission allocation • Line conflicts • Long range contracts
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YEAR IN REVIEW - HOLDING COMPANIES
Holding Company
Agency A
Buy-Sell Division
• Risk management, liability protection • Accommodation for foreign principal • Disregarded entities (one tax return) • S election • S corporation - Can own 100% of S corporation - Can own C corporation • C corporation cannot own an S corporation
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YEAR IN REVIEW – CASES
• Life of part, life of program • When commissions are earned - On shipment - Order acceptance • When commissions are paid • Acceleration of commissions • Surcharges vs. discounts • State law problems with non-solicit provisions
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YEAR IN REVIEW – CASES (Continued)
• Triggering of termination provisions - Change in control - Non-assignability (key leverage provision) - Security interest in commissions - Control of over 75% of sales • High volume in succession plans - Consolidation - Demographics - Line opportunities • Institutional payors – contractual compliance
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YEAR IN REVIEW – AGENCY VALUATION
Book value, plus commission allocation: 1990s
100-150% of annual commission revenue
2001-04
80% of annual commission revenue
2004+
80-100% of annual commission revenue
2014-15
100% of annual commission revenue
2016
Occasional valuations in excess of 100%, frequently due to special circumstances • Tax efficiency, use of pretax dollars • e.g. 20% per year, for 5 years - Commission sharing, management fees, deferred compensation, compensation for assistance in line transition • More signs of appreciation (greater than 100%) • More “personal goodwill” transitions - Selling rep has a strong reputation - Capital gain on the sale - 15 year write-off for the buyer
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YEAR IN REVIEW – AGENCY VALUATION
• Ultimate “valuation” approximation Seller’s compensation
$140,000
Replacement
(60,000)
Net
$80,000 x 5 years
Total Consideration
$400,000
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YEAR IN REVIEW – AGENCY VALUATION
• Three-Year Commission Term - Change in control - Assignment of reps - 18 months commissions paid, plus receivables - Deductible to principal • Post Termination - Lay low until last check clears - Comply with noncompete provisions - Manage duty of loyalty - Develop contingency plan in advance
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VIII.
APPENDIX a. Individual Income Tax Rates for 2016 b. Standard Deduction c. Employment Tax Rates d. MANA Article, “Your Best Principal Was Just Sold. Now What?” e. Biography
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INDIVIDUAL INCOME TAX RATES FOR 2017 Married Filing Jointly and Surviving Spouses Taxable Income Tax -0-0$18,650 $1865 75,900 10,453 153,100 29,753 233,350 52,223 416,700 112,728 470,700 131,628 Single
% on Excess 10% 15% 25% 28% 33% 35% 39.6%
Taxable Income -0$9,325 37,950 91,900 191,650 416,700 418,400
Tax -0$933 5,226 18,714 46,644 120,910 121,505
% on Excess 10% 15% 25% 28% 33% 35% 39.6%
Head of Household Taxable Income -0$13,350 50,800 131,200 212,500 416,700 444,550
Tax -0$1,335 6,953 27,053 49,817 117,203 126,950
% on Excess 10% 15% 25% 28% 33% 35% 39.6%
Capital Gains and Qualified Dividend Rate 2016 2017 If in 15% bracket 0% 0% If in 25-35% bracket 15% 15% If in 39.6% bracket 20% 20% plus Medicare tax below Medicare Tax Additional 0.9% on wages or self-employment income >$200,000 ($250,000 if joint) New 3.8% tax on net investment income over thresholds which affects high income.
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STANDARD DEDUCTION Standard Deduction Married Filing Jointly
2016 $12,600
2017 $12,700
Single
$6,300
$6,350
Head of Household
$9,300
$9,350
Married Filing Separately
$6,300
$6,350
2016
2017
Deduction for each taxpayer, spouse, and dependent (phase out begins at $313,800 for married filing jointly)
$4,050
$4,050
Child Tax Credit (child must be under 17; phase-out begins at $110,000 for married filing jointly)
$1,000
$1,000
Personal Exemptions
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EMPLOYMENT TAX RATES Social Security Taxes Employer/Employee
Tax Rate
Wage Base 2016
Wage Base 2017
FICA Medicare Additional Medicare
6.20% 1.45% .9%
$118,500 No Limit over $200,000
$118,500 No Limit over $200,000
12.40% 2.90% .9%
$118,500 No Limit over $200,000 (single)
$118,500 No Limit over $200,000 (single)*
2016
2017
$18,000
$18,000
$6,000
$6,000
$53,000
$54,000
Self Employed FICA Medicare Additional Medicare
401k Limits Catch Up Defined Contribution Plan
*over $250,000 if married filing jointly and over $125,000 if married filing separately.
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$
a
Your Best Principal Was Just Sold. Now Whal? Planning for Changes in Control and Welcoming Opportunities W¡th the New Owner BY
TOM KAMMERAIT
Your best principal was just sold. Hearing those words is generally not welcome news to the established rep. In some cases, new relationships are forged and a mutually rewarding situation continues for the rep and new owner. In other cases, the new owner takes the business in a "different" direction, putting future sales and the rep's commissions at risk.
In recent years, principal ownership changes have increased consistent with the trend of increased merger and acquisition activity. The purpose of this article is to provide guidelines and a framework for addressing a change in control ofyour principal from a relationship, opportunity and risk management perspective,
5ó | AGENCY
SALES
I
APRTL
2Oló
Definition of Change in Control In general terms, many agreements will define a "Change in Control" as a greater than 50 percent change in the ownership of a company. Frequentl¡ carve outs are made for transfers to "friendly members" such as affiliates, pre-existing owners or family members. The bottom line is that if a greater than 50 per-
Club
.S,:.
lir
"l
.
.dH¡
,,
Unless a contract provides to the contrary, an owner could sell a rep contract as part of the sale of his or her business.
cent interest in the company changes over a l2-month period, a Change in Control has occurred. Frequently agreements also provide that a sale of greater than 50 percent of the oper-
contract as part of the sale of his or her business. If working conditions change, opportunities are reduced, or a line conflict arises, the
ating assets would also constitute a Change in Control. Planning Point: The definition of a "Change in Control" is negotiable. The utmost care should be taken to customize the definition to cover anticipated contingencies to the fullest
contract has been terminated and post-termination commissions are due. To the extent the new owner pays commissions due under the contract on a timely basis, this will stand for ratification of the agreement in most cases.
rep has at least an argument that the
extent possible.
Assignability Provisions An assignment provision allows the rights and responsibilities under a contract to be transferred to another party. Most manufacturers are reluctant to permit reps to assign their contracts, out ofconcern for the uncertainty of the replacement reps' performance. However, most reps permit assignments in hopes of having at least an opportunity to sign on with the new owner. Planning Point: Assignability
provisions are negotiable like "Change in Control" definitions. The same care should be used to anticipate when an assignment might be permissible and even desired. It is also advisable to take steps to con-
firm that
commissions earned to
date plus post-termination commissions will be paid.
Business Implications of a Change in Control Unless a contract provides to the contrar¡ an owner could sell a rep
58 | AGENCY
SALES
I
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201ó
Mutual or Written Consent for Assignment A contract provision requiring a rep's approval on a Change in Control, from experience, might be difficult to accomplish. Most closely-held business owners would not agree to such a provision. However, one common approach is to have each side
mutually agree that the assignment of their rights and responsibilities needs to come at mutual written consent. Reps will have more leverage
in
situations where their sales
volume is substantial and movable to another manufacturer. It is important for reps to remain open-minded with respect to continuing on with new owners. This is heavily dependent on whether their opportunities are the same or greater with the new ownership, or at least "good enough" to continue with the new ownership even if some oppor-
tunity has been lost. Practice Point: If
a
rep determines
that the new ownership is less than ideal, a provision in the underþing
-
requiring consent for an assignment would provide the rep with some protection. Alternativel¡ the rep could give some thought to having alternate suppliers available on short notice.
There are some cases in which acceleration of commissions might be forthcoming. The thought process is that since the owner is about to get a payday in selling their business, they also ought to be willing or required to pay all of the commissions that go along with the sales that generated the business valuation,
Termination as a Result of a Change in Control Market conditions in many industries would point to an established rep getting 90 days' notice of a termination and one years' worth of post-termination commissions. If a contract does not permit assignment, it could mean that the seller is responsible for paying commissions earned to date and post-termination commissions. The rep, knowing of an asset transition, might have the ability to attach those assets in the
Conclusion It is important to keep a watchful eye on change in control and assignment provisions in contracts, both as a principal and as a rep. They can become important guidelines in the event ofa change in control. Understanding how these provisions work and looking for strdtegies to deal with the opportunities and challenges in the transition can have a signifi-
event these commissions are not be-
cant impact on the end results.
ing paid,
Tom Kammerait
serves as the Chair
of the Business and
Corporate Law Practice Group of von Briesen & Roper, s.c. in Milwaukee. He has been serving the legal needs of MANA members for more than 20 years ranging from the purchase, sale or succession plans of agencies to contract negotiations and commission collection cases, He maintains a "no charge" policy for
initial legal consultations with MANA members. He is a Certified Public Accountant and is listed in Wisconsin Super Lawyers
Legal Gounseling One of your benefits as a MANA member is a 30-minute consultation with an attorney known to us as being
experienced and knowledgeable about the manufacturers' agency business and laws that govern rep-principal relationships. The purpose of this short consultation is to enable you to get a quick answer to a general legal question. lt is not intended for you to get specific legal advice or services such as a contract review or even a contract clause review. The attorney you are speaking with will make the decision as
to whether the consultation falls under the no-charge member benefit category or under a fee for service category. lf the attorney believes the service is one you should be invoiced for, he should notify you and allow you to make the decision as to whether to proceed or not. Part of this notification would include the hourly rate and an estimate of the amount of time involved.
in the area of Business/Corporate Law He may be contacted at (414) 287-1413 or tkammera@vonbriesen,com.
LegollySpeokingisoregulordeportmenlinAgencyso/esmogozine ]hiscolumnfeofuresorliclesfromovorielyof legol professionolsondis
inlended to showcose their individuol opinions only, The conlents of this column should nol be conslrued os personol legol odvice: lhe opinions expressed herein ore nol the opinions of lVlANA, ils monogemenl, or ils directors
APR|L 20r
ó | AGENCY
SArES
| 59
BIOGRAPHY THOMAS J. KAMMERAIT, ESQ. NOVEMBER 9, 2016
Education
University of Wisconsin, J.D.; University of Wisconsin, B.A. Certified Public Accountant Experience Attorney, Director, Shareholder, Treasurer, and Managing Partner of Business Practice Group (over 35 attorneys, and 25 professional staff members) at von Briesen & Roper, S.C. Over 20 years’ experience as board member of Wisconsin Association of Manufacturers Agents (WAMA) Drafting assistance to legislature for Wisconsin’s commission protection statute (Wis. Stat. 134.93, eff. 1998) Assistance in strategy for updating Minnesota’s commission statute (2014) Averaging over 20 active rep engagements at any one time; current sampling: 3 sales of agencies 5 contract reviews 5 succession plans 5 estate plans 2 expert witness and mediation proceedings on valuation and rep practices Seminars for Manufacturer’s Representatives March 1996
Succession Planning
November 1997
A Seminar for Manufacturers’ Rep – Panel Discussion
March 1998
Part II of A Seminar for Manufacturers’ Reps – Panel Discussion
May 2000
E-Commerce and E-Business
April 2002
Succession Planning
February 2003
Estate and Financial Planning (Intl. Foundation of Employee Benefit Plans)
September 2005
How to Fail at Business Without Really Trying (Waukesha Cty Technical College)
December 2005
Everything You Wanted to Know from a Lawyer, But Were Afraid to Ask (Milwaukee/NARI Home Improvement Council, Inc.)
November 2006
Mergers, Acquisitions and Divestitures (Electronic Representatives Assoc., Naperville, IL)
May 2010
How to Grow Your Business with the Independent Sales Reps (TEC Special Interest Meeting)
1996-2016
Tax Update and Year End Review (WAMA; done annually for the last 20 years)
2013-2016
Numerous TEC and YPO presentations on Maximizing the Value of Your Business
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Other Relevant Experience •
Active board member of Renaissance Manufacturing Group – Waukesha, LLC (foundry operation)
•
Active board member and audit and risk management committee chair to IEWC Corp., a world- wide and world class wire distributor
•
Board Member at Siebert Lutheran Foundation and GPS Education Partners, Inc.
•
Active Executive Committee member and former board member of Milwaukee/NARI Home Improvement Council, Inc.
•
Outside board member and advisor to Boehm Madisen Lumber Co., since 1996
•
Active member in The Executive Committee (TEC), a local and national best business practices organization.
•
Leader and participant in MMAC Business and CFO Roundtable groups.
•
Resource and multiple expert witness proceedings on commission claims, agency valuation industry practices, compensation, and course of conduct.
Articles Contributed to “Navigating Through Turbulent Financial Times”, The Representor (magazine published by Electronic Representatives Association), Vol. 19, Issue 3, Fall 2008. Co-Authored “Product Recommendation? How to Manage the Risks…”, Agency Sales (magazine published by Manufacturers Agents National Association), Vol 42, Number 4, April 2012. Co-Authored “Advantages of Holding Company Structures for Owner-Operated Businesses”, von Briesen & Roper, s.c. Business and Corporate Law Update, November 2013. Authored “Adding Value to Your Agency Through Long-Range and Succession Planning”, Agency Sales (magazine published by Manufacturers Agents National Association), Vol 44, Number 7, July 2014. Authored “Your Best Principal Was Just Sold. Now What?”, Agency Sales (magazine published by Manufacturers Agents National Association), Vol 46, Number 4, April 2016. Awards •
2007, President’s Award recipient, presented by NARI – National Association of The Remodeling Industry, Milwaukee Chapter, in Recognition of Outstanding Service and Dedication to the Entire Organization
•
2009, named one of thirty professionals in estate planning designated as a Five Star: Best in Client SatisfactionSM in Milwaukee Magazine.
•
2011, President’s Award recipient, presented by NARI – National Association of The Remodeling Industry, Milwaukee Chapter, in Recognition of Outstanding Service and Dedication to the Entire Organization
•
2011-2015, named one of Wisconsin’s Super Lawyers, compiled by Thomson Reuters and published in the December issue of Milwaukee Magazine
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•
2012, Service Award recipient, presented by NARI – National Association of The Remodeling Industry, Milwaukee Chapter, in Recognition of Active Participation on the Board of Directors
•
2014, Nominee for the TEC Inspirational Leader Award
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