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CPWA Test Prep > Closely Held Business > Flashcards

Closely Held Business Flashcards

1
Q

What are key areas of focus for planning for closely held business owners?

A

Taxation, valuation, succession, and exit strategies.

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2
Q

Name common financial issues across the business lifecycle.

A

Financing, growth, tax planning, succession, and exit strategies.

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3
Q

Who are angel investors?

A

Individuals or groups providing equity financing to start-ups in exchange for a share of ownership.

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4
Q

What is venture capital?

A

Financing for high-growth companies in exchange for significant equity, often with a 3-7 year exit horizon.

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5
Q

Define mezzanine financing.

A

Hybrid financing that combines equity and debt, junior to senior debt but senior to equity.

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6
Q

What is a leveraged buyout (LBO)?

A

Acquiring a company primarily with borrowed funds, often targeting high returns through resale or going public.

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7
Q

What is distressed debt?

A

Investing in debt securities of financially stressed companies, often under bankruptcy protection.

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8
Q

What are the main business entity types?

A

C-corporations, S-corporations, LLCs, partnerships, and family holding companies.

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9
Q

What is a family holding company (FHC)?

A

An entity managing assets of another, often structured as an LLC or LP with voting and non-voting shares.

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10
Q

What are the tax advantages of Section 1202 stock?

A

Exclusion of 50-100% of gain from the sale of qualified small business stock held for over 5 years.

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11
Q

What is a buy-sell agreement?

A

An agreement among business owners to purchase and sell interests upon triggering events.

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12
Q

Name triggering events for buy-sell agreements.

A

Death, disability, retirement, bankruptcy, divorce, or termination of employment.

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13
Q

What is an entity purchase agreement?

A

A buy-sell agreement where the business buys back an owner’s share using life insurance proceeds.

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14
Q

What is a cross-purchase agreement?

A

Partners buy life insurance on each other to fund the purchase of ownership shares upon a partner’s death.

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15
Q

What is the formula for capitalized earnings valuation?

A

Value = Earnings / (Discount Rate - Growth Rate).

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16
Q

What are common valuation methods?

A

Discounted cash flow, comparable public company, and comparable acquisition methods.

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17
Q

Name common valuation discounts.

A

Minority interest, lack of marketability, and control premium.

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18
Q

What is the role of a terminal value in valuation?

A

It represents the value of all future cash flows beyond the projection period.

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19
Q

What are common exit strategies?

A

Private/public sales, ESOPs, SCINs, private annuities, and seller financing.

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20
Q

What is an ESOP?

A

An employee stock ownership plan, a tax-advantaged way to transfer ownership to employees.

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21
Q

What is a self-canceling installment note (SCIN)?

A

A sale structure where payments terminate upon the seller’s death, avoiding inclusion in the estate.

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22
Q

What is a private annuity?

A

A transfer of ownership in exchange for lifetime payments, avoiding gift tax if structured correctly.

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23
Q

What is the difference between asset and stock sales?

A

Buyers prefer asset sales for depreciation benefits; sellers prefer stock sales for capital gains treatment.

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24
Q

What is an IRC Section 338 election?

A

Treats a stock purchase as an asset purchase for tax benefits.

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25
Q

What is IRC Section 303?

A

Allows capital gain treatment for stock redemptions to pay estate taxes.

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26
Q

What are the tax benefits of converting a C-corporation to an S-corporation?

A

Avoids double taxation but triggers built-in gains tax if gains are realized within 5 years.

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27
Q

What does Section 6166 provide?

A

Allows deferral of estate taxes attributable to closely held business interests.

28
Q

What are common sources of liquidity for business owners?

A

ESOPs, bank loans, leveraged recapitalizations, and equity partners.

29
Q

What are ESOPs classified as?

A

Tax-qualified defined contribution plans under ERISA.

30
Q

What are the tax benefits of ESOPs?

A

Deduction of purchase payments and deferral of gains on the sale of stock to the ESOP.

31
Q

What are key family conflict issues in succession planning?

A

Fairness, control, and differing visions for the business.

32
Q

What is the role of trusts in family business transfers?

A

Minimize taxes, protect assets, and ensure control over succession.

33
Q

What is the role of recapitalization in exit strategies?

A

Restructuring a company’s capital to facilitate ownership changes or sales.

34
Q

What is the purpose of management buyouts?

A

Allow existing managers to acquire ownership using external financing.

35
Q

What is a Dutch auction in business transfers?

A

A bidding process to determine the best price for ownership interests.

36
Q

What are the key financial issues for closely held businesses throughout their lifecycle?

A

Taxation, valuation, succession, and exit strategies.

37
Q

What is the significance of buy-sell agreements?

A

They provide a framework for ownership transfer due to triggering events like death, disability, or retirement.

38
Q

Who are angel investors, and what do they provide?

A

Individuals or groups offering equity financing to startups, often with local focus and industry expertise.

39
Q

What are venture capitalists’ primary goals?

A

High growth potential companies with significant equity stakes and a target return within 3-7 years.

40
Q

What is mezzanine financing?

A

Hybrid financing combining equity and debt, offering lower priority than senior debt but above common equity.

41
Q

Define leveraged buyout (LBO).

A

Acquisition of a company using borrowed funds, repaid from the target’s cash flow or assets.

42
Q

What tax benefit does Section 1202 stock provide?

A

Exclusion of 50-100% of gain on qualified small business stock held for over five years.

43
Q

What is the primary purpose of valuation discounts like minority interest and lack of marketability?

A

To reflect reduced value due to ownership restrictions or limited liquidity.

44
Q

What is the capitalized earnings approach in valuation?

A

Valuation based on expected earnings divided by a capitalization rate.

45
Q

What is a self-canceling installment note (SCIN)?

A

A sale mechanism where payments cease upon the seller’s death, avoiding inclusion in the taxable estate.

46
Q

How does an ESOP help in business succession?

A

It transitions ownership to employees while providing tax advantages for the seller.

47
Q

Define ‘private annuity.’

A

A transfer of ownership in exchange for fixed lifetime payments, often used to defer taxes.

48
Q

Compare C-corporations and S-corporations in taxation.

A

C-corps face double taxation, while S-corps pass income through to owners, avoiding corporate tax.

49
Q

What is a family limited partnership (FLP)?

A

A structure allowing centralized management and estate tax advantages through gifting.

50
Q

What is the advantage of using LLCs for family businesses?

A

Flexibility in taxation and limited liability for members.

51
Q

What is a zero-premium collar?

A

A strategy buying a put and selling a call to hedge price risk without upfront cost.

52
Q

Define ‘prepaid variable forward.’

A

A contract monetizing a concentrated stock position by agreeing to future stock delivery.

53
Q

What is the primary objective of using exchange funds?

A

To diversify concentrated stock positions by pooling shares with other investors.

54
Q

What does Section 6166 allow?

A

Deferral of estate taxes attributable to closely held business interests.

55
Q

How does a charitable remainder trust (CRT) benefit business owners?

A

Provides income, estate tax reduction, and portfolio diversification by liquidating concentrated positions.

56
Q

What is the difference between a charitable lead trust (CLT) and a CRT?

A

A CLT pays income to charity during its term, while CRT provides income to the grantor.

57
Q

What are triggering events in buy-sell agreements?

A

Death, disability, retirement, or bankruptcy.

58
Q

How is a cross-purchase agreement funded?

A

Partners purchase life insurance policies on each other to fund ownership transfers.

59
Q

What is the advantage of an entity purchase agreement?

A

Simplifies funding by having the business purchase insurance for buyouts.

60
Q

What is the IRC Section 303 rule?

A

Allows capital gains treatment for stock redemptions used to pay estate taxes.

61
Q

What are the benefits of making a Section 83(b) election?

A

Elect to pay taxes at grant, reducing future taxation on appreciation.

62
Q

What does the built-in gains tax apply to?

A

Gains on assets held by a C-corporation before its conversion to an S-corporation.

63
Q

What are common sources of family conflict in succession planning?

A

Differing visions, perceived fairness, and control issues.

64
Q

How can trusts mitigate family conflicts?

A

By clearly defining control and distribution of assets.

65
Q

What is the role of a family council in succession?

A

To establish governance and address disputes in family-run businesses.

CPWA Test Prep (12 decks)

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