It’s mid summer 2012, and you’re thinking about doing a private banking client portfolio review, when suddenly the phone rings. It’s a long time client, Ted Hillman, in business for over 25 years, very profitable, loves your advice. He’s frantic, and asks for your opinion if he should sell his business now, before the “Tax Cliff” everyone’s talking about in January kills him. How do you respond?
How about; “Okay Ted, but let’s first take a breath, maybe ratchet down the media hype and get more facts. Then we can act; at least before we start jumping off cliffs, sound good?” Ted agrees, and you decide to set up an appointment, and hang up. Now ask yourself as you read this. You’re a pro. How ready for that call were you? What if other business owners and clients call to ask if they should sell now or wait for better times? You won’t be caught flat-footed if you read this quick primer.
Let’s start with:
BACKGROUND
- What is Ted really reacting to? Should he really sell his business before year end? I always ask for at least 3 reasons why a client may be considering a sale. Tax issues may be just one from a longer list, right? Be sure. Ask, who is on the advisory team? And how will sale proceeds be distributed and when?
REVIEW
- What is the definition of the “Tax Cliff?” If you don’t know already, call your research team and find out. In short, the “tax cliff,” aka: “taxamaggedon,” or “fiscal cliff,” etc is not any one thing. Read my article at Vistage International: The Top 10 M&A Drivers for 2012, featured in their May 2012 global Newsletter. Needless to say, in Jan 2013, certain tax and spending measures (laws) will expire, and taxes on payroll, capital gains, dividends, and income will be going up, unless Congress makes a move. Some tax changes will directly increase Ted’s tax bite. For example if taxes on Investment & Capital Gains for long term assets increase from 15% to 24% on January 1st 2013, all other things being equal, Ted’s tax bite could increase $100,000 for every million in proceeds. Wow! I’m thinking he should probably know that one? In fact, this alone can cause a change in deal structure, and how and when proceeds should be distributed to minimize the tax hit. Still, it’s a good idea to get permission to call your client’s CPA or tax advisor directly and compare notes.
ANALYSIS
- How will the current economic and tax environments actually impact Ted’s long term financial plans & goals after the business is sold? How should the portfolio mix change before and after the sale? Is it better to pull the trigger and structure a deal now?
- Depending on how good you are in this arena, with the help of a tax advisor you can put together a specific proforma impact analysis. Think “scenario planning.” Lay out Best, Middle and Worse case scenarios such as; what if Ted can defer a portion of the sales proceeds over time, or what if the business doesn’t sell this year, then what? What’s plan B look like?
GOALS & TIMELINE
- Next calculate and add Ted’s expectations for a range of sale prices and compute them in financial terms. You may already know his dreams for family and friends. But how suitable will his investment choices be post sale? In other words, what would the new right balance of risk vs safety look like after the sale? It’s amazing how easy it is to get caught off guard by this one, preferring to wait until a deal closes before planning. A huge mistake. Rather, it makes more sense to guide the advance needs for income now, especially when dealing with more complex Estate Planning, and Charitable Giving issues for private banking clients who own businesses.
TAKE ACTION
- Finally, as one of my favorite business school professors used to say: “Great strategy Rick, but what should each of us be doing next Monday morning at 9:00am?” This means you should define and align your step by step process with Ted’s expectations asap. He will likely appreciate this pro-active strategy.
- If it makes sense to move ahead with a 2012 sale, the first step should be to call Ted’s investment banker and gather some high level input. Discuss potential sale-price ranges, current market trends, and maybe learn what’s up with Private Equity transactions these days as a few examples.
- Then reach out to Ted’s business transaction attorney and CPA. Together with these 4 key specialists; you, his CPA, his attorney, and investment banker you can all help formulate and execute a plan that anticipates the many broader issues clients like Ted face when selling their business. So much so, that after the business is sold, the team gets even more client referrals calling for help.
So before you meet with Ted again, get prepared. Whether the impending Tax Cliff coming January 2013 should translate into a sale this year or not, no advisor should be caught flat-footed with a “let me get back to you” answer. You agree? I say better to be prepared in advance, so you won’t have to guess how best to talk Ted off the ledge of a big tax increase abyss he can still avoid before year end. And if you need more, I’m happy to help anytime