Help business owners with exit planning, philanthropy

Help business owners with exit planning, philanthropy

Many of your best clients are successful entrepreneurs. Their businesses represent 80% to 90% of their estate. And while that net worth number may be substantial, it’s often illiquid and prevents the owner from enjoying the rewards of all their hard work. The lack of liquidity can also make owners reluctant to do the right kind of planning to maximize their “walkaway” money post-sale (more on that in a minute).

With a record number of boomer business owners reaching retirement age, buyers have a large pool of business to choose from. Selling for a respectable multiple isn’t as easy as it used to be, especially since higher interest rates have substantially raised the cost of capital. Bottom line, both strategic buyers and private equity players are getting pickier. So, if owners haven’t taken the right steps to make their businesses sellable, they can’t ride off into the sunset as planned. But as your client’s most trusted advisor, you have a unique opportunity to create value here.

As Randy A. Fox, CFP, AEP points out in my new book, Holistic Guide to Wealth Management for CPAs, too many owners wait until the last minute to plan their exits. They don’t have a realistic estimate of what their business is worth, how much they’ll really need to live comfortably post-exit, or how they’ll spend their time when they don’t have the 40 to 70 hour a week demands of running a business. That’s where you come in. 

Another challenge, said Fox, is that boomer business owners think that as soon as they start talking about exiting their company, “it’s the first step toward the elephant graveyard.” That’s ironic, said Fox, because “the better the business can run without them, the more it’s worth to a potential buyer.” He said many owners don’t really want to talk to their advisors or family members about an exit until “somebody knocks on the door with an offer.” But, by that point, said Fox, “it’s too late to implement many of the good planning opportunities.” Again, that’s where you come in.

Charitable giving shortfall

At the start of every conversation he has with a boomer owner hoping to sell, Fox said he hears two things:

  1. “I want to take care of my employees.”
  2. “I want to give a large amount of money to establish a charitable foundation.”

But once owners see what’s left of their proceeds after taxes and transaction costs, those good intentions often take a back seat. “There’s not enough money left to follow the charitable aspirations,” he said. Also, by the time they seek the help of outside advisors with expertise in transactions, they often have binding letters of intent signed. “Legally, it’s too late to do things like set up a charitable remainder trust or some other charitable structure,” lamented Fox.

When to start planning

Fox recommends starting the exit planning process with your business owner clients three to five years in advance of the planned sale. One of the first things he does with clients is focus on the enterprise value of the business. “That means making the owner operationally irrelevant to the business,” said Fox. “The owner must learn to create a smooth-functioning sustainable business that can run just fine without them,” said Fox. “Otherwise, they don’t have a business, they just have a job.” As a CPA, you know the business inside and out. You are in a great position to look for processes and other routine tasks done by the owner that can be automated or delegated to employees. Don’t underestimate the value you can provide by helping owners streamline processes.

CRTs and PIFs

With several years of lead time, Fox said, you can help your business owner clients position shares of the company in appropriate charitable vehicles such as a charitable remainder trust or pooled income fund. “Both types of trusts provide an upfront income tax deduction and avoidance of capital gains tax on the sale of the company shares,” said Fox. “Further, the trust generates an income stream for the remainder of the business owner’s lifetime, their spouse’s lifetime and, in the case of a PIF, it might allow for an income stream for their children’s lifetime.” According to Fox, the owners might also want to transfer some of their wealth to future generations to reduce the size of their taxable estate. They might also want to ensure there’s enough liquidity in the event of a premature death. “Typically, this is accomplished by acquiring life insurance and, further, with comprehensive estate planning,” he added.

Get needed liquidity

As mentioned earlier, a business owner often has 80% to 90% of their wealth tied up in their business. But that wealth isn’t liquid. If the owner dies suddenly, their estate will likely owe tax and probably won’t have enough money to pay it. “With enough time to plan, you can craft tax-efficient ways to create the necessary liquidity for your client’s estate,” advised Fox. “The $24 million estate exemption is set to sunset at the end of 2025. That’s less than 18 months away, and many expect it to be cut in half. The time to start planning is now.” That’s another opportunity to create value for your client.

Goodwill hunting for clients selling a business 

As a CPA, you’re highly attuned to the tangible assets of a business and making sure they are recorded and accounted for correctly. But so much of the negotiations focus on the intangible assets of a company — the special sauce the dynamic owner brings to the business — i.e., the amount a buyer would pay over and above the seller’s net assets at fair value. As most of you know, goodwill is recorded as an intangible asset on the acquiring company’s balance sheet under the long-term assets account. Goodwill is considered an intangible (or non-current) asset because it is not a physical asset like buildings or equipment.

Under U.S. GAAP and International Financial Reporting Standards, companies are required to evaluate the value of goodwill on their financial statements at least once a year and record any impairments.

“Isolating personal goodwill can be highly advantageous for sellers,” said Fox. And this is where you can really be a hero. “There are many approaches to calculating goodwill,” said Fox. “Goodwill involves factoring in estimates of future cash flows and other considerations that are not known at the time of the acquisition. While normally this may not be a significant issue, it can become one when accountants look for ways to compare reported assets or net income between different companies (some that have previously acquired other firms and some that have not),” Fox explained.

Financial conditions are clearly tightening. But, if you have clients thinking about selling their businesses, there’s no reason to rush the transaction. When the future is uncertain, successful entrepreneurs and their advisors are tempted to “get while the getting’s good.”

But without taking the time to do the exit planning correctly, your clients could be leaving millions of dollars on the table. My book explains three key steps to isolating intangible assets and other goodwill in your clients’ businesses. 

I’ve spent most of my career at the intersection of accounting, technology and wealth management. Sometimes I think clients have more confidence in their CPA than the CPA does. You know your client’s business and personal financials inside and out. You know what they owe in taxes and why. You know intimately where their spending goes, and you may already offer basic ways for them to save on taxes. And you know who the most important people are in their lives. The trust is there. The data is there. This is a wide-open opportunity for you to help them.

You don’t need to know all the intricacies of exit planning and estate planning as long as you can enlist trusted experts to do the work in close consultation with you. 

The person who leads the client relationship usually has the greatest influence on that relationship because they see all the moving parts. Holistic advice involves looking at a client’s entire financial picture — both personal and business — and providing integrated solutions that tie together tax planning, retirement planning, business succession planning, estate planning, charitable giving and so much more. All roads can now lead to you.

When you are overseeing multiple facets of a client’s financial life, the relationship is inherently more valuable. That is why I trademarked the term Advis-ROR (Advisors focused on Return on Relationship). 

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