The wealth manager plays a key role in the early stages of an engagement, throughout the engagement and after the engagement.
One of the very first tasks that needs to be done by the wealth manager is to determine “the number” for the business owner. The number is the amount the owner/family will need from the business to exit the business. If retirement is the goal upon exit, then we need to determine how much money the business owner/family will need for their entire retirement, then do a net present value of such amount. After obtaining the net present value of the retirement need, we subtract the other assets positioned and available for retirement, to obtain the amount needed for the family from the business after taxes.
The next thing we do is complete a valuation of the business in its current position. We will compare the valuation of the business to the number the business owner/family needs to determine if there is a shortfall. If there is a shortfall, we need to have a conversation with the business owner to determine if they wish to reduce their retirement standard of living, work more years with less years of retirement, or increase the value of their business.
Opportunities for the wealth manager include, but are not limited to:
- Fees for completion of the financial plan;
- Becoming a trusted advisor of a business owner years before the exit, and providing consulting;
- During the term of the “exit planning”, the 401(k) and IRA money might be easily transitioned to their trusted financial advisor;
- At the time of exit, assuming: (1) there is a significant liquidity event; and (2) you have been providing advice to the business owner for years; you have the strongest opportunity of capturing more assets under management;
- Throughout the process, providing advice on risk tolerance, the financial position of the owner outside of the business, what if occurrences (e.g., death, divorce or disability of owner), and family needs;
- Years after the exit, continuing to manage assets and act as the financial planner and wealth advisor for the owner and his/her family.
As with most business transactions and personal planning, it is important to incorporate the CPA early and throughout the business and personal life process. To begin within exit planning, we request that the CPA:
- Normalize financials (determining EBITDA and adjustments thereto, from solid financials after the CPA cleans thereto) to get a good idea of the true value a potential buyer would pay for the business;
- Review financial and accounting policies and procedures to ensure the company is financially and accounting sound, and start remedying any issues well before a sell of the business;
- Review tax returns and tax accounting thereto, to remedy issues hopefully well before sell of the business;
- Potentially assisting with valuing the business; and
- Assist in establishing key metrics that are important to the business.
During the exit process the CPA will assist with:
- Reviewing any key person and executive compensation plans for tax compliance;
- Analyzing and assisting with the allocations of the purchase price;
- Assisting with due diligence; and
- Reviewing and advising on the structure of the sale and the tax ramifications thereto.
It is a common thought among CPA’s that if they help the business sell then they will lose a client. This may or may not be true but the reality is what is best for the business owner must drive our concerns, including the fact that the business owner is going to exit their business at some point and we would like to see them exit successfully realizing maximum value.
The estate planning attorney needs to be involved early in the process to facilitate the “what if” occurrences for the owner, such as upon death, divorce, and/or disability. One of the largest assets of the owner will more than likely be the business. What happens on one of these occurrences to the business? What we see in many cases is that financial planning, tax planning, estate planning and charitable planning are all done is silos and not coordinated thereto. This many time leads to extreme confusion to the owner, and “which counselor” to believe.
Hopefully long before any letter of intent is provided to the business owner, the estate planning attorney fully knows the needs of the family via the wealth planner, the family members and the owner’s desires upon his death. Transfers of ownership interest a few years prior to a sale could allow significant tax savings. These are key concepts and planning that needs to be addressed on the front end of the exit planning engagement, and throughout the engagement as “life” happens.
The business attorney who has been actively assisting in negotiating contracts, reviewing contracts and regularly acting as a counselor for the business needs to fully grasp the exit planning and collaboration thereto.
Such attorney will probably assist in analyzing the issues with a transfer of assets or ownership interest, analyzing the legal structure and how to remedy issues thereto. Such counsel might be a key person to know the “issues” and “internal” problems inside the business that might impede a sell. The business attorney, with tax knowledge, can also assist with restructuring the client’s operations. Finally, the business attorney who is actively involved in mergers and acquisitions can provide advice and drafting for due diligence, letter of intents and closing documents thereto.
Life insurance can play a critical role in the overall financial and business plan.
Key people are critical to the business. We use life insurance to reduce risk in the area of key people. We should obtain key person coverage on key people to indemnify the business if the key person passes.
Life insurance, if structure properly, can be used as a retention tool. It can be used as a golden handcuff and a golden parachute. The business owner wants to keep the employee with the firm to help them grow and succeed long term. With the right strategy, the key person will less likely leave if they are leaving a reward on the table. In regards to a potential buyer, they are concerned that key management my exit after the sale and worst case scenario take customers with them and compete against them. A properly structure retention plan reduces the risk of this.