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Deloitte shares tips for Harvesting Your Wealth

By Rob Starr, Content Manager

Private business owners should be looking at macroeconomic and capital market conditions in a favorable light, especially if they are considering a shareholder liquidity transaction. To that end, Deloitte has put together six tax planning concepts to consider in preparation to exit or reduce involvement in a company. Julia Cloud, partner and Private Wealth sector leader, Deloitte Tax LLP, and Lou Paone, managing director, Deloitte Corporate Finance LLC, answered some questions for us about the Harvesting your wealth: A guide to valuing your private company for a shareholder liquidity event, report.

Q: Why is this a good time for private business owners to begin harvesting their wealth?

For a variety of reasons, 2015 has demonstrated favorable market conditions for entrepreneurs seeking to harvest the wealth inherent in the businesses they have spent years building. First, from a macroeconomic standpoint, resumption of growth in developed

Julia Cloud

Julia Cloud

economies has significantly improved the global economic outlook. Specifically, in the U.S., businesses have seen strong growth with the S&P 500 index gaining over 12 percent in 2014.

Furthermore, from an international perspective, the Eurozone has shown signs of recovery, Africa has seen real incomes increase 30 percent in the past 10 years, and Asia continues to seek a balance of promoting growth while curbing inflation. Those U.S. businesses that are beginning to expand into foreign jurisdictions will have the opportunity to pursue future growth in markets that have increased demand and money to spend.

Second, there is more debt capital available than there has been since 2008. Not only has credit become more accessible but it is available to companies at a lower cost. Therefore, entrepreneurs should receive higher equity values for their businesses because buyers can access debt at a significantly lower cost and increase the leverage model to finance the acquisition.

Given these factors and the significant M&A activity in the marketplace recently, now is an excellent time for individuals to consider a transaction that will provide liquidity.

Q: What are the challenges involved?

There are a wide variety of strategic liquidity alternatives to consider. However, as you evaluate the alternatives, you should consider the amount of cash you want or need upon closing the transaction, the level of control over the business that you want to retain, and the overall impact the transaction will have on the organization. It is imperative for entrepreneurs to understand the business and tax implications of the alternatives available, so they can make an educated decision on which option fits their circumstances and desires.

Q: How does Deloitte’s recently-released report: Harvesting your wealth: A guide to valuing your private company for a shareholder liquidity fit into the picture?

This report provides a specific framework of the steps that an entrepreneur should take to prepare the business for a shareholder liquidity transaction. Without sufficient planning, such an event could be disruptive to the business organization and therefore, it could impact the enterprise value. The framework begins with a timing assessment and evolves into a broader, disciplined process. Time should be spent on each stage to effectively outline financial and qualitative objectives, to identify and evaluate each liquidity alternative, and to identify a corporate finance advisor who can effectively market and negotiate the transaction for a greater after-tax value.

Q: What are the biggest takeaways from the report?

The market conditions that exist today make it an excellent time to consider a shareholder liquidity event. Given the increased level of investor confidence and the extremely low cost

Lou Paone

Lou Paone

of capital, many individuals may choose to evaluate what opportunities exist to generate liquidity.

In addition, there are potential tax planning approaches for entrepreneurs that could be implemented prior to a liquidity event to facilitate the efficient transfer of wealth to a spouse, partner, children, trusts, or charities.

With thoughtful planning, entrepreneurs are more likely to increase the value upon the close of the transaction, limit the tax consequences of a sale, and transfer value to those they hold close to their hearts. However, to achieve additional value, entrepreneurs should leverage a disciplined transaction approach and experienced advisors to take them through what could be one of the most demanding, yet life changing events, they will experience.


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