If you are an accountant or financial advisor, it’s a busy time of year for you as clients work on filing their tax returns. While this makes for good accounts receivable for the next few months, what are you doing to provide year-round value to your clients? For accountants and CPAs, as well as bankers and financial planners, one area you might consider exploring with your business owner- and entrepreneur-clients as a value-add is exit planning strategies.

Accounting Today posted a podcast episode a few weeks ago entitled, “Building strong exit strategies.” The podcast, which is hosted by Daniel Hood, editor-in-chief of Accounting Today and Tax Pro Today, discusses the large number of baby boomer business owners who are looking to retire, as well as entrepreneurs who are looking to move on to a new business venture. The challenge is that many of these owners aren’t sure how to make their exit from the company they founded.

Types of liquidity events for business owners

The podcast features wealth manager Anthony Glomski, who wrote a book called Liquidity and You. Glomski discusses the four main types of these so-called “liquidity events”:

  1. A business owner has owned a company for a long time, and as net income levels rise, they begin to get interest from prospective buyers (even if the owner had not fully grasped how saleable their company is), so they decide to sell;
  2. Equity stripping, where the owner sells their company but retains some level of involvement in the business—perhaps some degree of control or ownership;
  3. Somewhat less frequently, a full initial public offering (IPO); and
  4. When a business owner starts taking cash out of the business they have grown over the years.

Of these four liquidity events, Glomski says that the majority fall into the first category of owners looking to completely cash out of their company (followed in frequency by the equity stripping option).

Liquidity event challenges

Glomski goes on to outline the five main financial challenges that business owners and entrepreneurs face during a liquidity event:

  1. Wealth preservation: This is intentionally at the top of Glomski’s list because he believes it is of upmost importance. Business owners have put their heart and soul into their company and assumed a lot of risks along the way, and the reality is that this could be their one big shot at cashing in on their investment of time, money, and hard work. With the proceeds of the sale of their company, they want to be able to at least maintain their current lifestyle, if not improve it.
  2. Tax mitigation: Oftentimes, business owners and entrepreneurs have done little tax planning when it comes to selling their business.
  3. Asset protection: With a large influx of cash, people are often susceptible to frivolous lawsuits or others looking to profit off of their new-found financial situation.
  4. Wealth transfer: It’s important for entrepreneurs to put a plan into place to secure their financial legacy to their family. Even if they have an estate plan, the numbers will completely change as a result of this liquidity event.
  5. Charitable intent: Business owners should consider what causes they may want to support with the proceeds of their company’s sale.

A CPA or accountant has a tremendous opportunity to add value to their client relationship by helping with all five of these challenges, especially with concerns around tax mitigation. These are also topics on which a banker or financial planner can provide guidance.

Is your client’s business saleable?

When thinking of these liquidity events, Glomski says the ideal timeframe for business owners to begin the planning process is “yesterday,” meaning that the sooner owners can begin to think about their exit strategy, the better—though the natural tendency among many is to put this off. It’s that common refrain: “I’m so busy running my business, I just don’t have time to think about an exit strategy.”

So, this is exactly where a tax pro can step in and help these business owners start to develop a plan now. Glomski suggests that to effectively get a sale agreement in order, take the necessary planning steps (both from a personal and business finance perspective), and seal the deal, it can take two to three years.

Tax and financial experts can take the proactive step of looking over their book of business and considering who among their clients may be approaching retirement age, as well as whose business may be particularly ripe for a potential sale. Because the market can be volatile and challenging to time, finance pros like accountants, bankers, or financial planners can discuss with their clients what their appetite is for risk when it comes to selling their company. Yes, right now, markets are thriving and it is a good time to sell, but that could of course change tomorrow.

How finance pros can help with planning an exit

A few big areas where financial professionals can assist their clients who are considering a liquidity event are on the tax and estate planning side, as well as maximizing the business’s value by ensuring the company financials are in good order. Also, a thorough cash flow analysis can give the owner a better idea of what type of profit they need to make from the sale in order to maintain their personal lifestyle.

A quality of earnings report is another useful tool that a prospective buyer will want and that an accountant can advise their business owner-client on. While it may be a different accounting firm that would actually create this report for the business, the owner’s personal tax advisor can consult with that firm in advance to learn what can be done to get the company in the best possible position to maximize the sale price and profit for the owner.

Quarterbacking the liquidity event team

Glomski suggests that a key role that is sometimes missing in exit planning is that of project coordinator—someone who can help orchestrate all financial aspects of this intricate sale process. The ideal person to fill this role may be the business owner’s own tax or financial professional. That person can take a more holistic look at both the personal and business aspects of the sale and advise their client on what to do and when.

As Glomski says, “You don’t need to be a valuation expert. You don’t need to be a trusts and estate attorney. You don’t need to be producing quality of earnings reports. You don’t need to be a mergers and acquisitions attorney. But you need to step up and coordinate and get the best of the best people around your client to execute.”

As a financial advisor or accountant, consider what your firm’s strengths are when it comes to your client’s needs. Then, outsource any areas that aren’t your forte to people who are experts on that topic and who will be good team players—communicating both with you as the project “quarterback,” as well as with your client and other members of the exit planning team, and acting in your client’s best interest.

Take advantage of tax time

Selling a business that they have poured their blood, sweat, and tears into over the years is arguably one of the biggest transactions your business owner-client will ever make. And odds are, they’ve never done this before, so they need sage guidance on how to do it right. The close relationships that you have worked to build with your banking, financial advisory, and accounting clients can be invaluable during this exciting and sometimes-scary time for the business owner.

Seize the opportunity! While you are meeting with your business owner-clients to discuss their taxes over the next month or so, it could be an opportune time to broach the subject of exit strategy planning. In addition to providing useful advice that can be extremely beneficial to your business owner-clients, this type of consultation can prove to be a valuable new revenue stream for your financial planning or accounting firm during the slower months of the year.

If you have a business owner-client who you think may have a company that is ripe for sale, check out the Vertical IQ Industry Profile for their niche. You will be able to see trends within that industry that might suggest that it is an optimal time to sell, or perhaps you’ll find that holding off on a sale may prove more profitable. Or, if you don’t yet have access to Vertical IQ, you can request a demo today!