Prioritizing client education to empower decision makers throughout their transaction

COVID-19 has caused a significant drop in the value of many privately owned businesses, real estate investments, and other assets. While this is a tragic situation, there is an opportunity to “make lemonade from lemons.” The combination of reduced asset values, recently passed regulations, and current tax laws yields some extraordinary strategies to transfer or gift these assets.

As COVID-19 continues to upend any sense of routine, the phrase ‘business as usual’ no longer makes sense. Business owners and executives are being forced to adapt daily to a changing economic and health environment.

Humans are wired to take the path of least resistance. It’s not that we’re lazy; we just don’t want to do more work than is necessary to get results.

That’s why private company executives were happy to see the passage of ASU 2014-02 Intangibles – Goodwill and Other, which allows private companies to elect an accounting alternative to the traditional GAAP (generally accepted accounting principles) standards pertaining to goodwill. The accounting alternative greatly simplifies accounting for goodwill – and typically lowers the cost as well.

Companies that are required to prepare financial statements for external reporting face complex and serious issues. Failing to timely file financial statements or comply with the reporting requirements could lead to fines, lawsuits, or other damaging consequences. Moreover, with fair value accounting (also known as the mark-to-market accounting practice) becoming more prevalent today, financial executives responsible for filing the financial statements have a more demanding role than ever before. While fair value accounting might provide a more accurate asset and liability valuation on an ongoing basis to users of the financial statements, financial executives are not necessarily prepared to accurately determine fair value of all assets and liabilities.

Fairness opinions are a fact of life in transactions involving public companies. There is a consensus that the fairness opinion is a powerful tool in protecting boards of directors from liability related to a transaction. For a public company, a board of directors’ careful consideration of an independent fairness opinion can be the strongest protection against accusations of, and liability for, fiduciary failure. But, why do privately held companies need a fairness opinion?

Change is hard to initiate even when we know the results will be better for us. This is true when there are signs that our ESOP valuation firm is no longer providing the necessary professional assistance. Our reluctance fades however, if warning signs begin pointing to increased risks for our company.

Congress created ESOPs (Employee Stock Ownership Plans) to foster employee ownership so that employees might share in their employers’ successes. To entice owners to implement ESOPs, the proceeds of the sale of the company’s shares to an ESOP are tax deferred, so long as certain requirements are met.

An interesting study exists called Roads to Resilience, which is a 2014 report by the UK’s Cranfield School of Management on behalf of the UK insurance and risk consultancy, Airmic. The basic thesis is that opportunity is the upside of risk, and that seizing risk-driven opportunities requires a decisive and rapid response, which in turn requires empowered teams, practiced processes and flexible resources.