Art of Accounting: Providing advice to a non-client

I received a call on a Friday afternoon from the brother of a friend of a friend who was going to close on the sale of their business the following Thursday. He wanted to know if there was a way to reduce the (shockingly high) percentage of taxes his accountant just told him he would be paying on that sale. He said he would need to have a meeting on Monday or Tuesday at the latest. I see two major issues here. I’ve written about this previously, but this just came up and I feel it is worth looking at it again.

The first issue is that when the negotiations to sell his business started, the accountant should have prepared a model of what he would net from the sale. That model should then have been used to discuss how the transaction could be structured, the cash flow he could expect from the net proceeds (after buying the “toys” he always wanted but could never afford) and the cash flow he would be giving up by selling. I’ve done this a lot and quite a few times the client decided to not sell. In some cases I’ve come up with alternative plans for the client to keep the business but turn over the active management to some of his or her key employees. Necessity sometimes drives the ideas or plan. 

The next thing that should have been done is to plan on whether and how the taxes on the sale could be mitigated. This would include advice on the tax ramifications of the transaction, the allocation of the sales price and contract clauses affecting taxable income and, more importantly, the seller’s post-closing cash flow. Other issues also need guidance unrelated to taxes and cash flow.

There are many ways to reduce the current income tax on a sale transaction. However, they all take time, require special structuring of ownership, considerations of the family dynamics of the seller and the estate tax aspects, an understanding of the cash flow the seller expects or needs from the sale proceeds, the tolerance for risk with the investment of the sale proceeds, and literally dozens of tax issues. Two that jumped out are selling the business to an employee stock ownership plan or gifting the business to a charitable remainder trust, both of which need advance planning and actions before a contract is signed. 

I told the caller he needed to quickly engage a knowledgeable CPA who advises clients who want to sell their business. I said I could provide “generic” responses to some of his questions, but they might be misleading to him since his sale is not taking place in a vacuum and is a one-off, life-altering transaction. As such, all advice would need to be integrated with his financial circumstances. Saving taxes is a good goal, but perhaps a more important goal should be to maximize his cash flow from the sale proceeds. Also to be considered are his family situation and future lifestyle.

I’m always tempted to try to help people when I can, but I realized at some point I would be doing a disservice since the only “right” advice I have ever been able to offer was after I was retained to do a thorough analysis of the client’s situation. The answers to each question and each piece of the puzzle could be very simple, but the application or execution can be totally wrong for that client. They might not accomplish what the client wants, or they could cause added tax in the long run. 

Many clients perceive CPAs as an infallible Mr. or Ms. Answerperson. We are smart and well-informed, but without being aware of the client’s full situation and having the opportunity to apply our knowledge and experience to that client’s specific situation at that time for that project, we would be doing them a disservice. 

As I spoke to the caller for about 20 minutes sitting in my car after a golf game, every question I asked evoked responses from the client about what he intended to do after the sale. I sensed the client felt pressure to get some quick “answers” since he wanted to close the following week. That is not the way to try to reduce more than a few million dollars of potential tax. 

I told the client that quick answers would not get him an adequate result. He should take the time to engage someone who could put the proper time into it, ask the proper questions and integrate all the aspects. My advice is to get it done right. Find someone who is able to spend the appropriate time. This is an arduous, costly process, but the results could warrant the efforts.

I told him I was not available to help him, but I would email him some articles I’ve written that he could review. This is not simple stuff, and simple answers under rushed conditions won’t hack it. Unless we can be retained to do it right, we should pass on these situations.

Do not hesitate to contact me at emendlowitz@withum.com with your practice management questions or about engagements you might not be able to perform.