Avoiding Taxes Like the Big Guys (and Gals)

The Trump Organization allegedly avoided paying taxes on almost $2 million of compensation to an employee. The allegations and prosecution shouldn’t surprise anybody because:

  • There’s politics involved.
  • There seems to be a family history of this.
  • Most business owners do the same thing but do it to reduce the owner’s taxes not the taxes of an employee.

One of the most irritating aspects of small business buy-sell is when the owner blends their personal and business checkbooks. I’m not talking about a meal or ballgame or round of golf now and then, I’m talking about paying for obvious personal expenses with business funds. One owner (I know his son, who bought out dad’s half of the business) felt the role of the business was to pay for his and all his kids personal bills (insurance, Costco, groceries, etc.). The son doesn’t feel the same way because he plays it straight and gets audited financial statements.

Of course, then the seller will say it’s the job of the buyer (and the bank) to determine what is really a legitimate business expense and what isn’t. In other words, “I’m cheating the IRS, but I won’t cheat you.”

But what if there’s an “Oops” and you must sell? A deal from years ago had an owner who was like the dad mentioned above, and she knew it. When a medical issue arose, she was stuck. She knew the risk and understood the increased price of the business would be more than many years of tax savings. And she’s right! Ignoring the time value of money, it’s 10 years or longer of tax savings to equal the increase price. 

Nobody wants to pay more taxes than they’re obligated to. There’s an inherent desire to get the tax bill as low as possible. But consider the big picture and it’s why I tell owners (and it’s in my book If They Can Sell Pet Rocks Why Can’t You Sell Your Business (For What You Want?)) to not play any games for three years (or more) because in the long run you’re way ahead.

The point of this memo is, just because you can do it (and others, including big names also do it) doesn’t mean you should do it.

“We must believe in free will. We have no choice.” Isaac Bashevis Singer

“At 50, everyone has the face he or she deserves.” George Orwell

Are You a Hunter or a Trapper?

Over the weekend our 14-month-old puppy Coco caught another squirrel. Dogs do catch critters but there are some things you should know about Coco. She’s half-lab and half-husky, 85 pounds, not the fastest dog around by far, sort of a klutz, and she’s hilarious when she slinks towards the bird feeders, where the squirrels hang out and get fat. She thinks she’s sneaking up on them.

She makes up for h er lack of speed and grace with smarts. She doesn’t sit and wait for a squirrel (trapping); she moves to corner them (hunting). And she doesn’t bite them or eat them; she plays with them.

I have an old book by Lionel Haines, written well before my time in this business, and one of his best lines, for business buyers, is, 

“You must act like a hunter not a trapper.”

It is important for business buyers, especially individuals and small business owners, to get the word out and see as many opportunities as possible because it’s hard to find a match. The “perfect” type of business for a buyer may be too large or too small, it could have a serious owner dependency, or a customer concentration issue.

It’s also important for:

  • Job seekers – I hear from outplacement clients 70-90% of good jobs are never advertised or listed. You have to get out and find them.
  • Salespeople – Find customers and/or referral sources means not being just an order taker.
  • Business sellers – going after the pool of logical buyers in such a way word doesn’t get out the business is for sale.
  • Business startups – you must always be on the hunt.

My world is buy-sell, so I emphasize this to buyer clients. Know what you want, go after it, keep in touch with brokers, network like crazy, and don’t be afraid to pick up the phone.

“Mother Nature, in her infinite wisdom, has instilled within each of us a powerful biological instinct to reproduce; this is her way of assuring that the human race, come what may, will never have any disposable income.” Dave Barry

Are You a Hunter or a Trapper?Are You a Hunter or a Trapper?Are You a Hunter or a Trapper?“You know you’re getting old when you get that one candle on the cake. It’s like, ‘See if you can blow this out.’”

Businesspeople Aren’t Like Politicians; Thank Goodness

You only have to read the headlines to realize there’s very little political collaboration these days. And that’s within the two parties as well as between them. The ends of the spectrums are the noisiest and yet all surveys say most people aren’t radical left or radical right.

Could you see if our businesses were like that? We wouldn’t be in business. The buy-sell industry is very collaborative. Business buyers and sellers must get along and collaborate, as must their attorneys, CPAs, and intermediaries. Most do a pretty good job of it. But what about within a business?

Employees rule! There’s a war on talent these days. Employees have more choices and as per the June 14 Wall Street Journal (and other publications) workers are quitting their jobs at a higher rate than any time since the year 2000 and April 2021 saw a record number of people quit, almost 4 million. 

Attracting and, especially, retaining good people is more important than ever. Covid still scares some of them, younger workers in particular. Many of those used to working from home like it, for at least a couple days a week. Employers have to be flexible or their employees will go somewhere else.

It reminds me of the dot com boom when fired employees went out and played until they had 30 days of severance pay left and then went and found a new job with better pay and better benefits. When speaking at outplacement agencies it was tough to get the agency’s clients to pay attention to entrepreneurship because jobs were so plentiful.

For business buyers the seller’s employee age range, the availability of good workers, and the flexibility they can offer people should be on the top of the due diligence list. And if business owners/sellers think it’s not their issue they’ll be in for a surprise.

“Experience is not what happens to a man, it is what a man does with what happens to him.” Aldous Huxley

Businesspeople Aren’t Like Politicians; Thank GoodnessBusinesspeople Aren’t Like Politicians; Thank GoodnessBusinesspeople Aren’t Like Politicians; Thank GoodnessBusinesspeople Aren’t Like Politicians; Thank GoodnessBusinesspeople Aren’t Like Politicians; Thank Goodness

When You’re Wrong, You’re Wrong

I was wrong. I’ll admit it. Go back a year and then I thought a lot of distressed companies would hit the market in Q2 and Q3 of 2020. They didn’t, at least not a massive amount of them. So, what happened?

PPP and other government loans saved a lot of businesses from going under. A client of ours saw her customer base put on severe government restrictions. Her company was allowed to remain open but there weren’t many customers to sell to. Without both PPP loans the company wouldn’t have survived. Add to this the Main Street lending program and the Restaurant Recovery Act and a lot of jobs, and businesses, were saved.

I’m starting to see more hurt companies on the market. The owners have just had enough. The problem is most of them aren’t salable, aren’t financeable (at the price the owner wants), and the only logical buyer for them may be someone in a related industry, who can consolidate.

One problem is the owners still see their business as it was in 2019 while the buyers and banks see it as it is now. I get it. When talking to owners about their future the optimistic-entrepreneur side comes out, as it should. What I don’t get is when they’re working with a broker to sell the business and the broker obviously hasn’t looked them in the eye and told them to fix the darn thing before trying to sell it (FYI, there are brokers/intermediaries who do this and actually help the owner fix it before selling).

In real estate, residential or commercial, it’s a lot easier to estimate the cost to rehab a building (assuming a top-notch inspector was involved). With a business, it’s not that easy. You’re dealing with the marketplace, economy, customers, employees, and competitors. 

Bottom line, if you or a client of yours wants to sell but the business isn’t ready take steps to get it where it should be in order to exit with style, grace, and more money. And now for a shameless plug, get our book If They Can Sell Pet Rocks Why Can’t You Sell Your Business (For What You Want?)

“If it wasn’t for the effort, I could argue against hard work all day.” Janan Ganesh

Being offended is the natural consequence of leaving one’s home.” Fran Leibowitz 

Decisively Solving Problems (Without Overreach)

“I hate lawyers” was how a client answered the phone. No hello, hi John, or similar. Just, “I hate lawyers.” And obviously not referring to any of my good lawyer friends (the lawyers he referenced are in the Midwest).

So what brought this on? The lawyers were overstepping their boundaries. Wordsmithing little things back and forth, trying to make it their deal by changing deal terms, and painting a “doom and gloom” picture for every little issue. It got to the point the client would write things like, I know what you’re going to say [kill the deal was a common reply from the attorney] but I’ve researched it and understand the risk.

It brings up the question, what are you doing for your client or customer? Simply, all of us, whether it’s advice, a service, or a product are solving a problem. If we can’t solve the problem, it’s not the right situation (and a fast no is almost as important as a yes-we-can).

We do this by asking questions and know we’re on the right track when we hear responses like:

  • That’s a good question.
  • I never thought of that.
  • Interesting.

And the best response being, “You ask great questions that get me thinking.”

A product solves the problem or it doesn’t. Advisory work is different, you give advice, tell your client what to do, and hope they’ll do it. A coaching client told me she would ask the client which of two strategies they liked best and my response was she’s getting paid to give guidance not simply point out options. Tell the client what’s the best option and why.

Despite the opening to this memo, I really like the attorneys I know, refer to, and work with. Someone at some time has said the same thing about accountants, consultants, coaches, salespeople, engineers, doctors, and just about any other profession. Ask questions, listen, and give good advice.

“A day can really slip by when you’re deliberately avoiding what you’re supposed to do.” (Cartoonist Bill Watterson)

The Benefit of (Good) Benefits

According to a Gallup study, one in every six workers stay in a job they’re unhappy with because of the benefits and the lower the income the more tied to the job people are. Benefits are a huge part of our lives.

Medical and dental insurance is essential and there are (at least) two aspects I don’t like about how it’s provided. I don’t feel it should be tied to employment and I don’t want the government taking it over. However, about three-fourths of people surveyed feel the government should “play a bigger role” in helping contain costs and reducing the financial burden of health care.

Some might say it’s good news people are tied to their job. Others would see it as reducing career advancement, reducing productivity because there are unhappy employees, and/or not letting a company hire better people (through normal attrition).

In the buying and selling of businesses benefits always come up in the discussion. Smart buyers want a company that takes care of their people. Contrast that feeling with this vignette based on what one owner told me a year or so ago:

He bragged about how little he paid people and how he didn’t (have to) provide benefits. Then he shared he was constantly hiring because of employee turnover. And, he had a serious issue with absenteeism, which was affecting his productivity and margins.

There’s no easy answer here but to get on the right track, small-business owners should do their best to provide what it takes to keep people happy, productive, and growing in their careers. It’s a lot less expensive than the cost of replacing people and having them not show up for work.

What do You Wish For?

We were watching Star Trek Discovery, during one scene they fired off some pods to a planet’s surface, and to describe what they were doing they used some words I don’t think make sense but sounded good. Don’t you wish you could make things up and have them solve your problems. And let’s face it, beaming from place to place instead of driving or flying would be pretty cool.

So, what would you “wish” for? Would it be:

  • A shield to protect you from your kids’ teenage years.
  • As a business owner, something that would get your employees to think about the business almost as much as you do.
  • For business buyers, a less inefficient market (this will not happen given business sellers are so worried about a breach of confidentially, and justifiably so).
  • An education system benefiting all, including those geared for the trades.
  • When selling a business some magic dust that would fix all the blemishes like customer concentration, poor financial systems, owner dependency, erratic growth, etc.
  • More customers like your best customers who want value not just the best price (for lower quality).
  • Peace throughout the world, opportunity for all, and no more Zoom meetings.

Look, none of the above are going to happen, which is why life is so interesting. But we get up every day to do our best for ourselves and others and that in itself is interesting and worthwhile.

“One of the penalties for refusing to participate in politics is that you end up being governed by your inferiors.” Plato

Flaunting the Rules

We got back from a week in Scottsdale and on the outbound flight, as we landed, the pilot asked us to stay in our seats as there was a law enforcement issue. At the gate, two airline employees came onboard to escort a young couple off the plane.

As we left, I overheard employees say the issue had to do with drinks and not wearing masks. The couple was being “interviewed” by the police as we crossed the gate area. Later I was walking out behind the couple and the cops and heard one of the cops say they don’t enforce mask wearing but passengers have to adhere to airline rules. The young lady commented she thought they were going to be arrested.

On the radio Monday morning I heard an announcer say how on a flight over the weekend he got admonished by a flight attendant for not putting his mask back on after eating (he said he was putting it up to his face when she snarled at him).

So, what does this have to do with business? Masks are like other rules and guidelines. Some are overbearing about them and others flaunt them and in business, I see the following.

  • Owners who overly blend their business and personal checkbooks, making it hard to determine exactly how much money the business makes. 
  • One could add here the CPAs who get their clients so obsessed with reducing taxes they do stupid things (like buy new stuff they don’t need just to reduce taxes).
  • Business buyers who think they deserve perfection when there are no perfect businesses or perfect deals.
  • Business sellers who don’t think valuation methodologies apply to their business, because their business is so different and special.
  • On the flip side, attorneys who dig in on minutia and lose track of getting the deal done (which sounds like a great title for a book).

What this means is actions about masks are no different than what people do all the time.

“Why is it a surprise to find that people other than ourselves are able to tell lies?” Alice Munro

Overleverage is Why Banks Shouldn’t Think Like Investors

Last year it was Deutche Bank and Trump. Now it’s Credit Suisse with Archegos and Greensill. These large banks seem to have forgotten the Five C’s of banking (capacity, character, capital, collateral, and conditions). And corporate execs take a lot more risk than if they had to stand behind the loans. A sixth C could be added, check (and double-check) as Credit Suisse “admitted” they didn’t know Archegos was also borrowing (to the hilt) with other banks.

On April 5 the Wall Street Journal had a frontpage article titled, “Small-Business Owners Feel Weight of Personal Debt Guarantees.” While it wasn’t all about bank loans, a large portion of the article was about lease guarantees, as I’ve previously written personal guarantees are common with small-business bank loans. 

The article made it appear banks are more willing to work out things than landlords and others. Here’s a quote from the article, “Banks don’t want to pursue guarantees,” said Alan Thomes, a managing director in charge of SBA lending at Cadence Bank N.A., noting that the process can be costly and messy. “It’s our desire to work it out,” he added.

Makes sense given another recent headline I saw, “Office-Space Subleases Flood Market.” I get what landlords are going through. When mega-companies are subleasing space it decreases the landlords leasing abilities, and they have mortgages to pay.

What this all means I really don’t know. But I do know that business buyers and business owners who are borrowing money can’t overleverage themselves. Some banks will allow borrowers to have a very low (1.1:1 or 1.2:1) debt coverage ratio (the first number is free cash flow and the second number is debt service payments). Good bankers will want their clients to have at least a 1.5:1 ratio and if it’s a small buy-sell deal a 2:1 ratio.

Prudence is a wise course of action when borrowing, and personally guaranteeing. Don’t emulate corporate types playing with other people’s money.

“Throughout the world the more wrong a man does, the more indignant is he at wrong done to him.” Anthony Trollope

“What sane person could live in this world and not be crazy.” Ursula K. LeGuin

Bad News Sells

As was predicted, news outlet ratings have fallen, especially those that are anti-Trump. People want to see, hear, and read negative news. In the first month since the Inauguration:

  • CNN was off 45% (down 16% in prime time in Q1 2021)
  • MSNBC down 26% (down 8% in prime time in Q1 2021)
  • The Washington Post 26% fewer unique visitors
  • The NY Times was down 17%
  • Fox News was down 6% (down 32% in prime time in Q1 2021)

Say good or bad things about Trump, he was a boon to all media (and I’m guessing Fox News went down when Trump replaced Obama, for the same reasons).

Bad news sells. Look at the headlines. Recently it was headlines about how the ship stuck in the Suez Canal would take a month to be dislodged and by then the world economy would collapse. It was freed in six days. When it comes to news and day-to-day business here are some thoughts in three areas: 

  • When a business is for sale, there is no bad news. Everything is rosy, no warts, no issues, and a very bright future. Two percent growth the last five years, no matter, it will be 10-15% the next five years. Look, the previous is a bit of hyperbole but you get my point.
  • On the flip side, all businesses have something wrong with them and some buyers think it’s their job to ignore the profits and pick apart every little thing. These buyers rarely get a deal done because nothing is good enough.

And did you ever hear outsiders talk about what a company can do in three easy steps to be more productive and profitable? My favorite was hearing two government employees discuss what the $100 million dollar firm where one of their wives worked should be doing to be better. Really?

I tell my clients there are no perfect businesses and no perfect deals. But their business, or the one a buyer is acquiring, have figured out how to be successful and profitable. Perfection is for brain surgery. 

“All things are so very uncertain, and that’s exactly what makes me fell reassured. “ (Author) Tove Jansson