Financial Planning: Why you should do this year-round

This article was written by Brad Stanek, CFP, and Paulina Matel, CFP, Financial Advisors 

1. Working with your accountant and financial planner

Dealers tell us all the time how great their CPA is at preparing returns and telling them how much they owe. But most wish their CPA would be more proactive about ways to reduce their taxes. Well, as Mahatma Gandhi once said: “’If you don’t ask, you don’t get it.” 

To get the ball rolling, don’t wait until year-end to start planning. This is something that should be done all year long and should consider all the decisions you’ve made while running your business.  

It’s invaluable for your CPA to know where you want to go over the next year, five years, or even 10 years. Do you want to transition it to the next generation of your family or to a key member of your management team? Do you want to grow your business in preparation for an exit? By helping your CPA understand your vision, they can provide guidance along the way that they’d never be able to provide from a historical perspective. Your accountant can plan to have capital in place for certain structures. They can plan to develop a management team and they can implement an incentive plan that motivates owners to build more value in the business.  

Bottom line: Don’t be afraid to suggest the advisory role to your CPA if you haven’t done so already. 

2. Maximizing income, normalizing expenses, and minimizing tax impact in the year of sale 

Many of you are asking yourselves: “Is this the year I sell internally or to a third party?” While some may be wondering how to best find a qualified buyer, all dealers we speak with are concerned about the tax hit.  

When running your dealership, for some the tax goal is to get your income as low as possible to minimize taxes due at tax filing. But when you become a potential seller, it’s the opposite. Maximize your income so when looking at a multiple of net income, you get the highest possible purchase price.  

You’ll also want to address “normalizing items” such as one-time expenses or higher than normal wages paid to owners and officers. You wouldn’t expect the new owners to pay for those expenses and you want to get those items in line prior to the sale, that way you don’t have to argue with a potential buyer over those items. 

If you pay unusually high (or low) rent for your business, that’s another thing you want to normalize prior to the sale.  Adjust your rent appropriately if it makes sense in your tax planning structure. That way you are setting the stage for a buyer to come in and evaluate your business based on what they think it will look like in their hands.  

From where we sit, on average, deals take six to eight months to complete. Recasted statements and normalizing will give you a rough idea of what your business might be worth to a third party. Your accountant can also help you determine your “walk away” money after paying taxes and paying the advisors who help you on the transaction. That’s going to give you a good number to work with before you implement any tax-mitigation strategies. The key is to do all these things BEFORE you go to market. If you don’t do these things before you go to market, they become negotiating items. You don’t want to be surprised by a lower-than-expected offer after it’s too late to back out.  

So, start your planning at least six to eight months before you approach any buyers. Clean financials are key. For each discretionary dollar that’s buried in your financials, that’s $2 to $4 less in your final offer.  

3. Estate planning  

Estate planning is not an area that people like talking about, but it’s essential for protecting your wealth, your family, and your business for generations to come. It doesn’t matter if you’re 30- or 90-years young, estate planning is very important for all individuals. As mentioned earlier, our current administration discussed reducing the lifetime tax exemption on gifts and estates by half (from current levels of $12.92M for individuals or $25.84 for married couples as of 2023)– i.e., the amount you can pass to your heirs without being taxed on it.  Even if the current administration is not successful in this pursuit, the current lifetime exemption is set to expire at the end of 2025 and will be cut in half then.   

While $25.84 million sounds like a lot of money, it’s not as much as it seems when you factor in the value of your business, which is a big part of most dealership owners’ net worth. Everything over $25 million that you own is taxed at the highest marginal ordinary income tax bracket, which is almost 40% as of 2023. Now just think about the impact of the exemption getting reduced in half.  

Fortunately, there are many ways to shelter and protect your assets without giving up control. The idea is to use up the exemption that’s available now and allow those assets to appreciate outside of your estate. That will save your family and heirs many dollars in taxes down the road. But it takes some time to get those strategies in place. Don’t wait until 2025 to get your estate plan in order. It’s especially important to do so if you’re contemplating an exit.  

4. Optimizing your walk away money

Before starting the sale process, it’s very important to huddle with your accountant and financial planner to determine how much income you need to have (after taxes) to maintain the lifestyle you want to have post-sale. Knowing that number will help your investment advisor know how aggressively to invest your money to generate the income you need.  

By calculating your after-debt, after-tax cash needs, you can back into how much you need to net from the sale of your business. As you start to get letters of intent (LOIs) from potential buyers, keep in mind that the highest gross offer is not always what gives you the most net walking away cash. A lot depends on the structure of the offer and what you can negotiate. You want to evaluate each LOI carefully.   

Conclusion 

You’ve worked too hard to build your dealership. Shift your perspective from a year-end tax and financial planning to year-round instead. Start the planning process well in advance and make sure you have the right team in place to ensure the best possible outcome for you, your family, your dealership, and your community.  

Brad Stanek, CFP is an Executive Director and Financial Advisor with The Stanek Group at Morgan Stanley in Chicago, IL brad.stanek@ms.com.  

Paulina Matel, CFP, CEPA is a Financial Advisor with The Stanek Group at Morgan Stanley in Chicago, IL Paulina.Matel@morganstanley.com.