Could you sell your Google shares for billions
of dollars?
Few of us are as fortunate as insiders like venture
capitalist John Doerr, who in this month alone has sold Google
shares worth about $30 million. The reality is you don't need
to be a Google director to be financially secure.
Whether you're an entrepreneur who will some day
exit your business or a senior executive who plans to retire comfortably,
you do need to maximize the probability of success with sound
wealth management.
Sound wealth management for those with a net worth
above $5 million does not only encompass investment planning but
includes a stress tested financial analysis, estate planning beyond
a living trust, and tax strategies that go beyond just minimizing
capital gains and income taxes.
Here are some situations we've come across
that highlight the need for sound wealth management.
The $100 million question: We were introduced to
the owner of a growing Bay Area business who expected to sell
his company for close to $100 million. For several months, we
encouraged the seller to make some decisions about the structure
of the sale, but to no avail. Getting a mound of cash from the
transaction was, in our opinion, going to be one of the easy parts
of his exiting strategy.
The trick was how to keep the tax man's sticky fingers
out of that pile. If the business sale were structured properly
ahead of time we knew he could potentially save millions of dollars
in taxes.
For example, part of his existing strategy could
be to establish a charitable remainder trust to potentially avoid
any capital gains taxes going to Uncle Sam. The owner wanted to
discuss these strategies later, but this is something that needs
to be executed before a letter of intent has been signed. That's
just the sort of strategic decision with huge tax implications
that can affect your wealth.
High-probability wealth plans vs. traditional
techniques: Two months ago, a well-to-do referral came
into our office with an extravagant investment plan prepared by
his bank. At the heart of the plan was a cash flow worksheet.
The banker had shown how the client's nest egg could grow 2 percent
per year, by assuming an 8 percent investment return each year
and assuming that the client took out 6 percent each year.
He asked us to prepare an alternative cash flow
worksheet to see which plan would give him the most income and
leave more money to the heirs.
Well, we had to break the bad news: there's a flaw
with cash flow analysis. Chances are none of us are going to experience
an 8 percent investment return year in and year out. We explained
that the correct analysis would be to go back to 1925, and stress
test his financial goals by running them through 1,000 different
real lifetime scenarios to determine the probability of success.
A plan that does not achieve the goals in at least
750 different lifetimes, or 75 percent of the time, is not acceptable
and may lead to financial ruin.Luckily for this individual, we
were able to draft and implement a plan with a high probability
of success. A cash flow worksheet may look pretty, but odds are
it won't get you where you want to go.
Securing your financial independence: An accounting
firm we know asked us to help out a business owner who had been
in business more than 20 years and wanted to work for a few more
years before retiring. Unexpectedly, someone had offered to buy
his business.
The first question for the owner became, "How
much is my company worth?" He contacted three M&A firms
and determined what the business could be sold for.
When he came to us, he was excited about the prospect
of exiting his business but was unsettled as to whether or not
it was the right time to leave his business and if this would
secure his financial independence. He was asking the right questions
so we focused the discussion around his desire to maintain his
current standard of living. We discussed his goals — plans
for traveling with his wife, helping with his grandchildren's
college education and donating to charities. After stress testing
his financial situation, we determined that he needed to net about
$5 million after taxes to have a betterthan- 75-percent probability
of achieving all that was important to him.
If his exit strategy raised less cash, his chances
of achieving his goals would decline. So, from this new vantage
point, he could focus on the real issue: maybe it wasn't the right
time to sell the business.
Wealth management is strategic, long-term planning,
not a bunch of tactical portfolio allocations with your money
from quarter to quarter or year to year. Asking the right questions,
combined with rigorous planning and discipline are needed to help
ensure success in managing and preserving your wealth.
Christopher G. Snyder and Haitham "Hutch"
E. Ashoo are principals of Pillar Financial Services in Walnut
Creek. Contact them at 925-356-6780.
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