With the rapid spread of COVID-19 taking hold in the U.S. and across the world, publicly-traded stock prices have taken a beating. Additionally, as business, economic, and political uncertainties increase, private valuations in certain types of securities and industries will certainly take a hit this year. Although this may cause temporary pain in the form of lower portfolio and 401k balances, significant planning opportunities remain for high net worth individuals, business owners, and shareholders of privately held companies. The federal government issued PPP loans to businesses to help them during this time, but after this is all done, will businesses be able to pay them back? The rules for how to get a Payroll protection loan forgiven are here and must be looked at by all businesses who worry for after this is over.
Take Advantage of the Exemption from Estate, Gift and Generation-Skipping Transfer Tax – With everything that’s going on, it’s easy to forget the significant changes that went into effect in 2018 with respect to the estate and gift taxes. To summarize, the federal tax law was changed to allow individuals to transfer double the amount that was previously allowed over the course of their lifetime free of tax. As of this writing, individuals may transfer $11.58 million and married couples up to $23.16 million. Given the sudden public market decline, there currently is a window for individuals to maximize this exemption by transferring certain assets that are significantly undervalued but will likely appreciate in the future. Examples include interests in family limited partnerships (FLPs) holding marketable securities, investments in commercial real estate and privately held businesses. Also, due to the current lack of liquidity in the financial markets, there is additional support for increased discounts for lack of marketability for interests in privately held businesses and FLPs.
Consider Issuing Employee Stock Options Early – In certain cases, companies may consider issuing employee stock options early to take advantage of lower valuations. Many employees view stock options as a key component of their overall compensation. In cases where a company’s share value has been temporarily reduced, the cost of employee ownership can also be reduced through lower option exercise prices. Depending on the valuation delta, this difference can be significant for employees when they exercise their options. Additionally, issuing options early may also help bolster employee goodwill without adding a cash drain to the business.
Testing Interim Goodwill Impairment – For companies with goodwill on the books, it may be a good time to assess whether taking an interim impairment charge makes sense. According to Accounting Standards Codification 350 (ASC 350), there are many triggering events for an interim test including economic conditions, changes in capital markets and factors impacting the revenue and cash flows of the company. If economic conditions warrant a test and impairment likely exists, it may be a good time to take an impairment during a down cycle.
Opportunistic Acquisitions – When valuations are low, buying opportunities are always presented. Currently, there is a lot of private equity cash waiting to be invested. A good portion of this capital has been sidelined due to unrealistic valuation expectations from sellers over the last several years. The new market reality may ultimately result in some deals moving forward “at the right price” that otherwise wouldn’t. Additionally, there may be distressed asset sale opportunities in certain sectors.
There is no question the current market decline has caused a significant loss of value for companies and stockholders in the short term. The losses are real, and businesses are struggling. Given the rapid spread of COVID-19, its unclear how it will all play out. However, as is the case with most negative events, there is usually a silver lining. Several opportunities are available right now for business owners to help ease the burden of dealing with lower equity values. As always, when considering one of these options, it is important to review all facts and circumstances that are relevant to your specific situation with legal, accounting, and valuation professionals.
Members of the Business Valuation Practice Group of Evergreen Advisors offer you reliable business valuation advice and well-reasoned opinions. Our findings are supported by actual market transactions, the most recent industry and economic research, the latest in valuation methodologies, and actual transaction experience. We have experience with a wide range of industries and can assist you with a variety of business valuation advice in connection with the following services: Estate and Gift Tax Planning, Fair Value for Financial Reporting, Equity Incentive Plans (409A), Employee Stock Ownership Plans (ESOPs), Transaction Support, and Fairness & Solvency Opinions.
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