Max Bialystock: So you’re an accountant, eh?
Leo Bloom: Yes sir
Max Bialystock: Then account for yourself! Do you believe in God? Do you believe in gold?…
From The Producers by Mel Brooks
So, I just had my second heated discussion (in three weeks) with another advisor about a mutual client. Now, believe me, I truly respect the passion that an advisor can have for his or her point of view – I am guilty of that myself at times. But, I draw the line when I have made my case and a client decides to do otherwise. It happens and you learn to deal with it.
Though these were different advisors and clients, it was the same subject- providing liquidity for an equity-type plan in a mature private company. First, let’s expand a bit on the issue. Many owners receive advice that some type of plan which provides economic rewards for performance based on an increase in the value of the business is a good thing. There is nothing wrong with that concept and the use of this technique (usually in the form of stock options) by public companies is rather widespread. But, public companies have a distinct advantage. Those receiving the options can turn around and sell the underlying stock in the public market with no further cash outlay on the part of the company. This is one of the advantages of being public. It is when the company is not publically owned that the “rubber hits the road.” Now, when that option is exercised in a private company, what does the new shareholder do to get liquidity?
So, why the heated discussion? Well, in both cases, the other advisor stated that without liquidity, such a plan really had no value and when my clients in both cases weighed the risks and decided against liquidity, both advisors became adamant about it being required. Both of my clients were ready to abandon their plans though they both felt they needed some type of plan. When I asked each advisor how they would handle the liquidity requirement, one said that company A could borrow money to buy the shares back, the other suggested that company B could give the company the right to buy back the shares, when appropriate. As my 8 year old granddaughter would say “really?” Banks love to make loans where all the money that is borrowed goes right out the door to a shareholder and a shareholder is happy to wait until their company is good and ready before they buy back their shares.
So, let’s forgive the fact that I felt neither advisor had thought through then consequences of their advice (they did not account for themselves), it was them imposing on these clients a solution that almost caused the clients to abandon a technique that would help them grow their business. By the way, we got rid of both advisors, developed an equity-like plan and a bonus plan and met the objectives the clients wanted.
So, if you are confronted with advisors who impose rather than advise, please be careful. Advisors come and go, but you are stuck with the consequences of their actions.