Transcript
Intro
Stephan Shipe:
Welcome back to the Scholar Wealth Podcast. Today’s episode is about decision-making when the numbers say you’re fine, but the choices still feel a little bit more complicated.
We’ll start with a question on charitable giving, specifically how to evaluate where to give when you want to make the most impact. Then we’ll walk through a tax planning situation around wash sale rules. This can come up regularly for investors with multiple accounts, similar holdings, and a lot of automatic activity happening in the background.
And to close out the episode, I’m joined by Mike Blake for a practical conversation on business valuation. We’ll talk about how valuations are actually determined, where people tend to misunderstand the numbers, and why valuation matters far beyond a transaction.
So let’s go ahead and get started with our first question.
Question 1 – Choosing Charitable Impact
Listener:
Our financial plan shows we can give about $100,000 a year to charity, but I don’t have any personal connection to any organizations. How do I figure out where that money will actually make a meaningful impact?
Stephan Shipe:
So this one typically, it may not be the case here, but we typically see this a lot whenever there’s a tax benefit of the charitable giving. And your CPA says, you know, it would save you some money this year if you just gave $100,000 to charity.
Then you come back to us and we run all these models and say, yes, you can give $100,000 to charity every single year, and it doesn’t impact your plan, and there’d be some tax benefits. And then the big question hits, well, where do I actually give the money to?
And there are easy answers to this, and there are a little bit more difficult answers. I equate charitable giving sort of to a lot like real estate investing, where there are easy ways to go, you just don’t get a lot of the benefits, and then there are a little bit more difficult ways to go where more of the benefits show up.
You could go give just a $100,000 check every year to the American Red Cross. That wouldn’t be a problem. It’s going to be very easy for you to do and you’re going to be done. Wash your hands of it. You did your charitable giving for the year.
That being said, that’s the easy way, but the impact of that likely is not going to be as large as if you were to give to smaller organizations, especially at this level, or local organizations.
That’s when you’re going to start seeing a bigger ROI on the type of charitable benefit that you end up seeing. And that’s not a knock against these bigger charitable organizations or anything. There are some great missions out there. But whenever you start to lengthen the distance between you writing the check and the actual good that is done with the check that you wrote, there’s a lot of room for disappearing funds, to administrative costs, to overhead, to varying missions that may not align with what you’re actually hoping to get out of it.
Where whenever you’re giving a little bit more local, you tend to have a lot more oversight of where that money is going. You’re going to write a check and it’s going to do that exact thing. You have a lot more visibility.
Now there are downsides to that as well, and we can talk about that today. But if you look at a local organization, what I’d recommend in your case, because $100,000 is a significant amount of money, especially at a local level, you can go to a local organization, a local charitable organization, a local humane society, or a little league field, and you put $20,000 or $30,000 down and you are completely changing that entire organization and possibly their future.
And that’s just $30,000 in one year, not taking into account the fact that you’re looking at $100,000 every single year.
Which brings up the next problem, that you need to look at this as a way for you to start a multi-year commitment with one-year commitments. In other words, you don’t know where you want to put the money now. No issue there. There’s no rule that says you have to go right now and spend $100,000 just at one place.
You can start dividing it up. I guarantee you that for all those local organizations that are out there fighting for $1,000 or $2,000 apiece, if you were to find five to ten around your local area and go in and say you would like to make a $10,000 to $20,000 donation for that year, and then start interviewing them on what they’re going to do with it, these are fun conversations.
We sit in these conversations with clients all the time. These are great. They’re happy conversations. They have great ideas. Everyone has an idea. If you go to any of these organizations and say, how would you spend $20,000, I guarantee you they have a list of how they would spend $20,000 and what they’ve been trying to save for.
So you basically ask for that presentation. How are they going to use it? How is it going to work? Who’s running it?
That’s where we tend to start to have a little bit of issues, around leadership, transparency, accountability, on some of these small organizations. You’re going to have to be a little bit more involved in that process. What you don’t want to do is just provide blank checks and hope that it’s done with however you want.
Now, some people choose to do that, but usually when you hear about that, that’s from relationships that have already been established in the past. In other words, you’ve been giving to the local humane society, you know the board, you know who’s running the organization, where their funds are going, what types of campaigns they’re running right now, and you’ve been funding them for years.
Then there hits a certain point where you’re okay just writing a $50,000, $60,000, or $100,000 check for them, because you know where it’s going to go and who’s running it.
But to start building up those relationships now, it’s a little bit of a fishing exercise. You’re going to throw a little bit of money into a lot of different organizations and you’re going to see who uses it the right way, who does what they say they’re going to do with it, where you get the most impact, and what’s going to be most enjoyable for you.
One of the great things about charitable giving while you’re alive, as opposed to as part of your estate, is that you’re able to see the benefits of your giving. You’re able to provide this level of accountability. You’re able to have access to leadership and talk to them about what goals they should be pursuing and how you would like to help them achieve those goals together.
So it’s a great opportunity. I wouldn’t take it as a deterrent that you don’t have a personal connection to a charity. A lot of people don’t have personal connections to charities at first. Miraculously, once you start giving money, then you’ll have a personal connection to those charities, and they’ll know you by name as well.
So there’s no limit to all the different organizations that are out there. That can be overwhelming, but you have to start somewhere. Start going to some of these organizations, thinking about what you enjoy, what resonates with you in your community, and a lot of times you’re going to see those opportunities continue to open doors for you.
Question 2 – Wash Sale Rules Across Multiple Accounts
Listener:
And now on to our next question. We have about $10 million invested across multiple taxable accounts and try to do tax loss harvesting between similar ETFs, different custodians, and automatic reinvestments happening in the background. I’m thinking we may have accidentally triggered wash sales. How concerned should I be, and what should we be doing differently going forward?
Stephan Shipe:
So, common issue. It’s not generally as big of a problem as people think about until you have to start self-reporting things.
What I mean by that is your broker will report a lot of the wash sale activity as long as they can see what’s going on. It’s when they can’t see what’s going on that it becomes impossible for them to report any wash sale, which ultimately comes down to you self-reporting.
So let’s take a step back and think about your situation. Wash sales, just to make sure we’re all on the same page, what will trigger a wash sale is you go in and sell an asset in your account. Let’s say you own Ford stock and it drops 10%. You go sell it to capture that loss and you’re going to write it off. But then the next day, you go buy Ford stock again.
Well, the government looks at that and says, you really didn’t sell it. You still own the same amount of Ford you did yesterday, but you were able to allow yourself to have this loss. So they disallowed that loss. In fact, they really reset your basis in that situation so that you aren’t able to take the deduction on that loss at that time.
So we have a couple of things at play. One is the timing aspect. You can’t buy identical or substantially identical investments within 30 days. So if I sell Ford stock today at a loss, I’m not going to be able to write that loss off unless I wait 30 days, 31 days, until I buy Ford stock again.
Now where the gray area of wash sale rules has really started to take hold is in this idea of substantially identical investments. So the IRS looks at this and says, well, what if Stephan goes and sells an S&P 500 fund from Vanguard, sells it at a loss, and then goes and buys a Schwab S&P 500 fund the next day? Do I have the same investment in my portfolio?
There’s no rule associated with that other than they can’t be substantially identical. Now, my personal opinion, you look at that and I would say those look pretty substantially identical to me when they hold the exact same things and the same funds. But I’ve heard arguments from people that say, well, those are two different companies. One’s Vanguard, one’s Schwab. So that alone makes them a little different.
And then you have others that say, well, if I sell an S&P 500 fund and I go buy an S&P 1000 fund or a Dow 30 fund, then that’s different enough. Now you have a completely different set of underlying investments. So your correlation may still be higher, but they’re not substantially identical in my opinion.
And this is exactly where the gray area is. And you could play this game all day long trying to see which fund is substantially identical to another fund. And if you look online, you’ll see tons of different tax loss harvesting pairs. That’s why they exist. People have come up and said, if I sell this, I could buy this, and it’s different, but it’s the same, right?
I’m selling the NASDAQ, but I go and buy an S&P 500 growth fund. That’s going to be mostly tech. I sell one small cap fund and I go buy another small cap fund. So it’s not only individual stocks that can trigger these wash sale rules. It can be ETFs, index funds. The similar exposure is what creates the issue.
Now, when people get in trouble with this, a lot of times they didn’t even know they had a wash sale issue. I’ll get emails that say, “Hey, Stephan, I don’t know what happened. I got this alert that I just created a wash sale,” and they’re worried about it and everything else.
A lot of that comes from dividend reinvestments. This is a common culprit. You have dividends that are automatically being reinvested. And by doing that, you sell a stock in one fund or you sell one stock, and then dividends get reinvested from either part of that stock or another section of the portfolio or in a different account.
Now you’ve created a wash sale because you went and bought the same security, even though it was a small amount, within those 30 days.
That’s not as much of a problem if your securities or investments are all held at the same broker, because what will happen is they’ll be able to identify that and say, “Hey, you just re-bought Apple stock after you sold it for a loss last week. So that’s a wash sale. You’re not going to be able to use that. We changed your basis around.”
And they’ll report that on your 1099 at the end of the year. So that doesn’t create as much of an issue.
Where it creates an issue is when I have a brokerage account over here that I sell something in, and then I have another brokerage account at a different custodian, and I buy something over there, or I buy something substantially identical to it. Now I have a wash sale that no one knows about except for me.
And the risk there is maybe I don’t even know that it’s occurring if I don’t understand these rules.
So it is really important when you’re thinking about rebalancing and tax loss harvesting that you’re not only looking at wash sale risks for an individual account, but all of your accounts collectively.
I’ll throw another one at you. Your IRAs get mixed into this as well. This is a big area where people don’t realize it. They say, well, what does my IRA have anything to do with this? I’m dealing with a brokerage account. That’s where my losses are. I can’t take losses in my IRA.
That does not matter. If you go sell GM stock for a loss in your brokerage account, and then you go buy it in your IRA, that loss is now completely disallowed. It doesn’t even reset your basis. It’s gone. You don’t get that loss anymore.
So that is a major risk.
Now, the common areas where you’re asking what you should be doing differently going forward, I think you need to be really careful about when you’re selling and what you’re going to be buying.
I would shut off dividend reinvestment unless you’re really opposed to touching your account throughout the year. Dividend reinvestment ends up causing a lot of problems, especially when you’re doing rebalancing and tax loss harvesting and trying to actively manage your portfolio.
Especially with rates where they are now, if your broker has a good cash management system in place where dividends are automatically swept into a money market, you’re not missing out on much by taking that average one-and-a-half to two percent in dividends and holding it in cash earning three to four percent while you rebalance throughout the year.
That doesn’t mean you never reinvest it again. What it means is you end up with a little bit more of a cash pile at the end of the year that you can then reinvest, and it can actually help with rebalancing as well.
Dividend reinvestment usually keeps pushing money back into the same exposure. If you’re collecting dividends in cash and then deploying them intentionally, you don’t have to worry about triggering losses or wash sales there.
The big thing to keep in mind is that you are ultimately responsible. Just like with taxes in general, you have to understand where your wash sale exposure is, whether or not you’re investing in substantially identical investments, and you have to make that call.
Taxes are self-reported. And in this case, you can’t rely completely on your broker, especially when you have multiple custodians like you do.
From the Field – Mike S. Blake, Business Valuation
Stephan Shipe:
And for today’s From the Field interview, we’re stepping into the world of business valuation, a topic that can play a major role in planning transactions and ownership decisions.
Today we’re joined by Mike Blake, a business appraiser and managing partner of a boutique valuation firm that works with founders and family-owned businesses on transactions, equity planning, and wealth transfer involving closely held businesses. Mike spends much of his time helping families understand how valuation works in practice, including how ranges are determined, how discounts function, and what holds up under IRS scrutiny.
So Mike, welcome to the Scholar Wealth Podcast. To start, why don’t you give us your version of your background here and the work you do today.
Mike Blake:
Well, hi, thanks for having me on. I think you probably did as well as I could have, but I am a business appraiser, second-generation appraiser, actually, as it turns out. I’m a recovering venture capitalist and investment banker.
Unlike a lot of my colleagues, I’m not an accountant. I’m about the worst accountant you’ll ever meet in your entire life. I don’t even do my own taxes. So as long as we stay away from hardcore tax and GAAP questions, we’ll be fine.
Stephan Shipe:
I think both of us would like to avoid the hardcore GAAP questions as well, so that’s completely fine.
You mentioned second generation. How did you make that shift from investment banking, private equity, and then into business valuation? Was that always something you enjoyed, or how did that transition happen?
Mike Blake:
It happened kicking and screaming. And I’ll tell you why.
On the one hand, I enjoyed venture capital, but I wasn’t very good at it. It was my first job out of school. When you get into venture capital and you’re young, you meet all these entrepreneurs and you just want to fund everybody. And that does two things. It makes you popular, and it makes you poor. And that’s not a great combination.
Investment banking, frankly, I was good at. But the problem with investment banking is that the client becomes the enemy. And the reason for that is because I only make money if the client sells. Once I’m engaged to that client, my goal then is to convince the client to sell. At least that’s the way the monetary incentives are set up.
And I know a lot of investment bankers are now screaming, saying, “I don’t do that. You can ask me. We’re not crooks.” And that’s right. Most are not. There are some that are.
But I could never really get comfortable with that incentive structure. So I decided that I was a better referee than I am an advocate.
Why kicking and screaming? Well, and you can attribute this to a proud son if you want, but my father ran the valuation practice for Ernst & Young North America for about 25 years. And he testified as the star financial witness in cases like AIG, Enron, the Parmalat bankruptcy, the New England Patriots antitrust suit against the NFL.
So my dad was basically the LeBron James of valuation. And I was gonna be Bronny. The problem is, valuation turns out to be the only thing I’m good at that I can make a decent living at legally.
So I wound up being sort of drawn back into that orbit again about 20 to 25 years ago.
Stephan Shipe:
Perfect.
When you’re doing this work now, there’s a big difference between valuation in a VC context, an investment banking context, and what you’re doing today. When people think about valuation, the most common thing I hear is everyone just wants the number. They say, “Well, what’s it worth?”
Tell us a little bit about what actually goes into that. Because as you mentioned, it’s not just ratios and accounting. What should people be thinking about, and what’s wrong with the idea that you can just put everything together and get one clean number that represents what a business is worth today?
Mike Blake:
So I think what a lot of people misunderstand about value is that value is not truth.
To paraphrase Raiders of the Lost Ark, if you’re looking for truth, go take a class in the philosophy department. Valuation is not an element of truth. Valuation is a narrative. It’s a story. It’s a thesis. It’s sort of a gravitational pull toward a particular space and time on the financial plane of existence.
That sounds metaphysical, but valuation is kind of like that.
So when we talk about point estimates of value, we’re talking about a particular narrative. And one of the things that frustrates a lot of clients, and frankly frustrates a lot of practitioners, is that two practitioners faced with a similar fact set can come up with radically different answers.
And part of the reason for that is because valuation is not a science. Now, it’s often referred to as a mystical art or a dark art, and I have somewhat of a sense of humor about that. I’ve got this little Gandalf figure that I keep on my desk to remind me of that reputation.
But it’s a craft. And it’s a craft that blends objective data with informed professional judgment. The synthesis of that is an opinion of value that we call an appraisal.
Where clients are starting to elevate their thinking is realizing that the number is important, but why you got that number is at least as important as the number itself. The credibility of the analysis, and the fact that a properly done appraisal is full of actionable intelligence that can be used to optimize the value of the asset in question.
Stephan Shipe:
Is that to come in with that story? Because I agree that one of the biggest things that I see is how you tell the story of a business, how it fits into the current landscape, especially when you start dealing with synergistic partnerships and all of this.
Is that up to you, or is that the owner coming to you and they have to tell you that story, and then you put a price on that story? I guess where are you in that process? I don’t know how to describe that in a way that’s like, are you on the team or are you truly the referee?
If somebody looks at you and says, “Here’s my business,” and they don’t tell you the story, is it your responsibility to come up with a story for them to increase the valuation? Or is it to say, “Here’s what I think the valuation is”?
Mike Blake:
Yeah, so it’s definitely not my responsibility to create the value story for them to try to increase their value, at least not in an instance where I’m acting as an appraiser.
Now, there are certain engagements where I’m not acting as an appraiser, but rather I’m acting as an advisor and advocate, a consultant for the client. In that case, I can do that. I can use the levers of value to help my client negotiate the best deal they can.
Because to me, negotiation boils down to two levers. One is asymmetry of information. Two is knowing what your walkaway point is.
So my role is to help create equilibrium in terms of asymmetry of information, because many buyers have bought many companies. Most sellers do it once. And that’s taking a knife to a gunfight. So I’m there to stand next to them with a gun to make that a more even fight.
And then the knowledge helps you know what your walkaway point is. Because if you’re never willing to walk off the car lot, you’re never going to get a very good deal on the car. And that’s true with businesses as well.
But in most cases, my job is to be an appraiser, which means to be a referee. And what I tell my clients is this. It does me no good, and it does you no good, to retain me and have me tell you something that I don’t think is the most robust, credible answer.
Because if I send you out into the marketplace with a value that made you happy in the moment, the market is going to educate you very quickly that it was not a reliable or credible value. And then you’re going to be very disappointed. And you’re going to come back to me ten times madder than you would have been if I had given you a disappointing value conclusion at the outset.
So I tell all my appraisal clients that you may not like what you hear, but you need to hear my best judgment. Because going out into the market with something that isn’t that is ten times worse.
Stephan Shipe:
When it comes to those value drivers for someone walking into this knife-to-a-gunfight type of scenario, are there any low-hanging fruit you see that most founders or families miss?
Things where, if they just had six months or a year to make some changes, they could materially increase the value of the firm.
Mike Blake:
You know, the cool thing about businesses is that businesses are created and run by human beings, just like you and me. And 95 percent of business problems or weaknesses are human-created, which means 95 percent of business problems are human-solvable.
It’s just a matter of will. And frankly, in many cases, it’s a matter of the willingness of the client to solve them.
So the first issue is customer or client concentration. Anytime you have more than 10 percent of revenue coming from a single client, the market starts to discount your company fairly rapidly. That becomes a significant risk lever.
The second is product concentration. Are you a one-trick pony, or have you diversified?
The third is over-reliance on the owner. The question I ask is this. If you went on safari, got off the plane, threw your smartphone into the river, and came back in three months, what would be left? On one end of that spectrum is a thriving business. On the other end is a smoldering crater.
Question number four is my favorite question, which I ripped off from Warren Buffett. If you raise your prices by 10 percent, what happens? Many businesses simply do not charge enough. And they discover that if they have the courage to raise prices even a little bit, they suddenly make a lot more money.
And fifth is standardized processes. It’s remarkable how many companies still fly by the seat of their pants. But by simply documenting processes, whether through writing, video, podcasts, smoke signals, cave paintings, whatever it is, something, anything, owners can increase the value of their business.
And notice that with the exception of pricing, none of these involve selling more. They’re all about de-risking the business, which is the easiest way to improve value. And when you work the math, it’s also the most leveraged way to increase value. A little bit of risk reduction goes a long way.
Stephan Shipe:
How does that come into play with control discounts, non-control discounts, and liquidity discounts?
How does that affect valuation on the negative side? Because you just gave great ways to increase value, but then discounts get applied afterward. And maybe you could talk a little bit about why someone might actually want those discounts created, because that’s another aspect where the IRS side tends to come in.
Mike Blake:
Yeah, you generally want a low value in a few cases.
One is gifting or preparing for an estate event. You’d ideally like the value of the business, or the interest being transferred, to fall under taxable thresholds.
You may also want a lower value to make it easier for the next generation to buy into the business.
If you’re in the unfortunate situation of divorce and you’re the moneyed spouse, you want your value to be low.
So there are plenty of scenarios where an owner prefers a lower valuation. And that’s something you can manage.
Take lack-of-control discounts, for example. One way to optimize them is to gift shares in smaller increments rather than large chunks. On a per-share basis, the lack-of-control discount is usually larger for smaller ownership interests.
You don’t need complex math to understand this. Would you apply a larger discount to a 49.9 percent interest or a 1 percent interest? The discount is much larger for the 1 percent interest because there’s almost no ability to influence company decisions.
A common mistake I see is owners trying to simplify by gifting 25 or 35 percent chunks. But by doing that, they’re not optimizing their tax outcomes.
And one important IRS nuance is this. The IRS does not assume that separate gifts, even to the same family member at different times, will be voted as a block. Each interest must be appraised as a standalone ownership interest.
That’s one fairly straightforward way to manage value by optimizing lack-of-control discounts.
Stephan Shipe:
And how does that play into lack of liquidity? Are those additive? Can you stack them on top of each other? And are there any rules of thumb around what those discounts look like?
Mike Blake:
Yeah, so let me answer the second question first because it’s easier. So the general rule of thumb, and I say this with some authority because I trained with the person who established the valuation review program within the IRS. So I’ve got some inside baseball. The IRS is much more likely to closely review your gift tax return if the combined minority and marketability discounts are over 40%. Now that doesn’t mean you’ll never get audited under 40%, but the likelihood goes up significantly. And there are a couple of practitioners that have made a fantastic living by applying much more aggressive discounts that are not unsupported, by the way. There’s a guy named Ashok Abbott that does a really good job of this.
And he finds clients that are willing to go to war with the IRS and he makes hundreds of thousands of dollars on these cases and as an expert witness because he takes and supports Combined discounts of 60 70 80 percent and and he often wins by the way But not everybody says, know, I want to go to war with the IRS I’m willing to I’m willing to put my name on that court case and we’re gonna do this for five to ten years so as a rule of thumb, not that I calibrate to this, but to answer your question, the IRS is much less likely to challenge combined discounts of over 40%. Now, under 40%, sorry. Now, the answer to your first question, which is the combination of liquidity and marketability discounts, there is a raging debate and there has been for decades within the appraisal community over that exact same question. Arguments have been made that majority discounts, I’m sorry, majority stakes and 100 % stakes in companies are always marketable. I don’t take that position, but that’s the position that many people take, so minority discounts are inherently non-marketable and therefore any minority discount that you might compute or estimate inherently includes a discount for lack of marketability. I’m not sure that that’s the case. I do think there’s a differential of marketability between a controlling interest versus a non-controlling interest. But even under the best of circumstances, it’s hard to sell a privately held, closely held company. It’s hard to sell even the majority stake if it’s a fractional interest in a company and the market sort of reflects that. So I take the position that a minority discount, any marketability discount are often appropriate.
That gets into the, you know, the 1 % versus the 49%. And also, by the way, you know, what if your vote is a swing vote? Meaning that what if there are three shareholders, there’s a, there’s a 48 % shareholder and there is a 51 % shareholder, and then I’ve got the remaining 3%, right? Or 1%. You know, I think I might be able to, I might be able to impact with my small share, might be able impact policy. And so all of a sudden that swing vote share becomes much more valuable dollar, you know, a share for share than it would on a minority basis. So yes, absolutely. And that’s an extreme case, but the more shareholders there are, generally speaking, the greater the number of shareholders that there are, the less valuable a large share becomes and the less of a penalty you necessarily get with a lower percentage because you’re sort of in the same boat as a lot of other people. So this is a classic case where you have to understand the facts and circumstances of each case as it comes along.
Stephan Shipe:
We’re seeing that now with a lot of these companies staying private longer. You have these huge private companies that have decent liquidity for private shares from employees. And the company can affect that as well, right? Which I imagine has to be taken in. If the company allows buybacks from employees and some sort of liquidity, then would that also lead to more marketability or more liquidity there? Yes. I find it fascinating that you could go into all of these different levels, because it really does depend on the specific circumstance of the company and the company’s policy. So I could change a policy for the company and add liquidity essentially even to a private company for shareholders, which would increase the value of all of the other owner shares.
Mike Blake:
Yes. And, you know, one of the things that is often overlooked is that you can synthetically create any kind of security you want. And the implication of that is that people who do what I do have to kind of become amateur paralegals, because that means you have to read a lot of documents with dry and confusing and arcane legal language to understand exactly what those restrictions, or lack thereof, on transfer are. How does that impact your discount for lack of control if there are drag-along rights, meaning that if the seller sells, you have to sell along with the majority owner of the company, right? Or what happens if there are tag-along rights, meaning that if somebody sells their shares, you’re allowed to sell your shares, you have the right to sell your shares on the exact same terms?
What if there’s a right of first refusal, which is sort of an embedded short call that I think is properly valued using game theory? So these things can be very complex. And I think the really sharp estate attorneys are well aware of these levers that are out there that sort of combine contractual restrictions with financial theory to optimize or kind of produce the discount that they want, not because they’re manipulating the appraisal, but because they’re creating the appropriate conditions that lead to the discount that they’re trying to achieve.
Stephan Shipe:
That’s exactly what I was wondering. It seems like there would be a lot more opportunity for updates to the actual organization of a company that could drive this up and down even before it gets to the appraisal perspective when it comes to discounts on liquidity.
Mike Blake:
For sure. One thing I’m finding myself called upon to do more now is to consult with the client and the legal counsel on how to structure their agreement or their transfer agreement or their operating agreement in order to lead to the type of discount that they’re hoping for. And say, hey, we’re thinking about doing this. Run a model for me that shows how, if you were the appraiser, that would impact the discount.
It’s a practice I’m surprised I don’t see more, because I’ve saved millions of dollars of taxes for clients just by taking that additional step, for fees that are a fraction of that.
Stephan Shipe:
And from a mindset perspective, and we talked a little bit about the gifting and the estate considerations, but as we wrap up here today, when you’re talking to founders or families thinking about valuation, or one of these major events where, as you said, they’re going to sell once and they’re likely selling to someone who’s bought multiple times, what is one mindset shift that you would encourage when it comes to valuation?
Mike Blake:
I think the mindset shift is to avoid thinking about fair value. I can’t tell you how many times I’ve had clients come to me and they say, all I want is fair value. I say, great, we’ll do the assignment. And then we do the assignment and they get what I call a fair value face. They see the report, they read it, they furrow their brow, they kind of crinkle their nose and frown. And then they want to know what unfair value is.
If you shoot for fair value, what you’re doing is you’re shooting for average, which is a bad negotiating tactic because you’re starting from a perspective where your best-case scenario means you do only average. But that’s not how you prevail in a negotiation. You prevail in a negotiation by taking a strong position and then, over time or over the course of the discussion, trading things away. That’s going to get to maybe a different value, but your hope is you’re going to end up better than what you would have accomplished with a statistical average. So I think getting out of the fair value mindset is really important.
Stephan Shipe:
So a great way to wrap up that conversation. Why settle for average? Perfect.
Mike Blake:
Absolutely. You don’t need my help to settle for average. On average, you’re going to get that.
Stephan Shipe:
Well, Mike, thank you so much for being here today. Learned a lot. It’s always an interesting discussion. Appreciate you coming on.
Mike Blake:
Well, thanks very much for having me.
Outro
Stephan Shipe: And that’s our show. Thanks for listening and we’ll see you next week!
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