Taking care of your net wealth

October 1, 2006 By    

Have you ever filed “pro se” in a lawsuit? If you don’t know what it means (and I wish I didn’t), it means that you represent yourself as your own attorney.

 Jim Hinkle
Jim Hinkle

I did that in one of my divorces because my attorney had to testify for me and therefore could not represent me. Well, let me tell you what an absolute idiot you can make of yourself. Judges don’t like it and neither does the opposing attorney.

The Judge kept asking me if I was trying to testify or question the witness. He couldn’t tell. The other attorney kept objecting, and though I argued her objections, she always won. That divorce cost me a lot. So can your exit from your business if you’re going to do it “pro se”.

Do you have an exit strategy for your business? An exit strategy can include many things. One strategy might be to sell your business to a third party and just retire. Another might be to turn it over to family members through gift, sale or preferred stock bail-out. Yet, another might be an ESOP, selling to your employees.

Most of my clients told me they knew what their business was worth, when in reality they had no clue. When formulating an exit strategy, you need a proper valuation by an independent third party, because turning over your business is one time the IRS will come looking for you.

The value of your business is not determined by how many gallons you sell or some other mythical measure. It is typically determined by three methods: income, assets and market.

Market method involves a multiple of EBITDA (Earnings Before Interest, Taxes and Depreciation) or EBITA. The former is more widely used. Income method includes DCF (Discounted Cash Flows). Your sales mix, tank control, geographic region and many more factors also determine your value.

If you own some substantially appreciated real estate, which buyers want but don’t want to pay for, how does that affect your value? Are you aware it could take two or three years to sell your business, or you might have to split and sell to two different buyers just to get what you want?

There are many different ways to exit your business, each with a different value. There are going-concern buyers, synergistic buyers, privately-held buyers, publicly-held MLP’s, junior MLP’s trying to acquire enough volume to do their IPO, family members, partners and employees, and then there’s just letting it go to your estate. All of them have a different price.

Before you exit (and exit you will), do yourself a big favor and get a valuation done by a knowledgeable independent third party about once every two or three years. You should be certain that they are familiar with propane valuations and that they adhere to the Uniform Standards of Professional Appraisal Practice.

Don’t hire those who will do it for $2,500, just tell you to mail them everything and don’t even bother to visit your location(s). That violates Rule 1 of the USPAP. Did you ever buy a car without kicking the tires?

It’s a little known fact that there are 243 sections and approximately 2,000 regulations of the Internal Revenue Code that deal with the value of your business. What you should know is that if you run afoul of one of these sections, and you have a valuation to hand the IRS, they are required to accept it or prove it unreasonable.

If, however, you get the $2,500 job, the IRS will kick this to the curb rather easily. If you do not have a valuation, the IRS will happily provide you with one, leaving the onus on you to prove it unreasonable. Proving something unreasonable is quite difficult and better left to the IRS.

If you think an offer from a buyer confirms your value, not so. Nothing could be further from the truth. A buyer will only offer what it is worth to them. So don’t even consider what you’ve been offered a fair value. The fair market value is the price in cash or equivalents at which these assets would be transferred from a willing buyer to a willing seller, both being adequately informed of relevant facts, and neither being under any compulsion to act.

An exit strategy, along with an up-to-date valuation, will allow you to get and keep what you feel you should from your business when your rule is over. It’s a better-known fact that over 60 percent of your net wealth is tied up in your business.

I wouldn’t go “pro se” with 60 percent of my net wealth.

James E. Hinkle is president of JEH Consulting, a certified public accountant and business appraiser in Cincinnati, Ohio. He can be reached at 513-697-9422 or at
jhinkle002@cinci.rr.com.

NPGA still focused on safety

Jay Johnston’s column (“In memory of the Safety Committee,” August 2006) spoke too soon about the loss of NPGA’s safety commitment. The article also gets some history wrong, but that’s an issue for another day.

Right now, NPGA and PERC are nearing completion of a new partnership agreement which will clarify responsibilities between our two organizations in the safety area and elsewhere. This renewed partnership will be the culmination of a process that began when NPGA chose to sell the CETP curriculum to PERC.

Mr. Johnston inaccurately portrays the sale of CETP and the move to Washington as forced decisions. Anyone involved in that process will remember that these were strategic policy decisions to reorient and refocus NPGA on the advocacy mission.

NPGA leadership is now in the process of changing the organization to align with the terms of the partnership with PERC. If the Board of Directors approves, the Education, Training & Safety Committee will become the CETP Certification Committee, with a more focused scope.

None of this means that NPGA is abandoning its safety promise to the industry. On the contrary, the changes Mr. Johnston wrote about go to the heart of our renewed focus on service to the industry. Safety continues to be a priority for the association and is NPGA’s number one strategic goal.

We are working closer than ever with PERC to improve the industry’s commitment to safety. There are changes at hand – but these changes are happening today to benefit everyone in the propane industry.

Phil Squair
Senior Vice President,
Regulatory & Technical Services
NPGA

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