[IMGCAP(1)]I have always told my clients to call me before they did anything major or new financially to see if there was anything tax-wise that could be done to help them.
Nowadays, there is much less tax maneuvering, but much more from a financial aspect, and it is amazing how accountants can help.
One of my clients was offered a job of setting up and managing an American menswear operation for a world-famous ladies designer. The offered salary was about double what he was currently earning.
The licensee was told by the designer that he preferred that my client be hired to establish the business. This was because of my client’s expertise, élan and reputation in the menswear area. He was jumping out of his boots with the offer and wanted to see me to find out what his new take-home salary would be and what type of deductions he could take against the income.
After a brief discussion I let my client know that I could have gotten him double what he was offered. My questioning revealed that the whole deal hinged on his acceptance. The licensee was one of the largest menswear manufacturers in Italy, with a worldwide sales organization. The association with that designer would add to the prestige of everything else the company was already doing, and the licensee had agreed to pay a royalty substantially above what was normal or economical given the parameters set for the new business.
I told my client that his salary was peanuts compared to the big picture of what was involved and that since the deal was contingent on the manufacturer delivering him, he had “settled” for much too little. I asked him to try to arrange a meeting for me with the principals and I was sure I could get him much more. This was a Thursday afternoon, and all the principals were in Italy. My client was scheduled to see them the following Tuesday.
I had an Italian-speaking secretary at the time. She called Italy and arranged for me to attend the meeting with my client. We were on an evening flight to arrive early morning on Tuesday. On Monday and later during the flight, my client and I worked up a financial projection for the new business. This included a startup timeline, startup costs, and a five-year profit and cash flow analysis. The numbers indicated an even greater upfront commitment than we had discussed, and further that the manufacturer could not make money based on the deal they made unless sales were substantially higher than was indicated to my client.
My client was confident he could reach the higher targets. I then made up a second projection showing much higher sales and included a bonus for my client based on the increased sales. Understanding that I might use these projections in negotiating for my client’s “revised” salary, I threw in some extra items that I could give up on, keeping focused on what I wanted to get for him.
When we arrived in Italy, we were met at the airport and driven to our hotel to give us some time to freshen up. We would be picked up in another hour.
During the meeting, we learned that there had been no projections or financial models done by the licensee, and my numbers became the base amounts upon which the company was going to be capitalized. The size and scope were, if not complete, then a major surprise to them. We spent the entire day going over the projections and in effect “setting up” the company.
I always have believed that if you couldn’t make it come out on paper sitting in the calm of your office, what chance did you have to make it happen under the pressure of running the business, arranging financing, hiring and supervising staff, getting the right sales staff and support, developing and executing a marketing, advertising and public relations plan, opening a showroom, and the myriad other things involved with starting and running a business?
The meeting was held in a stark office with a long narrow table, with my client and me on one side. As the day wore on, a larger and larger group joined the other side. Coupled with them having to excuse themselves many times to speak to the owner, who was in another part of the building, the meeting didn’t even touch on my client’s salary, which was much larger than what had been previously offered and accepted.
The meeting lasted all day until everyone was totally exhausted and we broke for dinner. I actually dozed off waiting to be seated in the restaurant since I had hardly slept the night before on the plane because of my number crunching and thinking.
The next morning (Wednesday) started with the controller and CFO introducing their own hastily drawn up overnight projections, which I saw right away had my client’s previously agreed upon salary prominently displayed.
I knew there was a noon meeting scheduled with the designer in his studio about an hour’s drive away. The meeting here started at 9 am, and I decided it would be better to delay looking at their projections until it was time to leave for that meeting. Since we had a working model at the end of the previous day that we had all agreed was reasonable and set doable objectives and financing amounts that were manageable, I said that there was nothing that could be added by diverting our attention to an entirely new set of numbers and that we should prepare for our meeting with the designer.
The meeting with the designer was to tell him that a deal with my client was agreed to and for him to meet with my client to discuss the clothing line and the marketing of it. I also knew that if we used their alternative numbers, mine would be discarded and theirs would become the benchmark against which I would have to argue. So I sat there and took a position that a deal was struck the night before and there was no reason to go over their numbers, and even if we did, there would be no time to do it carefully and seriously.
They naturally disagreed and we literally sat there for almost two hours, with me refusing to look at their “masterpiece” and with my client sitting next to me busting a gut, feeling he might lose the deal if we didn’t go over their numbers. The manufacturer’s accountants had a micro attitude toward each entry they had made. The company’s general manager had a big picture look and wanted this deal, no matter what!
The arguing for almost two hours was not about the numbers, but was about us looking at them or not. I prevailed because time ran out and the general manager was nervous about how the meeting with the designer would go. In the car ride my client and I were alone with the general manager (and his interpreter) while his staff rode in another car.
I told him we would reduce our proposed compensation package to make him look good with his financial people. But my client still ended up with a package that was more than three times higher than what he had initially “accepted” and approximately seven times what he had been earning!
Nothing beats understanding the situation, plus some careful preparation.
Edward Mendlowitz, CPA, is a partner in WithumSmith+Brown, PC, CPAs. He has authored 20 books and has written hundreds of articles for business and professional journals and newsletters plus a Tax Loophole article for every issue of TaxHotline for 27 years. Ed also writes a blog twice a week that addresses issues his clients have at www.partners-network.com He is the winner of the Lawler Award for the best article published during 2001 in the Journal of Accountancy. He has also taught in the MBA graduate program at Fairleigh Dickinson University, and is admitted to practice before the U.S. Tax Court. Ed welcomes practice management questions and he can be reached at WithumSmith+Brown, One Spring Street, New Brunswick, NJ 08901, (732) 964-9329, or email@example.com.
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