This blog is not intended to provide an analysis of Federal and Provincial relief measures – lots of others are filling that space for us. What we are blogging about is what we are seeing in our business. Before we start, we just want to state that we are all working remotely and that everyone has all the necessary tools required to carry out our tasks. In the event we need to go to the office, we will do on shifts with clear instructions on what to wipe down during our stay and on our departure. So far, so good.
Now for what we are seeing in our business relationships – unfortunately not all of it is pretty.
One concern we see that could impact the philanthropic space is donors whose net worth is built in the commercial or residential real estate business, but are also greatly leveraged. Their businesses are directly correlated to rent cheques, and April’s rent roll will be a strong indicator of where things are headed financially for them. If vacancies are prevalent, these donors will likely conserve cash and in turn, charities will be impacted.
But there are also great stories out there:
- The Conconi Family Foundation made a $500,000, dollar-for-dollar donation to St. Paul’s and VGH-UBC Hospital Foundations. Check out the great work the Conconi Family has done to improve the lives of British Columbians here. Good on them!
- To get food to impoverished families struggling on income assistance or minimum wage jobs, Jacqui Cohen’s donated $12,000 from her Face The World Foundation to The Vancouver Sun’s Adopt-A-School COVID-19 campaign. Excellent choice Jacqui!
These are two great gestures that will have an immediate impact on those in need.
With all the recent budget changes, one of the last tax planning opportunities was life insurance. Sophisticated insurance planners proposed elaborate plans that leveraged a large portion of the annual premiums. Other than having a great business and health, all that was required (we are making light of this) was a medical test and cash flow to support the unleveraged premiums for several years.
Covid-19 comes along and suddenly, no one is willing to have a medical for social distancing reasons and the need for these health care professionals to be in the community where they are most needed. And in terms of cash flow, most business owners are reluctant to commit to several years of premiums when they don’t know where their businesses will be. When in doubt, often the best decision is to do nothing.
We are aware of a few succession transactions that are now on hold for a variety of reasons. As an example:
- An operating business whose transaction valuation is substantially based on goodwill will earn a significant portion of the sales proceeds over time in the form of an earn-out. With uncertainty about the future of the business, the vendor may not receive all the earn-out proceeds and is therefore reluctant to close. In addition, they may be concerns on fulfilling certain covenants.
- A hotel typically has 100 plus employees whose salaries are largely variable based on occupancy. If you are in the process of selling a hotel with excess staff, there may be significant termination costs that either of the parties will have to deal with. Also, a hotel with 10% occupancy has little enterprise value – they only start to make money around 75% occupancy.
And then there is financing. We are finding that lenders are putting new deals on hold until things settle down. And if you are lucky to get financing, you will find that rates are getting up there and subject to change.
We are reluctant to talk about Estate Planning as it’s easy to sound like an ambulance chaser, and that’s the last impression we want to convey. But we will give it a shot:
What opportunity exists for an older Estate Freeze where the value of your business is unexpectedly depressed? Is there an opportunity to transfer value from one generation to the next to look after the grandchildren?
Your old Estate Freeze locked in the value of your business at a certain point in time using fixed value preferred shares. All future growth was for your children – they have common growth shares held by a family trust.
If the children’s common growth shares are depressed in value, consider an Estate Freeze for them at today’s value using preferred shares like you previously did. With proper structuring, all future value can be for the benefit of the grandchildren (using common growth shares and a new family trust).
As the value of your business rebounds post crisis, not only will your children be taken care of, but also your grandchildren. Think education, expensive housing, etc.
Requirement: lots of expensive advice noting tax rules continually change.
Take a Deep Breath – with a N95 mask of course. As George Harrison named his 1970’s album “All Things Must Pass”, Covid-19 too will pass, and we will be back to a new norm. Maybe working remotely and high-end food delivery will be the new norm. For now, follow BC’s Dr. Henry’s advice – be vigilant in social distancing, lots of hand washing, and cough into your elbow.
Be safe, and back to you next quarter.