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Related topics: Taxes and Transactions, The Letter of Intent – Unlocking the M&A Superpower

In this engaging episode of Cascade Conversations, Eric Green, Managing Director at Cascade Partners, sits down with Daniel Soleimani, the Tax Practice Lead at Butzel Attorneys and Counselors. They dive into the critical topic of pre-transaction tax planning, shedding light on the assignment of income doctrine and the crucial role of early planning in securing tax benefits. Soleimani shares expert insights on rewarding long-time employees in deal structures and emphasizes the vital collaboration between bankers and lawyers to ensure successful business transactions. Tune in for practical advice and valuable strategies in tax planning and business deals.

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Related topics: Taxes and Transactions, The Letter of Intent – Unlocking the M&A Superpower

Transcript:

Welcome to Cascade Conversations.

Join the Cascade Partners team and our network of trusted advisors as we work to demystify the details, terminology, and strategies of acquisitions, divestitures, financings, performance improvement, and restructuring.

Welcome to Cascade Conversations. My name’s Eric Green. I’m managing director here at Cascade, and I have the great opportunity and pleasure to welcome Danny Soleimani, who is the tax practice leader at Butzel Long. Thank you for joining me.

Thanks so much for having me, Eric. Absolutely. I’m excited.

Absolutely. Would you tell us a little bit about Butzel Long, your practice, and a little bit about yourself?

For sure. Butzel’s been around for over 170 years. We incorporated General Motors, we represented the Dodge Brothers as they started their business, and as we’re kind of moving forward here, we’re a full-service law firm with a deep bench working on really cutting-edge legal issues in a variety of industries and practice areas. A very collaborative team-first approach with great people. So really a wonderful place to work with really talented folks and happy to be there.

Yeah, a deep expertise. I mean, when we were preparing and we had lunch, I understood about 70% of all the things you didn’t even say. So, um, tell me why you chose tax law.

Yeah, it’s, it’s interesting. Certainly wasn’t thinking I’d be a tax lawyer, but in, in law school, when the professors start putting numbers on the board, about 75% of of the kids in class reflexively recoil and are automatically out. And I kind of did the opposite. I kind of leaned into the, the math and the, and the tax side of things, and I found comfort in, in the code, uh, and some familiarity with there being actual rules, unlike kind of some of the other amorphous areas of the law. I really enjoyed, uh, the fact that you could be creative but also be bound by the tax code. Uh, and so it’s worked out well.

Yeah, so combination of the quantitative and the qualitative.

That’s right. Yeah. Yeah. That’s fantastic.

Um, at Cascade, we, we serve middle market families, founders, entrepreneurs. Our enterprise value is about 20 million to 200 million. And, and part of what we are doing is the quantitative part and the deal flow and the execution of course, but there’s a lot of qualitative things that you need to take into account when you’re working with these types of families. But things that come up very quickly are tax-related issues, and there’s a lot that needs to be considered pre-transaction. Um, and that’s why we rely on experts like you. Can you, can you help me define first what does pre-transaction mean and what does that planning mean?

Yeah. I would say kind of negotiating the LOI and as you’re negotiating the LOI I found you get in with the owners, uh, you’re starting to look at their corporate documents, their governing documents. Maybe people haven’t looked at them for 10 plus years, right? And you start getting into the questions about, well, who do we want to have? What, how do we want this to be structured? I, I’m a big proponent of trying to reverse engineer a transaction. Let’s figure out what you want. And different owners have different goals and kind of reverse engineer one of many ways to kind of, to get to the goal desired goals. And when you’re in the pre LOI process, you’re talking about those things. You’re having those conversations, you’re kind of understanding what’s important to the business owners, and you have flexibility at that point to make some of these decisions before you go too far down the road of, uh, a, a transaction being baked and running into some of the issues that come up with, uh, trying to do transfers and different things at that time.

Yeah, it, it reminds me, our founder, Raj Qatari, he and I were in a pitch not too long ago, and first thing that the, that the owner asked us was about valuation, and Raj backed him off it and just said, what are you trying to accomplish? Oh, my son’s in the business. We want to see about exchange of, uh, of consideration and how all of the tax consequences would work. So we got off the valuation and we just relaxed to say, what is it that he wants to accomplish? So it sounds like one of the reasons we’re such great partners is the approach in a collaborative way.

Exactly. And I think, you know, kind of in furtherance to that point, right now, we’re getting close to an inflection point with respect to the estate and gift tax and some of the planning that people may be considering as the kind of rather large exemption for a husband and wife that’s at, you know, a little over $27 million for a couple now is set to become halved, uh, in the beginning, uh, January 1st, 2026. So some of those planning items and opportunities that are available here for the next year plus, uh, kind of very important things to think about and take advantage of in terms of transferring wealth to the next generation, which is a very important consideration for many of the, uh, business owners kind of in the middle market that we’ve been talking about.

Right. And you, you had told me at lunch that this transfer, making sure you’re doing it pre LOI because there’s some really specific tax rules that are associated with post LOI, correct, yes.

I think there, there is a, there’s an important doctrine. We’re, we’re kind of discussing it now on a large transaction. We’re working on, it’s called the assignment of income doctrine. It’s a little bit technical, but once you start moving further down, uh, the path of a transaction being completed or all of the events of a transaction being completed, you run into risks that if you make transfers at that time, actually the taxation of what is transferred goes back to the transfer or you lose the benefit of those transfers. There’s been some recent case law in that area. I think the LOI is kind of a, a universal, uh, metric to say, okay, if we’re okay, if we’re making transfers pre LOI, I think you have a little room after that, but the LOI is kind of an important, uh, barometer to say, okay, hey, we’re doing those transfers before LOI where we should be safe from assignment of income issue.

Yeah. And for our listeners, that’s why I didn’t understand most of what he said at lunch as you, as you can tell, but, but that’s awesome. And I think that’s the power of partnership with bankers and lawyers is really to, for us as bankers, to be out ahead of it, preparing our clients, trying to translate all the intellect into what does this really mean? And that’s the strength of, of working together on these types of things.

Um, I know you’re a sports enthusiast, so I had a couple questions for you. Um, Tom Brady or Brett Favre, interesting. Very different, very different styles there. I don’t know if I was ready for that one. It threw you off. You have, you have, you know, very different styles. You kind of have the poised Brady, the, the, the winner, uh, and then you have the gunslinger and Brett Favre. I think Brett Favre oftentimes is a lot more fun to watch, but you got a game to win, gimme Brady. Got it. Got it. And you identify more with Brady or, or Brett Favre. Yeah, you know, I think if you talk to some of my colleagues, they would definitely throw the Brett Favre comp out there a little bit more. And I think I’m probably okay with that, but, got it. Uh, it’s fun to be a gunslinger sometimes.

That’s fantastic because I think of you as a very technical oriented tax attorney, so I would’ve put Tom Brady systematic, just an assassin on the field and making it all happen.

So it’s very kind of you. I’ll take that. I’ll take it. I’ll take that. Yeah. Well, you know, Tom Brady, Brett Favre, you, you know, I feel like I’m in very good company, so, so thank you for that.

An important consideration in, in my opinion, working with these founders and entrepreneurs and families is the people and the teams that have helped to build these enterprises. So as your pre LOI and pre-transaction, what are some of the things that folks should be thinking about, about rewarding the people that help to build that enterprise?

Eric, it’s a great question and it’s a very important consideration for a lot of business owners that have had people with them for a long time.

This is a critical part of the structuring discussion in almost every transaction. And depending on what type of an entity you’re dealing with, this is where I think we can add value in the process in terms of talking through with these business owners tax-efficient structures to get their service providers, employees, people that have been with them a long time, equity in a tax-efficient way. Ideally, you’re starting this planning process years before a sale so that we can maximize employees having a two-year holding period on equities and get the best tax treatment available to them.

We use profits, interests in LLCs taxed as partnerships. We restructure historic S corporations in order to grant incentives to employees. So there are a number of strategies and planning mechanisms that we can employ on the tax structure side to make a founder’s goals happen in the best way possible for them and for the company to match incentives with results. And so very important discussion and a big part of the process in what we do.

Yeah, and it gets back to what you said earlier about kind of beginning with the end in mind. What is it you as a family or as a founder entrepreneur want to do, whether it’s succession planning with your family and your children, or with your employees and just backing into exactly what they wanna’ accomplish.

And, Eric, I think that’s been a big pivot point, at least personally for me, in terms of starting my career as a real technician in the tax world, really being in the weeds on the tax issues, and recently. But something that I’ve enjoyed a lot more is kind of taking a step back and being a real business advisor to these clients, kind of letting them know what’s happening in the market with your experience, looking at a transaction holistically, not just from a tax perspective, but from a succession planning perspective, from a corporate perspective, from a market perspective, all being informed with a tax lens, but kind of offering this holistic view of an advisor. It’s part of what I enjoy most.

 

Yeah. And I think a really nice value add that we can provide to clients is not just the technical expertise, it’s really the holistic approach to looking at a transaction.

Yeah. Well, I think we at Cascade share that value, which is to think of us less than just the transaction experts. Of course, we have to be that, but also that holistic advisor to help people walk through it. Because when you do transaction after transaction, you get a sense of the things that are important and most important is to do with partners that know what they’re doing. And we really appreciate you coming out and being a part of this Cascade Conversation.

Well, one of the things we’ve mentioned, Danny, was about succession planning, and that’s a non-trivial event. It’s a huge part of a transaction. There’s a lot of details. Can you walk us through some of the things that you’re thinking about tactically and qualitatively that our founders should think about?

Sure. I think step one in terms of leveraging the exemption with a larger estate and gift tax exemption that’s available through the end of 2025 is we like to utilize valuations of companies from an estate planning purpose that take advantage of discounts for lack of marketability and lack of control. You’re able to discount the value of the business from an estate planning perspective, transfer value to the next generation at this discounted rate, and allow those assets that have been transferred to grow free from estate and gift tax. When you do this pre-transaction and you have these highly appreciating assets, that’s the best way to leverage your estate and gift tax exemption.

Right. And we’ve hit some home runs with clients where clients have transferred assets valued at $10 million and many years later they’re worth over $100 million. That’s a grand slam. Utilizing that planning early in the process when you can take those valuation discounts before you’ve gotten a private equity offer or an arm’s length comp is the most efficient way to transfer that wealth and leverage your exemption from estate and gift tax in the most efficient way.

Yeah. And stating the obvious. But when you get that letter of intent or that LOI, that’s when there’s an established valuation that the IRS sees as saying, hey, there’s an arm’s length transaction pending, and that would establish the valuation.

Yeah. And it wouldn’t be definitive, but it’s certainly a fact out there that wasn’t a fact before you have that. Right. And so I think a lot still goes into it. I don’t think a value in an LOI is gonna be a binding third-party arm’s length comp, but it is a fact. And before that happens, there’s a lot more opportunity for a valuation firm to take those discounts and allow founders to have the benefit of leveraging that estate and gift tax exemption in the best way possible.

Yeah. Well, I mean, a huge part of the transaction and appreciate you sharing the technical pieces. Remember, he is a sports enthusiast, so there were two game seven basketball NBA conference finals. What’s the probability that the away team wins both?

Very low, very low. It was very surprising. I think I was more surprised by the Minnesota Timberwolves beating the defending champions on their home floor. You don’t see that very often. Pretty wild stuff.

Well, I’m here with Danny Soleimani, unbelievable tax attorney, sports enthusiast, and good friend. Thank you so much for coming out. I appreciate it. Alright.

Thank you for joining us for Cascade Conversations. For more information, please visit cascadepartners.com or call 248-430-6266.

Related topics: Taxes and Transactions, The Letter of Intent – Unlocking the M&A Superpower