Why Not to pay your BOARD!
??Dean Anders? Finance Economist Corp Lawyer B.
No Money Acquisition Finance?? Cash Recycling Increase Capital at Zero cost; Self Fund 401k Plans, Salary Sacrifice - Save Tax Reduce Wage Costs; Rescue Failed IPOs, M&As, Private Equity Deals Free Acquisitions Finance
Many people in to Private Equity Acquisitions need someone to check their pulse.
They do not seem to be thinking - for example a question the other day about paying the Board of Directors - sheesh.
If you can not think about the financial numbers for each move you better go back to the sand pit.
Reflect on the consequences of paying a wage to each director and other helpers (there are many ways to pay but one which seems to come in to peoples' mind before they think is a salary) Say you pay 10 people $30k a year for 3 years - on top of that the employer must pay FICA of 7.65% - you do the numberes for a year - that is the reduction in EBITDA - so multiply by 3 the aggregate cost for a year and derive the reduction in the value of the business.
How does the following off-the-wall alternative stack up against your option 1?
Instead of the business paying the 10 people at least 32k a year why not have each of them buy services from the business for $33k a year - which instead of reducing EBITDA it could add $330k a year to earnings and an extra $1m to the business revenue when that initial increase in earnings is plowed back in to the business. If the marketing multiplier is bigger - say 5 times expenditure - increase in revenue could be around $1.5m
Subtract COGs of $0.5m the increase in EBITDA could be close to $1m. Now comes the magic part. By substantially increasing total business earnings to around $3m a year the earnings multiple for valuation can be a lot more than 3. It may be possible to list the business on the share market and get an earnings multiple of 10 or more depending on the industry.
Let's settle for 10 - the increase in the business valuation just in respect of the revenue paid in by shareholding directors comes out at $10m - each of who can get $1m as a capital gain after 3 years for an outlay of $100k ($33k a year of spending). As the tax on Capital gain would be at 15% and the $33k a year expenditure would be tax deductible can you estimate ROI?
and compare that to paying your Board etc. a salary??
Now to make your eyes roll plug in Leverage - have each contributor borrow their annual pay-in. Select an interest rate for the cost of funds, deduct the tax benefit and come up with an after tax cost of borrowing $33k a year for 3 years.
The additional earnings from above would not only be subjected to a much higher multiple for valuation - so too would the balance of business earnings; giving all shareholders a ride up in the higher valuation - particularly significant for all if the business gets listed.
Recompute ROI and then compare paying the Board a Salary.
(By the way - if you are smart enough Capital Gains tax can be zeroed - but that is another story)