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SPACs are currently all the rage in financial media.

Why? As with any investment being heavily promoted, you can almost always understand by simply looking at the incentives. SPACs are no exception.

What is a SPAC?

SPACs, previously called “blank check companies,” have been around since about 1980. The technical definition of SPAC is “special purpose acquisition company.” A SPAC is an alternative way for a company to go public. Most companies are private, meaning they are owned by a small group of people and do not have to share their financials with the world. However, as companies become larger, they often open their ownership to the masses by going public. Drawbacks to going public are increased regulation, a larger group of shareholders to answer to, and the requirement to produce your financial statements for the world to see. Companies go public to have easier access to cheap financing.

The traditional route of going public is through the IPO, or initial public offering process. At IPO, a company first offers its stock to the public and keeps the money from the proceeds to finance its operations. The IPO process usually takes about 18 months, drowns the management team in paperwork, comes with hefty fees paid to bankers, and brings in an unknown amount of financing. A SPAC is a little different.

How does a SPAC work?

A SPAC is a shell company that goes public via IPO at a discounted cost and expedited process. The only asset of the shell company is cash. The SPAC management team (ideally experienced managers) raises the cash in the shell company from investors. The cash will be used to complete an acquisition of a private company. The new combined publicly traded entity is the private company’s operations plus the SPACs’ cash, a much simpler and less expensive process for the private company to go public, and the private company knows they will receive exactly the amount of cash in the SPAC.

There are three stakeholders in a SPAC: the experienced management team that invests a small amount of money and creates the SPAC shell company, the private company being acquired, and the investors who provide the majority of the cash. The incentives are as follows: the management team receives outsized ownership of the company relative to the money they invest; the private company gets certainty in the amount of funding received and easier access to the public markets than via IPO (not to mention an experienced management team to bounce questions off); and the investors who provide the cash are hoping that the management team they are putting their cash with will be able to earn returns larger than the investors could earn themselves.

Who wins?

Currently, the incentive structure is positioned to massively favor the management team. If you notice who is promoting the SPACs on TV, it is usually the management team. How favored is management? Here is an example: A SPAC is being raised by a company a handful of my clients are invested in; we’ll call it Company A. The terms of the SPAC are that Company A puts in $6.6 million to receive 20% ownership of a $230 million SPAC—20% of $230 million is $46 million. Company A puts in $6.6 million to receive $46 million as long as Company A completes an acquisition. Even if the company acquired by Company A is a total loser and drops in value by $150 million its first day of trading, Company A’s 20% share of the remaining $80 million is worth $16 million. Company A gains about $10 million, while investors in the SPAC lose $150 million. In addition, if the SPAC performs well, Company A gets to purchase more shares at an advantaged price which lessens investor gains. This is a typical structure for a SPAC; easy to see why SPACs are all of the rage now—easy to promote SPACs if all you have to do to become wealthy as a SPAC manager is complete acquisitions even if they incinerate investor money!

Who loses?

As an investor in a SPAC, you are effectively paying Company A (or whichever management team founds your SPAC) a very high fee to pick a company to invest in for you. Historically, paying high fees for investments has not been a rewarding strategy. At Abacus Planning Group, we focus on low-cost investments, and we go to great measures to understand the incentives of all stakeholders before making an investment.

Incentives, more than opportunity, likely drive the SPAC popularity. It is not because a SPAC is going to magically offer amazing returns (unless you are a SPAC creator). The current structure incentivizes management to buy any company possible, good or bad.

While this article may sound critical, there is nothing obviously dubious about SPACs. If SPAC incentives become more balanced, SPACs could provide an effective alternative to the inefficient IPO process. However, as with any investment, earning outsized returns in SPACs is difficult and requires thorough research before anyone should consider an investment.

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William R. Jeter

For many, budgeting has a lot of negative connotations. Tracking where money comes from and where it goes leaves some feeling frustrated and guilty. Having a budget puts you in control of your financial life and allows you to choose how your money is spent, not wonder where it went. Creating a personal budget can result in peace of mind and self-confidence. If you are honest and realistic with yourself, this 5-step method will be a successful process for creating and conquering a budget.

Step 1: Separate fact from fiction.

Remind yourself what you spend and how you spend it. If you’re so inspired, a terrific idea is to write down what you spend and where over a week or two. As simple as this exercise sounds, you will be surprised at the “found money” you will discover (the cash you probably don’t even realize you’re spending).

Step 2: Separate fixed expenses and variable expenses.

The fixed category includes things like your mortgage, car payment, school costs, insurance, etc. The second category includes things like your morning coffee, how many groceries you buy, how often you shop for clothes, etc. The goal is a clear picture of the money that flows through your life—how it comes in, and how it goes out.

Step 3: Separate how you live and how you want to live.

Once you have your expenses separated, review and create your guidelines for spending. A budget provides an opportunity to be proactive and intentional by serving as a blueprint to guide you toward your personal goals. The goal is to build a plan that puts you in control and supports the real priorities in your life. This is where you clarify the priorities in your life and settle on a plan that will support the direction you want to take.

Here is a summary of general guidelines when creating a budget. Remember the general rule of thumb is to allocate 50% for needs, 30% for wants, and 20% for your future. No two budgets are alike. If you live in a metropolitan area, chances are your housing budget is going to be much higher than if you were to live in the suburbs, just as if you have a family with three children, your food budget is going to be much higher than a single person’s food budget.

Percentage of budget to allocate toward:

• Housing 25-35%
• Food 10-15%
• Savings 15-20%
• Transportation 10-15%
• Giving 10-15%
• Personal 5-10%
• Recreation 5-10%
• Medical/Health 5-10%

Step 4: Separate wanting to change and acting to change.

Once you establish your goals or spending choices and create a budget where your spending categories add up to 100%, the next step is to put your wishes and plan to action. Continue to track your expenses each month at first. Take 10 minutes to evaluate where you underspend, overspend, and whether your spending matches your goal. After six months, consider adjusting your budget if you have consistent over/under spending.

Step 5: Put it all together and use resources to keep you on track.

Creating a budget requires a lot of work, so don’t let it all go to waste by not maintaining it. An abundance of resources are available to help you create, evaluate, and maintain a budget.

The following list includes various resources for creating and maintaining your budget. Explore the resource list to find the best tool for your personal situation and needs:

• Microsoft Excel has a few budgeting tools that may help people who prefer to track expenses in a spreadsheet.
• Many major credit card apps include features to help consumers track expenses and create a budget.
• AARP provides simplified budgeting forms to help you get everything easily organized on paper: www.aarp.org.

The following are budget applications that allow you to track all expenses (mortgage, credit cards, bank accounts) in one place:

• Mint
• Simplifi by Quicken
• EveryDollar
• Clarity Money

Managing your money is an important skill to cultivate. In today’s world, planning is necessary. Your financial health depends on knowing where your money comes from and where it is going, and everyone should feel empowered to make a budget work for them. Budgeting provides the means of telling your money what to do, instead of wondering where your money went.

Download the Smart Column PDF (1.6 MB)

Anne Marie E. Ashworth

Cheryl Holland, along with Ashleigh Brooker and Tiffany Ritchie, participated in a webinar hosted by the South Carolina Women’s Lawyers Association. Cheryl, Ashleigh and Tiffany shared guidance on the multitude of financial issues that all women face from the beginning of their career to well past retirement. 2020 has been and continues to be an especially challenging year for professional women, women business owners, women with children and women caring for aging family members.

Cheryl R. Holland

If your business has more than one owner, having a buy-sell agreement in place is vital. A buy-sell agreement is used to determine in advance how a potential sale of the business (or a portion of the business) will transpire. Navigating these decisions ahead of time can provide peace of mind and financial security for business owners.

If you are contemplating the creation of an agreement with your business partners, or if you are reviewing an agreement you already have in place, consider the following:

1. What will be the sales price?

Multiple methods are available to determine a price for your business sale: (1) You can use a formula based on assets owned by the business, gross revenue, or net profits. (Often the formula will be a combination of these factors.) (2) The owners can agree to an independent appraisal. (3) Occasionally, the agreement will define the price. (This tactic is uncommon unless the sale is imminent.)

Some advantages of using a formula are that it provides a level of certainty, and it forces a conversation between the business partners of what is most important for you and your business. Some downsides include that the formula may not reflect the actual value of the business, and people may be motivated to maximize the value of the business. An owner could have incentives to focus on one area of the business while ignoring others. For example, if the formula is revenue based, one owner may be motivated to grow revenue without keeping an eye on profitability.

The appraisal method also has advantages: Perhaps the appraised value will better reflect actual market value better than a formula. Negotiating a formula with your partner can be stressful and time-consuming. Sometimes it is best to agree to use an appraisal so that you can focus on other, more important aspects of running the business. The primary downsides of using an appraisal are its uncertainty and cost. If you are nervous about uncertainty, you may provide a provision allowing for one party to pay for a second appraisal that will be averaged with the original.

2. What is the payment period?

Do you expect the buyer to pay cash? Will the seller finance the purchase over a term of years? If so, for how long, and at what interest rate? If the seller finances the loan, he may have opportunities for tax deferral and reduction.

As a seller, receiving cash is appealing and reduces your risk. For the buyer, having the seller finance a portion of the sale could further align the seller’s interest in maintaining a thriving business after the sale.

Remember the provisions are intertwined. You can negotiate the price and payment period simultaneously. For example, if one partner is nervous about paying cash, that partner may be able to negotiate the purchase price.

3. Do you want restrictions on who can own the business?

You likely do not want an unknown business partner, so decide in advance to whom the business owners may transfer their ownership without the approval of other business owners. You may want to consider a right of first refusal to the other business owners, and include provisions for what happens to shares when the owner is no longer an employee, what happens to shares if an owner is fired for cause, how to manage divorce or legal trouble of an owner, and/or how to manage the death or disability of a business owner.

4. As part of the buy-sell agreement process, you may want to have a non-compete agreement (as a separate document).

A non-compete agreement will provide some protection from competing with a former partner after a business transaction. A non-compete agreement will likely have both time and geographic limitations on its enforceability.

5. How does the document work as a whole?

Finally, when you review the document, think through how the buy-sell provisions will work together. How will you feel if you are buying someone else’s shares? How will you feel if someone is buying your shares? Having an effective buy-sell agreement requires a delicate balance of being fairly compensated for your ownership interest while still ensuring the business will be sustainable when the buyer is making payments to the seller.

Thinking through these provisions with your partners can be stressful under ordinary circumstances. However, think about how relieved you will be when you do not need to negotiate these provisions when you are under the stress of a sudden need to sell. Having a thoughtful agreement benefits your future self as well as your business.

Jonathan J. Robertson

We make decisions constantly. What will I eat today? When will I take the car for servicing? What do I want to watch on TV this evening? We make many decisions on the fly, either because the answer is obvious or the choice is simple. What do we do, though, when the right answer isn’t so clear or the decision could have substantial consequences?

In early April, a client called to share that both of her parents and her oldest son had lost their job within the space of three days. In tears, anxious for her family’s health, and worried about her family’s financial security, Catherine needed to discuss changes to her portfolio to meet the unexpected financial demand to assist her son.

Sometimes, like Catherine, we are facing a decision when we our emotions are fraught and the risks for making a wrong decision are high. The decision tree is a methodical process that will help you get to the root of the issues involved in any decision and discover what the potential outcomes of your decisions may be. A smart decision can alleviate worry and provide much needed peace of mind.

Let’s look at an example that many of us are familiar with—whether or not to financially assist an adult child—to see how the decision tree can be put to work:

FIRST: Start by listing only the positive outcomes of the decision. Then list all the negatives. By listing the pros first, and the cons second, you will avoid any biases towards or against a decision.

Some of the pros could include: helping your adult child with an immediate financial need allows him to maintain a solid credit score; keeping a child out of consumer debt might preserve her ability to save for retirement or a home in the future. Conversely, with too much assistance, you may compromise your own financial health; you may risk your child’s ability to create their own financial independence.

If you are making decisions as a couple, be careful to listen to each other throughout the listing of all of the pros and then throughout the listing of all of the cons without commentary.

SECOND: Seek perspective from others on the positives and negatives of the decision.

You might seek insights from friends, other family members, or your financial advisor or CPA. Talking through the pros and cons with a second “ear” is an invaluable way to add to both the pros and cons of the potential decision, clarify information, and surface your own values.

THIRD: Can the positive aspects of the decision be enhanced, or can some of the negatives of the decision be mitigated to make the decision more appealing?

For example, your CPA might suggest that a gift of stock with a low basis to an adult child with no income can result in no income taxes on the sale of the stock, which would mitigate the financial impact on you. Your advisor might recommend a low-interest loan to an adult child, which sets boundaries for financial assistance while providing support in dire circumstances.

FOURTH: Stop and assess whether or not the decision is still the right one. A decision of YES may be apparent at this point, or the process may need to be taken one step further.

If the decision is still not clear at this point, find someone who can answer any questions that still remain.

LAST: Once any lingering questions have been answered, imagine what the results of the decision would look like in the future. Think five years from now to see what the decision will look like. For example:

What is the likelihood that my son will have gainful, meaningful employment within the next five years? Will our family dynamic change in positive or negative ways?

Projecting the decision in your head will allow you to envision what the decision will look like down the road—beyond tomorrow.

Twelve to 18 months after making the decision, look back at what you originally thought the end result would look like. Does the mental picture envisioned after making the decision match the reality of what the decision looks like after some time has passed? Your ability to think through the outcome of your decision will improve with experience of using this process.

As the late Roy E. Disney once said, “It’s not hard work to make decisions when you know what your values are.” The decision tree model can be a powerful tool to get to the root of the issues around your decision-making and help you make a decision that best aligns with your values and your financial capacity.

Charles B. Flowers

As the owner of a business, you have worked tirelessly to build a profitable company in which you take pride. Now, as you approach retirement, you may be looking for a suitable way to transfer the ownership of your business. An Employee Stock Ownership Plan (ESOP) is a way to maintain business continuity, preserve your legacy, increase employee engagement, and receive favorable tax treatment. An ESOP is one selling option to smooth the transition while at the same time benefiting yourself and your employees.

An ESOP transitions the ownership of a company by transferring company shares to the employees. In turn, employees become owners of the company. An ESOP is a type of retirement plan and, like a company’s tax-qualified retirement plan, is governed by the rules of the Employee Retirement Income Security Act (ERISA). Some well-known employee-owned businesses include Publix Super Market, New Belgium Brewing Company, and Mast General Store.

Plan Structure

In order to establish an ESOP, the company sets up an ESOP trust, a legal entity established to hold shares for employees, and contributes money to the trust. Alternatively, the company can borrow the funds from a bank, the seller, or a combination of both. When the company borrows the money, the plan is called a leveraged ESOP. The trust then purchases shares (some, or all) from the owner. The price of the shares is determined by an outside appraisal of the company.

An individual account is set up for each employee who is eligible to participate in the plan. The trust then allocates company shares to the employee accounts. With a leveraged ESOP, shares are allocated as the loan is paid back. The shares are distributed among all eligible employees in a manner proportionate to the employee’s compensation (or by a formula which ensures a more equal distribution). The shares remain in the employee’s account until the employee retires or leaves the company, upon which time the employee cashes in the shares.

Benefits

An ESOP not only provides obvious perks to employees, but it also provides numerous benefits to business owners looking to sell a business and retire.

Some benefits include:

1. Employee engagement — An ESOP is a good alternative to finding an outside buyer for your business. By transitioning ownership to the existing employees, the employees are able to share in the value they are creating in the workplace, leading to more engaged employees who are invested in the success of the company. This means increased productivity and pride in the business. Moreover, this strategy can provide a significant retirement benefit to employees.
2. Business continuity — Without the disruption of outside management taking over the business, an ESOP is a great way to preserve your legacy while smoothing the transition of ownership. An ESOP provides you as the business owner options for your role in the business as you ease into retirement. Even after transitioning ownership to your employees, you can continue working for the company.
3. Favorable tax treatment — An ESOP may provide tax benefits to both the business owner as well as the business itself. First, the company’s contributions to the trust are tax-deductible. Second, if an S corporation is owned 100% by an ESOP, then the company does not pay income tax on profits since the income flows through to a tax-exempt trust. (If you are considering setting up an ESOP, work with your CPA to learn special tax benefits based upon your entity.)

Limitations

Business owners considering the use of an ESOP in retirement should understand the limitations. In order to buy shares from the business owner, a company must generate enough profitability to continue conducting business. Also, business owners cannot be discretionary about which employees receive shares. Like other tax-qualified retirement plans, all employees who have worked at least 1,000 hours in a plan year must be included.

For the business owner of a profitable company nearing retirement who is looking for a way to ensure the continuity of your business operations, reap tax benefits, and increase pride and engagement among your employees, an Employee Stock Ownership Plan may be the right option for you. Always consult a CPA or attorney for the best advice for you.

Ann J. Beckwith

The Abacus team has a conversation on trends in the markets, the challenges to an economic recovery, and the evolution of your portfolio strategy.

Cheryl R. Holland

Many of us are not sure how long to retain certain financial records; consequently, we often end up keeping boxes of documents that take up precious space.

We created a handout that shows how long you should store your common financial documents and the timeframes for keeping and/or destroying these documents.

If you take care of your financial documents in a timely manner, not only will you be able to free up space, you will also have accurate, up-to-date files that can be easily accessed.

Download the Storage Guidelines Handout (46 KB)

J. Abigail Mason

Benjamin Franklin wisely said, “When you fail to plan you are planning to fail”. Many of us and most of our parents have failed to plan for their own care. The need for extended care is a reality, and according to the National Medicare Handbook at least 70% of those over the age of 65 will need long term care services.

What’s your plan?

Your plan begins taking shape with a discussion about how you will know when you or someone you love needs care and what that care may look like. The discussion may be uncomfortable but is necessary. It is recommended that you write down a long-term care strategy. Most of us plan to remain at home if possible; but what if that is not possible? Answering some questions can help families avoid many of the pitfalls of not properly planning for extended care needs.

• What role will your spouse or your adult child(ren) play in your care needs?
• Where will the care be given, and who will pay for the care?
• Will you hire a professional caregiver service to provide the care for you at home?
• If you are unable to be at home, what facility would be top of the list?
• How am I funding my future care needs?
• How often should the plan of care be reviewed?

How to go about writing the plan and including important documents.

Writing a long-term care action plan can be as simple as answering a few questions and including the right documents. Having a written plan and strategy minimizes the emotional and sometimes physical stress to spouses, partners, or children. Having a plan allows family members to supervise the care rather than being solely responsible for the day -to- day care needs. Having a plan in place allows you to let your loved ones know what you would like to see happen. Thoughtful planning not only reduces stress, it can curtail disagreements between family members that may arise over a loved one’s care needs; keeping the family intact and healthier.

It is important to include those documents in your plan that further support your wishes. Such documents are your Living Will, Health Care Power of Attorney, Do Not Resituate Order, Health Insurance Portability and Accountability Form, Health Insurance Policies, Long-term Care Insurance Policies, List of Medications and End of Life Wishes (which may be as simple as a family discussion documented).

What are some signs that may signal a need for a plan to be implemented?

Dr. Jim McCabe with Eldercare Resources shares the following issues to watch for in a family member that may signal a need for assistance and time for their plan to be put into place.

• Is your relative having problems with memory or decision-making?
• Is the person unsteady when walking or have difficulty getting in and out of a chair or bed?
• Does the home present any danger of falls?
• Is there adequate food in the house and how is the shopping done?
• Is there a good system for managing medications?
• Is your loved one isolated? Do they have interactions with others on a regular basis?
• Is managing money a problem? Are they at risk for financial abuse?

As author and financial advisor Coventry Edwards- Pitt discusses in her new book Aged Healthy, Wealthy & Wise “All of us would love our parents to take the steps necessary to enjoy their later years. We would appreciate clarity from our parents about their wishes for where to live during their later years, their end of life wishes, and the meaning behind their estate planning decisions. But judging by how infrequently these topics are discussed, few of us will have that clarity.” Her book focuses on the practical steps we can take to enjoy our later years and impart this gift of clarity to our own children. No parent wants to be a burden – this is about how not to be.

Susan A. McCants