Tax Playbook for the Year You Sell Your Business

Speaker 1 – 00:00
Making the decision to sell your business that you’ve put blood, sweat and tears into grow over the course of your
lifetime and career can be extremely stressful. We’re going to talk about the Playbook from a tax perspective to
hopefully alleviate some of that stress.
Speaker 2 – 00:13
From a cash flow perspective, it’s great from the buyer to do an asset sale, but as the seller, it’s probably better for
us as a stock sale to structure this.
Speaker 1 – 00:22
The big drivers here, number one, timings, number two, your entity structure. And then number three would be
who’s the buyer, how you’re structuring your equity, your entity. That should all have an end goal in mind. I hear this
all the time. Can I move to a different state that has significantly less income tax when I sell? Make sure that like
it’s done correctly and you’re not just doing it to avoid the taxes. Year of a sale, the big thing would be charitable
contributions, donor advised fund, charitable trust, family foundation.
Speaker 2 – 00:50
When you’re in that last year of and there wasn’t much planning ahead of time, there’s just not that much to be
done. We can help you get it set up most efficient and again, plan for life after you sell your business.
Speaker 1 – 01:05
Making the decision to sell your business that you’ve put blood, sweat and tears into to grow over the course of
your lifetime and career can be extremely stressful. There’s a lot that has to go into this. It can be a very
overwhelming process that can take months to years. And so today we’re going to talk about the Playbook from a
tax perspective to hopefully alleviate some of that stress, to understand all of the tax implications that go into a
business transaction and how you can best be set up to do this and optimize it in advance in the year that it
happens. Today I’m joined with Nick Rosen. He’s a CPA on our tax side. I don’t think we’ve ever actually done a
podcast together.
Speaker 2 – 01:44
No, we haven’t. First time. Yeah, it’s been with Matt for all of them. So far, so good.
Speaker 1 – 01:49
Nick’s a tax savant, technical expert on the US Tax code.
Speaker 2 – 01:55
Got it all in the brain.
Speaker 1 – 01:56
So we’re going to dive into the weeds. Specifically, if you are thinking of selling your privately held company, what
goes into that and some of the tax implications and how you plan for it. Really a Playbook on what do you do when
you’re selling your business? So Nick, why don’t you just give a overview of like maybe give us an example of how
you’ve Seen clients you’ve worked with in the past, like, what went well, what didn’t go well. Just like a general
overview of like what this process looks like.
Speaker 2 – 02:21
Yeah, I mean, so first, like I, you know, from the top, I kind of want to say a lot of the times the bot, there’s kind of
two types of business sales, right? There’s going to be asset sales and be stock sales. Okay. Most of the time the
buyer is going to push for an asset sale and we’ll hit on that a lot, I’m sure. But one of the main reasons is they’ll be
able to actually depreciate a lot of the property that they’re buying. They’re buying your equipment, they’re buying,
you know, your underlying assets. At that point, they’re not buying the company. Right. So then if you have, we’ll say
a million bucks of equipment on the books, they can buy it. Some of that purchase price gets allocated to the
equipment.
Speaker 2 – 02:57
They now get 100% depreciation write off for that in the year they buy it. So from a cash flow perspective, it’s great
from the buyer to do a do to do an asset sale. Now from the seller’s perspective, that’s not always the best thing
because you will have to pay some ordinary income tax which can be up to 37% on the gain, not all of it. So some
of it, basically some of the sales proceeds will get allocated between your assets and goodwill. The goodwill
portion is taxed as capital, as a stock sale would, but the asset portion of it is taxed as ordinary income. So if
you’re looking at it from your perspective as the seller, that can cause you know, if you’re talking a couple million
dollar sale might cost you $100,000 in taxes.
Speaker 2 – 03:42
So it’s something to definitely understand as you’re in negotiations, as you’re in talks, because they’re probably
going to push for that. But as the seller, it’s probably better for us as a stock sale to structure it as such.
Speaker 1 – 03:53
We’ll hit on, we’ll dive into that a little bit more and then the goodwill. So that’s a one. If you think of what’s like
goodwill in a business, your relationships, your, you know, your industry knowledge, all that stuff. And so that’s a
way to allocate some stuff to goodwill and save on taxes. But if you, it can be like scrutinized.
Speaker 2 – 04:14
Right.
Speaker 1 – 04:14
If you go too aggressive in goodwill.
Speaker 2 – 04:16
Yeah, because I think most of the time it usually ends up being like 40 to 70% of the allocated amount is goodwill.
Roughly, you know, you might be able to. Again, you can probably push it for more if the buyer’s willing to. But
again, you’re dealing with IRS scrutiny at that point.
Speaker 1 – 04:32
So before we get into, like, the technical weeds, have you had anybody come to you, like, year of sale, like, hey, I’m
about to sell and what should I do?
Speaker 2 – 04:40
I actually haven’t. A lot of the clients at my old firm were actually pretty good about kind of getting in touch with us
ahead of time and saying, hey, like, this is on the table. We did have one example that I actually didn’t work on too
much myself, actually. I just know the story where young guy, I think he was in his late 30s, had no. No plans to sell,
no interest in selling. I think it was a PE company knocked on his front door and said, hey, we’ll. We’ll pay you this.
And he was like, I’d be an idiot not to.
Speaker 1 – 05:09
Done.
Speaker 2 – 05:09
Yeah, yeah. So there was really no ability to plan in that scenario. I know that because it just came together so fast.
You know, usually you’re dealing with clients who are maybe in their 60s or maybe early 70s who are getting to the
point where they want to retire, they want to be done right. So you have some years to kind of plan for that exit
strategy. And that scenario is just kind of like, oh, hey, I’m going to get this much cash and they want to close and,
you know. Right, right.
Speaker 1 – 05:35
So, okay, so that’s the year you sell. There’s some things you can do that we’ll get into, but I would say the big
drivers here, number one, timing. So if you have a three to five year Runway, there’s a lot that can be done. Number
two, your entity structure. So are you a S corp, a partnership, a C corp, an LLC? And then number three would be,
who’s the buyer? So if a private equity firm’s gonna come in, and if it’s a minority or majority sale, but a private
equity firm coming in, they’re going to have their own rules to play by, I guess they’re going to want to do their
things. Things their way. They’ve done it, you know, time and time over and over again. And there’s like, they have
their own Playbook, I guess, which we’ll dive into.
Speaker 1 – 06:17
So those are the. The driving factors. But bottom line, yeah, if you come in year of. And you’re like, hey, my. My
deal’s on the table. It’s probably too late.
Speaker 2 – 06:26
Yeah. To really do much.
Speaker 1 – 06:28
Yeah. There’s Some stuff that we can do. But I would say the big thing is if you’re an owner, you know, it’s good
practice anyway. A lot of what you’re doing as far as how you’re setting up the business, retaining key people,
doing how you’re structuring your equity, your entity, that should all have an end goal in mind. So if your end goal is,
hey, I want to sell this at some point, you should start doing that as early as possible. So let’s dive into, let’s first
start with the, let’s start with the PE scenario. So if you’re interested in selling to private equity, whether that’s a
majority or a minority, and then other buyers could be like, you know, another company in the industry that wants to
buy, take you over.
Speaker 1 – 07:10
Could be a sale to family, which, that’s a whole nother thing in itself. Could be a strategic buyer. But we’ll hit on
private equity here for a second. So what have you seen in your experience? What have you seen as far as deal
structure, what private equity is looking for, how this has to be set up?
Speaker 2 – 07:27
Yeah, so. So most private equity, you know, firms are set up as kind of like an LLC partnership situation. So LLC’s
partnerships can actually be shareholders in an S Corp. So they typically require some sort of reorganization in
every organization to be done. Basically what that means is you as the, you know, if you’re a single member share
or solely owned shareholder, you create a new S Corp and you contribute that stock and reorganize that stock as
now an LLC. So you have this Holdco S Corp. And inside of that Holdco S Corp you have an LLC and that’s what the
company actually is. So that is what gets then spun off and sold to private equity. So they are not able to actually
buy the stock.
Speaker 1 – 08:13
There’s a couple of reasons for that. Number one would be generally it’s an entity buying in. It’s not individual, it’s a
private equity company. They entities cannot own an S Corp stock in an S Corp. I believe so. That’s one reason.
Second reason is when a new. They’re always most likely going to want a new entity being formed one way or the
other, whether you do the reorg or do it a different way because they can when this new entity is formed from the
buyer’s perspective, they don’t take on any of the liability and legal risk of anything that happened before they buy.
So that’s what they want to do. Entity. And the third thing, if you want to talk about the, from a buyer’s perspective,
you hit on the depreciation a little bit.
Speaker 1 – 08:56
But with a partnership they’re able to, if it’s an asset sale, they’re able to depreciate a lot of the assets.
Speaker 2 – 09:01
Right. So the private equity, their great thing for that is that now they’re allocating this as an asset sale. Cause if
you buy a partnership, it’s automatically deemed as you’re buying the underlying assets or an LLC, you’re buying
the underlying assets. So now this PE firm can buy these assets, allocate the purchase and they.
Speaker 1 – 09:19
Get a step over it, they get.
Speaker 2 – 09:20
A step up to whatever the allocated agreement ends up being and they get to 100%, write that off. And then again
we talk about goodwill real quickly. Some of that gets allocated to goodwill that’s amortized over 15 years. But
again it provides a write off for them every year for 15 years. So from a PErspective that’s very tax efficient
because yeah, they’re probably paying you 10 million bucks or whatever number it ends up being. But then they get
huge tax savings on their end by investing in this new LLC, by buying the assets in the LLC.
Speaker 1 – 09:55
So in this scenario, let’s think now from the seller side, the goodwill is going to get taxed to capital gains and then
how’s the asset sale?
Speaker 2 – 10:04
So the asset sale basically they will have to, it’s some depreciation recapture that is subject to ordinary income.
Speaker 1 – 10:12
So whatever the owner had previously depreciated on the assets.
Speaker 2 – 10:15
That’s correct, yep. And then any of the current assets, you know that get allocated to that is also ordinary income.
So again the number I said earlier was 40 to 70% for Goodwill. So again, so you’re going to pay 60, you know, 30 to
60% on Ordinary. If the numbers are high enough. That’s a lot of. Or a lot of tax. I’m sorry.
Speaker 1 – 10:39
Yeah. And then a lot of times, you know, if you’re doing a full majority sale, the, I guess depending on the goodwill
number is going to be telling. If it’s, you know, if a lot of that is allocated to goodwill, that means the owner is, has
strategic rel, has a lot of the key relationships, their knowledge. They don’t want that owner just to walk out the
door. And I have seen, I’ve seen firsthand where people have just like took less money to not have to sell, but they
may have a two year earn out period. So let’s walk through if that happens. You sell PE Wants to keep the buyer,
wants to keep you on for two years to make sure that the relationships get retained, the business keeps running.
What happens?
Speaker 1 – 11:23
So one question would be a lot of times there’s an equity roll up in the new entity that’s formed. So if you want to
talk about that a little bit. And then how is that earnout tax? It’s usually based on EBITDA or revenue or some sort
of growth metric in those two years. So walk through from a seller side how those does that side of the transaction
works.
Speaker 2 – 11:39
Yeah. So from the earnout perspective, most of what I’ve seen is it’s taxes. Ordinary income as well, kind of again,
helps PE and save some tax money on their end because that’s what they want to do. But it can be capital. Again,
the sale just has to be structured and written up like that. And then. So I’m sorry, what was the rollup question?
Speaker 1 – 12:00
Yeah, so basically the reason that you would do an LLC or a partnership, it allows this equity rollover.
Speaker 2 – 12:07
Right.
Speaker 1 – 12:07
That you defer the gain.
Speaker 2 – 12:08
Yeah. So again, we’ll say round numbers. You’re going to get 10 million bucks. You might have the option. It might
give you the option to roll 3 million of that 10 million into this new PE. Right. And what that does is you’re not going
to pay tax on that $3 million. It’s deferred. You’re going to pay tax on it whenever you go and sell that in future
years, hopefully at an even bigger gain. So that can save you some cash now and also give you an investment if it’s
something you really believe in and you do plan to obviously stay around. It’s a good way to kind of continue to
grow that investment portfolio that you have and still have a little bit at stake in the company that you, like you
said, put your blood, sweat and tears in growing.
Speaker 1 – 12:49
Yeah. So that’s the S Corp. Partnership LLC. Let’s talk about C Corp for a second. Selling a C Corp. One other thing I
want to add. You can, instead of doing the F reorg, you could just do a straight asset or. Yeah, right, an asset sale.
Because you can sell the assets then to this new entity that they form. So that’s one way around the F reorg, but
that may not be as tax efficient from the seller side. But let’s talk about C Corp. So same thing can be a stock or
asset sale. How’s that?
Speaker 2 – 13:22
Yes. So unfortunately, if it’s a C Corp, asset sales kind of get hit even harder. Because the C Corp will pay some tax
on the gain at the C Corp level.
Speaker 1 – 13:33
Which is 2120.
Speaker 2 – 13:35
Yeah, I believe so. 2321.
Speaker 1 – 13:37
Which is 21%.
Speaker 2 – 13:38
Yeah, which is 21%. And then you know, if some money gets distributed down to you as the owner, you’re going to
be paying tax as well as a dividend.
Speaker 1 – 13:49
So C Corps are double taxed even just whether there’s a sale or not. There’s the corporation pays and then any
distributions and then the owners. Yep.
Speaker 2 – 13:58
Yeah. So but then from a stock sale perspective, it’s treated as if you’d sell any normal, you know, capital gains.
Yeah, it’s capital gains. It’s more favorable to you. But again the purchasing company probably is going to push
against that a little bit.
Speaker 1 – 14:13
So one of the big reasons that people would structure their business as a C Corp if they are going to sell would be
for QSBS. So that’s section 1202, I believe is the tax code. So why don’t you give an overview of how that works
and why that’s beneficial.
Speaker 2 – 14:29
Yeah, so it’s a very uncommon thing to see. C Corps aren’t, you know, in my time I’ve probably worked on a dozen
of them so. But QSBS you’re allowed to exclude up to its $15 million as of the new one big beautiful bill of gain.
Unfortunately, this takes years and years. I mean you have to be a C Corp. So I’ve heard a lot of people say that you
can reorganize a C Corp and then claim it. That’s not actually how it is because if you reorg as a C Corp, it’s based
on the issuance date. So it cannot, you can’t just do that, wait five years and then get this huge exclusion. You kind
of had to have been a C corp from the beginning. Right.
Speaker 2 – 15:11
And the great thing about it is you have to below 75 million in assets, which a lot of companies are.
Speaker 1 – 15:17
The companies that qualify for QSBs, like tech companies, like they should be.
Speaker 2 – 15:22
Right, right. 75 Million. I mean that’s a lot of assets if you’re exceeding that. But again, that’s something you have to
be kind of planning for from the jump almost. You can’t do this five, six years before you’re going to sell because
there is also a five year period, holding period, so to get 100% exclusion. But so in order to do that again you have
to be a C Corp from the beginning. If you try to change to a C Corp you’re only going to get that exclusion after you
switch the C Corp.
Speaker 1 – 15:53
Your business is worth 100 million.
Speaker 2 – 15:54
You flip your C corp and it grows to 120.
Speaker 1 – 15:57
We’ll say yeah, you would only save on that 15 and you could stack them so you could have you spouse, kids if you
wanted to trust stack. So you can stack that 15 million on different entities as different ein numbers, Social
Security numbers as owners.
Speaker 2 – 16:13
But again that requires like long term planning, long term goals. It’s not something that you know you can just do
because you’re like, oh, I’m going to retire in five years, let’s try to avoid taxes.
Speaker 1 – 16:24
Yeah. So bottom line, a lot of this you want to plan for in advance, structure your entity structuring to do this. Now
let’s talk about a common question. I hear this all the time is can I move to a different state that has significantly
less income tax when I sell? So let’s dive into that a little bit. How, how can that work? Well, and when will that fail?
Speaker 2 – 16:51
Yeah, so you definitely can if you’re, if it’s a stock sale. So a lot of times what happens? And we had a client at my
old firm again who this is publicly traded company, but his aunt I believe was involved early in this publicly traded
company, inherited a bunch of shares. He actually changed his residency to Florida I believe two years prior before
selling everything. Because it was going to be, I don’t even know what the number was. Five million dollars of gain,
maybe six million dollars of gain. And just to save that, he wasn’t P.A. So to save that three percent, you know,
makes a huge difference for you. Three percent on a five million dollar gain. I mean what is that? A hundred and
fifty thousand dollars? Yeah.
Speaker 2 – 17:34
So to go buy a Florida house if you have the money to do it.
Speaker 1 – 17:37
The bigger the number is, the bigger number is more savings. And if you’re in a state like California, New York, I
mean, you could be looking at 10 to 12%.
Speaker 2 – 17:44
Right, exactly. It’s pretty low tax. Yeah. So if you’re in a state like California, like you said, it’s definitely a
consideration to at least talk to your CPA about because that’s, you know, a couple. I don’t want to pay a couple
hundred thousand dollars in tax if I can avoid it.
Speaker 1 – 17:58
We could be talking millions for bigger numbers. So those states that have high income tax rate, California, New
York, we’ll say specifically they do kind of scrutinize this. And what I mean by that is like they may, if you do this, do
it in advance, which we’d say what, probably two years.
Speaker 2 – 18:15
Yeah, two years. I think safe.
Speaker 1 – 18:16
If you try to do it the year of, you’ll probably get looked at. But things to do this safely would be driver’s license in
the new state. Obviously you have a residence.
Speaker 2 – 18:24
Yeah.
Speaker 1 – 18:25
Like a house or rent somewhere. Voter registration, anything that you can possibly document that shows that
you’re living there 183 days of the year.
Speaker 2 – 18:34
Right.
Speaker 1 – 18:35
That keep it, keeps it clean. Because these, a lot of people are leaving these high tax states to go to Florida, Texas,
Tennessee to do this. And so they want to, you know, they obviously want their tax money. So they want to make
sure that like it’s done correctly and you’re not just doing it to avoid the taxes.
Speaker 2 – 18:51
Right, exactly. Yeah, 100%.
Speaker 1 – 18:54
And another, I want to, I’ll say this because it’s kind of cool, but you probably shouldn’t run to do this. Puerto Rico,
you don’t pay any tax.
Speaker 2 – 19:02
Yeah.
Speaker 1 – 19:03
So same type of thing, you gotta have a tracker. But. But it. I believe the rule’s not 183 days. Like you have to be
there all year. Other than like going back to see.
Speaker 2 – 19:13
Your doctor or something I’m not super familiar with.
Speaker 1 – 19:16
Yeah, I’ve heard of people. I’ve seen people do this. It’s. It’s definitely.
Speaker 2 – 19:20
Yeah.
Speaker 1 – 19:21
A little bit riskier. But yeah. Puerto Rico pays no taxes if you’re a resident there. So if you want to live full time in
Puerto Rico for a few.
Speaker 2 – 19:29
Years, could be save some tax money, get some good weather out of it.
Speaker 1 – 19:32
Yeah. You also might get audited pretty quickly. Okay, so let’s talk about actual mechanics. So let’s start with if you
have a three to five year Runway, we’d say number one, check your entity structuring. Do you want to do a reorg?
The F reorg. Usually you could do that like 12 months, six. 12 Months in advance. You don’t need to do it too far
ahead. Or do you see a lot of people have a holding company like when. From the get go?
Speaker 2 – 20:02
No, not usually from the get go. Usually it’s. They’re kind of formed for a sale. Yeah.
Speaker 1 – 20:09
Or if someone has multiple businesses, maybe they’re.
Speaker 2 – 20:13
Yeah. I mean I again, I haven’t seen it very often. I really haven’t. I think prepare in preparation of a sale is probably
the most common thing you’re going to see.
Speaker 1 – 20:24
So in advance, check your entity structuring. Let’s talk about the like a full upfront purchase versus Installment
sale.
Speaker 2 – 20:32
Yeah. So this is all kind of up to the seller to a degree and to the buyer. Right. But you can sell on an installment
basis. But however, I mean you’re kind of betting on the company. Right. Because if the company goes bankrupt, if
they go out of business, maybe they can’t make their payments. You know you’re kind of out that money. Right.
Depending on, you know, legally you’re gotta get in line for bankruptcy. And I know that’s a pain in the butt. But
what you can do is you can agree to an installment sale. What that does right is that pushes the income from one
year into one huge year. Spread it over maybe 5, 10 years.
Speaker 2 – 21:10
However, whatever the terms are, a lot of times there’s a balloon payment at the end of it, maybe five years where
you get one big payment compared to the other ones. You collect some interest on the payments over time as
well. It’s very common. I mean I see it a lot with real estate would be more so than I see it for corpse. I’d say the
most common time I’d see it for a corp. Is if it’s a family.
Speaker 1 – 21:30
Yeah, it’s a private.
Speaker 2 – 21:32
If you’re going to giving it to your son maybe or something like that.
Speaker 1 – 21:37
Definitely family probably if there’s a strategic buyer. So if you’re going to merge with like a competitor.
Speaker 2 – 21:44
Yeah.
Speaker 1 – 21:44
They may not have the capital to just.
Speaker 2 – 21:46
Right. To just cut the check upfront. Yeah.
Speaker 1 – 21:49
A private equity firm probably won’t do an installment sale other than the only trail would be like the earn out and a
lot of like depending on who the buyer is, these bigger entities and funds they’re going to go get, they’re not just
going to strike a check, they’re going to get financing from a bank. So private equity firm is going to easily be able
to go to a bank and say hey, underwrite this, give us a right. That’s one thing to note because I have had people,
someone I work with did this a couple years ago and he actually sold pretty quick. I think it was nine months. And
those things can drag out like a year, 18 months. It can be painful. But what he told me, he said it was the most
uncomfortable thing in my life.
Speaker 2 – 22:29
Going through the process.
Speaker 1 – 22:30
The PE firm, full majority sale of his company. The PE firm got a loan from the bank. So there was the PE firm
underwriting it and then the bank underwriting it. And he was like I had to disclose everything. Every piece of legal
paperwork I’ve signed tax returns, K1s, they want it all so uncomfortable. Like I had to share stuff that I’ve never
even told anybody in my life. Right. Yeah, a lot can go to that. But installment sale more so with a family member
selling it to a partner or something. That could be an installing. So a lot of times maybe there’s 20% upfront in
cash. It’s paid over the course of five years, seven years, 10 years. And then that tax gets spread out across those
areas.
Speaker 1 – 23:11
To your point, you have to bet on the business succeeds to be able to finance that Cash flows can support it.
Speaker 2 – 23:16
Yep.
Speaker 1 – 23:16
But there can be a benefit where you’re spreading out over multiple years where you could be in a lower.
Speaker 2 – 23:22
Yeah, you’re filling up the lower brackets instead of one year. You’re filling up all the top bracket basically.
Speaker 1 – 23:27
And any capital loss that you have from investment income, you know, if you’re tax loss harvesting or you’re doing
an aggressive tax strategy that can offset any of those gains. So we’ve, I’ve seen a client I worked with, they sold
from father to son. Yeah, father to son. And then the parents are getting paid out. And every year we’ve taken there
was payments made up front that went into a direct indexing portfolio. And then each year the losses wipe out all
the gain on that business sale. So there are some benefits to doing that. And then outside of that. Oh, I would say
the only other thing to note. So there is one of the big savings would be depending on the size of the sale, which if
you’re selling your business, it’s probably, you’re probably in this range.
Speaker 1 – 24:17
But the federal estate credit right now is for 15 million a person. So married couples 30. Anything above that credit
gets taxed at a 40% federal level. So if you have enough Runway and you think you’re going to sell three, five years
out, 10 years out, you could move some of your, whether it’s stock in a S Corp. C Corp. Interest in a partnership LLC
into a trust, an irrevocable trust that would, what’s called, we would freeze the asset at that price and could be a
discount because it’s a minor. You could be selling a minority share that goes into the trust. Let’s say you do it in
20, 26, you put, you use 10 of, you’re going to take a $10 million asset as a minority piece of your business. You
discount it say 20%.
Speaker 1 – 25:02
So you get use $8 million of your $15 million credit to get a $10 million asset in there, fast forward five years, that
$10 million asset, the percentage of your business that is, grows to 20 million, you still pay capital gains taxes on it
if there’s a sale, like you would normally, but all of that growth is outside of your estate. So you would avoid that
40% tax when you die and that exemption could drop. So any type of irrevocable trust planning in advance can be
super beneficial. The 40% is obviously much more meaningful than trying to save on capital gains, right?
Speaker 2 – 25:38
Oh, for sure, yeah. 40% Is insane. I mean, no one wants to pay that. No beneficiaries want to pay that.
Speaker 1 – 25:45
Yeah. And everything in that trust is creditor protected, divorce protected to pass to kids. And the cool thing too,
that percentage of your business is going to spit off profits because that whatever that percentage is entitled to,
the profits of the business that all goes inside of the trust can be invested in, can grow inside there. Yeah. And so
all those profits that are growing outside of your estate.
Speaker 2 – 26:05
No, for sure.
Speaker 1 – 26:07
So let’s talk year of a sale. I mean, really what you’re looking at is the big thing would be charitable contributions,
donor advised fund, charitable trust, family foundation. Why don’t you walk through like how that could be?
Speaker 2 – 26:21
I think a daf, a donor advised fund would be really, you know, advantageous if it is kind of came together quick and
you need, you just want to save some tax, right. Get rid of some of those big gains in your portfolio. By doing that,
right. You’re going to save directly against the gain from the sale of the business. Okay. And you avoid the capital
gains on top of it from those big winners in your position. So I think a DAF is very strong to do, you know, I don’t
think enough people probably talk about it and do it, to be honest with you, because the fact that you can avoid,
you know, even if we’re just saying capital rate, so 20% capital from that and you get a 37% deduction because of
the charity.
Speaker 2 – 27:05
You know, it’s not, doesn’t add up perfectly to 57%. Let’s just say 50% tax savings. I mean, I think that’s a great
strategy and it’s easy, you know, it doesn’t require any long term crazy planning. How quickly can you open a DAF
and fund it? I mean, yeah, so I think that’s something people should really be.
Speaker 1 – 27:24
So if you’re set, let’s say you’re selling for, you know, you’re gonna have a $10 million gain that’s gonna show up as
income, 30% of that cash is 20%. Stock is 30% of that. So you have a $10 million, $10 million of income that year.
You could donate appreciated, maybe have a brokerage account with 5 million bucks in it. You could take 3 of
that’s in stock or funds. Donate 3 million, you get a deduction. You didn’t pay capital gains, and then that money
just has to go to charity at some point. The step up from that would be like a charitable trust, similar concept, and
then a family foundation.
Speaker 1 – 28:01
So if you’re talking, you know, if we’re talking in, I’d say north of $50 million net worth range, you could take 2, 5, 10,
whatever you want to do into a private foundation works similarly. You get it. You get the same deduction. You
have to form a new entity, which is like starting any other business. You have to get the legal work done. And then
from there, 5% of that asset has to go out every year to charity. But the cool thing is you can employ family
members on it, so they can take a reasonable salary. And it gets kind of a way to get the family involved in
something that you’re passionate about. A charity fund, there’s some tax benefits to it. People can make some
income on it, and that’s like kind of the next step up.
Speaker 1 – 28:43
If you’re in that net worth range.
Speaker 2 – 28:45
Yeah.
Speaker 1 – 28:47
Well, outside of charity, what else can be done?
Speaker 2 – 28:51
Year of, Talk to your advisor and make sure you’re harvesting any losses that you have on your portfolio. If you’re
not doing an installment sale and spreading that over five, six, seven years, however long the installment
agreement is, why would you not capitalize and harvest all the losses that you have in the year of unless you feel
differently? No, that’s the best year to do it. Right. So don’t just sell your company, you know, and then go radio
silent on us. Make sure you’re talking to us. Let us do our job for you. Sell your losses. You know, obviously you’re
not going to offset the whole gain. I mean, no one has that many losses, I would think.
Speaker 2 – 29:28
But if it saves you 50 grand in tax, 100 grand in tax, that’s meaningful versus letting those losses sit in your
portfolio and offset $3,000 a year for the rest of your life. You know, like, let’s be proactive from that perspective
too. Again, very easy. It’s just probably going to be a call or an email. That’s all it takes. But again, when you’re in
that last year of and there wasn’t much planning ahead of time. There’s just not that much to be done. You know
what I mean? Like, that’s just one of the easiest things that I’m sure all business owners have available to them.
Speaker 1 – 30:02
Yeah. So definitely, the farther. The farther in advance you have to plan, the better. So if you are thinking about a
potential sale in the near term or in the future, you want to grow your business to a point, definitely assemble the
right team in place. You know, that would be, you know, someone that understands the tax mechanics, probably an
M and A attorney. Maybe there’s an investment banker involved. If you have a good financial advisor that
understands this stuff, bring them in. But the biggest thing I’d say figure out. There’s definitely a lot of tax nuances
and technicalities, but figure out what you need to get out of this sale as far as what your goals are, what your
lifestyle needs to look like. After reverse engineer that to what you would sell it for to make sure that’s all on track.
Speaker 1 – 30:51
Maybe it’s kids, education, maybe it’s helping family, buying a house, whatever that looks like. Figure that out. We
should work with your financial advisor, and then do a lot of soul searching on what life is gonna look like after a
sale. Because I’ve seen way too many people that think that this. It’s. It’s like Mark Zuckerberg almost sold
Facebook to, I think, Yahoo. I think it was Yahoo. It was one of some big company, like, early on, for a billion
dollars. He was like, 23, right? And he said no. And they said, why’d you say no? He said, well, if I sold my business,
I would just start another business, and I like the one that I have, so I’m just gonna keep my business.
Speaker 1 – 31:28
So I’ve seen that way more than we probably should, where people get a big number in front of them. They think it’s
a good idea to sell. They sell, and then they’re, like, totally miserable, Right. They don’t even know how they’re
spending time.
Speaker 2 – 31:42
They don’t know how to spend their free time. They don’t know how to spend their money.
Speaker 1 – 31:44
One client sold three years ago, four years ago, and he just told me a couple weeks ago, like, retirement’s
overrated. All I want to do is assemble my friends out that I started the business with and get back to work. He’s
like, I don’t really even know what I want to do right now.
Speaker 2 – 31:57
Right.
Speaker 1 – 31:58
That’s probably the biggest thing, aside from the tax thing, is figure out how you want to spend your time and what
you actually.
Speaker 2 – 32:02
Right.
Speaker 1 – 32:03
But any, if you find yourself in the situation, we have a very good team here with our advisors, CPAs, to be able to,
you know, walk through this and help you assemble.
Speaker 2 – 32:16
The right team to do this very nuanced situation. Obviously, these agreements can, you know, we can’t really help
with the agreements necessarily. We can help structure them, but you will need an attorney to do that. So. But
definitely talk to us. We can help you get it set up. They’re the most efficient. And again, plan for life after you sell
your business because it probably is taking up 68, 60 to 80 hours of your week as it is.