Tax Planning

Stars can line up for a sale, however remember about wealth and tax planning

Now that the worst of the Covid-19 pandemic is (hopefully) behind us, three positive signals for entrepreneurs seem like a good time to sell at least a stake in their businesses: ample equity and cheap debt financing, attractive valuations for private companies and the Prospect of higher tax rates. They make a sale, especially a tax-deductible sale to an employee participation plan, attractive.

But wait a minute. Despite the convergence of tempting factors, this may not be the best time for you to start selling. The decision is not just about numbers. We know more than a few former business owners with remorse. Many simply found that their expectations of their business and / or personal situation after the sale were not right. In addition, substantial unfulfilled personal goals could have been achieved through solid wealth and tax planning.

In my years of advising family businesses and private entrepreneurs, I have found that it is worthwhile for an entrepreneur to answer the overwhelming question: Why now? Am I selling for the prospect of a big payday? To leave a legacy? Accelerate growth? What does retirement look like for me? Are you tempted by a hobby or a sideline?

I admire business owners – especially boomers who are still recovering from the shock of going from the pre-pandemic prime to the worst of times they face – hiring a wealth and tax advisor to do some thorough planning, ideally before the sales process begins.

The relationship shouldn’t necessarily be short-term. Personally, I’ve found that family wealth advisors like Linda Litner of Sequoia Financial Group and real estate and tax advisors like Suzanne Shier of Levenfeld Pearlstein – all veterans in their field – are particularly adept at getting private entrepreneurs to consider far more than that to do with the proceeds. You recognize that both personal and business planning require complex considerations in order to arrive at the appropriate action.

On the one hand, Suzanne pays particular attention to three flows: where is the company in its life cycle; the owner’s personal and financial wealth planning, often including their philanthropic and intergenerational wealth transfer goals; and the personal transition of the owner. “It’s a process and you have to take care of all three.”

She notes that while a property owner can achieve a lot when planning begins during or after the sale, the greatest option comes from planning before the sale. For example, this is necessary to get huge tax benefits under Section 1042 of the Internal Revenue Code, which requires a three year hold period when selling to an ESOP. By taking advantage of these provisions, owners can diversify their holdings, defer capital gains and income taxes, and receive multiple tiers of discount from gift opportunities.

An opportunity arises for Linda when an owner plans to use the proceeds to raise significant charitable donations. Often times, the owner does not understand the tax savings that can be made with such donations, but Sequoia Financial analysis has shown savings in the seven-digit range for some owners who followed a specific sales strategy identified through the pre-sale schedule.

These examples underscore our belief that while Verit Advisors is an investment bank that receives compensation after the deal is closed, it is unusual in that we seek to be on the same side of the table with our clients. We provide a solid pre-sale planning process that complements the wealth and tax plans drawn up by their other advisors. Alternatives often include the distinct advantages of selling to an ESOP: Deferred capital gains. Tax-free diversification. Liquidity. Stay in control. An improved estate plan. A ready market for closely held stocks. And other.

So, as a business owner, you should definitely consider the benefits of selling part or all of the business now. But if you haven’t completed your wealth and tax planning before the sale, do so too. When you sell your business, you benefit from smart planning to help you achieve your goals and aspirations. And if you choose not to sell now, you have developed a wealth and tax strategy that positions you, your families, and your business optimally for a future transition.

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