Estate Planning: Defining Success in Your Business Exit

March 01, 2017Exit Strategies

Few things are as despised as paying taxes. As business owners, we all cringe when Uncle Sam shows up demanding his pound of flesh. In fact, we’ve come up with elaborate ways to run lifestyle expenses through our business. Hello, company car.

That’s about to dry up when you sell your business. Even worse, the government is going to come knocking for one giant final check.

Time to pay up. Or is it?

At Exit Consulting Group (ECG), one aspect of our exit planning falls squarely on creating unique strategies to minimize the amount you turn over to Uncle Sam. Why send 40% of the profits from the sale to the government if you don’t have to?

Insert estate planning.


Estate Planning from an Exit Perspective 

We’re not talking about dictating who gets the Prius or the family jewels, although establishing a plan for the day you’re gone does come into play. From the business exit perspective, we’re looking at defining your financial, charitable, and living goals for the years after you formally exit the business.

More importantly, we’re evaluating how opportunities to shave off on your tax bill align with your personal goals.


Establishing Cost of Living Needs

Owners want to sell their business for as much as possible. While we work to maximize that number, we have to be realistic. Business sales often fall short of sustaining a desired lifestyle post exit. That means being creative to still achieve the necessary outcome.

It starts by understanding all of your assets, ensuring they are protected, and defining how much you need to live off of moving forward. In this case, we evaluate your entire estate to create ways to make up the difference a business sale might not bring. This includes everything from your real estate portfolio to considering an annuity and more.


Charitable Giving

Once we establish your needs moving forward, we look at your charitable goals. Perhaps your true mission falls to, say, saving the whales or leaving a library with your name on it.

Certain charitable strategies prevent a taxable event at the sale. For example, a Charitable Remainder Trust (CRT) is an irrevocable trust that generates a potential income stream for you, as the donor to the CRT, or other beneficiaries, with the remainder of the donated assets going to your favorite charity or charities. You can actually live off of the trust, which is now tax-free money. Once you pass, the money goes directly into the 501C3 of your choice.

This option does come with limitations. Trusts employ specific rules that you must abide by while living off of the money. That being said, it essentially bypasses two taxable events. One, when you sell the business. The second is after you pass.


Business Goals

Charity isn’t the only thing the government supports. They are also fans of money staying with employees. For owners that wish for the business to live on through their employees, an employee stock option plan (ESOP) creates another creative exit strategy. When you structure the deal to sell the shares to the ESOP, you can take the profits and reinvest them into another stock while paying zero in taxes. It’s similar to a 1031 real estate exchange.


Eliminating Tax Layers

If you’re not careful, you can wind up pay taxes on layer after layer of your transaction. Let’s take the example of selling a $2 million business to a key employee. If you structure a seller financing deal with payments over ten years then the company must make $300,000 a year in net profit to come up with $200,000 after-tax cash to make the loan payment. Then you, as the seller, receive the $200,000 in loan payments and then you have to pay taxes on that income.

That’s two taxable events in which the government gains the most.

Instead, if you plan far enough ahead you can set up a cash balance defined benefit plan. If we put in $300,000 pre-tax dollars a year into that for five years, meanwhile using it as a deduction, at the end of five years you have $1.5 million and the company was able to deduct those payments in their taxes. You can then sell it to your key employee for $500,000.

You have your $2 million nest egg. Your employee has a better chance of growing the business. You also have the satisfaction knowing that the government took a smaller portion.


Planning Pays Off

Good things don’t happen overnight. The same is true when developing a comprehensive estate plan to minimize taxes. The more time and planning you invest into it, the less you’ll have to fork over to the government.

We’re talking years here, not months.

A business owner who starts planning their business exit strategy three to five years in advance can employ all the different tax saving strategies available. Too often business owners wait until they are ready to exit to plan ahead.


Comprehensive Strategy

Selling a business is the most complex transaction around. Minimizing taxes needs to factor into all aspects of the sale, not solely estate planning. Additionally, depending on your unique goals and situation, there are countless different ways to achieve your desired outcome.

That’s why you need an experienced partner to walk with you. At Exit Consulting Group, we specialize in creating the best exit strategy to achieve your goals.

Contact us today to see what options you have for exiting your business.