Business Owners put their head down and go. Usually, they dedicate no time for extensive business or personal planning. When the time to sell arrives, owners often move ahead without critical planning that can help boost the value of the business and enhance their overall estate and financial plans. Spending a little bit of time on the matters below should greatly improve the chances of a smooth sale and provide for a well thought out financial plan!
Business owners need to know their “planning flexibility.” That is a critical step in planning their post-sale personal cash flow and the efficient transfer of their wealth to future generations. What is “planning flexibility?” It is that amount of assets in excess of the client’s core retirement assets needed to generate retirement cash flow. Once the amount of assets needed to generate cash flow is identified with a high degree of statistical certainty, the “planning flexibility” amount may be dedicated to more sophisticated estate planning techniques. The owner can implement more sophisticated tax mitigating and asset protection techniques that should not adversely impact the owner’s retirement plan.
Pre-Sale Estate Planning
Once the owner knows if he or she has “planning flexibility,” estate planning techniques can be adapted around the owner’s objectives. In the planning process, business owners can concentrate effectively on implementing the most tax efficient strategies for the sale of a business and the transfer of wealth. For example, the selling business owner can structure a trust to own his or her shares and that arrangement can provide asset protection, federal and state income tax minimization, and still provide the owner with access to the funds for retirement cash flow needs.
Long before a sale occurs, an owner may be able to establish residency in a state with no income taxes and mitigate the state income tax bite on the sale of the business. It is tricky to navigate that slippery slope, but worth the effort in some cases!
Buyer’s Due Diligence
Buyers of businesses want to know what problems exist in the business they are about to purchase. They will reduce the offering price for the risks they learn about in the due diligence performed before the closing of the purchase. Often, selling business owners first learn of problems, such as sales tax exposure or risk of losing large customers, only during the buyer’s research of the seller’s books and records.
An owner interested in selling should engage CPA and law firms to conduct the very same due diligence a potential buyer would do. Such reviews will help to uncover issues to be addressed before any buyer uncovers them and that can help strengthen the company’s standing and value.
Business owners desiring to sell in the foreseeable future need to stop and think about planning seriously before a sale of the business is imminent. Plans put in place long before a sale will enhance the owner’s personal wealth management plan and the overall value of the business being sold.
Michael C. Foltz, JD, CPA, CFP® is a BDF founding principal and founder of our Business Owner Team with an extensive background in law, tax and estate planning. Mike shares his deep estate planning expertise by following the ever-changing federal and state estate tax laws and preparing education summaries for clients and team members. Recognized by Chicago magazine as a Five Star Wealth Manager, Mike has given numerous presentations on estate planning to BDF clients and professional organizations such as the Exit Planning Institute. Publications such as Inc. magazine and the Wall Street Journal have featured his insights into estate planning, and he has contributed to an estate-planning publication for Commerce Clearing House.