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Capital Ideas for Private Business

It’s What You Keep That Matters

Funding Retirement Goals

By Roy T. George, Vice President
Bernstein Global Wealth
& Jeff Johnson, Managing Principal
Northern California Office, Corporate Finance Associates

It is not necessarily what you get for your business; it is what you get to keep. Without proper advance planning, the after-tax proceeds from the sale of a business may be far less than the owner’s expectation and may not support the retirement life-style anticipated by the seller. When asked by us how much the business is worth, it is not unusual for the owner to tell us what they need to retire. Further discussions reveal that the business may be worth less than what is needed to fund that retirement goal

Smart estate planning can contribute to closing the gap between the owner’s retirement goals and the value of the business. Doing so enables one to significantly reduce the taxes paid to the IRS and therefore enhance the value of the deal.

One estate-planning technique that can be used in conjunction with a sale is called a Charitable Remainder Trust or “CRT” for short. If you have a low cost basis in your business, you stand to pay a hefty tax bill when you finally sell your business. A CRT offers a powerful way to reduce the income tax bite. Its main features are as follows:

  • Avoiding any income tax when the business is sold. Entire sale proceeds can be reinvested providing a higher cash starting point.
  • The seller receives an annual payment from the CRT and pays income taxes only on the amount distributed out of the trust.
  • Upon the death of the seller, any remaining assets in the trust will go to a charity. However, in exchange the seller receives an up-front tax deduction that can be used to offset other income taxes. This is true even if the charity happens to be a private foundation that is directed by the seller’s family.

Higher Net After-Tax Proceeds

The CRT technique requires that the seller place the business within the trust in advance of the sale. By doing so, it offers a tax-deferred environment to conduct the sale and then subsequently invest the proceeds.

An obvious difference with using a CRT is that you do not receive a lump sum payment. Rather, the lump sum payment sale resides within the CRT. This may not be a major constraint, especially if you were intending to spend the proceeds over a long period of time. And of course, the upside to all this is that you are not faced with an immediate tax bill. Income taxes are also stretched out over this same long period of time.

Higher Likelihood of a Sale

By reducing the tax bite, a seller is now more open to considering less attractive offers since these may still achieve the desired after-tax outcome. In today’s competitive marketplace, having this flexibility can greatly increase the probability that a sale may actually happen. The CRT is one of several powerful techniques that can be used to exploit a once in a lifetime event such as selling a business. After all… it’s what you keep that matters…not just the price at which you sell.


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