Presale planning is an important step in the business transition process that should not be underestimated, overlooked, or cut short. This important step can help you potentially minimize tax, maximize value, achieve your personal and business goals, and make your transition process as smooth as possible.
Pre-sale planning should be ideally started a few years in advance of the transition execution. Presale planning is a process of reviewing key business and personal goals and fact patterns that may impact the outcome of your business transition. While there may be some needs specific to you and your business, the common personal presale planning needs include cash-flow planning, income-tax planning, and potentially estate planning.
Personal cash-flow planning
Know “your number” is a common phrase heard in the retirement planning realm. This is true in business transition planning. A number as important as knowing the value of your business for many business owners is knowing what you need to net from the transition of your business to achieve your financial goals related to retirement, charity, and legacy. The way to know this number is to work with your financial advisor to create a financial cash-flow plan. Your advisor with use of cash-flow planning software will input your assets and liabilities and assign numerical figures to all your financial goals (i.e., retirement, charitable, and legacy). Your advisor can show the transition of your business in your eMoney® plan. They can run multiple “what if” scenarios to incorporate different tax, estate, business values, or outcomes to show the potential impact to the success of your financial goals and what the outcome may be.
As a part of this planning, you can review the value of the business. Do you know the value of your business? How did you come to determine this value? Knowing the value can be very helpful in this personal planning process to show success of given goals and strategies. If you don’t know your value, your financial advisor can solve for the minimum value required to obtain your financial goals through the software.
Income-tax planning
One of the most common questions often asked by business owners in transition is “How can I save on taxes in the transition?” The tax strategies available can be very specific to your business tax and legal structure and the deal structure of the transition. It is recommended that you reach out to your CPA to discuss strategies and how you can save on tax. While you should rely wholly on your tax advisor, others, such as your attorney, financial advisor, transition specialists, M&A advisors, can provide you with ideas that you can take back to your CPA.
There are a few common strategies that most business owners consider with varied tax savings. A key savings opportunity is charitable giving. Gifting business interests to charity may allow you a charitable deduction and, if structured properly presale, the portion of the business interest owned by the charity will also be tax-free on the transition. There are several ways to give to charity, including outright, donor advised funds (DAFs), charitable trusts, and private foundations.
Some of the other tax saving strategies may include tax-loss harvesting, 1031 exchange for real estate owned as part of the operation of the business, and tax advantageous investments like opportunity zones. There are several other strategies that may be applicable given the specifics of your situation. Your financial advisor can show you the potential impact of these tax strategies on your eMoney plan.
Estate-tax planning
If your net worth is above the estate and gift limits or your net worth is anticipated to grow rapidly, there are some unique opportunities you have as a business owner in the estate-planning space to potentially save on estate tax. Through a qualified appraisal, you may be able to value your business with discounts for lack of marketability and control for estate-planning purposes. These discounts can range from 20% – 40%.
For estate-planning purposes, these discounts allow you to tell the IRS that your business is worth less than market value, allowing you to transfer more outside of your estate to irrevocable trusts or directly via gifts to individuals. While this may be prudent to take advantage of at other times throughout your business ownership, it should be reviewed during the presale process to see what may make sense and what, if any, opportunities should be taken advantage of to help save on estate tax.
Once you receive a letter of intent (LOI) or enter into an agreement to sell, you generally lose the advantages that come on the estate-planning side. This should be reviewed early in the presale process to take advantage of potential opportunities. Your financial advisor can model these strategies in your eMoney plan to see the potential tax savings and impact these strategies have on your estate.
Conclusion
Presale planning is an important step in the transition process that should be started early. It is important to get a team in place that can help you through the process and to address the needs that you will have during presale.
Your advisor is an important part of your personal pre-sale process, as you explore a transition and consider your pre-sale planning needs.
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