According to Small Biz Trends, close to 10,000 businesses are sold in the United States on an annual basis. Often, a single founder with a singular vision is selling their life’s work. The American Dream come true. Starting with nothing, they’ve helped build an enterprise that is worthy enough to be acquired by an outsider who sees and understands the value. Yet, in too many instances, the seller fails to step back from the urgency of the sale and undertake any personal tax planning. In not taking the time to plan, these owners become involuntary philanthropists, also known as taxpayers.
There is nothing wrong with voluntarily paying a fair share of taxes after the options have been explored but it has been my experience that most of the business brokers, investment bankers and other business transactors don’t ever pause the process long enough for that exploration. Whether it’s through ignorance of the options or something else, it doesn’t serve the seller well to cede money to taxes unnecessarily. I’ve spoken to the leaders of several of the major training groups who teach advisor how to help business owners realize maximum value from their enterprise and all have seemed numb to the idea of slowing the transaction. In reality, most businesses aren’t ready to sell at the time the owner wants to begin the process and may take several years to get to the point where the business is salable. Several years is plenty of time for the owner to consider options to exit with the most cash and the least tax. Doesn’t the owner deserve good advice in the biggest transaction of his life?
Recently, I have become aware of two examples of extreme involuntary philanthropy. One founder I know of sold the company he founded for more than $1 Billion. In a high tax state, that owner will now pay almost $400 Million of state and local tax. Someone smart enough to build a billion dollar company should have had enough advisors around to at least make him aware that there were alternatives such as Charitable Remainder Trusts, Pooled Income Funds, Donor Advised Funds, Foundations to reduce or eliminate that astonishingly high amount of tax. Nothing illegal or immoral about this kind of planning. Nothing cutting edge or risky. Just good, “stop and think” planning.
Another advisor I know has been in communication with several partners of a firm that is in the process of negotiating a sale of their business. Transaction value to be in the $500 Million range. They’ve been advised by a very capable adviser of a few strategies that would allocate 10-20% of their holdings to reduce the tax burden and allow them an income stream for as long as they’re alive. Certainly, they will have substantial wealth whatever they decide. They’ve recently turned the sale management to a large institution who has advised them to do nothing but sell outright. Isn’t this a form of malpractice?
Most business transactions aren’t this substantial, and the owner often needs to exit the business with the maximum available capital that will keep the family living the way they would like to live. It makes no sense to not have every opportunity for the seller to consider options that will put the family in the best financial position possible. If it pauses the transaction for a bit, well, so be it.