We spend a lot of time thinking about strategies and tactics that private business owners might think is important.
One of the ideas I’ve been working on is how to position you to leave your business with more money. The main problem with this is when it comes time to sell your business; you probably have not spent enough time on understanding tax friendly exit planning. At the same time your buyer wants to get the deal done quickly, so you and they end up paying way too much in taxes.
I think one of the best things you can do is to help your buyer pay for your business in pre-tax dollars. The simplest and least expensive way to do this is by putting a non-funded, non-qualified deferred compensation document in place. This allows the buyer to purchase your business with tax deductible dollars instead of pre-tax dollars.
For example, if I was to buy your business and pay you $1,000,000, I would need to earn $1,800,000 to pay you the $1,000,000 for your business. You would then have to pay taxes on that amount of probably in the area of $250,000, leaving you with $750,000. If instead I used deferred comp to pay you for your business, the entire amount would be tax deductible to me as the buyer, saving me a huge amount in taxes. Under this arrangement I would be able to pay you more for the business, but my cost would be significantly less.
So, if you are thinking there might be a possibility of leaving your business within the next five to ten years, we need to talk about the structures you can put in place today that will greatly increase your value.
Hope you enjoyed this idea. As always, I’m interested in your ideas about exit planning. If you want, you can contact me at firstname.lastname@example.org or you can just hit contact us on our call to action button.