With the worst of the COVID-19 pandemic (hopefully) behind us, three positive signals appear to make this a great time for business owners to consider selling at least a stake in their companies: Abundant equity and low-cost debt financing, attractive valuations for private businesses, and the prospect of higher tax rates. They make a disposal, especially a tax-advantaged sale to an employee stock ownership plan, look appealing.
But wait a minute. Despite the alignment of tantalizing factors, this may not yet be the best time for you to sell. There’s more to the decision than just the numbers. We know more than a few former business owners with remorse. Many simply found their post-sale expectations about their business and/or their personal situation didn’t pan out. Plus, substantial unmet personal goals could have been addressed by sound wealth and tax planning.
What I have determined in my years of advising family businesses and private business owners is that before calling an investment banker bent on forging a deal, it pays a business owner to answer the overwhelming question: Why now? Am I selling because of the prospect of a big payday? To provide a legacy? To accelerate growth? What does retirement look like to me? Does a hobby or avocation beckon?
I’ve grown to admire business owners – especially Boomers still recovering from the shock of going from the best of times pre-pandemic to the worst of times coping with it – engaging a wealth and tax management advisor for comprehensive planning, ideally, before the sale process begins.
The relationship shouldn’t necessarily be just for the short-term. Personally, I’ve found that family wealth advisors like Linda Litner at Sequoia Financial Group and estate and tax consultants like Suzanne Shier of Levenfeld Pearlstein – all veterans in their fields – to be especially adept at getting private business owners to consider far more than what to do with the proceeds. They recognize that complex considerations are involved for both personal and business planning to arrive at the appropriate actions to take.
Suzanne, for one, pays attention to three streams in particular: where the business is in its lifecycle; the owner’s personal and financial wealth planning, often including their philanthropic and multi-generational wealth transfer goals; and the owner’s personal transition. “It’s a process, and you must pay attention to all three.”
She notes that while an owner can accomplish much if planning starts during or after the sale, the greatest optionality emerges from pre-sale planning. This is needed, for example, to reap huge tax advantages under section 1042 of the Internal Revenue Code, which requires a three-year holding period if selling to an ESOP. By taking advantage of these provisions, owners can diversify their holdings, defer capital gains and income taxes, and gain multiple layers of discounts from gifting opportunities.
For Linda, one meaningful opportunity arises when an owner plans on making considerable charitable gifts with the proceeds. Often, the owner doesn’t understand the tax savings that can be realized with such giving, but Sequoia Financial analyses have identified seven-figure savings for some owners who followed a particular selling strategy identified through pre-sale planning.
These examples underscore our view that while, yes, Verit Advisors is an investment bank, compensated once the transaction closes, we are unusual in that we strive to sit on the same side of the table as our clients. We provide a solid pre-sale planning process that complements the wealth and tax plans completed by their other advisors. Often, this includes among the alternatives the distinct advantages available by selling to an ESOP: Deferred capital gains. Tax-free diversification. Liquidity. Retaining control. An improved estate plan. A ready market for closely held shares. And others.
So, as a business owner, you should by all means look at the benefits of selling part or all of your business now. But, if you haven’t completed pre-sale wealth and tax planning, do that, too. If you do sell your business, you’ll benefit from smart planning to help you achieve your goals and aspirations. And if you choose not to sell now, you’ll have established a wealth and tax strategy that positions you, your families and your business optimally for a future transition.
