Entrepreneurs Thrive in the Pacific Northwest: Planning Ahead for a Business Sale

Oct 5, 2023

IBA, as the premier business brokerage firm in the Pacific Northwest, is firmly established as a respected professional service firm in the legal, accounting, banking, mergers & acquisitions, real estate, and financial planning communities.  Periodically, we will post guest blogs from professionals with knowledge to share for the good of owners of privately held companies & family owned businesses. The following blog article has been provided by David Rosell of Rosell Wealth Management (https://www.rosellwealthmanagement.com/):

Entrepreneurs Thrive in the Pacific Northwest: Planning Ahead for a Business Sale

Unraveling Our Regions Charms for Entrepreneurs and Avoiding Tax Dilemmas

When it comes to entrepreneurship, there’s no place quite like the Pacific Northwest. Surrounded by breathtaking landscapes and vibrant communities, our charming region has become a hotbed for ambitious individuals looking to turn their dreams into profitable ventures. Perhaps it’s the blend of outdoor adventure and artistic flair that provides the perfect breeding ground for startups.

While the Pacific Northwest may be a paradise for startups, the journey doesn’t end there. Business owners must also navigate the labyrinth of capital gains and estate taxes when the time comes to pass the baton. Entrepreneurs have a unique way of tackling challenges. Many believe in karma, especially when it comes to business. You might hear them say, “Don’t worry, I’m just investing in good karma by supporting the local brewery!” Well, karma might not directly boost profits, but it’s an essential part of the community spirit that thrives here. Another humorous quirk of local entrepreneurs is their obsession with naming their businesses after local landmarks. You can’t go a block without stumbling upon a “Ponderosa Pizzeria,” “Smith Rock Software,” or “Cascade Climbing Gear.” The areas’ natural wonders are so ingrained in the entrepreneurial mindset that even the business world bows to the majesty of the mountains and rivers.

After years of hard work and dedication, selling your company can be a momentous occasion and a realization of your hard work and entrepreneurial dreams. However, as you embark on this new chapter, the looming reality of taxes can quickly dampen the celebration. Picture this: your business has been taking off, and you’re ready to cash out, but Uncle Sam wants a big slice of the pie. How can entrepreneurs mitigate this tax burden while sipping craft beer at Elysian Brewing Company? Fear not, for in the realm of finance, there are strategic paths to mitigate tax burdens and keep more of your well-earned proceeds. While entrepreneurs revel in the present, it’s equally important to plan for the future. Here are just a few strategies that can potentially help you mitigate capital gains and estate taxes to help protect your hard-earned wealth for generations to come.

1. Transferring Non-Voting Shares: Unlocking Discounts and Preserving Wealth

Before we delve into the intricacies of this strategy, imagine your company’s voting and non-voting shares as characters in a grand financial play. Voting shares, being the decision-makers, typically carry higher value due to their power in company affairs. On the other hand, non-voting shares, often less sought-after, can be surprisingly versatile in tax planning. When planning for the sale of your company, consider making a significant portion of the shares non-voting shares and then transfer them out of your estate. This transfer can result in a “lack of control” or “minority interest” discount. In the eyes of the IRS, a minority interest in a company is generally less valuable than a controlling interest. This means you can reduce the overall value of the shares subject to taxation, ultimately preserving more of your wealth.

2. Charitable Giving with Donor-Advised Funds (DAFs): Donate with Purpose

Philanthropy is a noble endeavor, and it can also be a tax-smart move. By leveraging Donor-Advised Funds (DAFs), you can combine your desire to give back with the opportunity to reduce your taxable income in the year of the sale. Here’s how it works: Before the sale of your company is finalized, set up a DAF and contribute a portion of the shares to the fund. While the funds will be distributed to charities over time, you receive an immediate tax deduction for the full amount contributed to the DAF. This deduction can help offset the taxable gain from the sale, easing the financial burden while supporting causes close to your heart.

3. Charitable Remainder Trusts (CRTs): A Win-Win for You and Your Favorite Causes

The Charitable Remainder Trust (CRT) is another powerful tool in the tax mitigation arsenal. Picture this: you create a CRT, transfer appreciated assets (such as shares of your company) into the irrevocable trust and designate yourself or a loved one as the income beneficiary. The magic of a CRT lies in its dual-purpose nature. Firstly, you or your beneficiary receive income from the trust for a predetermined period or life. Secondly, the remainder of the trust’s assets goes to the charities of your choosing after the trust term ends or upon your passing. By contributing appreciated company shares to a CRT, you can bypass immediate capital gains tax on the sale. Plus, you get to support charitable causes that matter to you, leaving a lasting legacy beyond financial gains.

4. Structuring an Installment Sale: Time is Money

In the world of tax planning, timing can indeed be everything. If your company’s sale allows for flexibility in payment terms, consider structuring it as an installment sale. In this arrangement, the buyer pays for the company over an extended period, and you receive payments and recognition of gain over time. By spreading the gain over several years, you can potentially reduce the overall tax bite, ensuring that your income remains at a more manageable tax bracket. This approach can be particularly beneficial if your sale involves a significant sum, and you wish to preserve a steady cash flow.

In Conclusion: Mastering the Tax Jigsaw for a Rewarding Sale

Selling your company is a major financial milestone, and tax planning should be an integral part of this journey. By employing strategies such as transferring non-voting shares, utilizing Donor-Advised Funds (DAFs), and exploring Charitable Remainder Trusts (CRTs), you can achieve a win-win situation—preserving your wealth, supporting charitable causes, and reducing your tax burden.

Just like the steady flow of the Deschutes River, local wisdom is abundant in the region. However, tax laws are complex, and it’s essential to work closely with financial advisors, tax professionals and estate planning attorneys to navigate this intricate landscape successfully. With their expertise and your entrepreneurial spirit, you can confidently step into the next chapter of your life, knowing that you’ve made the most of your company’s sale. If you’re looking to sell your business over the next 1 to 5 years, feel free to give my office a call at 541 385-8831 and we’d be happy to discuss the possibilities of mitigating your potential taxes.

Remember, in the world of finance and taxation, knowledge is power—empower yourself for a rewarding and tax-efficient future!  So, my fellow entrepreneurs, embrace the Bainbridge Island buzz, relish the laughter, and plan wisely for a future as bright as the autumn sunsets. Remember, in this magical city of opportunity, the only limits are the ones you set yourself. Now, go forth and conquer Bend’s entrepreneurial kingdom!

David Rosell is President of Rosell Wealth Management in Bend. www.RosellWealthManagement.com. He is the host of Recession-Proof Your Retirement Podcast and author of three books: Failure is Not an Option- Creating Certainty in the Uncertainty of Retirement, Keep Climbing- A Millennial’s Guide to Financial Planning and In The Know- Turning Your Unneeded Life Insurance Policy Into Serious Cash. Find David’s books at local bookstores, Amazon and Audible. This material has been prepared for informational purposes only, and is not intended to provide, and should not be relied on for, accounting, legal or tax advice. The services of an appropriate professional should be sought regarding your individual situation. Investment advisory services offered through Valmark Advisers, Inc. a SEC Registered Investment Advisor Securities offered through Valmark Securities, Inc. Member FINRA, SIPC 130 Springside Drive, Ste 300 Akron, Ohio 44333-2431. (800) 765-5201. Rosell Wealth Management is a separate entity from Valmark Securities, Inc. and Valmark Advisers, Inc.

IBA, the Pacific Northwest’s premier business brokerage firm since 1975, is available as an information resource to the media, business brokerage, mergers & acquisitions, real estate, accounting, legal, and financial planning communities on subjects relevant to the purchase & sale of privately held companies and family-owned businesses.  IBA is recognized as one of the best business brokerage firms in the nation based on its long track record of successfully negotiating “win-win” business sale transactions in environments of full disclosure employing “best practices”.