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A business owner may feel both excitement and concern at the prospect of selling a business.
We offer five questions to consider as a liquidity event approaches.
The structure of the sale (immediate cash, criteria to receive earnout proceeds, and so on) can have a significant impact on financial and nonfinancial areas of life: for example, retirement, taxes, relationships, or lifestyle.
Depending on the business entity and its tax structure, use of a charitable strategy before the sale of a business may provide an opportunity to save capital gains taxes. If such a strategy is not available, a simple cash gift to a charity or charities or to a donor advised fund may provide income tax benefits and savings.
Additional advanced charitable planning strategies, such as the use of a trust or private foundation, may be viable, depending on the size of a charitable commitment and how it intersects with estate and legacy planning intentions.
A current estate planning review and a discussion of additional estate planning considerations are important before commencing a sale. For example, the estate planning structure will determine the way assets are distributed and the tax treatment of the transaction. Certain techniques, such as a grantor retained annuity trust (GRAT) and an intentionally defective grantor trust (IDGT), may provide opportunities for income tax and estate tax planning efficiencies.
Before reaching agreement with the buyer, the business owner should be confident that the sales price is sufficient to sustain his or her lifestyle and legacy planning expectations. A want versus need analysis can be accomplished through the use of future cash flow and Monte Carlo simulation projections. A future cash flow analysis will forecast the prospect of a cash surplus or deficit based on the projected expenses.
A comprehensive asset protection discussion is vital before any business transaction is completed. The sale of a business is an opportunity to consider the adoption of additional asset protection elements suitable to the changing dynamics of both the life and the financial plan of the business owner and his or her family. Examples would likely include a broad insurance review (life, disability, and property & casualty) and the current status of accounts such as 401(k), 403(b) and individual retirement accounts (IRAs). More sophisticated planning options may be prudent depending upon the business owner and his or her family’s goals and aspirations. An example of a sophisticated planning option is a domestic asset protection trust (DAPT). A DAPT is a self-settled legacy trust created by an individual for his or her own benefit.
 For more information about donor-advised funds, please see “Donor Advised Funds,” and “Donor Advised Funds and Private Foundations: A Comparison of Key Features,” produced by the PNC Center for Financial Insight.
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