Case Study: Business Sale

John and Mary Thompson have owned a tooling company for the past 23 years. In that time they’ve grown their company from a mom and pop shop to a regional powerhouse. John and Mary are now considering selling the company and retiring. There primary goal is to generate enough money to live comfortably in retirement. If possible they’d also like to leave money to their children, and maybe some to charity. The Thompson’s are currently working with an investment banker, their accountant and an attorney on the sale of their company.

At the bequest of their attorney John and Mary contacted Fluent. At first, they didn’t know why they should be contacting us; shouldn’t they worry about investing once they get the money? Also, the process of selling and running a business at the same time is consuming, can’t financial planning wait until the process is finished?

On the surface the answers to these questions seemed to be yes. However, after talking to Fluent John and Mary realized there are actually quite a few items that need to be done prior to a sale to maximize the return.

As part of their business John and Mary owned a warehouse as well as equipment. Some of the equipment was older but worked well just the same. The purchasing company, a larger company, wanted to upgrade the equipment and move the employees to their home office 5 miles away. The purchasing company also wanted to buy the company as an asset sale, versus a stock sale, to limit liability and retain favorable tax treatment.

The Thompson’s had depreciated much of their hard assets, which meant they would have large built in gains on the sale of the company. While the investment banker was attempting to get the best price possible for his clients, he was largely unconcerned about these consequences.

First Fluent looked at the property. The Thompsons believed it would make sense to keep the warehouse for income. Fluent was able to model how much they would receive after taxes on the sale of the property versus what they could get for rent, assuming vacancies and improvements. That allowed for an apple to apple comparison to determine which choice was better. It turned out the Thompson’s were correct, leasing the warehouse at its current rent would make sense. However, because the acquiring company wanted to move, they would not have a built in tenant.

Fluent suggested that they do a tax free exchange of their current property into another property the acquiring company was going to use. By doing this, John and Mary didn’t have to pay capital gains or recapture depreciation on the sale of the property. Instead they leased the new property to the acquiring firm and received regular payments. It was the best of both worlds. As a result, they did not include the building in the sale of the company but did put in a 10 year lease provision on the new property.

Next Fluent looked at the equipment, similar to the property there would be large gains on the sale of the equipment. Fluent suggest the company do a 1031 exchange to buy new equipment. They then could lease the equipment back to the acquiring company. They now have another cash flow stream during retirement.

Because they have income from the building and equipment flowing back into their company, John and Mary kept the corporate structure in place. They were now able to keep their medical insurance and other benefits in place and contribute to retirement accounts.

After reviewing their retirement plan, John and Mary decided they would be comfortable gifting some money to their children now. Rather than just giving them the money, which would create a gift tax issue, we suggested they set up a GRAT (Grantor Retained Annuity Trust). They put shares of the company into the GRAT before the company entered a contract to be sold. When the company is sold the shares substantially appreciate. Most of that appreciation then goes to the children. They have effectively given their children money without paying gift taxes or estate taxes.

Finally, the Thompsons decided they wanted to gift some money to their favorite charities. But rather than one big gift, they wanted to gift smaller amounts over a period of time. Fluent suggested they set up a CRUT (Charitable Remainder Unitrust). This type of trust would allow the Thomson’s to get a tax write-off now and receive a stream of income from the CRUT. The tax write-off could help offset some of the large tax bill they would have from the sale of the business this year and the stream of income could provide funds for future years. We then set up a family foundation through Fluent to accept the charitable contribution. That allowed John and Mary to gift smaller portions throughout their lifetimes and retain full control over the assets.

While it first appeared that John and Mary should discuss financial planning after the sale of their business, they were able to save a substantial amount of money in taxes and generate strong income streams by working with Fluent prior to the sale. The Thompsons can now focus on the sale of the company with the knowledge that they haven’t missed any opportunities.

Fluent Wealth Partners, LLC
1530 The Alameda #115
San Jose, CA 95126

Phone: 408-217-2000
Toll free: 866-630-7583
Fax: 408-217-2011