Business owners have to be prepared with a succession plan that weighs options from selling the business in this advantageous environment of low-interest and capital gains rates, to passing it down to the next generation in a way that mitigates heavy tax penalties, according to Putnam Investments attorney and CPA Chris Hennessey, who spoke at the Forbes | SHOOK Wealth Management Virtual Summit.
Hennessey highlights that only 30% of business owners have a formal plan in place for succession, despite a low success rate for business owners who attempt to pass on their businesses to the next generation. The first step in setting up a succession plan for businesses is analyzing the value of the business, which can start out as simply as looking at cash flow and EBITDA rather than going all the way into a certified financial appraisal. Once that valuation has been determined, it is important to look at succession options from keeping the business in the family to selling outside or to key employees and looking at how that can be structured in a tax-advantaged way.
If pursuing the route of keeping a business in the family, Trey Haydon, managing director for The Haydon Group at Raymond James, mentioned the sale to an intentionally defective grantor trust. This mitigates taxes but must be done pre-liquidity and Haydon recommends doing so two years before the liquidity event.
For those that are charitably inclined, a donor-advised fund is also an option where clients can donate c or s corporation stocks in order to get a tax deduction. However, this is a post-tax strategy during a year where the owner will get income and typically a far larger payout from the sale. In cases where this renders the income not necessary, business owners can avoid income tax by donating that income to a donor-advised fund.
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