Pre-Sale Planning For the Private Client

Is your agency for sale? Learn how to maximize your return by addressing privacy, asset protection, value maximization, income tax minimization, estate tax minimization, and succession planning upfront.
By: James Duggan

Pre-Sale Planning For the Private Client

Is it time? Is it finally time? Has the time come for you … to sell? It is true that it is a great time to sell your business from a valuation perspective. Multiples are up and cash is plentiful. But regardless of whether it is time for you to actually sell, it is definitely time for you to engage in prudent pre-sale planning.

Planning to optimize your structure in advance of a sale should address six key objectives: privacy, asset protection, value maximization, income tax minimization, estate tax minimization, and succession planning. Although it is difficult to pull yourself away from your business, the payoff for proper planning can be extremely rewarding.

1. Privacy

Your privately held business is just that: private. And you should ensure it stays that way, both before and after a sale. In a time when it is all too easy to access information on someone, you should do your best to ensure that both your own and your family members’ names do not appear in state and federal filings, newspaper articles, court documents, and on the internet in general. Planning for anonymity, both during your lifetime and in the event of death, is imperative in this context.

In order to accomplish this, you should consider the following mechanisms:

Trusts: Consider creating a trust to own your shares. Trusts avoid the public probate system at death and can be titled with a nondescript name to mask the actual owner.

Limited liability companies: LLCs can similarly be used to own shares. They should also have nondescript names so as not to clearly identify you as the owner. In the normal construct, an LLC is combined with a trust. In this manner, ownership interests in the LLC are the subject of the transfer as opposed to the actual ownership interests in your operating company.

Confidentiality agreements: To prevent unwanted disclosure and publicity at the hands of your employees, partners, or independent contractors, enter into enforceable confidentiality agreements that you can actually enforce. You have protectable interests as an owner, but if you don’t treat such information as confidential and make a point to protect it, the courts will not likely protect it for you.

2. Asset Protection

You have worked way too hard to lose all that you have built. Do not jeopardize your prospective sale or lose your ultimate sales proceeds because you left your assets unnecessarily exposed.

There are four distinct asset protection considerations for the private business owner:

Protect your personal assets from company creditors. This is accomplished by using any of the available entity forms. And with the advent of the single-member LLC, there should be no more operating sole proprietorships!

Protect your company assets from company creditors. Identify areas of critical mass of risk or value and separate them out into their own entities. For example, business owners frequently create separate entities for real estate, equipment, intellectual property, employees, and operating divisions,. The objective is that a lawsuit should only adversely impact the separate entity, and not take down the whole.

Protect company assets from personal creditors. If you own your company directly, you are at risk of turning your shares over to a creditor in the event of a personal judgment against you. Avoid this by layering in asset protection trusts (APTs) or LLCs — or both — as a layer of insulation between you and the company. Properly structured and enforced, a personal creditor will not be able to get to the shares of the enterprise or its underlying assets.

Protect your sales proceeds upon liquidation. Make no mistake, once you cash out, you now have the most attractive assets for creditors to attack: cash and securities. Use LLCs and APTs as owners of the company so that the proceeds are actually received by an asset protection structure. If you receive the proceeds directly, and subsequently transfer to an asset protection device, it will probably be too late, and you will be subject to a fraudulent conveyance action. This can be easily avoided with some simple pre-sale structuring.

3. Value Maximization

The most obvious objective that all sellers share is to get the highest amount possible for the business. It takes work and a disciplined approach to accomplish this:

Clean it up! Selling a business is like selling a house: You need to clean it up and make it look pretty to the buyers. Defects should be spotted and fixed now so as not to hurt the sales price later.

Understand due diligence items. In performing due diligence, buyers will want all information pertaining to financials, tax returns, litigation, employment and labor matters, benefits, audits, regulatory issues, real estate, material contracts, and organizational information, among other items. It is critical that you involve your lawyers and CPAs now to get all of these in order so that you are not deficient, delayed, or embarrassed when the comprehensive due diligence requests come in.

Maintain corporate records. Hire lawyers to fill in that “empty” corporate record book of yours with all the necessary organizational and governing documents, minutes and resolutions, state and federal filings, and stock ledgers, so that you are current and complete and look like a properly run company when the time comes.

Hire a valuation expert. Hire your own valuation expert to give you a sense of a reasonable range of value for your company. The last thing you should do is rely blindly on a buyer’s appraisal. Also, so that the number you receive remains confidential and not subject to disclosure, you should always hire your valuation expert through a lawyer in order to keep the information privileged.

Consult with investment bankers. The earlier you consult with investment bankers and business brokers, the better. They can provide you with valuable insights into your industry as well as guidance and recommendations to best package your company for sale.

4. Income Tax Minimization

Income tax planning is fact-specific and depends on the tax risk profile of a particular client. The tail should not wag the dog, but you should consult tax counsel to assess whether the following might be advantageous in your circumstances:

Section 1202 Stock to get a 100% capital gain exclusion up to $10MM.

ESOPs for C Corps to get a company deduction for dividends paid and a tax-free rollover of sale proceeds if you invest in qualifying securities.

ESOPs for S Corps to create a tax-free company altogether by having profits flow through to the ESOP, which is a tax-deferred, asset-protected qualified plan.

Captive insurance create your own insurance company to insure legitimate risks, and convert what would have been ordinary income at the operating company into qualified dividends on profits from the captive.

Self-directed IRA as owner establishes a tax-deferred wrapper around the ownership interests.

IC-DISC for manufacturers who export; converts ordinary income into qualified dividends on allowable sales commissions.

Defined benefit plans, such as cash balance plans, allow for disproportionately high allocations and deductions for older participants.

Try to sell stock and not assets to achieve capital gain exit instead of ordinary income. (This can reduce taxes by approximately 50%.)

State tax arbitrage: Break your business into components and isolate income generators in low/no-tax states.

Changing residency pre-sale: Become a bona fide resident of a no-tax state to avoid state tax, or a foreign country to avoid both state and federal tax.

Charitable remainder trust (CRT): Contribute stock to a CRT before sale to get an upfront charitable deduction and tax-free diversification upon sale.

C Corp conversion: If your goal is to accumulate income to improve your balance sheet or expand your business prior to sale, consider converting to a C Corp in order to benefit from the new 21% fixed corporate tax rate.

Qualified business income deduction: Structure your entity to qualify for the new 20% deduction on certain pass-through income.

162 audit: Engage your CPA and lawyer to review and maximize your business expenses as a whole under IRS Code Section 162.

The more that you can save in taxes, the more you can retain in the business. And with multiples being what they are today, every dollar saved could lead to multiples of that dollar being received upon sale.

5. Estate Tax Minimization

If you are contemplating transferring your business to your children or grandchildren to remove the asset from your estate for estate tax purposes, the goal is to do so not just prior to sale, but ideally, prior to any significant run-up in value of the business. The three strategies to pursue for wealth transfer are as follows:

Gifting: You transfer the current value as well as the appreciation of the asset with a complete gift. For the previous planning objectives discussed, you should actually be gifting ownership interests in the LLC holding company you have established as opposed to direct interests in the operating company. As a result, when you sell, the proceeds go into an LLC that is still controlled by you instead of directly to your children.

Freezing: When you enter into a “freeze” transaction, you only transfer the appreciation of the asset after the date of gift. This is generally accomplished through a trust in which you transfer an asset worth $X, and receive payments over time equal to $X. Thus, there is no gift. But as the asset itself grows in value, all of the appreciation occurs outside of your estate and inures to the benefit of your descendants.

Diverting acquisition opportunity: Perhaps the best transfer planning approach is to transfer an opportunity to your descendants before there is any value. When you set up a new company, usually worth $0 at inception, establish a trust for your descendants at that time, and all of the growth will occur outside of your estate.

6. Succession Planning

In the end, succession planning becomes your overriding goal with respect to: a) the business itself, b) your employees, c) the wealth you created, and d) you and your personal transition. Each requires a thoughtful approach in advance of a sale in order to protect the legacy you intended.

So, whether a sale is imminent or not, pre-sale planning should be on your mind. Ideally, you’ll have a coordinated advisory team working together at least one year before an anticipated sale in order to get it right. Good luck in your planning!

This article was written by:

- has written 550 posts on Agent Entrepreneur.

Kate Spatafora is the Associate Publisher for MG Business Media.

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The views expressed by the authors and those providing comments are theirs alone, and do not necessarily reflect the views of Agent Entrepreneur or any employee thereof.

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