Business Transition - People and Taxes

By Tom Bixby, President & CEO, LEVEL Management Partners
Published April 28, 2016

The prior article in this Business Transition Series we addressed the importance of viewing your business through a buyer’s eyes. In this article, we take a look at the ability to prepare for a successful transition by paying close attention to your people and the impact the transition might have on your taxes.

People as Assets

Any new owner of your business will want to buy your company for the future earnings it will generate for them. One thing all businesses have in common is that they require people to operate. Some of those people, commonly in critical sales, operations or company leadership roles, are a key part of your ability to generate sales revenue and deliver products/services to your customers. They are truly assets of your business.

You may have invested time and treasure in developing them and now they are paying dividends as your highest sales producers or the people who you rely on most to delight your customers. If you lost those key employees, your company might not collapse but your profit will suffer greatly until you are able to recover from that loss. Any prospective new owner of your company will look long and hard to find those key employees and want assurances they will be there after the transition to continue to produce profit for them.

LEVEL Expert Network™ member Michael Rosenthal, Business Attorney with Wagner, Johnston & Rosenthal, P.C., frequently helps clients consider ways they can structure incentives for key employees to stay on with new owners. “In an ideal world, business owners plan ahead so those key employees know the business owner is considering a sale at some point in the future. It’s a goal, and they are part of the team and this they will get by helping the owner achieve that goal.”

Business owners considering an ownership transition should be aware of several important tools to motivate key employees to stay through the transition:

  • Restrictive Business Covenants (not to compete, solicit customers, hire employees)
  • Equity stakes with claw-back options if employee leaves early
  • Stock appreciation rights or phantom stock
  • Stay bonuses

Michael Rosenthal shared more information about these employee retention tools in our Business Transition Expert Extra – Retaining Key Employees (click to read).

It’s What You Keep That Counts

Your business is an investment, most likely the biggest investment you’ll ever make. When you transfer all or part of your ownership in the business, the government will want to thank you by taking as much of your equity as they can. Since it’s only the money you keep that counts, advance planning with the right team of advisors can make a huge difference.

LEVEL Expert Network™ member Gary Smith, Business Attorney with Bass, Dunklin, McCullough & Smith, PLLC, helps us understand how advance planning helps business owners avoid a huge tax hit when selling their company.

“The largest obstacle most business owners face is a lack of tax planning for their exit. To get the best tax outcome, you need to start your planning at least one tax year before your exit.”

Gary also shares there are many things to think about if you intend to minimize taxes at a business transition. Some of those things include:

  • Tax Deferrals May Catch Up with You
  • Use Charitable Trusts or Foundations for Donations
  • Choice of Business Entity Is Critical
  • Avoid Double-Taxation
  • Advance Planning Pays Off

Read more about these key business transition tax matters in our Business Transition Expert Extra – Taxes at Transition (click to read).

A Complex Maze

Our four-part series revealed a great maze of complexity involved with preparing you and your business for a successful ownership transition. If you can only remember one thing, that thing must be to begin planning for your business transition many years before your intended exit.

That early start will allow you the needed time to consult with the team of experts who can help you work through the complex issues and execute strategies to achieve your very best business transition outcome. A fitting reward for your years of hard work building a great business!

Fully develop your post-exit opportunities with a holistic exit strategy and plan incorporating LEVEL's Growth Vision and Value Architecture solutions.

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