• $2,000,000 in business income
• Looking to exit and not sure the best routes
David & Christine have built a successful engineering firm and want to exit their practice in the next 5 years. They’re worried about taxes when they sell but also transitioning to income & assets they don’t have control over. They want to make sure they make the most of their business.
After digging into their financial situation we boiled their goals down into a few key areas:
Goals
Sell business in 5 years
Sell business for full value to people who will value their employees and take care of them
Minimize taxes on the transaction
Turn proceeds into income she doesn't have to worry about or work for her life $150,000 per year
Taxes
They have a 401(k) plan for their employees but do not have a plan to minimize taxes on the sale of the business.
They are currently an S-Corp
Protection
Their business relies on a few key engineers who they couldn't live without. They want to make sure these people are taken care of
The business would suffer a bit in the intermediate term, but would be ok if something happened to them once managers got up to speed
Growth
Their 401(k)s totaled $2mm and were invested in their target date funds.
Their assets aren’t aligned with their goals
They have $1,000,000 in cash in the business
Completed a business valuation to give them a better idea of the value of their business
Implemented a retention plan for the 3 key employees to make sure they didn’t leave the business before sale
Identified and put a plan in place to help improve key business metrics pre-sale
Switched from an S to a C Corp to prepare for sale. This may increase taxes slightly today, but allows for more flexibility come sale time.
Reviewed their sale options
1) 3rd party - not sure because they’re scared culture will change
2) Management team - would like to, but not sure they have the funds
3) ESOP - allows employees to purchase for full value and not take on personal debt
If we execute an ESOP and sell the business as a C, all gains can be deferred if certain rules are followed!
Implemented a buy-sell agreement with 3 key employees if something happened to them before the contemplated transaction
Allocated outside assets to lineup with this goal
Proceeds generated $250,000 per year in income, well above target range.
Allocated money in bank to higher yield savings options for emergency fund and into total retirement allocation for excess to improve return
Financial planning for small business owners, by small business owners