Lexi Grant (L): Hi, I’m Lexi, founder of They Got Acquired, and today we’re talking about how to minimize taxes when you sell your business, plus some other tips for financial planning. We get a lot of questions from founders who are looking to reduce their tax burden when they sell, and that’s why we’ve brought on an expert today to walk us through it.
Matt Camrud is a financial advisor with Brighton Jones, a financial services firm. Brighton Jones is also one of our sponsors. We cover lots of topics in this conversation, like: Why some founders move states before they sell, how investing in real estate after you sell can help you avoid paying some tax, who should consider leaning on QSBS?—and if you don’t know what that means, you will soon—and even how much it costs to engage a firm like Matt’s to get your ducks in a row. My biggest takeaway from this chat is that it literally pays to think ahead. Many founders neglect this part of selling until after they have a contract in their hand because we’re busy running the business. But you really want to be strategic about financial planning well before you find a buyer.
All right, let’s get into it. Thanks for being here.
L: Say I’m a founder who is selling a business for the first time. What are the big-picture things? What are the biggest things that I should think about when I’m going into that process from a financial perspective?
Matt Camrud (M): Yeah, and I appreciate that you said big picture things, because it is really important to start with the big picture. I think sometimes we can get bogged down on just the tax piece or just the investment piece when all of the financial planning disciplines really are important here. taking a step back, understanding how much does this business represent in terms of a person’s overall net worth? A lot of times we’ll see business owners come to us and this is the largest asset on their balance sheet and by far. And it’s a liquid, right?
A transaction can be a real game-changing event for an individual and their family. So, just making sure we’re thinking about things from an investment, from a tax, from an estate, from a risk management perspective, a whole variety of financial planning disciplines really come to bear here in these situations.
Something I’ll probably repeat several times today is this idea that planning well in advance of a transaction is critically, critically important. We have a lot of clients who come our way who either are already in a legally binding contract or the sale already happened and the and the cash is in their bank account.
At that point, it’s really difficult to do much in the way of meaningful planning. Even when a business owner begins the contemplation of a possible transaction, that’s really the best time to be starting to bring in some professionals—tax, estate, legal investment, et cetera.
Then, once we start having those conversations, then we want to just paint a picture for what life looks like post-transaction. Again, you’ve gone from a highly illiquid asset, which produces income for you, but is not liquid to something where there could be a large influx of cash, we want to make sure we’re thinking about how we are going to recreate that income stream with an investment portfolio versus with an operating business, and how are we going to make sure we’re taking care of family members, and are we going to try to fulfill any bucket list items, are there things that you as a business owner have been too busy to do or haven’t had the liquidity to do, and now you’re like, “I want to go enjoy the fruits of my labor and go on a really great trip!” Or maybe it’s a second home or a new car. So it’s just really fun to sit down with business owners at that stage of pre-transaction planning and paint a vision for what that looks like both before, during, and after the transaction.
L: Yeah, I love how you explain that because I think for a lot of folks, especially people who come into a business because they’re passionate about it, not everyone is great at the finance piece. And you just said it’s fun to come in and do this kind of planning. I love that because I think it can be fun, but you’ve got to come in with that attitude. And, so, I love that you bring that.
M: Yeah, absolutely.
L: Can you tell us a little bit about you and your background and why you’re qualified to give us some of this advice?
M: Yeah, happy to. I’m a partner and senior lead advisor here with Brighton Jones—been with the firm for 15 years. Prior to Brighton Jones, I was with another wealth management firm in the state of Minnesota. So, all told, about 22 years in the business of advising high net worth individuals, many of whom are business owners. Some are executives, some are professionals of various types. I’m a certified financial planner as well.
L: How much money do you have to make through your sale to make it worth hiring someone like you?
M: Yeah, great question. Although we are a financial planning firm—and this may sound self-serving—I think financial planning is important for everybody, regardless of the size of the transaction. What’s different is the type of planning that’s being done. So, if it’s a $10 million sale, then there’s probably a state planning and some very advanced tax planning. Maybe there’s some philanthropic components. Maybe there’s wealth transfer elements. If it’s a $200,000 transaction, it’s still: If you’re the business owner who’s built that business to $200,000, you want to make sure you’re optimizing every aspect of that $200,000.
In that case, instead of some of these more strategic types of planning, it might be: “Let’s clean up some debt.”, “Let’s get education funded for our kids.”, “Let’s make sure the investment portfolio is structured so that we can really optimize the proceeds from the business.”
Brighton Jones has built a firm where we can really work with folks along that spectrum. We have people who are what we call “wealth accumulators.” They haven’t quite hit the number they need to really step away from productive work and business building. Then we have folks who have more than they need and they’re starting to think about legacy planning and the next generation and giving money to causes they care about.
But, in all cases, financial planning is extremely valuable. We would recommend, as I said earlier, If you think there’s the possibility of a transaction, whether it’s $200,000 or $2 million or $10 million, just make sure you’re engaging some professionals in advance.
And, if it’s on the smaller side, you don’t need to go to the big city law firm and spend $700 an hour. There are great hourly financial planners out there at Brighton Jones. We’ve got people that can engage with you at that kind of more-modest end of things. But modest doesn’t mean not that we don’t need to still invest time and money and effort into optimizing the outcome.
L: What other things do you think about in terms of tax strategies, specifically? Because that’s something that you sort of just mentioned now, but you do have to think about that ahead of time, for sure.
M: For sure. I’d say that the majority are pre-transaction, but there’s some you can actually do afterwards. It’s not like all hope is lost if a business owner comes to us two weeks after the transaction. The further you get away from the transaction, the harder it is to plan. So I do want to make sure that’s clear. We’ve seen a lot of clients—again, in anticipation of a transaction—relocate to Nevada or Texas, and you only have to be there for 183 days out of the year to be considered a resident.
And just be very mindful of the fact that, when a state looks at your residency, they’re not just looking at how long you were there. They’re going to be looking at things like your voter registration and your license and your legal mailing address. So, I just want to make sure the listeners here are realizing that there’s a lot to establishing residency beyond just spending half the year in a state, but it’s really something to be thoughtful about.
Because, if you think about it, California having a—call it roughly 10% plus marginal tax rate—you’re going to have a large transaction. That’s a real number, right? So, just being thoughtful about residency planning, I think, can be a great way to obviate some of the tax. But, again, it can’t be done two weeks before the transaction, right? It’s got to be done well in advance.
L: I was talking to an entrepreneur recently who just did that. He was living in California and he anticipates he hopes to sell in the next couple of years. So he and his wife moved to Austin and I thought hard about that because I was thinking, “Yeah, if you, if you’ve got kids or a family that needs you nearby, it can be hard to make those shifts.” Do you see people actually choosing that as something that’s—do a lot of people do that?
M: We do, but you’re absolutely right. Sometimes the tax tail can’t wag the dog all the time, right? Sometimes you’ve got to do what’s best for your family. Where do you want to be, right? You may not want to be in Texas. And you may be willing to spend that extra amount on taxes to be in a place you love, near family, near your community, near your connections. By all means, it should be a holistic decision. But, if you’re open to a move and realize you can still spend a good chunk of the year in your preferred home state, then residency planning can make a lot of sense. But, absolutely, you’re right. There are times when it’s just not even an option because kids are in school and there’s just too many commitments in where you are.
L: How much do you see founders saving when they make that move?
M: Yeah, I mean, let’s say it’s a million-dollar transaction, million-dollar capital gain at 10% in California versus zero in Texas.
It’s a hundred grand, right? So it really can be material depending on the size of the transaction and the capital gain involved and the types of planning that you can do or can’t do.
L: How long do you have to have been living in a state to be considered a resident? Like how, how far ahead of my sale do I have to move to the state?
M: It depends, because each state does have slightly different requirements. We would suggest if you’re going to do that, start the process—in other words, make a move maybe 18 months in advance of a transaction. You want to have, ideally, you have a couple of tax years that you straddle and show that state’s Department of Revenue that you’re a committed resident of that state with all the evidence to support it. I’d encourage your listeners to research each requirement from the state in question.
L: That’s good. Thank you. What else you got for us?
M: Yeah, you bet. Another one: This is one you could do after the transaction. For those who didn’t get around to planning, at least there’s an option for you, and that is: Opportunity Zones.
A Qualified Opportunity Zone Fund allows you—I’ll use an example just to use real numbers here: Let’s say you’ve got a million-dollar gain on the sale of your business and you don’t want to recognize all that gain in one year. You could take a portion of it, let’s say $250,000 of that million, and reinvest it back into what’s called a “Qualified Opportunity Zone Fund.” This is where you’re investing into areas that the IRS has defined as needing further investment because of being previously underserved or an underprivileged area. So, you’re incentivized from a tax perspective to go make investments in these areas. If you take that $250,000 and you roll it into a Qualified Opportunity Zone, you have to do it within 180 days of realizing the gain.
You can’t indefinitely wait, but you do have some time once those dollars are in the Opportunity Zone Fund, there’s a couple things that happen: The first is the gain on that $250,000 that you would have otherwise recognized in the year of sale gets deferred until the end of 2026. So you’ve got some deferral, which is nice. Deferral is always a good thing.
But the bigger benefit from a Qualified Opportunity Zone Fund is the long-term capital gain exemption on the gain from the investment itself. Let’s say you put $250,000 in; you hold it for 10 years—and the requirement is a 10-year hold—and, let’s say at the end of 10 years, it’s worth $500,000. Upon sale, 100% of that gain on that $250,000 of gain is exempt from tax because you invested in a Qualified Opportunity Zone Fund.
These investments tend to be real estate-oriented. It could be student housing; it could be a multi-family development. You’re diversifying what was once a concentrated business asset into a more diversified asset that creates cash flow and you’re deferring tax and you’re exempting future gains from tax as a result of the investment. This can be a really cool way to plan taking advantage of the tax code and also a great diversification opportunity.
L: Yeah, that’s interesting. I didn’t know about that one in great detail, so thanks for sharing that.
M: Yeah, absolutely.
The other one I wanted to touch on is this idea of charitable planning. For a lot of business owners that we see, you’re either too busy to focus on it, because you just can’t even think about being intentional. You don’t want to just give money away for the sake of giving money away. You want to be thoughtful. You want to make a difference. We see business owners who, all of a sudden, have the time to consider charitable giving and they have the liquidity to consider charitable giving. That’s where pre-transaction charitable planning can go a long way and creating the donor-advised fund, getting that upfront deduction, and timing it with when you receive the sale proceeds, can be a great way to do some planning.
L: Sometimes I have calls with founders and they’ll ask me like, “Hey, what should I think about in terms of tax planning ahead of the sale?” It seems like it’s very personalized to that specific founder. I know you can talk generally about all these different ideas, but how much of it depends on their own specific financial situation?
M: Yeah, it’s a great question and it’s so true. Because, you can come up with all the exotic tax planning strategies in the world, and if it doesn’t make sense for the client, then it doesn’t make sense to do, right?
For some people, they’ll just happily pay the tax, take the proceeds and go do with it what they’ve been wanting to do for years, but haven’t been able to because they’ve been in an illiquid, concentrated position.
For some people doing a lot of this pre-planning—for example, transferring wealth to kids—maybe they don’t have kids or maybe they don’t want to give their kids money. They don’t want to give them too much at the very moment. So, that doesn’t make sense.
Maybe they’re not charitable, right? That’s okay. So let’s not use a charitable strategy. Maybe they don’t want to lock their money up in an Opportunity Zone for 10 years. Then, let’s not do an Opportunity Zone.
Generally, we can find some way to find some marginal savings around the edges. But, sometimes there’s just only so much you can do if the focus and the needs of the client don’t lend themselves to some of these planning strategies. And, that’s okay. You can still have a great outcome.
I know one of the things we should talk about here is this idea of the stock exemption, because this is one of those things where—talk about advanced planning! You’ve got to set this up right at the very beginning of your business, really, right?
To share a little bit about the qualified small business stock exemption: to qualify for that, you have to be a C Corp. You can’t be an S Corp. You can’t be a partnership. Not a sole proprietorship. You’ve got to be formed as a C Corp. Then, at the time the stock is issued or you’re capitalized, you need to have a capitalization value—essentially gross asset value—of $50 million or less. If you meet that threshold, then in the future, upon sale, you would actually exempt 100% of the tax on the gain up to $10 million. That 100% number is predicated on the stock being issued after September 27, 2010. Prior to that year, it wasn’t 100% exempt. But, talk about a really impactful strategy that really doesn’t require any planning toward the transaction, it’s really all about the upfront planning
But some things to be mindful of with the qualified small business stock exemption: Number one, it isn’t respected by a lot of states. Again, to pick on California, if you were to have a transaction in California and realize $10 million of gain that would be exempt for federal purposes, California would tax every penny of it. It gets back to this idea of residency planning and not counting on the QSBS exemption if you’re in a state that doesn’t respect it essentially.
L: Yeah. I’ve talked to a lot of founders who have used QSBS and have saved a lot of money from it. But they all say that the biggest piece is you have to decide, I think you have to become a C Corp like five years before the sale or something like that. So you have that decision so far in advance.
M: You do. Yeah. And sometimes being structured as a C Corp doesn’t always make the most sense for the business from an income tax standpoint. So, it’s definitely something where you want to bring in tax and legal help to be thoughtful about it. But if you feel like you’re a business that’s positioned for substantial growth and you’re kind of falling well below that $50 million threshold it’s definitely something worth taking a look at because the savings can be pretty extraordinary.
So, just make sure that, if you’re pursuing QSPS, do your due diligence. Make sure that you’re making a well-informed decision that’s holistic. Because, again, to your point, you have to make the decision fairly early on. And if you factor all the considerations into the decision, it may not actually make sense, even if you know this company is going to go up a lot and be worth a lot someday.
L: One thing I really like about your website—about the Brighton Jones website, generally—is you say, we can be your personal CFO. Yeah. Can you talk about what that means to you and how you think about that?
M: Absolutely. Yeah, that’s something that I think we take great pride in and differentiate ourselves in, which is that a lot of people in our business are investment managers, primarily. They’re there to take a pool of assets and invest them into the market. We view ourselves as total balance sheet managers. We’re here to act as the client’s personal CFO. For a business owner, I think that resonates because you kind of look to your CFO or your head finance person to give it to you straight, to give you a sense for the holistic picture of what’s coming your way. When we sit down and work with clients, we want to be in that position of their CFO. Not to sound sort of cheesy, but the client is the CEO, right? Ultimately, we’re here to serve the client and help them fulfill whatever it is they’re trying to accomplish. We do that by giving them the big picture.
Then, part of being a personal CFO is also the coordination of all of the experts, because you really need more than just a certified financial planner in your life, especially if you’re a business owner and you’re looking to do a transaction. What we’ve built at Brighton Jones is a team of experts: we have CFPs, we have CFAs, we’ve got a team of accountants. We do tax work for our clients; we have estate planning attorneys on staff; we have real estate experts for folks who want to invest in real estate. We’ve tried to build a business where a business owner can walk in and say, “Wow! Everyone is sitting around the table. They’re all on the payroll of Brighton Jones, and they’re all here to serve me as my personal CFO.” I think that’s really the focus of that “personal CFO” concept: serving as that hub to bring all the experts around and really advise on the big picture.
L: Yeah, I agree. We can all understand that because we know how much we need that for our own business, we need it for our life as well.
Can you talk about how much it might cost to work with a firm like yours, just generally, so people can think about how they might work this in?
M: Yeah, absolutely. We work with folks in a couple different ways. I may have mentioned earlier how we work with up-and-coming people that are still accumulating. That’s a service model. That’s an upfront planning fee and call that about $2,500 for a deep comprehensive plan driven by a certified financial planner, fiduciary-based. And then it’s more of a subscription fee beyond that. Basically $150 per month if you have less than a million dollars of liquid assets and you’re still growing and trying to get to that point of financial freedom—what we call “vocational freedom”—then that can be a great opportunity or great service line.
Our personal CFO offering, which is kind of the core of our business, starts at a level of assets under management. The reason we do that is simply to align our interests with our clients. Typically, if we have a business owner where the business owner has much of their net worth in their business and not so much in a liquid investment account, we’ll figure out what’s a fair fee for us to serve as a personal CFO to advise on the total balance sheet, knowing that at some point that illiquid asset becomes liquid. Then, we’re able to engage more on a direct management of those liquid assets with that assets under management model. It starts at less than 1% of the asset base and then tiers down based on the amount of assets involved.
There’s no upfront planning fees necessarily when you’re in that personal CFO range. But, to be an ongoing client would require an ongoing quarterly retainer, if you will. With business owners, it’s unique because it’s different than an executive who comes to us that’s amassed $10 million in their brokerage account. That’s super clean and easy to say, “Yep, we kind of know what, what this is going to cost.” If somebody comes to us with a $10 million illiquid business asset and they might have $200,000 in a brokerage account, we need to get creative to say, “Okay, does an engagement make sense right now, for us?” If it does, how can we be fairly compensated and have you feel like you’re getting value for what you’re paying? In those situations, we just have to make sure we’re coming up with something that both parties find mutually beneficial and agreeable. It can be a little variable in those situations.
Not to harp on it too much, but try to set aside some time to be thoughtful about the longer-term vision for the business—if an acquisition is part of your longer-term strategy, there’s an exit in the future versus just an ongoing operating business. Make sure you set aside time to give that some thought from time to time, talk to your peers, talk to advisors, have coffee with a business broker. Start gathering data and understanding the components of a transaction that make for a successful transaction.
Sometimes you can’t plan for it. Sometimes an offer falls in your lap that you can’t refuse and, guess what? That’s a good problem to have. And then maybe we consider some of the post-transaction planning opportunities that I mentioned today.
But, in general, just start having those conversations. Orient your mind, not only towards working in the business, on it every single day, but then thinking about that vision for the future and how you can really optimize this asset that you’re working so hard to build.
L: What do you tend to spend the most time on with people? We’re talking a little bit about tax strategies today. You mentioned charitable giving and estate planning. Of course, the investment side.
Where is most of the effort? Which of those buckets tend to be most fruitful?
M: All of the things you just mentioned, definitely bear fruit. What I find interesting is this concept that it’s really hard for a business owner to wrap their head around, which is this business was my source of cash flow and my living expenses for—you name the number of years—and, all of a sudden, that asset’s gone and it’s been replaced by this pool of cash, which we need to then go deploy into markets. And, of course, markets are marked to market daily, whereas your business isn’t right. So you don’t see the volatility day-to-day. I think it’s spending a lot of time just kind of wrapping a business owner’s mind around the psychological impact of that and realizing that there’s no, there’s no longer a corporate checking account to issue their next paycheck. It’s coming out of their brokerage account.
L: Yeah. What about for someone who has a half-million dollar sale?
M: In that case, it’s realizing that in most cases, $500,000 is not enough to be in vocational freedom. So it’s more about saying, “Look, this is one step in a path or a process of accumulating enough to be able to be vocationally free. How can we use this to our best advantage, as a significant step in that direction?”
Certainly being smart with tax planning is key if they plan to continue on in business ownership—maybe it’s taking more stock of the acquiring company because there’s tax benefits and then they’re just kind of basically leaning into that next company. They’re still working in that business. Certainly the approach is a bit different. The estate planning elements are a little lighter because you’re not necessarily going to push yourself into some new estate planning scenario or tax bracket. I think at that level, it’s more of the block and tackle, tidying up the balance sheet, figuring out what comes next, and continuing to plan for how we can get that person to the ultimate vocational freedom.
L: Can you give some examples of what I would want to think about well in advance, as opposed to after the sale? ‘Cause, I think for many of us, when you go through selling your business—especially the first time—there’s a lot to think about with the due diligence process. You’re also trying to continue running the business. Then, adding this component of taking care of the money after you sell and even optimizing the sale in these ways you’re talking about… it sometimes comes as an afterthought. Let’s be more specific about the things that you’ll be able to do if you do think about this in advance that are not possible if you wait till after you sell.
M: Yeah, maybe I can share through an example some of the things we would think about.
We had a business owner come our way who was a majority owner of a small biotechnology firm here in the Northwest. At the time he came to us, the value of the business was pretty modest, just because from a profitability standpoint, it was still getting off the ground. If you look at an outside valuation, it would be very, very modest. But this client was very bullish on the stock, very bullish on the company, and wanted to think thoughtfully about planning ahead, which we really appreciated, ‘cause that’s where we’d love to come in and help.
What we suggested, because this client was inclined to pass some wealth to his two kids: We set up an irrevocable trust for the kids and we transferred 6%, so 3% to each of the children of the company to these trusts. Because the valuation for purposes of a transfer was so nominal, there were no estate or gift tax issues to worry about. It was just very clean and simple. Basically, just a paper shuffle, right? Just some transfers of units and that was done. We set that aside and we thought “Great!” We, of course, aren’t in the business, so we gave it a, “Maybe this will work out. Maybe it won’t.” But the client was very bullish.
Fast forward three years, and the company just blew up. Took off, revenues were way up. They had some great contracts that really supported the business and they received an unsolicited offer to be acquired, and it was an offer that the ownership group could not refuse.
Now, think back to the planning we did when we transferred those shares when they were worth next to nothing. Now, those trusts have a value of, call it a half a million each just from that proactive planning. Now we’re at the point where, because there’s a contract, there’s a price that’s been established for the stock.
Now we’re going to say to the client, “Are you charitably inclined?” And we knew he was because we had had conversations. We use a tool called a “donor advised fund.” A donor advised fund is really just a 501c3 charity that’s at the individual account level that the business owner client can control or direct after a transaction. What we did is we moved half a million dollars of company stock into the donor advised fund. Again, this is after a price has been established through a legally binding contract. And the client received a $500,000 charitable deduction on their tax return in the same year that the sale occurred. That’s key, because you want to time the two so that that deduction is worth more to you. Because of course the higher your income generally is, the more that deduction will be worth. So now, again, this is pre-transaction. It’s key, right? Because if we wait till after the fact, we’re going to lose out on this benefit. So we get the half-million-dollar deduction, the transaction occurs, those shares that were in the donor advised fund now become cash, and now the client essentially has a $500,000 foundation where they can distribute funds over time. It doesn’t have to all be at once—they can take as many years as they want to distribute that out. And then also remember that these two trusts, which once held stock, now hold cash.
So now the kids have a mid-six-figure sum that we’re able to reinvest for longer term growth. Then, likewise, the client who’s just received all this liquidity, lots of post-transaction planning that occurs there with getting things reinvested and finding out the right mix of diversification and so forth.
But hopefully that illustrates why, if we were to have to have waited ‘till after the transaction, we could have never transferred the stock at that really low valuation. We would have never been able to take advantage of the donor advised fund, because if we wait ‘till afterwards, the capital gain is realized on all of the stock. Whereas, the capital gain attributable to that which we put into the donor advised fund: tax free. You get the deduction and it’s a tax free sale.
Those are just a couple examples of the many types of pre-transaction planning that we look to do for clients.
L: Aside from tax planning, what are the other big pieces that someone should be thinking about as they head into a transaction?
M: Yeah, I think one thing that we see is entrepreneurs want to really optimize that top line number. “I want to get this business acquired for $10 million, no less!” Right? When in actuality, viewing a deal holistically makes a lot of sense. What I mean by that is maybe it’s $9 million, but there’s an ongoing contractual consulting agreement for the next five years that allows you to retain health insurance benefits and optimizing or contributing into a retirement plan.
Just make sure that you get creative, that you’ve got good advisors and don’t necessarily focus on the number that goes in the press release, but go focus on the other benefits you can build into a deal that will be just as valuable, if not more valuable over time. So I’d say that’s a big one.
And then, again, just getting back to this idea of seeing the forest for the trees and not getting so focused on one element of planning and then realizing that by doing so you’re sacrificing others. So kind of what we talked about earlier, this idea that if “I’m so focused on saving tax, I might actually not get the outcome that is best for me.”
For example, this idea of charitable giving, like people often say, “If I give money to charity, I’m going to pay less tax.” True, but you’re still going to have less money than you did when you started. So, unless you’re truly charitable, that is not a good planning strategy for you, right?
There’s a lot of examples of that, where you don’t want to let the strategy dictate what you do. You want to let your goals and objectives dictate the path. Then we come in and help you figure out what that right path is. Hopefully this goes without saying, but there are very few people that can go out into the world, build a business, and have it be worth something and sell it and reap those rewards. What we always tell people—and we’ve been known to give people a bottle of champagne—make sure you celebrate! You’ve spent so much of your life and blood, sweat and tears building a business. We really encourage people to celebrate. Maybe that’s a bucket list travel item. Maybe it’s just something you’ve been putting off because you just haven’t had the time or the resources. Making sure you take that time to recognize your efforts is so important.
L: Yeah, that’s great. Thank you. These are all really practical, tangible tips that we can all use. That part I always really appreciate, so thank you very much.
M: Yeah, it’s my pleasure. Thank you.
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