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The Life of a Business Owner

Yesterday I talked a little about some of the expectations of an entrepreneur in terms of commitment. Another subject that is often discussed among business owners is an "exit strategy" ... a plan for realizing the equity, or some of the equity in a business. Many business owners live and breathe their business 24/7 for many years in the belief that they are building equity that will see them through their retirement comfortably and provide a nice nest-egg for their family.

The reality is that is often as far as the thinking goes ... the effort mentally and physically of running a company becomes all-consuming and so many personal issues get neglected. One of them being financial planning!

A good friend of mine ... who "exited" his business a couple of years ago sent this to me. I thought that anyone who might ever be interested in owning their own business (if I didn't frighten them off yesterday) might be interested. The moral of the story being that financial planning is ALWAYS important, but the more assets you have the more the taxman will take if you don't structure things appropriately.

This is from Jim ...

A quick story I'll share.

I was recently approached by a CEO who owns a very successful cabinet making company looking for advice regarding the possible sale of his business. He has worked tirelessly for 30 years building his company from nothing to over $20 million is sales, a large manufacturing plant and 75+ employees. He's overcome tremendous personal and business obstacles including a fire that destroyed his entire operation several years ago. He is married with 4 children and has done everything possible to balance his work a family commitments. It's a truly inspirational story.

After listening to his story and talking with him about potentially being acquired he asked me how much tax I thought he might pay if he sold his business. I asked him if had done any planning to minimize his tax impact in the event of a sale or for that matter even for the ongoing distributions that he issues out of the company. I was amazed to find out that he done nothing of the sort. I'm no tax expert but, based on his situation, he would be faced with paying over $5 million dollars in taxes if he sold his company. I suggested a number of things that he should consider as the CEO and shareholder of his company:

1) Investigate the use of a Family Trust to own shares in your business
2) Look at the option of your spouse owning shares
3) "Creditor-proof" the assets (especially the cash) in your company. This is easily done with the use of a holding company(ies)
4) Ensure that you are optimizing the use or planned use of "one time capital gains exemptions"
5) Meet with a tax expert to review other options that are available to minimize taxes for succession and/or a liquidity event.

This is not the first time that I've seen this type of situation. There are tons of articles written about it, professional services offered for it and the tax man standing by just waiting to collect. The reality in most cases is that CEO's are so involved in building and operating their companies that issues such as tax planning take a back seat to other priorities. Only when a succession, retirement or liquidity event takes place does the importance of it become evident.