Charitable Strategy: The Most Missed Element in Business Sales

It happens time and again. While most owners have 80-90% of their assets locked up inside of their business, it’s remarkable how unprepared many of them are at the point of sale. Indeed, at the point of sale the business owner, and the advisory team, should do everything they can to maximize the sale. But many business owners completely miss a key element in the sale process: a charitable strategy.

A study by the Exit Planning Institute (EPI) for Georgia in 2018 revealed that historical transition success rates are only 20-30% nationwide.

EPI notes that “preparing for a business sale is an urgent imperative, that transitioning a business is a high-stakes endeavor” which requires focused time and action.  Here’s what EPI notes about the state of unpreparedness:

1. Owners don’t allow themselves time for the transition itself (that includes mentally and emotionally).
2. They don’t allow themselves time to address taxes, specifically strategies to minimize tax.
3. And they don’t allow themselves time to maximize the sale proceeds.

EPI hits it right on the head. But I want to go deeper on item No. 2—minimizing taxes.

Many of the owners we’ve worked with arrive at The Signatry office with their advisors with the assumption that tax minimization is about calculating the tax. Some might even take the step of setting up a trust.

Most Missed Strategy: Charitable Tax Deduction

The biggest missed element in the business sale is the opportunity to minimize tax by donating shares in the business before the sale. 

The law allows business owners to donate closely held shares to a donor advised fund prior to sale. The donation brings capital gain reduction, ordinary income tax reduction, as well as zero estate tax on shares donated. It is a triple win. On top of those benefits, the owner will get the opportunity and privilege to support ministries within the community.

But to achieve these benefits it takes time. Often the charitable tax deduction opportunities are not considered, or the last thing considered. However, it takes time to bring advisors on board and to make sure that the sale process includes the charitable component.  The last thing anyone wants in the context of a sale is a surprise.

I’ve had friends tell me that they believe it’s almost malpractice to not address the charitable tax component of a sale. Unfortunately, we still find it’s the most missed element of the business sale.

Help spread the word so that we eliminate the charitable tax poverty situation from business sales.