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How to Save $1,000,000 on Your Tax Bill (or Pay None at All) With Shanyn Stewart
It’s not about how much you sell your business for, it’s about how much you get to keep. A lot of sellers get to the point of selling and see an opportunity to cash out on all their hard work. Unfortunately, there are these entities called the state and federal government whose pockets get lined before the sellers get their bottom line.
Shanyn Stewart is a tax specialist who works with sellers in the acquisition process. She goes as far as to claim she can actually structure a sale where the seller pays 0% taxes. The process and benefits of the different structures she offers can allow for more money in the seller’s pocket. Tune in for a very useful episode for both buyers and sellers on how to prepare for a sale and legally keep the IRS from getting too big of a slice of the pie.
- The power of knowledge and ways that Shanyn claims she can reduce and potentially eliminate taxes for the seller.
- How capital gains tax really works.
- Understanding the basis of your business. What qualifies as basis in various types of businesses.
- The difference between basis and expenses and where to pay attention when it comes to capital gains tax.
- The importance of planning well before the LOI.
- Shanyn explains deferred payment structured sales using a third party.
- How to mitigate the capital gains in a transaction and reduce the net effect of the taxes over time.
- A case study of a transaction Shanyn has worked on and ways she increased the seller’s profit.
- How the structures Shanyn proposes can serve as a safety net.
- Where charitable strategies and trusts fall into the spectrum of planning for sale and profit.
Joe: So Mark one of the conversations we have all the time; I think I probably had at least 3,000 of them is that it’s not about how much you sell your business for, it’s about how much you get to keep. And I understand you had Shanyn Steward on the line on the podcast and went through a lot of the different scenarios about the different types of transactions and which one might get more beneficial than sort of an all-cash deal to help sellers out in the process of keeping as much money as they can after the sale.
Mark: Yeah. You know it’s an interesting discussion because I think a lot of sellers get to the point where they’ve been putting their money into the business. They’ve been growing their business over many years and they look at that sale as their opportunity to finally cash out and take that money off the table and be rewarded for all their hard work and they should be. But there’s this pesky little thing called the federal government and state government and they want to take their share.
Joe: It’s getting bigger all the time; it’s not little at all. It’s bigger [inaudible 00:02:11.5]. I’ll stop.
Mark: Well no, you’re right. Look you go into this process; actually it’s funny Joe, you and I were talking to Ryan about this yesterday and he was saying how he puts people through this exercise of here’s what your net proceeds are from the sale and let’s go run through some scenarios and it’s eye-opening for a lot of sellers. Shanyn is a tax specialist and she specializes in acquisitions and saving sellers money on taxes. And she makes the claim that she can actually structure a sale where the seller is going to pay 0% taxes. Well, she and I went through a lot of different scenarios. I want you to listen to this and tell me how many times you heard my mind explode from just some of the things that she suggested in here. I think from a perspective of restructuring a sale she offers a lot of great tips and things that think about rather than saying I just want to get my cash and move on to ways that you can protect your investment, get more money off the table. Here’s the tease, here’s the hook and I then I’ll get right into it. We used a case study in here on an 11.6 million dollars sale where she was able to increase the net proceeds by over 3 million dollars on the 11.6 million dollar sale net proceeds by over 3 million dollars, a 46% increase in the net proceeds on that. Remarkable stuff.
Joe: Yeah. Look full disclosure to everybody listening here. I talked to Shanyn a year ago and gosh it just sounded amazing; so amazing it felt too good to be true. And then things fell off and we didn’t get a chance to follow up. Mark had the opportunity to follow up and chat with her and get some of the real cold hard facts on the process and the benefit of different types of structures than just all cash. As a seller, everybody says I want all cash mostly because you don’t know who your buyer is and you’re not going to trust them until you get to know them. It’s great to keep an open mind because ultimately what you want is to keep as much of your proceeds as possible. You’ll have a great attorney working with you on that asset purchase agreement to make sure it’s secure and safe in the event you take a non-all-cash deal. We’ll refer a few out if needed but it’s a great idea to listen to the entire podcast for both buyers and sellers. Buyers you’re out there listening, you’re learning, and you might be buying a business that’s not going to be 8 million dollars like the example that Mark is talking about. You might buy something for a half a million or a quarter or just a million; just a million, I should stop that, or a million and…
Mark: Just around a million dollars.
Mark: It’s chump change for you.
Joe: Brad sold one of his $40,000; everybody that is listening to this you saw the launch, it was a one to one multiple $40,000 which is exceedingly small for us these days. But he had 20; I talked to him this morning, he had 25 offers on it and over 500 inquiries. Not just the automated inquiries but directly to his inbox so it’s a frenzy and I think it launched on Tuesday and today’s Thursday that’s already closed’ that type of situation. But buyers you’re buying these businesses no matter what size and you’re growing them. You’re taking it to another level that the person that’s selling it could not because they reached their threshold for staff and management or their own level of incompetence as we often say you got to figure out what your own level of incompetence is and they decided to exit. You’re stepping in because you’ve got a different either level of working capital to help grow that business and expand SKUs or buy more inventory or you’re better at scaling from 20 million to 100 million or 1 million to 10 million whereas the seller is not. So this is great for both buyers and sellers is my point. And I’m excited to listen to it myself because my level of incompetence is all about what you’re left with after the sale. So I’m going to learn a ton as well. So thank you for following up with her Mark and getting her in the podcast.
Mark: Yeah I was just about to ask you what is your level of incompetence?
Joe: We don’t have time for that.
Mark: But what’s my level of incompetence?
Joe: No don’t mention that. I always talk to Megan about that.
Mark: Alright let’s get to this episode. She talks a lot about preparation. If there’s one takeaway for people both on the buy-side and sell-side and we had Joseph Harwood on a few episodes ago talking about how he saved a ton of money on the sale of his business is be open to different structures even from a broker standpoint. I know you and I Joe like hey we actually like these cash deals because that are really simple but when we’re looking at saving hundreds of thousands of dollars it’s worth looking at some alternative structures. And it doesn’t get too complex with the right preparation and that’s a lot of what Shanyn suggests here is prepare before you sell.
Joe: Gosh that sounds familiar. Please, everybody, plan your exit. Prepare before you sell. If I had a drum I’d be beating it right now. One last thing before we go to this amazing podcast with amazing information that you can learn. I don’t like ruining people’s weekends, months, years when I tell them, man, you’re doing 10 million in revenue that’s great and based upon the P&L you gave me it looks like you’re probably worth about 6 million but everything is wrong so you have to go back to the drawing board and start over in terms of your financials. I don’t like doing that and I did it recently so please prepare; plan. Don’t wake up and decide to sell your business when you’re emotionally toast and you want to move on. If you plan it in advance and you do that; the four pillars, but the fourth one we’re talking about now which is documentation and planning, get that done. You will make so much more money and you’ll have so much more peace of mind in the process. And after listening to the podcast you’ll have so much more money left over in the bank because you get to keep more of it with the structure and deal size that Shanyn is talking about. So let’s go to it.
Mark: Shanyn thank you so much for joining me on the podcast. I know you and I have just recently met but I’m really, really excited about this conversation because you and I talked only briefly. I think we talked just for a little bit on the phone and in just about 10 minutes you opened my eyes to some awesome strategies that sellers can use to reduce their tax burdens. And look I’ve dealt with so many sellers who go to their accountants and say what is my tax burden? Oh here’s what it’s going to be, 22% or whatever of cap gains tax and I said well what can I do to reduce that? I really can’t suck it up and pay for it. And you’re like no that’s not the case.
Mark: So let’s start out with just kind of a quick introduction of yourself. I want to tell everyone who you are the firm you work for and kind of what your mission is.
Shanyn: Yeah. So I am the chief strategist here at Advanced Accounting. And we are a little bit different than your average tax professional. We actually do proactive tax planning for our clients. So what we do is we want to help mitigate those taxes before we actually have an occurrence of sale. And then even on the backend, we can help you after you’ve actually sold the company as well. It’s not as advantageous for you but we really like to be proactive. And that’s what we’re going to talk about today is how do we after we hopefully the profit on the sale of our business how do we keep the IRS from getting a slice of our hard work legally.
Mark: Legally right that’s the big thing. You know my eyes were open on a recent transaction that we did hear at Quiet Light, in fact, we had Joseph on who is the seller in that case and it was a little bit of a different deal because he was a UK based seller. But we brought in a tax specialist on that deal who ended up saving lots of money. I mean significant amounts of money from a tax perspective. And so to be able to talk to someone like you who does this as a specialty is going to be really exciting. So let’s start off real quick with this and just a point that I know you made to me before our call here which is whenever there’s money changing hands the IRS wants a slice of it; like they’re going to get something out of it. What would you say to the tax professionals that are saying just suck it up and pay it?
Shanyn: Yeah. You know I actually was talking to a tax professional the other day and he was like well nothing is certain in life but death and taxes and just be thankful you’re not dealing with death. And he said there is a cap on capital gains and I was like right there is a cap on capital gains after the seller sells has company but there is actually a way that we can mitigate taxes, reduce them dramatically, and sometimes even eliminate them which is like everyone’s excuse me how can that be?
Mark: Yeah, excuse me, we can eliminate taxes on the sale. Okay, I’m intrigued.
Shanyn: Yeah, you caught my attention now. And of course one of the things that when we’re looking at the IRS code there was a senator that once I heard quote that the first nine pages of the IRS code is all about the definition of what is income and then the rest of the code is just a web of preferences and deductions and how to actually work the code and work income. And so when we’re talking about tax planning that’s what we’re talking about really being proactive so that we’re not giving the tax professional who says suck it up and deal with it you’re going to pay capital gains and don’t worry about it it’s cost of doing business and that’s not the truth. It’s not. Taxes can be legally mitigated. And if you have enough knowledge that knowledge is power and can really put more money into your pockets.
Mark: All right so the first nine pages just define what income is, do you know how large the tax code is; how many pages?
Shanyn: You know what after the new revision I really don’t know. I think that it’s thousands and thousands of pages.
Mark: So there’s a lot in there. And I met with some tax professionals personally recently for just my own benefit and we went on a conversation with them which was hey we’ll look at all the things that you’re basically handing over the government where legally you don’t have to if you’re doing these different things. And it’s more than anyone of us can really decipher on our own because I don’t have time to sit there and read and stay up to date on all of this. Alright, so where do we start?
Shanyn: And I don’t mean to bash any type of tax professional because keeping a taxpayer in compliance is in and of itself is a full-time job. So what we’re doing is really by being proactive this is a specialty from that standpoint. So I think the first thing that we start about is we talk about how does capital gains really work because that’s what happens when you sell your business, you actually have a capital gain. So the methodology is buy low and sell high and pay the tax on the difference. And that’s the whole concept really in nine words but really Taxes are never just as easy as just buy low and sell high. The first thing that you have to understand is what your basis is. And basis basically is what did I actually purchase my business for or what did I invest into my business? Sometimes we call it original basis or adjusted basis. So basically it’s just anything I paid for the asset and anything I added to it. So we have to understand what our basis is when we ever go into a sale. In fact, the IRS has a 13-page document just on basis. So if you’re really excited about basis you can read the 13-page document on it.
Mark: I can say I haven’t been really excited about it but I am now. And maybe I’m jumping ahead, how would you deal with bases in a startup situation?
Shanyn: So basically a lot of service-based businesses are going to have a zero basis. That’s one of the things that we deal with on a regular basis is that there is no basis. You started an Amazon business and you really have no assets to speak of. And so, unfortunately, your basis is zero.
Mark: Okay, what can you count as part of the basis; what qualifies as that?
Shanyn: So equipment would qualify; if you purchased a building sometimes depending on the business it could be that you added furniture and fixtures and things of that nature.
Mark: What about things like molds for those that are making their own products?
Shanyn: Exactly. So anything like that. So anything like if you have a mall or sometimes depending on the patent copyrights things of that nature can be the basis if you’re actually transitioning into another business.
Mark: For those that are not in e-commerce; let’s talk about like a content site, a lot of content sites are start out by hiring a bunch of writers to build kind of a foundational amount of content on their site and that can be tens of thousands of dollars of content being written. Could that qualify for a basis?
Shanyn: It could. It depends on how it was expensed. Sometimes accountants can be creative in the way that they’re expensing things. So really basically when we’re getting ready to do a sale we get a look at the balance sheet and determine what’s been depreciated. So basically if you’re depreciating it then that’s part of your basis. If it’s just been completely; so if you hired a copywriter and you’ve expensed that then it’s not going to be considered basis.
Mark: Oh, I get it. And this is one of those things; we talk about this all the time in this podcast, we talk about making sure you understand your own financials. And so many entrepreneurs are really weak in this area when you look at the balance sheet as its kind of cryptic report where we don’t really understand it. And then there’s also this idea well I want to expense as much as I can to reduce my income tax burden. But this is looking at a little bit different. So if I were to start up a content site and I realized look I’m going to invest $50,000 into seeds content. You’re saying look you might initially not be making any money anyway so maybe it’s better to put that in and record that as an asset investment that I can depreciate.
Shanyn: Right. And see that’s one of the things you always want to think about the end in mind. You’re always going to want to like look at what is my exit strategy? Even when you’re starting a business you want to look at what your exit strategy is to determine. And I know in those early years; I mean most businesses in the first three to five years are not really making a huge profit. And so I look at different expenses and really a lot of those can be capitalized over time instead of just expense in that year. And that’s something to take a look at. That’s where proactive planning and understanding your financials become so important.
Mark: Yeah. Now from a buying standpoint if you’re acquiring a business obviously you’re going to capitalize expense investing in the business right away. That’s going to be an investment so that’s going to form basis but then also things that you’re doing right after as well.
Shanyn: Correct. So anything that’s going to be adding capital value to that business is something that you’re going to want to kind of look at and see if it is something that we should; is it really truly an expense or is it actually adding a capital value to the underlying business and should be depreciated over time.
Mark: Okay. So how does this shake out on a sale basis so I would know we the buy low sell high; I imagine there is a simple subtraction coming up here, right?
Shanyn: Right. So I mean basically the difference between the sale price and your basis is where you’re going to get capital gains and you’re not going to get capital gains depending on your filing status you’re also maybe getting hit with something called net investment income tax. And that’s a new tax underneath the Obama administration where they’re going to kick in a 3.8% tax for those that are $200,000 of adjusted gross income for individuals and 250,000 for joint filers. And so that basically, you’re going to hit with capital gains and that net investment income tax. And so that can be pretty hefty so one of the things when we’re talking about mitigating taxes on the sale of a business preplanning, becomes very important. And one of the things is that if we have enough time before the sale of a business there’s a lot of planning we can do. I mean there’s a few after the sale offsets that we can kind of facility to mitigate tax but it’s nothing like the time before the sale. And one of the things is we’re going to talk about several different strategies. It’s really important to understand that we actually need to start our planning; there cannot be a binding contract you’re going to say repeat this again, there cannot be a binding contract in place when we start this preplanning.
Mark: So a binding contract again from a sales standpoint we’re looking at LOI which is it’s usually non-binding but then those purchase agreements which are going to be binding.
Shanyn: Correct, exactly. So we even like there to be no LOI and we want no question by any type of government organization or court system. So we even tell our clients even before there is an LOI we want to have our planning done. So oftentimes when people come to us to sell their business they know they’re going to sell their business. That’s the goal. And so that’s when the planning should start right then and there.
Mark: Alright. And we preach all the time that if you want to sell your business it’s best if you’re actually planning 12 to 24 months in advance because from our standpoint we want those other metrics that we look at; the influence, the valuation to be as optimized as possible. So I would imagine this pre-tax planning would also benefit if you’re at 12, 24 months out.
Shanyn: Well definitely because there’s a lot that we can actually do in the current year to help them mitigate taxes but then on the sale of the business definitely. Now the quickest we’ve done; we can do this in 60 to 90 days. But one of the things I found is that what we have to do is we actually educate our seller on these strategies because a confused mind always says no. And one of the things we want to make sure is that our clients understand what they’re doing and why they’re doing it; what the advantages and disadvantages are. So we really start an education process with them so that they understand exactly that they could sit down and explain exactly the transaction that’s about to happen in their own words and have that confidence.
Mark: Right. Okay, that makes a lot of sense. Alright let’s get into the example of a transaction here because let’s say that knowing that we’re going to sell the business we’re getting into this here and we’ve said okay we’ve got maybe a little bit of basis we still have a pretty large delta on what we’re selling for versus what our basis is. Maybe we’d be able to form 50 maybe a hundred thousand dollars basis but we’re selling a business for two million dollars. The savings is nominal on that side. Where else should we be looking at here? I know we talked a little bit about short term capital gains taxes and our pre-cal stuff. How does this play into this?
Shanyn: Well I think one of the things is when we start to look at the fact that we have a capital gain and that’s what we really want. We have to really immediately step in and say okay what are the strategies that I can do to mitigate these taxes? So one of the strategies and we usually use a combination of strategies. So I know you and I are going to kind of break down just the simple line strategies but oftentimes they’re actually strategies that are interwoven together from that standpoint. So one of the strategies we often see is something called an installment sale. And an installment sale is just simply a sale where you receive payments installments in more than one year. And so basically what that means is you sell your business in year one and you agreed to take three equal installments over a three year period. Now that works with some people. The advantages are that you’re going to defer the gain until you actually receive those payments so taxes is divided throughout the years. So for example, we just did a transaction where let’s say you have a business that you bought for 600,000 and you sold it for a million. So 40% of your sale is a gain. So when you receive those installment payments over the years 40% of each of those installment is going to be taxed as capital gain. So why is that important? A couple of different reasons; it’s going to actually if you split out the capital gains over three years or five years you actually reduce the overall taxation that you’re absorbing from that standpoint. And so you’re not getting stumped all in one year with a big tax bill. But the devil’s in the details with that one because not all assets are going to qualify for an installment sale. So that’s one thing to remember. So anything that’s publicly traded is not going to qualify for an asset sale. You also have tool items we find that buyers and sellers want to get a really, really low rate interest rate and so you have to charge adequate interest to the person who’s buying. And if you sell depreciated assets; so let’s say you’re selling equipment; you have to recapture all of that depreciation and pay ordinary income tax rates immediately. So there’s some things where an installment sale works really, really well with and sometimes it’s not going to work really well but that’s one of the simple strategies that we see. Now, one of the problems with that is that you’re going to get your income over a few years. Sometimes it’s a big deal. And I actually sent you an example earlier and we can talk about that in a few minutes where our buyer actually got his money over five years. And that worked out perfectly. We are actually able to eliminate the taxation on that. We’re going to talk about that because that’s huge. And he was given over two million dollars a year so he was pretty happy.
Mark: Right. So real quick are you able to reduce the effective rate by doing an installment sale? Obviously, the amount that you’re paying in one payment is going to be reduced but you are able to reduce that rate?
Shanyn: It does. It depends on the taxpayer’s adjusted gross income but we are able to reduce the net effect of taxes over the period. And oftentimes we’re talking about that sometimes depending on the amount of the sale or the amount of the proceeds we’re able to even get payments five to 10 years out so that we’re able to keep that; kind of make an individual pension for that person. And that way they can also do things like delay Social Security and keep their taxes down and so it really becomes very much not just a planning for the sale event but planning for the next few years of what happens with those proceeds.
Mark: Alright so I already know most of my clients are going to say with this which is I don’t want to defer my payments because what happens if they don’t pay; what are my collection options? There’s always this worry especially with the Internet and acquisitions where so much of the business is wrapped up in blue sky, goodwill, non-tangible assets. And so what happens if the buyer runs a business into the ground two years from now and they still have about $400,000 payment well what are my options? Could you ask for those funds upfront and pay them out?
Shanyn: One of the things you could do is actually do a structured sale and actually bring in a third party.
Shanyn: So a structured sale is sometimes very advantageous because it actually takes the installment sale tax treatment. It does require a buyer to pay a little bit of cash upfront or all of the cash upfront. So basically what you’re doing with a structured sale is you’re bringing in a third party and you’re exchanging your business for a stream of income. So basically what happens is; and let me say this is appropriate for businesses between the 100,000 and the five million dollar. So if you’re over five million it would not work this way. But basically, in a structured sale you’re going to negotiate a traditional sale. Your buyer is going to sign their obligation to make payments to an independent third party. So there’s a lender involved here or an insurance company involved here. And then that third party is going to take that cash. And so you never actually get receipts. So we avoid constructive receipt rules which would actually make if we actually took that money in our hands immediately that would make it taxable immediately. So then the third party now has your cash and they’re going to buy you something like [inaudible 00:26:30.4] to start income to you immediately. So you pay taxes on as you receive those payments over the years you’re going to pay taxes on the capital gains again defer it. But this is a way to bring a third party in; it’s called a structured sale in order to help mitigate some of that risk.
Mark: Okay. So who is this third party company; what would be some examples of these third-party companies?
Shanyn: So it could be a lender. It could be an insurance company. There are third parties that actually facilitate deals like this.
Mark: Okay. And then from the seller standpoint, the benefit here is that they’re not having to act as a collector of funds. You have a certain party that’s doing that work.
Shanyn: Correct. And so here’s something that what we’re seeing gain popularity; so one of the downsides of most installment sales, either structured sale or an installment sale is that you sold your business, you’ve deferred the tax, but you don’t have all your money.
Shanyn: You have a stream of income but you don’t have all your money. And so one of the things that we have found is that if you’re comfortable exchanging your equity in your business for just a stream of income that’s perfect; if you don’t need it all at one time. But oftentimes I think that entrepreneurs want to go to another venture. It’s in their blood. They want to close one chapter and start a new chapter. And so that becomes an issue because there’s no capital to actually work with them unless the sale is very large. So here what we’re finding is that we can take an installment sale and we can couple it with something called a monetizing loan. Now, this is a complicated concept. It takes months to actually really kind of; we do webinars and PowerPoints to really educate our clients on this and we bring in the legal team to really explain this but I’m going to try to kind of be very simple in my explanation. What we do basically is we take an installment sale and we couple it with a monetizing loan. And so basically the way that business works is we’re going to defer the taxes for 30 years.
Shanyn: So basically you negotiate a sales price with your buyer just like you would. And when it comes time to close there’s going to be simultaneous things that happen at closing. You’re going to sell your assets to an unrelated third party in exchange for a lump-sum payment in 30 years. Step one that third party simultaneously sells your asset to the buyer in exchange for your agreed-upon price. Now you’ve sold your asset. You’re going to use installment sale treatment to defer the tax but you’re still going to have your money. Here’s where the monetizing loan comes in at the same time that you and the third-party and the buyer close the original sale the third party lender is going to step in and he’s going to extend to you a loan equal to 93.5% of the sale. So remember loan proceeds are not taxable because they come with an obligation to repay. Now you have your cash in your hand and that’s almost equivalent to what you had for your sales price. And you’re free to do whatever you want with those funds. Now it’s a loan. While that loan is outstanding the third party pays the interest. In fact the terms of the loan specify that the interest is non-recourse to the seller which is really important because non-recourse means that the lender can’t come after you for the payment of that interest. So 30 years goes by and you have all of your money. You do whatever you want with it. And at the end of the 30 years, the whole transaction unwinds. The third-party pays you or your heirs the purchase price in cash. You use the proceeds to repay the loan and then you pay the tax. So there’s some magic that happens here. I always call it the eighth and ninth wonder of the world; that deferral and the time value of money. So the question really happens to be what’s going to be the tax in 30 years. So if you think about this if inflation continues at 2½ %; that’s kind of what it’s been for the last 20 or 30 years, and it continues and long term capital gains remains at 20%, the tax bill on a million dollars of pain in 2019 would be equivalent to about $94,000 in 2049.
Shanyn: That’s less than half of today’s tax bill and you’ve got to use your money for 30 years.
Mark: Right. So with the installment sale and the monetizing loan you get that money upfront it’s just coming in a different vehicle; it’s coming through essentially a loan.
Mark: My mind is spinning right now. And you said it earlier a confused mind says no. My head is a little bit confused right now but I’m seeing where you’re going with this. This is really, really brilliant. What are some reasons why people both on the buy-side and sell-side wouldn’t want to do this other than confusion of the concept.
Shanyn: And you know what really when we actually walk; so oftentimes we get clients who are like right in the middle like I’ve got an LOI I want to sign I need to do something now. This structure takes a lot of time to explain and to be comfortable with and to show how all of the numbers move. So really what are the downsides of this? Confusion, that’s probably the number one thing or lack of understanding of how it can really; can this really work? I mean people are like really defer taxes for 30 years? They’re skeptical of lenders sometimes that would actually be extending the loan. So there’s a lot of skepticism I think and lack of understanding. But really this is a win-win for everyone involved. I mean really the buyer doesn’t care. The buyer is going to give his asset and he’s going to walk away and he’s going to have this new business. So he probably doesn’t care.
Mark: And they’re paying just as they normally would if they’re buying the business upfront, right?
Shanyn: Exactly. And the seller sometimes they don’t understand. But I mean there’s legal agreements in place around the loan. You’re making sure that you’re working with a reputable third party from that standpoint so you’re making sure that the loan is non-recourse and how it’s going to unwind. And of course, you’re going to have your own attorney look at all of the documents and paperwork as well. So basically you’re doing your own due diligence. But any tax professional that’s utilizing these kinds of strategies has done their own due diligence as well and they’re picking at third parties to actually work with that and a lawyer or legal team to work with that’s what they specialize in.
Mark: Right. How do you handle this with more complex sales where you have a portion of like an equity rollover over, a cash upfront, and maybe some debt as well coming in there. Can you structure this as a component of a larger structure?
Shanyn: Correct. So that’s what I said we often use multiple strategies. So right now I’m working on a deal where someone is selling a restaurant franchise along with the real estate that some of the franchise franchises sit on and there’s debt. And so we’re actually restructuring debt to flow through like a different entity on the real estate side so that we can use and monetize installments. So we’ve got like three or four actual strategies that are in play and that’s where the preplanning comes in. So if we got 12 to 24 months to sit down with you and figure out a game plan we can really kind of put several different strategies together. Sometimes we’re just deferring the tax sometimes we’re able to eliminate it altogether. But it’s just different components of the sale will be treated differently.
Mark: Alright. So I want to get to our example because again I can hear the question in people’s minds which is is the juice worth the squeeze here; the fees to you, the amount of time, the headache, trying to convince a buyer to do this which doesn’t look as traditional as maybe everyone is expecting going in. So let’s run through an example here and you sent me a PDF with an example; is it okay if I post this on our site?
Shanyn: Yes definitely.
Mark: Okay so we’ll make this available for download in the show notes so that people can follow on with us if you want an actual example of this but let’s talk through the example here that you gave me.
Shanyn: And this is just one; so this is just one strategy, so I just illustrated one. This was actually a business that’s being sold in Michigan. Equipment was included. So they had molds and dyes and they sold on the Internet. So they are a combination business. So the sale price was 12 million dollars. And the cost of the sale was about 360,000. They had actually found a buyer outright. But this is what the legal team was kind of charging. So the gain overall was 11.6 million dollars. So at the end of the day you’ll see here underneath projected taxes we have federal taxes, we have that net investment income tax, we also are recapturing depreciation, and then we have the state tax. So all in their total gain is 11.6 million and they’re losing 4.3 million dollars to taxes.
Mark: Yeah. I can tell you when I sold my business that wasn’t for a million dollars but when I sold my very first business one of the most sobering moments was getting this first tax bill. And again just to reiterate this; the tax will gain so the cost of the sale on this we have 12 million dollars on the sales price 360,000 towards advisors and fees here so 11.64 is what they’re gaining after those advisory fees and then the government at different levels comes in and says thank you for that 11.6 we’re taking 4.3 of that and reducing you down 7.2, 7.3 million dollars.
Shanyn: Yeah so about 7.3 million dollars is what you’re going to walk away with. That’s a lot of money but it can be a lot more.
Mark: You’re still buying dinner the next time you go out but if you look at 12 million and it gets reduced to 7.3, that’s pretty hefty.
Shanyn: So one of the things that if you look here is that we’re able to increase this seller’s profit by over 3.3 million dollars and so basically what we do is that you’ll see here that the sale price didn’t change, the net sales price didn’t change, we’re actually using a combination of different strategies and the seller is actually taking payments over five years. So over a course of five years, he’s going to get 2.1 million dollars and then there’s some additional tax savings that we found in there over time. So he’s getting a little bit more cash flow from that standpoint. So after just a coupling a couple of strategies together instead of walking away with 7.3 million he walks away with 10.6.
Mark: That’s a huge gain. That’s 3 point…my math here is 3.3 million dollars.
Shanyn: 3.3 million, a little bit more than 3.3 million.
Mark: Because some of that money is deferred now with those deferred payments you mentioned briefly the time value of money. How do we capture some of that time value of money?
Shanyn: So with those deferred payments I mean basically you are actually getting a little bit of an interest rate in that as well. So that all has to be inside the different strategies. Remember when I said we’re doing installment sales so we’ve got to charge interest and have an interest in things of that nature.
Mark: It has to be reasonable.
Shanyn: It has to be reasonable. Exactly. So over five years, you’re going to receive that 2.1 million dollars. So this person is giving up; they’re comfortable giving up a little bit of return on investment in order to actually eliminate the taxes.
Mark: Yeah and that right there I can totally see being worth the effort of going through this and I know you know we talk to sellers all the time. They get so nervous about doing installment plans. They want their money and they want their money now. And for a lot of people especially growing a business they’re profit rich but cash flow poor where they’re showing good profits and the selling moment is the first time where they’re really getting the cash out of the…
Shanyn: They’re reaping their harvest. Yeah.
Mark: Yeah exactly. So it’s kind of a hard sell initially to say okay I know you’re now selling a business for 12 million dollars.
Shanyn: Right. Well, I think one of the things that; like the conversation I had with them when we proposed these strategies because they’re one of the things that we’re looking at is okay you’re used to living on 250,000 a year in income and now you’re going to get two million. What are you going to do with it?
Mark: Yeah [inaudible 00:39:19.4].
Shanyn: What’s the difference if you are given a check for 7 or you’re given a check for 2? How is think going to change your day to day life? That’s a conversation you actually have to have. You have to understand what the seller’s ultimate goal is. I mean if it’s just to go live on the beach in Delray Beach Florida that’s kind of my dream then you can probably do that for two million dollars a year.
Mark: Yeah, absolutely.
Shanyn: It’s kind of you know; and also one of the things and this was the eye-opening experience for me I actually had a brother set and one of the brothers wanted all the money up front and the other brother said to me if we don’t structure this on installment sale my brother will blow through this money and he won’t have anything because money burned a hole in the brother’s pocket. And so the other brother was willing to both of them saw the validity there but the other guy just saw the big numbers and was like ah if I could open up my bank statements see that money sitting there. And the other brother was like no if we do that I know I won’t spend it because I’m I will hold onto my money but you’ll go through it and you won’t have anything.
Mark: Right. And I think something that entrepreneurs need to keep in mind and I personally went through this myself when I sold my first business is that a lot of entrepreneurs especially in the Internet space are bootstrappers, we get things going and we do it with a lot of grit. And then when you come into a lot of money you’re trying to replace some of that grit with spending and so the second startup is way more money thirsty than that first one. And if you don’t get the right payout and I’ve seen it happen with our clients and I had it happen with myself with that second startup I threw away more cash than I anticipated. So this is kind of a nice little lever on that to make sure you’re not following through.
Shanyn: I call it a safety net because sometimes we see entrepreneurs who actually sell their business and they say I’m going to retire and that retirement lasts like a year and then they’re itching. They’re like what do I got to do?
Mark: I’m bored. I want to do this again.
Shanyn: Right. I want to go do this again. And so basically when we’re going into our planning process, not every strategy is going to work for every client but what we’re doing is we’re doing a full discovery and we’re figuring out what’s really important to that seller. And then we are working to mitigate taxes through the legal channels that are available so that they get the best deal at the end of the day.
Mark: I want to hit on one last thing on the notes that you provided me here because we didn’t get a chance to talk about it and that’s the charitable strategies section here and we only have about five minutes left here so hopefully I’m not uncovering like an enormous topic that we could have spent…
Shanyn: We can talk all day about charitable strategy.
Mark: Or maybe we’ll do a secondary podcast just on that because that’s something that’s near and dear to my heart; making sure that entrepreneurs are contributing or we should. But where does this fall into the spectrum of planning?
Shanyn: So basically charitable strategies is one of the strategies that we use and it’s a foundation of tax planning. It’s also a foundation of capital gains planning and that’s because charitable organizations can sell appreciated assets without paying tax on the gain.
Shanyn: So again it’s a very convoluted type of strategy but basically what happens is you actually establish a charitable remainder trust and you transfer those assets into the trust. It’s important that there’s no; this is preprinted, there’s no binding contract before you transfer something into the trust. The trust then sells the assets to the buyer. And that’s where the magic happens because the trust is tax-free and see there’s no capital gains and then that trust then reinvest those assets from the sale price and then it pays you the after-tax amount over a period of time. So basically it’s a way that we can eliminate a lot of taxation.
Mark: Wow that is absolutely mind-blowing right there. And the worry that I think some people would get into is okay I know you said this is legal how much red tape and how fine are the rules that you have to follow for something like that?
Shanyn: So basically; I mean there are rules and so by charitable remainder trust you have a legal team that actually specializes in this. You’re not going to your mom and pop local lawyer who handles everything from drunk driving to criminal.
Mark: My uncle who’s a lawyer and not going to charge me a retainer; that type of a deal?
Shanyn: Right. I mean so here’s the thing; this is a place where when you’re doing these strategies you want expert advice. You want somebody who has done this again and again and again and who understands these concepts. And so you’re picking individuals that understand how to put together and to write a charitable remainder trust; how to facilitate these third party transactions.
Mark: I got it. Okay, we are up against a clock. Shanyn, how can people reach you because I guarantee you’re going to get a lot of calls and a lot of e-mails from this so careful what you’re giving out right now; how can people reach you?
Shanyn: So definitely they can reach me at AdvancedAccounting.com in the right-hand corner there’s going to be a button that says a free consultation. And I would love to have a 30 minute Xoom call with them and just kind of talk them through what their particular situation is and if we can help them.
Mark: That’s fantastic. We will put that in the show notes; a link over to your website, we’ll also upload this really simple example that you put together of tax savings which amounted to three million dollars in tax savings on a 12 million dollar sale, really interesting stuff. And I think the big lesson that I would like people to come away with is to think about the selling process in a little bit more strategic way because so many people are just looking at let’s get it simple, let’s get it done, let’s move on with our lives, I’m going to eat this fee. There’s a lot that can be done by hiring the right people to reduce those fees. You are one of those people for sure that can certainly help. So thank you for coming on. I can see having you on and maybe digging deep into one of these strategies maybe in a future episode if you’d be up for it.
Shanyn: Yeah, perfect. I’d love it.
Mark: Awesome. Thanks so much.
Shanyn: Thank you.
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About Shanyn Stewart:
She’s a serial entrepreneur and fearless single mom who has a background in military tactical training and is not afraid to stand up to anyone, including the IRS. A gun-toting, libertarian proactive tax strategist, Shanyn has built a team of tax and financial experts to assist clients in legal tax avoidance. Shanyn began her career with General Electric as one of two advisors that worked directly with GE employees and executives to mitigate taxation throughout the country. Armed with years of tax navigation experience, in 1996 she started Advanced Accounting to help clients apply those principles she learned at GE to assist in reducing their tax liability.
A former American Baptist Pastor, Shanyn owns Gunpowder & Lace, a concealment garment and holster company for woman. She also coaches women on how to give themselves permission to channel their inner goddess and inner badass and make no apologies for it.