Demystifying the Proposed Changes to the Capital Gains Tax

The proposed changes to the Capital Gains Tax are concerning for many entrepreneurs, especially those looking to exit their business in the next few years. Will the gains tax be higher than ordinary income tax? Will the changes be retroactive? Are there effective strategies for legally mitigating your tax burden?

Tax attorney Sharon Winsmith joins Quiet Light for this AMA webinar to help demystify the proposed changes, and to offer some insights for entrepreneurs who want to lessen their exposure to high taxation.

TRANSCRIPT

So, let’s go ahead and get started. My name is Christopher Moore. I’m the Chief Marketing Officer of Quiet Light. We help entrepreneurs exit their businesses for six, seven, or eight figures.

A lot of what we do is educational. We do conferences, podcasts, and, obviously, AMAs and webinars like this. We really work hard to help founders plan for a successful exit.

We were founded in 2006, and we are entirely entrepreneur-led and entrepreneur-focused. All of our advisors are themselves entrepreneurs. They’ve each built, bought, or sold their own substantial online businesses. I think about 90% of them have done all three, so we’re very proud of that track record.

But we’re also very, very proud to have with us today Sharon Winsmith, who is a tax guru. I don’t like that word, “guru,” but I think it applies here.

Sharon has a bachelor’s from the Moore School of Business at the University of South Carolina, and she went on to get a law degree there. She went on to study at the New York University School of Law. She worked for a Big Four accounting firm. She handled clients ranging from high-net-worth individuals to Fortune 500 companies, and she’s assisted with over $45 billion in acquisitions.

So, when it comes to tax laws as they relate to buying and selling businesses, Sharon is the person you want to talk to. We’re so, so excited to have her with us, coming to us live from New York.

Sharon, how are you doing?

**Sharon:** Good, Chris. Thanks so much for having me on. I really appreciate it.

**Christopher:** Yeah, I’m really excited about this one. We had Sharon on the podcast, as some of you may know, a couple of weeks ago, and it was a really great interview.

As we started talking about it, we thought, “We want to go a little bit deeper into a conversation about some of the upcoming proposed tax changes.”

I threw out this very salacious title of something like, “Is It Time to Panic?” which I liked, but we went with something a little more moderate in terms of the title: “Demystifying the Proposed Changes in the Tax Code,” particularly as it relates to capital gains tax.

I think what’s on everyone’s mind is just a worry about, “Okay, what impact is this going to have on me and my business? Does it change my strategy for when I want to exit?”

All of those things are definitely top of people’s minds. We’ve been getting a lot of questions about them, so I’m thrilled that Sharon agreed to come talk to us more about those.

Again, if you’ve got questions, feel free to pop them into the Q&A box or the chat window, or you can raise your hand.

But we’re going to go ahead and get started here with a really simple question. Why don’t you just walk us briefly through what’s proposed with the capital gains tax and maybe other changes to the tax code that might impact someone thinking about selling their business or someone who’s got a growing business?

**Sharon:** That’s a good place to start, Chris. As we all know, there are a lot of proposed tax changes in front of us right now with Biden. One of the ones—and I think the one where I get the most questions from my clients—is definitely around the capital gains tax. I know, Chris, you guys have been getting a lot of questions on this one as well.

What’s proposed with respect to capital gains is, under current law, capital gains are taxed at a lower rate than ordinary income. So, 20% is the highest tax rate on capital gains. There’s actually a 3.8% net investment income tax that can apply in some cases, but for all intents and purposes, we’ll assume that rate is currently 20%.

What Biden is proposing is to actually raise that rate up to the top ordinary income rate for high-income earners who are earning over $1 million a year.

Right now, the top individual rate is 37%. However, Biden is proposing to raise that back to 39.6%, which was the highest rate before Trump lowered the tax rates when he was in office.

So, what we’re looking at under this proposal is that capital gains for individuals with income above $1 million that year would be subject to tax at 39.6% federally.

That doesn’t even take into account the state tax rates, which, in some states like New York and California, can add quite a bit to that amount. We’re looking at a situation where, if you’re going to exit your business, you could be looking at paying tax at a federal level of at least 40% on those gains.

**Christopher:** Okay, so that’s considerable. Is it going to happen?

**Sharon:** That’s a good question, and that’s one of the most common questions I’m getting as well.

We don’t know if it will happen. Biden needs support in the Senate from every Democrat. We know there are probably not any Republicans who would vote in favor of this.

There are some Democrats from more moderate states that have some tough elections coming up, and we think they’re already pushing back that maybe 39.6% is too much.

There could be a situation where they agree to a middle ground. Maybe there is some increase in the capital gains rate, but it doesn’t go quite as high as 39.6%.

Several years ago, the highest capital gains rate was 28%, so maybe we see something like that come back.

But, with that said, he could potentially get this through. If he can get every Democrat in the Senate to sign on and most of the House, then he could get this through.

I do think we expect to see some increase in capital gains rates. Biden campaigned on that. We can expect taxes across the board to go up.

So, we don’t know if it will go through, but we do expect some increase. I think a good baseline assumption to make at this point is that tax rates—regardless of whether we’re talking about individual rates, capital gains rates, or estate tax amounts that are exempt—are all going to go up.

We just don’t know when or how much.

**Christopher:** Right. Okay. Do we have any kind of timetable on when these negotiations and everything will take place, when it might go to a vote, and then when these proposed changes, whatever they are, become law?

**Sharon:** We don’t know an exact timetable. Really, we don’t know a lot about what’s proposed with this capital gains increase.

What we’ve heard about it so far has been from a speech from President Biden and just a short fact sheet that was released.

We are expecting what’s called a Green Book to come out with more details around how Biden is thinking about how this will work. How is $1 million calculated? What does that include? Are there going to be exemptions? That type of thing.

We do expect that to come out. It was actually supposed to come out, I think, this week. That was the original estimated timetable for when we would get more details on the proposal.

Whether or not that does, in fact, come out this week or next week, in any event, that should come out momentarily. We’ll be able to see more of what exactly Biden is proposing and what the specifics are.

Then I think we’re expecting maybe a vote on this this summer.

But another point—and I know this is the most common question I’ve gotten—is: If it did pass, when would it be effective?

That’s very important, right? Because if it’s effective next year, that gives us some time to do some planning.

But the answer to that is we don’t know. We like to think that tax increases would be effective prospectively, so maybe starting in 2022. However, there have been situations in the past where they did make tax rate increases effective retroactively.

There is a risk it could be for all of 2021. So, if you already sold a business this year, or if you’re thinking about selling later this year, it is possible that the higher rate could apply.

There have been Supreme Court challenges to these retroactive rate increases, and in general, they have been held to be constitutional. So, retroactive tax increases are possible.

I think they’re harder to get passed politically. In this case, where you’ve already got a tough battle getting this through, you have to think about that as far as the likelihood.

But, with that said, I do think it’s possible that you could have a retroactive tax increase. I would like to hope that it would be effective going forward.

**Christopher:** I hate crystal-ball gazing. I don’t really encourage it at all. We don’t like that at Quiet Light. But do you have a sense of where this might settle in terms of the range or what people can maybe expect, just based on the fact that it’s going to be pretty unpopular in a lot of these constituencies? So, there’s probably some adjustment.

**Sharon:** I know this isn’t a helpful response, but that’s hard to say because there are a lot of nuances around this one.

So, the individual tax rate—I think that will go up to 39.6%. I think that one will be easy to pass. The corporate tax rate, I think that will probably go up, maybe even to 28%. It could be a little bit lower than that.

This one is a little bit harder. There are some attachments to what Biden is proposing. I don’t know, Chris, if you’re familiar with the step-up in basis that you get upon death.

One strategy, particularly if someone has a lot of investments in the stock market or a family business, is they’ll pass that on at death, and their heirs will get a step-up in basis to fair market value. So, there is no gain at that point.

If I’ve got a business, for example, that’s just got a huge embedded gain in it, instead of selling it, maybe I pass it down to my children. They get to step up their basis in that asset on the date of my death. So, if they went and turned around and sold that business, there’s no gain.

What Biden is proposing, which is really impactful and something that definitely needs to be watched for business owners, is he wants to eliminate that step-up in basis.

So, that could mean, if you’re someone who owns a business—and I think we do expect some exemptions, because I think we can all understand where the concerns would be there with small family-owned businesses. The children aren’t going to have the liquidity to pay the estate tax, those types of things.

In that case, that’s a big change to the tax code. That’s more than just a rate increase. That is a really monumental shift in the estate tax approach that we have.

Those are the types of things that I think make this harder to get through.

So, do I think Biden will get through a 39.6% capital gains rate increase with elimination of step-up in basis? I think it’s possible. I think it will be a very tough battle in the Senate, but I do think it’s possible.

With that said, I think 28% is always a rate that economists like because they think, if you tax people too much, they’ll just stop working, or they’ll find ways—they’ll be more incentivized to do planning or hold on to assets and not sell.

So, 28% is always a good break-even as far as increasing tax revenues, but at the same time not disincentivizing people from selling assets.

It wouldn’t surprise me—I’m not aware that anyone’s mentioned this—but it wouldn’t surprise me if we see someone first talk about 28%.

But, with that said, again, we don’t know what will happen. It will really come down to what Biden is able to get through the Senate.

**Christopher:** Great. A good follow-up came in from Ted on that question. Do you think President Biden will try to remove the step-up in basis on real estate as well?

**Sharon:** I do. Real estate’s a big one, right? I think what Biden is concerned about is, if I raise the capital gains rates, people are just going to hold on to their assets until they die. Anyone that was selling might rethink that.

I think real estate’s a big one. Typically, real estate is an asset you hold on to for the long term.

Also, with real estate, there are so many planning opportunities. It’s the easiest asset to own as far as planning opportunities to defer capital gains tax anyway, with 1031 exchanges.

So, I would be surprised if I saw Biden include an exception for real estate.

What I think there will be an exception for is farms and small family businesses. I’ve heard businesses that are valued at $1 million or less might be exempted. So, that’s where I think you’ll start to see Biden have a little bit more sympathy for these small, family-owned businesses.

**Christopher:** Great. Good question, Ted. Thanks a lot.

And a reminder: You can keep popping those questions into the Q&A box or into the chat window. We’ll do as many of those as we can within the hour. Thanks a lot for that question.

The next thing I wanted to ask: Given that we don’t know a lot, should people be thinking about selling now in light of the potential increases?

**Sharon:** That’s a really good question, Chris, and I also get asked that a lot.

I think there are a number of ways to think about that. If you are someone who was already thinking about selling your business in the next few years, I think the answer to that is yes, absolutely.

What we do know is capital gains tax rates are not going down, right? I feel pretty confident that’s not likely to happen in the next few years.

So, if you are someone who is thinking about selling your business, definitely I think this is something that should incentivize you to think about, “Should I speed up the trajectory of that?”

From an estate tax perspective, we expect the estate tax exclusion to go down. So, I have a lot of clients who are gifting up to the estate tax exclusion now.

With these types of things, if you were planning to hold on to your business for a long time, don’t panic. There are always planning opportunities that we can do. Don’t think that because the capital gains rate goes up, you’re stuck paying it. There is always planning that can be done when you sell your business to try to reduce or eliminate the capital gains tax.

So, I wouldn’t just run out and sell my business if I wasn’t thinking about it. But if I was thinking about it and it’s on the horizon, I would absolutely consider, “Maybe this is the year to do it.”

**Christopher:** Are there deal structures that people should consider when doing that to lessen their tax liability?

I think we’ll get into a couple of strategies here in a minute, but are there deal structures that people can look at? Even looking down the line, like, “I’m not ready to sell yet, but I want to sell someday.” Are there deal structures or things they can be thinking about to help mitigate that liability?

**Sharon:** Yeah, absolutely. That’s kind of what I specialize in—working with business owners to structure their business while they’re operating to minimize tax, as well as minimizing taxes when they ultimately exit.

There are planning opportunities. There are structures you can use while you’re operating to reduce your taxes and then structures that can help you when you go to exit and sell your business.

The sooner you talk to someone like myself or your tax-planning attorney who can help you put yourself into the right structure, the better, because some of the structures do take some time.

In order to achieve some tax benefits, you would have to have had that structure in place for a number of years before you exit.

But in other cases, there are things we can do at exit. It’s just that the menu of planning opportunities goes down the closer to the sale we get.

I’ve had people come to me—and it’s not ideal—but I’ve had people come to me and say, “Okay, I think I have a potential buyer. I might be selling in the next few months. What can I do?”

There are things we can do. As long as you have not signed that LOI or that purchase agreement, there are still planning opportunities that we can talk about that are on the table.

**Christopher:** We had one question come in via email beforehand that was like, “Well, I just exited, and now I’m like, ‘Oh crap. What should I have been thinking about?’”

So, are there things that someone can do post-sale to mitigate their tax liability?

**Sharon:** Usually, I get the question of, “I’ve already signed my LOI. Is there anything I can do now?”

But after the sale? I like to think I can come up with pretty creative planning strategies. That one’s tough.

Other than reviewing the transaction to make sure that it was treated properly by your current tax person, it’s going to be difficult to come up with things that you can do after the contract is signed and the sale is closed as far as minimizing the tax impact on the gain you got from the sale.

There are certainly things you can do going forward to minimize your taxes and ways that you could invest those proceeds that are tax-preferred and can help you minimize any future tax you’re going to pay.

But if you’ve already sold the business, it’s difficult at that point.

It can’t hurt for us to talk about it and just see. Maybe there’s something unique about your fact pattern. But you really need to get in there before you sign the contract, because once the terms are agreed to, it’s hard for us to do our structuring and planning on that side.

**Christopher:** Right. Excellent.

A reminder, everyone: If you have questions, drop them into the Q&A window or the chat window. We’ll get to as many as we can. You can also raise a hand. We’ll jump to you and answer a question for you.

So, how should people be thinking about these potential capital gains increases more broadly? Are there things that, right now, they can be doing to batten down the hatches?

**Sharon:** There absolutely are. And it’s not just capital gains.

We know, if you’re in a corporate structure, corporate taxes are definitely going up. That, I think, will happen pretty quickly. Individual tax rates are going up. You may even have other things like corporate AMT coming back in.

So, we know taxes are going up. We don’t necessarily know how much, and we don’t know when, but we know they’re going up.

There are absolutely things you can do. In the e-commerce space, you’re in a situation where it’s difficult to claim business deductions that other businesses might have because you’re not very capital-intensive. You generally don’t have large amounts of real estate or other assets that can help you claim large business tax deductions.

So, in the e-commerce space, it is critical that you make sure your legal structure is set up in a way that you’re optimizing it from a tax perspective.

Then you really need to think about what you’re doing with your money on a holistic basis.

What are you doing with the money that you take out of that business? How are you investing it?

You don’t want a situation where you’re just putting all that money in the stock market. Or, if you’re going to do that, we need to structure that properly because that’s not really the most tax-preferred investment. Gains on stocks are now going to be subject to a higher capital gains rate, as well as that 3.8%.

I don’t know if everyone saw, but I think it was CNBC that recently came out with an article that was very illustrative in the sense that, if you live in California or New York City, like myself, you’re in a situation where your effective tax rate is going to be higher than 62% under a lot of these Biden proposals.

I haven’t even touched on payroll taxes, which are also going up for high-income earners. There are some incentives that Trump had in his tax cuts that are going to go away if you make over $400,000. They already kind of do, but they’re going to get even worse.

So, it’s going to be a really bad environment for business owners who are not working with the right advisors and don’t have the right structure in place to minimize their taxes while they’re operating, let alone when they go to exit.

Don’t make the mistake of not thinking there’s something you can do. There are always options that can be considered.

They might not necessarily work for you and for what you’re trying to accomplish, but it’s worth having that conversation to see if there’s something we can do.

**Christopher:** I think that’s a nice little segue. You put together a little chart for us about planning, the importance of planning, and thinking about structuring things in a way that—because, I mean, you’re saying it’s more about the long-term investment and what you do with that money.

Can you walk us through this case study real quick and explain some things that people can do to plan better for their exit and how they invest?

**Sharon:** Yeah, absolutely.

I think what this is intended to illustrate is, we all understand that when we go to sell our businesses in a couple of years, or now, we’re going to pay tax on that gain. So, we know we have the tax hit.

There’s plenty we can do to try to reduce that or eliminate that, but if you don’t do any planning, you’re going to pay capital gains tax on that gain.

What I think people don’t think about as much is what that really means from a dollars-and-cents perspective.

I’m very passionate about investing, and I’m also a passive investor in a lot of different assets. So, not only do I think about minimizing the tax I pay on any assets that I sell, you need to think about your ability to invest the money that you make from the sale of your business in a way that can increase its value to you.

One of the benefits of planning is obviously reducing the tax you pay on the gain. But what’s really helpful, I think, is to think about—and this is what this example shows—if I invest the money I make from my business pre-tax versus post-tax, what’s the difference in the value I can gain from that over 10 or 20 years?

Let’s look at the base case.

You have an e-commerce business owner who sits in California, and let’s say they sell their business for $10 million.

As is common in the e-commerce space, let’s say the basis in the business is zero. That’s actually not that far from the truth. Most of the time, the basis that our clients have is very low in e-commerce businesses because they’re not very capital-intensive.

At that point, you’re stuck with a $10 million gain for tax purposes. When you add federal and state taxes to that, you’re looking at paying tax of over $3.3 million.

At that point, what you get to take from your business and put in your pocket is $6.7 million.

So, from a $10 million sale, you’re only getting to take home $6.7 million of that.

We understand there are planning opportunities to reduce that $3.3 million that you have to pay. I think what is impactful is showing you the difference between investing the money I make from my business pre-tax versus post-tax and the value I can gain from that over 10 or 20 years.

Let’s look at the next slide, Chris. It shows what we would get if we invested that $6.7 million that we got from our business sale.

This is just 10 years, and I’m assuming a growth rate of 7%, which is a pretty achievable growth rate.

So, I got $6.7 million for my business. I invested that in, let’s say, the stock market or something. Every year, I’m getting 7% on that. After 10 years, I’ll have turned that into $13 million.

You’re like, “That’s great. I was able to grow that money.”

But let’s look at a situation where we were able to work with you to set you up in a structure where you could defer the capital gains tax on that.

On the next slide, we show where I sold my business for $10 million, but I did tax planning, so I deferred the capital gains tax that I paid on that $10 million. I’m able to invest that $10 million on a pre-tax basis.

If I invest that same $10 million in something like the stock market that’s gaining me 7% a year, after 10 years I’ve got over $19.6 million.

So, that’s the difference between tax planning and not.

It’s not just the tax you pay when you sell your business. It’s the amount of money you’re going to be able to make from investing those proceeds on a pre-tax basis.

Hopefully, that’s what we’re intending to show with this example. Don’t just think about tax savings. Think about your ability to build wealth and the amount of money you’re going to be able to make over 10, 20, or 30 years if you can do this in a way that you’re deferring the tax or eliminating the tax that you have to pay.

**Christopher:** Sure. With these numbers, what really stood out to me are these 20-year numbers.

If you carry this out another 10 years, your investment, if you are taxed and you haven’t done any planning, is $25 million. That sounds like a great amount of money to get after 20 years on a $10 million sale.

But the 20 years with planning is $38 million. I mean, that’s over 50% more.

To me, that’s really eye-opening, just how much you can do over time.

**Sharon:** Absolutely.

**Christopher:** Cool. So, Jarrett here popped a question in the chat window. He said, “We’re looking to sell in the next few months, and the topic of charitable remainder trusts has come up. Is that a realistic option for people?”

**Sharon:** It could be. It’s one of the options we would consider. There are other options out there, and it really just depends on what you’re trying to achieve and what your goals are.

If you’re someone who is very charitable-minded, I would say a charitable remainder trust is a more simplistic, less complicated way to structure the sale.

If you’re someone who is happy to ultimately donate that money to charity, then that’s absolutely one of the tools you could use.

There are other options out there. It’s just a matter of what makes the most sense for you and what your objectives are.

That’s kind of what I do. If you came to me and we talked about what the options are to structure the sale of your business, a charitable remainder trust would just be one of many options you could consider.

There are options out there where, because with the charitable remainder trust you are required to donate at least 10% ultimately to a charity, you don’t have that charitable donation requirement.

Again, it just goes back to: What are your goals and objectives?

You want to work with someone who understands this area and talks to you about all the options on the table.

I get a few strategies people ask me about. They’ll say, “What about a charitable remainder trust?” Sometimes I get a lot of questions from clients about, “What about the qualified small business stock exclusion for $10 million?”

That’s another one I get a lot. I get ESOP trusts—a lot of people asking questions about that.

Those are options. Those are on a menu. But there are a lot of other options that might make sense and have bigger savings for you.

**Christopher:** What would you say to e-commerce sellers who aren’t taking a lot of money out of their business? They’re putting a lot back into inventory and that sort of stuff.

They’re really excited when they get to that big exit. They’re taking out a big chunk of their money.

We talked about some investment strategies. How can someone both invest and take some money out of the business and finally realize some benefit from all that hard work?

Because more than 50% of the amount that someone will earn over the lifetime of the business, they earn at exit. Right?

**Sharon:** Absolutely. You’re exactly right.

That is what we see mostly with e-commerce businesses.

There are ways. If you want to start to take money out sooner rather than later, you can do that, and then we want to make sure we do that in a tax-efficient way.

But if you want to leave the money in there and grow, which is what we commonly see, then we need to take that into account in your structure.

We want to make sure that you’re not being penalized for that, because the last thing you want is to be paying tax on earnings that you’re just putting back into your business, if we can avoid that.

That is very difficult in the e-commerce space. So, you need to make sure you’re working with someone who can really talk about the planning opportunities that are on the more sophisticated level of planning that’s out there.

It’s not as easy as setting up an LLC and treating it as an S corp or something like that.

There’s really more that comes into play here. As an e-commerce owner, when you look at the scale of business owners, e-commerce businesses, I think, are the most difficult from a tax-planning perspective, just because you don’t have those heavy capital assets that a lot of other businesses have.

**Christopher:** Great. You mentioned that it takes time to do this planning, especially if there are some strategies that need years, as you said.

What’s a reasonable time frame for someone to think about, “Okay, I’m feeling like this thing is going to be something I want to exit in two years, six months”?

What’s a good time frame? What can they be doing? What should they think about now in regard to the exit?

**Sharon:** I would say, as soon as you’re able to make the investment to work with an advisor who can help you with this.

I think people have a misconception that it’s very expensive.

What I do with my new clients is a tax strategy for them. That would include reviewing their business and telling them what structure they should be operating through, and talking to them about their investments and how they can make investments in a more tax-beneficial way.

The minute you’re able to make that investment, you should do it, because the worst thing you want is to be paying more taxes than you need to be.

Every year you don’t do planning, you’re paying more tax.

I always joke with my clients, “Wouldn’t you rather pay me than Uncle Sam?”

So, the minute you’re able to make the investment to work with an advisor to do a strategy, you should do it.

Even if you’re not making a lot of money in your business because you’re just starting, the first year you do start to make a profit, you’re going to pay that away in taxes.

So, it’s critical that you do it sooner rather than later.

As I mentioned, there are some structures that do take some time to bake. If you come to me and you’re going to sell your business in a couple of months, there are certain structures we can’t consider at that point because there isn’t enough time, or there are certain requirements in the tax code that we wouldn’t meet.

So, the sooner we can talk about that and get you in the right structure, the better.

I would say the minute you’re able to make the investment of working with someone on strategy.

**Christopher:** Yeah. Outside of working with a tax professional, what’s the number one mistake most entrepreneurs make in preparing themselves for lessening their tax burden, just normally or even when they’re exiting?

**Sharon:** I would say the biggest mistake I see is not working with the right person.

I think a lot of people will pay a CPA a thousand bucks to prepare a return and then get disappointed that the CPA wasn’t bringing them planning solutions and things.

So, I think it’s not partnering with the right tax professional, but also not having the right structure in place and not taking into account your specific facts.

I have clients that come to me and they’re like, “Well, I read a book that said I should switch to an S corp, but I make $40,000 in net income.”

That doesn’t make sense. It doesn’t even make sense to start, and it doesn’t make sense for everyone.

If you’re an e-commerce business that thinks you’re going to IPO in the future, then we should start thinking about a C corp structure. If you’re someone who wants to reinvest your proceeds, maybe we need to put a C corp structure in your structure somewhere so that you can do that at a lower tax rate.

So, I think not having the right structure and not appreciating the value of working with advisors who can help you get there is a mistake.

A good advisor pays for themselves, right? My business coaches and the advisors I work with, within a year, they pay for themselves.

I don’t charge my clients if I can’t recover tax savings for them, and I think any good advisor would have that same guarantee.

So, in my mind, the two biggest mistakes I see are not working with the right advisors and not being willing to make the investment, and then, second, not having the right structure in place that can help them accomplish their business goals in a tax-beneficial way.

**Christopher:** Right. I see this a lot with Quiet Light clients. There’s a certain amount of fear that goes into dealing with taxes, but I think there’s a big payment on the back end if you’re being too fearful of what you need to do.

One thing that we also see a lot is people haven’t normalized their P&Ls, or everything’s in Excel, or whatever.

What do you need to look at when someone comes to you to be able to quickly get to the heart of where they’re at and what they need?

**Sharon:** I can actually gain a lot of the information I need from your most recent tax return. That’s always a good starting point because that will tell me a lot about what your tax position is and what your structure looks like.

Then, if a business has projections—most of my clients do not have good projections to work with—but if you’re someone who does, that’s always good for me to see because that shows me what we’re looking at over the next few years.

Then it’s just understanding what your business objectives are, what your path to growth is, what your intended exit is, and what your cash needs are to fund your personal lifestyle.

After that, it’s pretty easy to put a strategy in place that can help you do this in a way that’s very manageable.

**Christopher:** Great. So, I guess, when should someone reach out to you or to another tax professional when they’re thinking about exiting or even wanting to know what their options are?

I know you said as soon as possible, but if they are worried about what’s going to happen in 2022 but they need to get some things in order, when’s the latest they can do that?

How long does it take you to put things together? When should someone reach out to you?

**Sharon:** If you’re thinking about exiting anytime in the next few years, you should definitely reach out.

I mean, anyone should reach out now as far as coming up with a strategy. But if you’re thinking about exiting and you’re curious about what the alternatives are out there, then you should reach out as soon as possible.

The further you get down the line as far as negotiations with potential buyers, the less opportunity there is for planning.

You want to reach out. We want to get you in the structure that we want. If we want to set up a trust, for example, we want to do that.

We also want to know what we’re going to be expecting from a buyer. In some cases, you might need the buyer to agree and sign on to some things. Or, in some cases, we might be willing to take a reduction in the purchase price if we can get the buyer to agree to structuring the deal in a way that’s advantageous to us.

So, as soon as possible. The worst thing is that you’ve already signed the contract and there’s nothing we can do at that point.

The sooner, the better.

And just to have a conversation with me is free. I’m not going to charge you just to get on the phone and talk about it and see if it makes sense for us to do a strategy and help with exit planning.

**Christopher:** Sure. Are there types of buyers that people should be more receptive to or looking more toward that are amenable to deal structures?

**Sharon:** There are.

If you have a buyer that’s going to get financing through the SBA or banks—which I know is less common in the e-commerce space—that can be more difficult as far as being able to negotiate the structure of the deal.

You’re kind of stuck with the SBA wanting it a certain way, and you’re not going to have a lot of wiggle room there, in our experience.

But if you’ve got a cash buyer, it’s a negotiation point because what’s good for you as the seller from a tax perspective is usually detrimental to the buyer.

So, it really just comes down to, “Okay, I might be willing to take a hit on the purchase price and reduce that a little bit if you’ll agree to this structure that will help me on my taxes.”

That’s what comes into play.

To the extent you’re working with a buyer that’s more sophisticated and really understands what you’re trying to do, they’re usually willing to work with you because they want the same thing when they turn around and sell the business they’re buying.

I find the more sophisticated the buyer, the better it is as far as getting them to work with you to structure the deal.

The other thing I’ll say is a lot of our planning strategies don’t involve the buyer at all. Those are great because the buyer might not even know what you’re doing, to be honest.

So, those make it a lot easier as far as getting the buyer to agree or negotiating the deal structure.

**Christopher:** Sure. Stepping back for one second, what about private equity buyers?

I know we’ve got a lot of aggregators and private equity in the marketplace right now. Are they pretty amenable to deal structures that are advantageous, or do they really want you to take a bigger hit in sales price for better deal terms?

**Sharon:** I think a sophisticated buyer is probably going to want to negotiate the purchase price if you’re going to prefer a deal structure that’s not preferable to them.

I think anyone who knows what they’re doing would expect some sort of negotiation there at that point.

A lot of my peers would not necessarily agree with this, but in my experience, PE buyers are very easy to work with. They’re actually usually the easiest.

A lot of it is because of the lack of financing restraints. But in my experience, I find private equity is very amenable to helping you because they get it. They understand what you’re doing and what you’re trying to accomplish.

**Christopher:** Great. That’s awesome.

Well, I guess we’ve blown through a lot of questions. I thought it would take a little bit longer to get through all those.

But I guess the biggest question is, if someone wants to contact you, how do they do that to get more information?

**Sharon:** You can go to my website at WinsmithTax.com, and there you can actually schedule a free consultation with me.

We can talk about your situation and see if there’s anything I can do to help.

**Christopher:** On our side, we obviously love to have conversations with entrepreneurs about the value of their business.

We recommend Sharon and a few other tax attorneys as well, so it’s kind of a both-and type of situation as far as we’re concerned.

You want to be thinking about what you need to be doing to get your business ready to sell. We help by giving a free valuation and business analysis to understand the levers that are driving the value of your business and help you understand what you need to do to get it ready to sell.

Then people like Sharon can help you understand what tax things you can be doing.

It’s a pretty labor-intensive thing to sell your business. It’s emotional. It’s hard. So, we really encourage planning, planning, planning at every stage of the sales process.

Reach out to us at Quiet Light. I’m the Chief Marketing Officer, so you can reach out to me, of course. Or, if you just have an inquiry and want to do an evaluation, you can go to QuietLight.com or email us.

We’ll also be placing this video on YouTube and on our website, so you can refer back to it.

And certainly, we give our hearty endorsement of Sharon and her services. She’s been awesome to work with and has brought a lot of value to our clients.

Thanks, everyone, for your questions and for joining us. Sharon, thank you so much.

**Sharon:** Thanks, Chris. I appreciate you having me on, and I appreciate everyone joining.

**Christopher:** Yeah. Do you have any parting shots?

**Sharon:** I think just make sure you work with an advisor when you’re selling your business.

There are some promoters out there that will try to sell you some structures that can be very risky and can also have some criminal penalties and, in some cases, even land you in jail.

So, it’s important that you make sure you work with a non-biased advisor who’s not incentivized to sell you something that’s going to make them a lot of money.

That’s kind of what I do. I work with my clients to assess the options and tell them which I think is best for them.

**Christopher:** Great. Awesome.

Well, thanks, everyone, for your questions and your participation. We’ll see you for our next webinar next month with Paul Andersen.

Thanks a lot, Sharon.

**Sharon:** Thank you.