'&&Boomers Bailing from Businesses

A team should also include a financial planner and an insurance specialist, says Gregory Banner of Asset Preservation Strategies in San Diego. As an advisor specializing in exit planning, Banner says no one advisor will have all the necessary skills required for proper exit planning. In addition to structuring the team with all the right advisors, he adds that all team members must be able to “check their egos at the door” and collaborate with the client’s best interest in mind.

Taxes

Business sales inevitably throw off taxable income and/or capital gains, and there are plenty of creative ways to reduce or delay both. In the sale of my own book of business from my C-corp advisory firm in 2001, I learned that I could take capital gain treatment on my personal return for the goodwill inherent in my client relationships (precedents: Martin Ice Cream Co. v. Commissioner of Internal Revenue, 1998, and William Norwalk v. Commissioner of Internal Revenue, 1998).

Martin Shenkman, a tax attorney in Teaneck, N.J., suggests counseling the client to consider a time-honored technique used in many capital gain situations — the charitable trust coupled with an insurance trust. Says Shenkman: “One strategy is to gift part of the business interests to a charitable remainder trust (CRT) before the sale. The boomer client gets a charitable contribution deduction to offset some of the gain on sale and the CRT provides cash flow during retirement.” He adds that an insurance trust can be used to replace the portion of the business gifted to the CRT. “Some planners call this a ‘wealth replacement trust,’ but it’s really a standard insurance trust.”

Of course, it’s important to leave a piece of the sale unencumbered by planning so the boomer can have free reign of the money.

The Softer Side

Good business planning touches more than just technical considerations. “The first issue we address with those exiting businesses is what will the boomer do next,” says Ron Rhoades, director of research with Joseph Capital Management of Hernando, Fla.

“This is by far the hardest issue for entrepreneurial-minded boomers to face. Surprisingly few of them plan for what they will do in retirement.” Rhoades asks his client-sellers a series of probing questions about their interests and goals — or lack thereof. “We often get [insightful] answers when asking them to describe a typical week during retirement.” Some boomers, says Rhoades, will do better in retirement if they take jobs in the field in which they worked previously — but for 40 or fewer hours a week, not the 50 to 65 hours they endured as business owners.

The key to a successful retirement, says Rhoades, is having the proper mindset. “It’s a huge psychological challenge to go from paying bills with a paycheck to paying them from a retirement nest egg.” Undertaking projections of withdrawal rates helps, says Rhoades, as do projections of living expenses and taxes based upon checkbook ledgers and credit card bills for the past 12 months. In other words, it’s one thing to negotiate a business sale, but quite another to convince the client his business proceeds are going to take care of him for the rest of his life.

We’ve all heard the saying, “It’s important to know what you don’t know,” and this couldn’t be truer than in the case of a client with a business to sell. Unless you have a background in business brokerage, it’s unlikely you’ll be expert at business valuation, contracts, negotiating, taxation, actuarial considerations and counseling the client through this major life change. Know your shortfalls and bring in the right people. Doing so will keep you in charge of your client, not to mention the proceeds of his business sale.