Building Your Business Exit Plan? Consider This
Many business owners plan to eventually retire or sell their business someday. But, “someday” can feel far away, especially when you’re busy managing the day-to-day of the business.
Understanding that business exit opportunities can appear suddenly, having a plan in place prior to the transfer of your business is important. One key consideration of that plan should be whether or not you choose to donate your business interest.
Why Donate Business Interest?
The sale of your business may be one of the most significant wealth trigger events you experience during your lifetime. And, depending on the size of the sale, it has the potential to support all of your wealth management goals, including investments, charitable giving, and legacy planning. But, the sale of your business is also a major tax event. Your business, which is considered an asset, will be treated (and taxed) as a form of long-term capital gains.
Donating your privately-held business interests can help you minimize capital gains exposure, by offering you a charitable tax dedication and reducing the overall taxes you would expect to pay for the sale of your business. More importantly, it is a great way to maximize the impact of your charitable giving and legacy planning efforts.
Things To Consider When Donating Business Interest
If you are a business owner with charitable giving interests, there are a few important considerations that should be made to ensure you can successfully donate business interest when the time comes.
- Start Planning Now
When it comes to the sale of a business, timing is everything. The last thing you want is to wait to explore your charitable giving opportunities until the perfect business exit opportunity arises as, by that point, it might be too late.
Start by seeking guidance from experienced professionals well-versed in business exit strategies through initial planning discussions. This may involve your team of advisors, including your Entrust Wealth Partners advisor, as well as potential charitable recipients. These early conversations will help ensure prospective recipients have the structure and resources necessary to support your philanthropic goals.
As part of these early conversations, consider what type of charitable giving vehicle you’d like to use. Options include:
- Donating directly to an operating charity
- Donating to a private foundation
- Donating to a public charity via a DAF (Donor Advised Fund)
Having the appropriate individuals participate in the early planning stages can help you navigate important decisions and maximize your philanthropic effort without impeding the sale of the business.
- Review Company Documentation
In advance of any business transaction, you’ll want to review your business’ governing documents to ensure there are no transfer restrictions noted. If transfer restrictions do exist, you’ll need to work with the appropriate counsel to determine what amendments are needed in order to successfully donate business interest to a charitable recipient.
More often than not, transfer restrictions can be resolved through a simple waiver or by approval from other interest holders. However, you’ll want to explore and secure these approvals in advance of any business exit event.
- Don’t Forget The Appraisal Requirement
Something that is often overlooked is the need to obtain an appraisal of the asset being donated (in this case, business interest). The appraisal must be done by an independent third-party no more than 60 days before the date of the deduction and no later than the date of your tax return due date for the year in which the charitable gift is made.
Although the appraisal doesn’t need to be completed prior to the sale of the business or the donation itself, you and your advisors will want to confirm the appraisal or valuation amount early in the planning process to guide discussions and avoid surprises when you go to file your taxes for the year.
Donating your business interest can be a powerful strategy for maximizing the value and impact of the sale of your business. If you’re interested in exploring this option as part of your future business exit plans, contact your Entrust Wealth Partners advisor or contact us at (860) 838-3730.
