Business Succession & Exit Planning

You own your own business — wonderful! But what will happen when it’s time to retire?

Do you plan to sell? Hope your children will carry on the family business? What would happen if you were unexpectedly unable to carry on managing your business tomorrow?

Having the answers to those questions — and a path to maximizing profit while minimizing taxes — requires either business succession planning or business exit planning. YouthBridge CEO Michael Howard describes charitable giving as “an often-overlooked strategy” that can make sense for either scenario.

Chances are, charitable giving is already part of your corporate culture or personal values. A Harris Interactive poll found that 90% of business owners give to charity. Including charitable giving in your business transition plan can allow a significant portion of your company’s value to go to a cause you care about, rather than to the IRS.

Why do I need a plan?

A plan will help match your wishes for the future of your business — and your family — with the closest possible outcome and at the lowest possible cost. Planning, in consultation with your financial and legal advisors, can also help reduce estate or capital gains taxes. Using philanthropy as a means to reduce taxes also means you can maximize those savings while having a meaningful impact and lasting legacy.

What kind of plan do I need?

If you plan to hand over your company to a partner or family member, you need a business succession plan. If you would like to sell your business, develop a business exit plan.

A business succession plan will address two goals: the transfer of ownership and the transfer of control. Those recipients might not be the same two parties. A business exit plan can help maximize the value of your business prior to sale, while reducing capital gains tax and providing for financial security for you and your family after the sale

When should I plan?

The short answer is, if you don’t already have a business succession or exit plan, you’re already behind the game. Dan Bean of CMA says business owners should start planning for a transition of wealth or control “at the point they acquire ownership in the organization.” Timely planning will help you maximize the benefit of available strategies.

What charitable giving options fit into a business succession plan?

  • Charitable remainder trust
  • Gift of company stock
  • Donor-advised fund — often the best option if the charity you would like to support does not have the resources to handle a gift of stock.
  • Charitable lead trust
  • Charitable gift annuity

How can charitable giving benefit a business exit plan?

In one scenario, a business owner may decide to contribute an interest in their business to a charitable organization or trust prior to the sale of their business. Timed correctly, the donor will receive an income tax charitable deduction for this contribution, and avoid capital gains tax on the contribution. The same strategy can be used to avoid or reduce estate taxes. Using tax-efficient strategies also allow you to make the most of your donation.

Philanthropy can also help maximize your profit on the sale of your business. As many companies realize, contributing to the greater social good, also known as corporate social responsibility, can elevate the public perception of your company, and also help improve employee retention. A positive standing in the community and a stable talent base can add to the value of your business.

Does that mean the charity will control my business?

The answer to this question lies in understanding the difference between ownership and control. This concern is can be addressed in a number of ways:

  • Contributing non-voting stock to the charity
  • Giving gifts of tangible property like real estate
  • Serving as a trustee of the charitable entity
  • Giving stock subject to buy/sell agreements
  • Attach rights of first refusal on stock redemptions

What if I want to hand over the company to my kids?

Not every family business is destined to stay under the next generation’s leadership. But you can help encourage interest in the business, expand understanding of the impact the business can have, and develop crucial leadership skills, by using philanthropy as a training exercise.

Some of Bean’s clients give the younger family members responsibility over a charitable grant, requiring them to report back on what they decided to do with the funds. He explains, “[The current leadership] use it as a way to transmit family values and to develop planning, execution, accountability, and reporting skills. Everything a CEO’s going to need to know some day.”

To understand more about the financial and tax-saving benefits of incorporating charitable gift planning with your business succession or exit planning, talk to your advisor and legal counsel. YouthBridge is available to join the conversation; call us at (314) 985-6778 to schedule a consultation.

Finally, remember to enjoy and appreciate what your hard work has created! As you think about the next phase of your life, consider how a charitable plan can help you build something meaningful beyond your business.