Once the business owner is ready to sell the business, there will be considerable time and energy focused on that goal. The client may engage an investment banker or business broker to assist in the sale, along with dedicated legal counsel specializing in mergers and acquisitions (“M&A”) for the transaction. The business’ accountant will play an important role as will the personal financial advisers. It is possible that these roles may change from the individuals currently serving in these roles given the complexity and dollars involved, which is a natural progression during a business sale.
The business owner may be an existing client who has already done some estate planning with the business interests. In this case, the estate planner will likely need to be involved to educate the M&A counsel on the trusts that have been put into place and provide documentation to be shared during the due diligence process. The client generally does not have to share the full terms of the trust with anyone. For many states, a certificate of trust can be provided in lieu of providing the full trust, which provides key details about the trust without disclosing the dispositive provisions. The buyer’s counsel may require a legal opinion from the estate planner as to certain aspects of the trust, or the client may agree to provide a full copy of the trust as long as there are strict limitations on how it can be shared among buyer’s counsel and advisers.
The estate plan of the existing client should be reviewed as well to confirm any updates to the documents in light of the sale. For example, testamentary plans may need to be simplified to remove complex business succession provisions once the business is no longer an asset owned by the client. Similarly, if not all of the equity is being sold, the estate planning counsel should confirm whether the business provisions in the client’s existing estate planning documents still make sense if the client is only a minority owner going forward.
If the business owner is a new client who has not done any estate planning to date and is only looking at it now because the sale is imminent, there may still be opportunity to plan. A third-party valuation may still be useful to transfer business interests ahead of a sale. Generally, transfers made prior to any signed letter of intent may rely on a third-party valuation, and there may be an opportunity to use a third-party valuation even after a letter of intent has been signed, especially if there is a long due diligence period or time before signing/closing. Even if there is not time to be comfortable using a third-party valuation, there may be other benefits to transferring equity at the third-party sale value prior to close. For example, transferring equity to a grantor trust would allow the sale proceeds to remain in the trust without reduction for income taxes. Trusts may also be established for income tax purposes, such as potentially limiting state income taxes, stacking benefits for qualified small business stock, or to engage in an installment sale transaction to limit an immediate substantial capital gains tax liability upon the sale.
If the business owner will be retaining any rollover equity, there may also be a new opportunity to plan with that equity. For example, a client may not be ready to part with any of the cash sale proceeds at closing, but may be comfortable transferring part of the upside equity that the client will be retaining for that second bite at the apple. In that case, the client can use the closing valuation for purposes of the rollover equity without needing a third-party valuation, and may transfer all or a portion of that equity to family members or to a trust for their benefit.
If a client is not comfortable with moving any of the rollover equity now, the estate planner should still be involved to ensure that the equity agreements going forward allow for the transfer of equity for estate planning purposes and to ensure that the controlling owners will be comfortable with allowing a third-party valuation for that purpose. It is best to clarify and negotiate those provisions now while the seller and buyer are still in a good place. It is not uncommon for a sale to occur and the buyer and former owner to have significant disagreements whereby neither party will be willing to assist the other with personal matters unless they are obligated to do so.
Finally, as the client looks to minimize taxes for the year of the sale, the client may want to explore charitable gifting options with the estate planner. This may be as simple as making gifts to public charities or establishing a donor advised fund, or may involve more complex charitable planning like the establishment of a private foundation or split-interest charitable trusts. Even gifts to public charities may involve negotiating gift agreements and things like naming rights or other acknowledgments.
While the client may be prioritizing the sale transaction, there are still many items that can be implemented or that need to be reviewed from an estate planning perspective before and during the year of the sale of the business.
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