Small business owners shouldn’t wait until they’re ready to sell their businesses to execute what is likely to be the most important transaction of their lives. They need to plan for the sale years in advance, say advisors and industry experts.

“If you wait until the moment there’s a sale, you are caught off guard and you’ve not optimized your estates, you’ve not optimized your taxes, you’ve not optimized gifting,” said Michael Ott, head of U.S. Bank’s Private Client Reserve, the bank’s high-net-worth wealth management unit.

Jennifer Flickinger, a private bank advisor at Umpqua Private Bank who works extensively with small business owners generating up to $5 million in revenue, couldn’t agree more. “We always think that four years out is good,” she said.  “It gives you a chance to align what your business needs to look like in anticipation of the sale.” 

A long time horizon allows advisors to help business owners take advantage of tax strategies that will minimize their federal and state taxes. For example, a business owner might consider moving the domicile of the business to a non-income-tax state, such as Washington, Delaware, South Dakota and Nevada, said Flickinger. This way, when the business owner sells the business, he or she won’t have to pay taxes at the state level, according to Flickinger. 

“These are the things that we plant seeds on ahead of time for them to position themselves,” Flickinger said of the business owners she serves. 

Advisors can also help small business owners set up a charitable trust to both reduce estate taxes and create an income stream for clients when they retire. Typically business heirs would have to pay a big estate tax bill upon the death of the business owner. By placing some shares of ownership of the business into a charitable trust, business owners would reduce the taxes that their heirs would have to pay because whatever is in the trust is tax-exempt. In addition, the charitable trust benefits the person who donated the shares to the trust, creating a vehicle that will give the business owner income for either a specified time or a lifetime, according to Flickinger.

Not all business owners are well suited for charitable trust, however. “The business owner, first and foremost, must have charitable intent, plus a low tax basis in their company,” Flickinger said.

A long-term vision for selling a business also allows advisors to work with business owners ahead of time to start “gifting shares at a discounted value” to the next generation, if the owner wishes to transition the business to family members. Let’s say a business owner has a business valued at $1 million and he or she wants to give each of his or her four children 25% of the shares in the business.  The gift tax on the transfer would be assessed on the value of $600,000 (not $1 million) because gifted shares can be discounted up to 40%, according to Flickinger. If the business owner had left the business to his or her children through a will, the children would have to pay estate tax on the full $1 million. 

Planning ahead to position the company for sale benefits not only the business owner. It’s also a smart move for an advisor angling for the investment business a sale will produce. 

“As an advisor we want to make sure that we are working with the business owner sooner [rather] than later, even though we may be waiting in the wings for some time,” said Flickinger.

Advisors tend to service small business owners as investors rather than small business owners, neglecting to help them with succession planning, say industry observers. This is a huge oversight as advisors will lose most of the assets tied to the business when it’s sold, Scott Stathis, a managing director at BISRA, a research and consulting firm for banks and credit unions, told Bank Investment Consultant in February. “It goes somewhere else because the advisor didn’t help with the transition,”Stathis said.

Indeed, the money left on the table is significant. In a survey BISRA conducted last year, more than four in five bank investment services executives (82%) estimated they kept less than 30% of the assets that result from the sale of client businesses. One in four said they kept less than 10% of the assets.

Few advisors understand the opportunity better than Flickinger. “If you’re there with them [business owner clients] from the beginning on how to structure their succession planning, even though they may not actually pull the trigger on it for years down the road and you’ve given them great advice along the way, when that business sells, where do you think those investments are going to go?” Flickinger asks.

That answer, of course, is the investments will go to the advisor.

Read More: How Advisors Can Help Small Business Clients

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