Case Study: Business Exit Strategy
Jim & Elsa Callahan
Age: 55 & 53
Make strategic decisions with their money when presented opportunity to sell business at a premium.
Jim was a seasoned entrepreneur who was approached with an unsolicited offer to purchase his company. The acquiring firm wanted Jim to stay on and run the company for three years, and they were willing to negotiate terms, including an earn-out and bonus provision should he accept.
So What's The Problem?
Jim couldn't imagine no longer making such an impact on the lives of the people he works with. He loves being able to contribute to something so important and vital: creating jobs and financial security for his employees.
It's important to Jim and Elsa that selling their business is something they choose, on their terms, not just something that happens to them - and they definitely don't want financial limitations to be the reason they can't do what they want.
Jim and Elsa knew they didn't know where to begin. They're smart, self-aware people, which is why the first step they took when they realized they faced a lot of uncertainty was to reach out to a professional.
We know we'd need to focus on a few key things to give Jim and Elsa the answers, clarity, and confidence they wanted. We set out to:
- Determine optimal scenario for business buyout versus retaining ownership.
- Where possible, minimize tax consequence following the sale.
- Coordinate a sustainable financial plan that maximizes retirement cash flow.
More importantly, there were a number of questions whose answers would drive Jim and Elsa's decision whether to take the offer and sell:
- Was the offer attractive enough to offset the opportunity costs of giving up ownership and control? The business was growing at a high rate and the bonus and earnout would need to sufficiently offset lost upside potential.
- Would it make sense to establish residency in a no-tax state? In addition to their primary residence, Jim and Elsa owned property in Florida and had contemplated changing their state of residence upon retirement.
- With their existing investments, coupled with the proceeds from the sale, would there be "enough" to stop working without sacrificing their lifestyle? The majority of their wealth was concentrated in the business itself, but as they transitioned to the next phase, they needed an understanding of how other sources of income, such as social security and qualified retirement distributions would be integrated into a cohesive strategy.
We helped Jim and Elsa visualize the ideal financial outcome for the sale of their business. Then we connected them with the right legal and tax experts so they could confidently and quickly move forward.
After we began working on their Exit Plan and recommendations, we were able to:
- Confirm the optimal scenario was for Jim and Elsa to sell the business, with 50% of the proceeds paid as lump sum and the remainder to be paid out over 5 years.
- Jim and Elsa were able to test drive "what-if" scenarios such as paying off mortgages or market "disruptions" and could visualize the impact of the sale on their long-term financial position, ultimately making an educated decision whether to move forward.
- Establish residence in a no-tax state prior to the sale would save $200,000 in state income taxes. Working closely with the tax advisor, Jim and Elsa were able to follow all the required steps to establish Florida residency prior to the sale, making the proceeds from the transaction free from state income and capital gains taxes.
- Illustrate there was high probability of achieving their financial goals under either scenario, but monetizing the business now would allow them to get where they wanted to go with considerably less risk along the way.
- Implement charitable giving strategies to reduce Jim and Elsa's tax liabilities, and utilized a creative IRA funding strategy to create even more tax efficiencies.
We also gave Jim and Elsa access to industry-leading technology that provided them with even more clarity around all aspects of their financial life. With the ability to understand and see everything at a glance, their situation started to feel simpler - and much more within their control. They felt like they were transitioning into retirement, on their terms.