Baby Boomers who Own a Business Face Different Retirement Planning Decisions

Nov 2015

As the baby boomer generation ages and begins to face retirement, those boomers who are business owners face different decisions that go beyond making sure their retirement portfolio is in order. Often they worked long and hard to build their businesses and now want to either slow down or fully retire. However, this retirement “plan” comes with many financial and legal challenges other non-business owners don’t face. Because of these challenges, it is very important that you seek competent professional help, whenever you are either selling your business or just transitioning towards retirement. Although each situation is unique, the following need to be considered:

1. In most cases there will not be a buyer who is willing to pay cash for the business. With most small businesses the transaction is structured as an installment sale paid over several years. This means the seller has additional risks. For example, in order to receive full payment the buyer must often continue to successfully manage the business. This means in structuring the sale you want to make sure you have adequate security in the event of a default. If the buyer is unable to continue making payments the security you receive from the sale will determine the extent of damage you actually incur as a result of the default. In many cases the assets of the business sold will be the security for the buyer’s performance, which can be a problem if the buyer of the business fails, because the assets may also be worthless. Therefore alternatives may be needed. Every situation is unique and in many cases there is no easy solution.

2. In most cases, all or the majority of the sales price that is paid over time is financed by the seller. IRS rules require that interest be charged. In many cases banks will not be interested in making loans to a buyer and even if they do their terms may not be acceptable to a buyer. Therefore often the seller is the lender of last resort.

3. If the stock of the business is sold, you will receive long-term capital gain, which is taxed at lower rates. This is the preferred way for business owners to sell. However, buyers generally do not want to pay for the stock and rather purchase the assets. Purchasing the stock means the purchaser is liable for any future debts and unknown liabilities. Therefore it is generally safer for the buyer to purchase the assets. Normally, the seller will pay greater taxes when selling assets rather than the stock of the business. In most cases, there is an allocation between intangible assets (i.e., goodwill) and fixed assets between the buyer and the seller. Intangible assets are taxed at capital gain rates which are more advantageous to the seller. The amount of the allocation is normally negotiated between the buyer and the seller.

4. Oftentimes the seller and the buyer want the seller to continue working in the business. There are many ways that the seller’s continued work in the business can be structured as part of the sale. In most cases there is an employment agreement and or a consulting/deferred compensation agreement. The purpose of the agreement is to assure that the seller receives the payments and to permit the buyer to deduct the payments. The income received by the seller is taxed as ordinary income like wages, and the buyer is able to deduct the payments. The exact terms of the compensation are subject to negotiation.

While the areas aforementioned are among the most important for the seller of a business, there are many other issues that often need to be resolved between the buyer and the seller. . Once the parties have an understanding as to the terms of the sale, it is imperative that the agreement be memorialized by written documents. In addition to the various tax considerations, there are legal requirements and disclosures that must be contained in the agreement.

The purpose of the document is to protect both parties in the event something goes wrong.  As you can see, Baby Boomer business owners have a lot more to think about for their retirement planning. But with the help of professional with experience in business sales, you can structure the sale to ensure your years of hard work will pay off in helping you reach your retirement goals.

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