including any adjustments that need to be considered (such as
recasting the business financial statements, an often-overlooked
detail that can greatly impact a business’s valuation).
Important: A valuation estimate should be done at least three years
prior to bringing a dealership to market. If the estimate comes in
lower than desirable, owners can take steps over a period of years
to improve key areas of their business that can result in a higher
valuation.
In the Smiths’ case, their dealership was in good shape—no
significant operational weaknesses were found—and it was
determined that they could likely sell their business for around
$2.2 million.
4. Terms and conditions. Terms must also be developed and
agreed to. These include identifying the right buyers (children,
existing dealership managers or employees, an outside third party,
etc.) and deciding on the right structure (a stock sale versus an
asset sale, for example).
The Smiths decided that their two children were not yet in a
position to take over the company’s operations and that they did
not want to wait for them to be ready to do so—thus, they decide
to seek out a third-party buyer. Additionally, an asset sale structure
was chosen and other key terms of a potential deal were agreed
to in advance.
One of the most important pre-sale decisions the Smiths made
was to retain ownership of the real estate the dealership resided
on and lease the land to the buyer. This strategy ultimately enabled
the Smiths to defer unnecessary additional taxes by holding on to
appreciating land while generating an annual rental income stream
of approximately $85,000.
5. Tax mitigation planning. As the saying goes, it’s not what
you make—it’s what you keep. Selling the business in the most
tax-advantageous way can help ensure that sellers walk away with
as much money in their wallets as possible. Unfortunately, too
many dealership owners don’t consider options to mitigate taxes
until right before the sale—at which point, it may be too late to
implement some of the more effective tax reduction strategies.
Once again, proactive planning can help ensure sellers don’t leave
money “on the table.”
One example is personal goodwill. If it can be established that
a business owner is integral to the success of the business—if
you’re Bob and you’ve owned Bob’s Trailers for 40 years—it can be
possible to book some of the gain from the sale of the business as
a capital gain (taxed at 20%) rather than as ordinary income gain
(taxed at an income rate that could be as high as 37%)
Another tax-savvy approach is to gift some of the sale assets to
a charitable trust, which can accomplish three important goals:
support a favorite charitable organization, reduce taxes on the sale
of a business and provide an income stream to you, the charitable
donor, for many years.
92
The Smiths’ new accounting firm determined that both of these
strategies could be highly beneficial to the couple. This pre-sale
tax planning ultimately allowed the Smiths to legally avoid paying
an additional $215,000 in taxes when they sold.
6. Post-sale wealth management. Wealth planning after the
sale is also critical, of course. Newly liquid wealth must be managed
to meet current income needs and future growth goals while also
keeping an eye on taxes. In the Smiths’ case, the income stream
from their charitable trust and the land they leased to the new
dealership owner (along with Social Security and other sources)
generated most of the $150,000 annual income they needed. A
balanced portfolio for the remaining sale proceeds was thoughtfully
constructed, consisting of high-quality tax-free municipal bonds
along with stocks of large, high-quality companies known for their
dependable earnings and consistent dividend payments.
More advanced wealth management issues were also addressed.
For example:
• Asset protection. In the Smith’s case, the expert team’s
analysis revealed that the couple lacked adequate umbrella
insurance—and their policy was increased from $1 million to
$4 million.
• Estate planning. Working with their attorney, the Smiths’ wills
and trusts were updated and assets were retitled.
7. Regular progress check-ins. Quarterly meetings following
the sale are essential, as they allow ex-business owners and their
advisors to discuss any new developments that could require
existing wealth strategies to be updated.
Take Action Now
Smart, proactive planning, in relationship with a team of high-level
experts, can empower trailer dealership owners to maximize their
wealth when selling their businesses. If you’re preparing your
business for a liquidity event—or even just considering it as an
option down the road—take the key steps today that will position
you for tremendous success when the big moment comes.
To better understand what those steps may be, consider taking
advantage of our Second Opinion Service—a process that is
designed to help you identify where you are today, where you want
to go and any gaps that need to be bridged to get you there.
Brad Stanek, CFP ®, is a financial advisor and senior vice president
at The Stanek Group at Morgan Stanley in Chicago who helps
trailer dealership owners manage their wealth. He can be reached
at 312-648-3381 and [email protected].
Morgan Stanley Smith Barney LLC (“Morgan Stanley”), its affiliates
and Morgan Stanley Financial Advisors or Private Wealth Advisors
do not provide tax or legal advice. Clients should consult their tax
advisor for matters involving taxation and tax planning and their
attorney for matters involving trust and estate planning and other
legal matters. CRC 2639474 07/19
NATDA Magazine www.natda.org