Selling Your Business? Plan for Taxes Before You Sign the LOI

Speaker A: Before you sign an LLI, all 24 strategies are available. After you sign your LOI, there are less strategies available uh, because there are uh, issues, legal issues that I won't get into full details right now. But um, after you sign loi, potentially you don't get the income tax deduction or you avoid the capital gain. So it's important to do before you sign an alli, it's not how much

Speaker B: you sell your business for that matters the most, it's how much net you will bring home after the sale. And one of the most important determining factor is your tax planning. Today we are joined with a wealth and investment advisor to discuss tax strategies that help business owners preserve more wealth before, during and after the sale of their business. Welcome to Business beyond you. The website a one stop hub for insights, conversations and perspectives. Business owners need to build businesses that last beyond them. Hi, I'm Sara Vaziri, M and a advisor in the state of California and my guest today has been helping business owners do tax planning for the sale of their business for more than 25 years. Andrew, welcome to Business beyond you. How about you give us a quick intro to yourself.

Speaker A: Well thank you so much Sarah. This is such an important topic for business owners uh, because their biggest asset typically is your business and their most valuable assets. So uh, my name is Andrew Lowe and I am a private wealth advisor managing director with Wealth Design Financial Architects group of um, Wells Fargo Advisors here in Newport Beach California.

Speaker B: Uh awesome, thank you so much for your time. I know that you have been helping business owner with this subject for a long, long time. So tell us, what are the biggest tax mistakes you see business owners make before selling their businesses?

Speaker A: Yeah, the biggest mistakes that I've seen just with various business owners who are founder led, uh, or family owned businesses is that they don't uh, look at all the possibilities in terms of planning uh, for their vision for their life. Uh, in other words, you know, they have this biggest asset and they're going to sell it. They're used to getting an income stream for the business. They need to figure out how are they going to replace that income stream for their family needs, their retirement needs, their other needs that they have. And so it needs to be very intentional. Mhm.

Speaker B: So in an ideal world, how long before selling the business? Uh, somebody needs to start thinking about this subject.

Speaker A: Well, typically it's best to do it a year or three years in advance. Many business owners uh, wait until they get an offer to sell and by that time they cannot minimize the capital gains in Income tax. And they wind up making mistake of here in California paying 37% in, in terms of taxes both to the federal and the state government or could even be more.

Speaker B: Oh, okay, 37% is really a big number. And we get into these situations that somebody gets to the time that they want to get that bunch of money and suddenly they realize that, oh, it's late, I have to give this big chunk of it. And so it's. So for most of these owners that you work with and you get a good result, how long before the sale you have started working with them?

Speaker A: Um, you know, minimum is 6 to 12 months ahead of time. Even longer is better because then we can really be intentional about what they want. The purposes of the money post sale to how to fund their retirement, their kids, lifestyles, uh, their family needs, passions they have or maybe even dreams you kind of set aside before they, before they built their business. Now they've got the time, uh, and the treasure and the money to be able to engage and impact that and fulfill their vision and their life dreams.

Speaker B: Mhm. So you actually work with each individual owner, try to understand their specific situation and based on their specific situation, you come up with a strategy to help them use that chunk of money that they have otherwise to give as tax. Correct. Is that what you guys exactly do?

Speaker A: Yeah, Sarah, that's a, that's a very good point. And, and you're very good as a M and a advisor to point that out to, to business owners. Right? Um, I would be careful, I'd be very careful if you get approached by other advisors and say, hey, here's this strategy, or here's that strategy because um, they're only selling your product without understanding your pain points, your needs, and what your vision for life is posted not only for yourself, but for your entire family. Right. And so the only effective strategy is by listening and understanding, uh, their heart, their needs, their priorities, their goals, their vision, and also addressing pain points. Maybe they have some things, uh, you know, throughout their lives, when they built their business, there's some, you know, trauma or other things in their lives that uh, that keep them up at night or that they're worried about. Well, we need to address that in the overall plan. So the overall plan needs to be integrated and doing a lot of listening and getting to the heart of matter is important because effective planning really only comes out by customizing the strategy based on their needs, their pain points and their vision for life. And So I have 24 different strategies available. I'm not married to any Single strategy. It's really based on their needs and their vision.

Speaker B: And uh, that's what I like about working with you, Andrew, because I get approached with a lot of people, like every week. I get a lot of messages that, yeah, we can help your clients do this strategy. And I don't know if that strategy really is a good match for my client. But when we talk about this strategy, can you give us a couple of examples? What are we even talking about?

Speaker A: Well, if they're selling a business, um, if we do things ahead of time, you know, there's multiple strategies involved, but a common strategy, uh, that is used. And again, we don't give legal and tax advice. We work with your tax and legal advisor. But I come up with a strategy after I understand the vision and pain points. And we, you know, we collaborate and work together with your attorney or CPA or business advisor. M and a advisor. But you know, one of the strategies is to transfer your company or your shares of your stock of your company into a capital gains bypass trust or a shared remainder trust. Because when a trust sells it, uh, you pay no capital gain at the time of sale. So three different tax benefits. You avoid paying the capital gain at the time of sale, it's deferred, you get an income tax deduction, and you also remove that asset from your taxable estate, saving additional, potentially 40% of estate and gift tax. Mhm.

Speaker B: What about the, uh, like I have heard a lot about the charitable trust. Tell us a little bit about this. How can somebody use the money that they get to do what they probably have. Always think about if it was a great thing, if I can help this company or do something that really helped me as an individual, something charity, uh, have a purpose.

Speaker A: Yeah, no, it's a very good point. And so one of the subsets of these strategies, uh, it could be called a capital gains bypass trust or chiral remainder trust. So the charitable strategy, and again, it has to line up with their vision right at the end of the day, when they passed away. Right. Their assets, you know, whether it's 10 million, 100 million, 500 million, whatever it is, uh, whatever is the assets to wipe in three buckets when they pass away. 1. The IRS 2, charity and community activities, 3, their kids and heirs. And so before, at the very beginning of planning, I really asked them, you know, if, if, if they're, if they're married, I speak to both the husband and wife. I say, hey, you know, when you pass away in an ideal world, what percentage of your assets you want to Go to the irs, what percentage you want to go to charity and community activities, and what percentage are your kids and heirs depending on that answer, then it opens the doors and narrows the doors to certain strategies. So if they have say, you know, they want zero to the irs, right? Whichever he wants. Although most people, when they don't do any plan, you won't pay about 40% to the IRS. So if you want zero to the IRS and say, you know, 20% maturity, 80% to their kids, there's effective strategies, uh, in terms of insured remainder trust, like you said, where um, they pay no tax at the time of the sale, uh, they avoid the capital gain at the sale paying it. They uh, get an income tax deduction and they uh, remove out of taxable state. But let's say they sell for, you know, $20 million. Right? And uh, and so, you know, if they take 5% of that, they would get a million dollars a year for the rest of your life. Right. If the husband were to pass away, the wife still gets the income stream. If the wife passed away, the husband still gets the income stream. Um, none of that money will go to charity until after they both pass away. And once they both pass away, then whatever's left in this trust will go to a surety of their choice. And now the charity of choice could be the Sarah Vaziri charitable gift fund. I mean it can be customized. It doesn't have to be to UC Irvine or UCLA or USC or the seafoodstrom center or City of Hope or whatever it is. Right. It can go into a customized donor advice fund where then the family can use that as a piggy bank to then gift to charity, um, you know, whenever they please and wherever they want to go, as long as to a 501 surety. But uh, in the meantime they've gotten cash flow and the benefit of that for the rest of their lives. Uh, and then after both spouses pass away, then whatever's left will go to a surety of their choice. But it could be a customized surety. It's kind of like a simple form of a foundation. Uh, it's a charitable gift fund. It's a donor advised fund that the kids can advise to, um, post after mom and dad passes. Mhm.

Speaker B: So um, this way they can put that part of it I saw in one of the interviews you had with one of your clients about how they managed to do everything and then get that money to use for the charities that they really like. So, um, these are the things that you have applied for Several past clients, yes.

Speaker A: Um, it's always been customized. And uh, there's certain strategies where it can be, the charity can be given to every year. And there are other strategies where after, you know, after the husband and wife or the mom and dad or the patriarch and the matriarch passed away, then those funds would go to, uh, a surety of their choice. Now it can again go into a fund for charity. And then over time, the family members, the kids, the grandkids can use that to give to charity, uh, over time as well.

Speaker B: But do they have to do this? Like I can remember that we just talked together two weeks ago about the client that I have right now, and you said that before they sign their loi, they still have time to do something about this, but after that we are done. Correct?

Speaker A: Yeah, I talked about 24 different strategies. Um, before you sign an LOI, all 24 strategies are available. After you sign your LOI, there, there are less strategies available because, uh, because there are, uh, issues, legal issues that I won't get into full details right now. But, um, if after you sign loi, potentially you don't get the income tax deduction or you avoid the capital gain, so it's important to do after you, before you sign an loi, uh, there are certain cases after you sign an loi, uh, again, it's a little iffy, but after you sign an loi, if it's a non binding loi, there still are certain strategies that can work for that. And even post sale, that's not ideal, but even post sale, after transaction closes, you've really realized the capital gain and the taxable transaction. But if, if they close yesterday, August 1st. Right. I still have five months to generate deductions to offset the taxable gain, but it's better to avoid triggering the taxable gain in the first place.

Speaker B: M. I know that you, um, have so many, uh, different strategy, but the ones that we hear more about, I just want to have a quick review of them. One of the other ones that we get approached a lot about is about these, um, opportunity zones. Um, can you tell us a little bit about those? What are those? And qualified small business stock or something like that.

Speaker A: Yeah. So one of the 24 strategies, uh, so this one is post sale. Right. Let's say the business owner just didn't get around to it or wasn't educated enough to know that there are all these strategies, just assume they have to pay the tax. So they've sold their business now, August 1st, and let's say they have $10 million of capital gain. Right. And so that capital gain is payable next year by April 15th. Uh, you may have to pay in certain states, you may have to pay, um, installments ahead of time, but it's all full and due. You know, it's considered part of 2026 taxable income and it's payable on April 15th of 2027. Right. So after the sale, let's say August 1st, they've realized the sale and they realize and they owe ten, uh, million dollars to the IRS for capital gains tax. Right. Um, for that gain using a qualified opportunity zone is after you realize the gain for that portion, uh, of the gain that you want to defer, you can put it into a qualified opportunity zone beginning um, next year. Right. In January 2027. The uh, the Obba, the one beautiful bill, I changed the provisions to improve the taxability of it. Again I don't give legal and tax advice, but improve the benefit of it where you can put let's say $10 million into a qualified opportunity zone. Instead of paying taxes on that $10 million next year in April, you can now defer it for five years. So you can defer it for five years. Uh, and let's say that you put that $10 million into a qualified operating zone and it has to be an opportunity zone, uh, that around the country there's many of them, but is meant for economic development and in areas that are uh, say uh, economically disadvantaged, you, uh, can put into a real estate project, you could put into business that's in a qualified opportunity zone. And the amount of money that you put in there is deferred and tax. But let's say you put 10 million there. So now you've deferred $10 million a gain. You hold that for at least 10 years in that project and let's say that 10 million now grows to 25 million over 10 years. Right? The gain from 10 to 25 million you get a step up in basis. So when you sell that project in over 10 years from now for 25 million, you pay no tax on that growth from 10 to 25 million. And, but you've now deferred the tax that first 10 million, uh, for five years. So that would be a qualified opportunity. So that would be one strategy. Uh, if you did not do the pre sale tax planning, which is the recommended way, uh, after the fact you can do that. It's like you know, using a rescue club when you hit a bad golf shot into the rough or different things, there's rescue clubs this is kind of a rescue strategy using a qualified opportunity zone. Uh, the other strategy you mentioned is section 1202 uh qualified small business stock. And that allows uh, a company, uh, so you know, companies will either be LLCs, S Core or C cores. Uh, if you are potentially going to have a sale in the future and you're thinking about again thinking with the end in mind, right. You're building a business. Right. It's not just having business, there's an end in mind, what you want to accomplish out of it. Right. What do you want to accomplish for your family? And so if you are going to sell eventually and have a gain, oftentimes it's better to uh, be a C corp because if you're a C corp and you're a founder and you have founder stock or treasury stock and you hold that stock for at least five years, you can exempt up to $15 million of capital gain from the sale of the business. Federal tax, California law doesn't comply so still have to pay the California tax but you can accept up to $15 million per taxpayer ID in not paying capital gains. So that was meant to incentivize business owners and startup businesses. Uh because in our country over 90% of our business owners are family owned or entrepreneur started businesses. They want to encourage that. Because you're taking a risk to start a business, they want to give you a tax break. So that would be one way to qualify small business stock. Um, if you own it for five years you can accept 100 of capital gain up to $15 million. If it's four years it's uh, 75%. If it's three years it's 50%. But that's only again if you're a C corp and you don't have your C corp when you, you know there's other rules around it. There's five criteria but that's the main one. The other criteria is that the assets in the business is, is not greater than 75 million. But there are other rules around that. You should consult your tax and legal advisor for all the specifics around that. But that's a wonderful strategy. One of the top, top strategies of the 24 strategies is to uh, utilize section 1202 qualified small business stock to exempt upon the sale. Exempt capital gain upon the sale.

Speaker B: Nice. Um, I think that anybody who is listening to you understand that ah, it's really complicated and you need to consult with somebody who knows about all of, to pick the best strategies for you. So as we are getting to the end of our um, session. Uh, I like to. Right now we are in the, In July of 2026, what is new in our tax law? Any recent changes, anything that owners need to know about and have in mind? Is there anything that you can specify?

Speaker A: Yeah, well, uh, Sarah, you're on top of it. So the two tax law changes came from the one big beautiful bill act that talked about qualified opportunity zones in section 1202 in improved growth provisions before section 122 only allowed you to um, exempt $10 million of capital gain. Uh, and he had to hold it for five years. The law passed last July, in July 2025 allowed you to have even a tax break if you hold the company stock for at least three years or four years. And they increased the exemption from 10 million to 15 million. So that's a wonderful thing. And in a qualified Opportunity Zone, it used to be that you can defer to tax until the 2026 tax year and payable in 2017. So if you did it in 2020, uh, you know, you can defer until, you know, 2020. Pain of 2027 you did in 22, you can defer it to 27, did in 25, you can defer it to 27. Now it's a rolling five year time period. A rolling five year time period. And uh, so that's a much better in terms of, for the qualified opportunity zone projects.

Speaker B: Okay, awesome. Um, Andrew, thank you so much for joining us in this episode of Business beyond you. Is there anything that you want to say at the end and also tell us how, uh, each person who wants to use your help, how can they can reach out to you and what is that initial conversation you have with them look like?

Speaker A: Yeah, so one big thing is that when you're selling a business, many business owners want to try to do it themselves and save them the expenses of fees of uh, hiring an investment banker or MA advisor or a team to do it. And that's a huge mistake because when you sell your business, the process of selling your business is a full time job. If you're going to do that, who's going to run the business? That's also a full time job. And so there's two full time jobs. So I would always encourage you to use a team of professionals. You know, start with an M advisor like Sarah or another type of advisor, bringing a, uh, planner, uh, so they can map out, uh, with intentionality what you want out of it. Because again, this is your biggest, typically it's your biggest asset and your largest asset and you need to convert that certainty of your income for your business to be able to fund all your different priorities post sale, you need to fund your income stream, your lifestyle, family needs, kids, needs, your retirement and different dreams. And so you need to be very intentional about it. And the other thing that I would encourage you to do is, um, is before you sell, right, I would encourage you to sit down with a planner like me or somebody else fee based, not just someone throw on a strategy, but fee based where we're charging a fee. Um, it's worth the fee, um, by the way, is to help you map out and understand what your vision for life is. What do you want to do with your free time? What do you want to do with the cash? What's important to your family? Are there pain points? Are there other issues? Because once you have a vision for life and most business owners are successful and people that made an impact with their business, they're misunderstood, they're seen as sometimes as, uh, narcissistic. But really, you business owners are servant leaders. You care for everybody. You care for your community, your employees, your family. A lot of people count on you and you give of yourself. Um, and so when you do that, you have to then think through what you want out of it, out of the sale, and how you take care of all the things you need to take care of. And oftentimes, um, also it's hard because it's really like letting go of your baby. This is your baby letting go of your baby. And so if you can envision what you want to move towards, the transition is going to be a lot easier. If you're just trying to leave something behind, there's a lot of sadness, um, and regret because if you're not moving towards something, but if you're moving towards something instead of just leaving something, the outcome is a lot more successful. And so I would be just be intentional. Bring in the team of professionals, um, bring in a team of professionals to have that conversation, do the planning so that you can fund your vision for life post sale. And all your different needs, not just your financial needs, but your relational needs with your family, your personal needs and all your different holistic needs. Uh, because you've got one chance at this to do it right.

Speaker B: Perfect. So tell us about your contact information too.

Speaker A: Oh, yes. So again, I'm Andrew Lowe. I'm a managing director, private wealth advisor here at Wells Fargo, uh, Advisors here in Newport Beach. Uh, my email address is Andrew Lowe, that's L O WFA.com and my phone number is 949-776-1970 or 949-759-5316. I'd be happy. I normally give complimentary consultations, uh, that take an hour and a half or two hours just to understand if I can add value in your process. And that is a good fit for you. And I enjoy doing that, uh, because when my dad sold their business, it did not have the outcomes m and it was painful for our family. So I love helping business owners keep as much as they legally can because your blood, sweat and tears for 10, 20, 30 years, you deserve to keep as much as you can for your family's needs, for things that you care about, as opposed to, uh, the government not being able to spend it as efficiently as you can.

Speaker B: Thank you so much. Uh, you had a great point and thank you so much for sharing your knowledge. We'll add all of your information under the videos, so anybody who, uh, wanted you to use your help, they can reach out to you. Thank you again for your time, Andrew.

Speaker A: Great. Thank you, Sarah.