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Welcome to How to Retire on Time, a show that answers your retirement questions. Say goodbye to the oversimplified advice you've heard hundreds of times. This show is about getting into the nitty-gritty so you can make better decisions as you prepare for retirement. Text your questions to 913-363-1234 and we'll feature them on the show. Don't forget to grab a copy of the book, How to Retire on Time, or check out our resources by going to www.retireontime.com.
Welcome to how to retire on time, a show that answers your retirement questions. Say goodbye to that oversimplified advice you've heard hundreds of times. This show's all about the nitty gritty. Now that said, remember, it's just a show, not financial advice. It's educational.
Mike:So do your research. As always, text your questions to (913) 363-1234. Again, (913) 363-1234. Let's dive in. David, what do we got?
David:Hey, Mike. I've got a business that I plan to sell in a few years. Any tips on how to prepare for the sale and retirement?
Mike:Yeah. Couple of things. First off, keep clean books. You've gotta have an evaluation of your business for it to be priced appropriately. So if you really don't have clean, accurate, predictable books, you're guessing.
David:So if there's, like, big gaps, like, oh, I was really good at recording everything here, but then I goofed off that year or this month.
Mike:Or you oversimplify the expenses. And I've been guilty of this too. You've got three or four categories, and everything goes into three categories. It's really hard to figure out what's going on in the business if you have oversimplified books or it not really kept well, and you kind of just, at the end of the year, just throw it all in something and call it good.
David:Okay.
Mike:You wanna have good, high quality, transparent books. That's the first thing. Alright. The second thing is to make sure that you're building systems so that the business is able to proceed without you. That's important.
Mike:If your business is in your brain and your knowledge, you're gonna have a hard time selling it.
David:Right. We can't just transfer your brain.
Mike:Yeah. The Matrix. We haven't figured out how to, I don't know, download from The Matrix or whatever, but but that's important. Is your business sellable? It's all predicated on the idea that someone could buy it, and then maintain it along the way.
Mike:So that's written SOPs, you know, standard operating procedures. That's if you can walk away from it and it still runs, that's a good sign. What are your assets? So you've got real estate assets that you wanna make sure are accounted for. What's the value of the real estate if you own office space or something like that?
Mike:What are the total hard assets to you? Are you a farm? Do you have tractors? Do you have equipment that's gonna be part of the sale? And then there's goodwill as well, and that's kind of the brand, the intangibles that you might wanna consider.
Mike:So making sure that the business can operate without you is huge. Making sure that you understand the differences so that when you sell, you divide up parts of the sale. This is often missed. You could just sell a business, and you're paying the gains on the taxes. And a lot of businesses started with sweat equity, so there's a lot of capital gains on that.
Mike:Most people started the business from nothing, so everything has been taxed as capital gains, or you could divide it up. So let's say that the real estate is half your business. The office space is let's just throw a random number. Let's say you've got a million dollar office space building that's yours, and there's other tenants. Great.
Mike:And then your business is worth, let's say, a million dollars as well. So $2,000,000 in total sale for this simple situation, you could take and divide up. So you've got the real estate and ten thirty one exchange it into something like a Delaware statutory trust, so that you don't pay capital gains or depreciation recapture of that part of the sale. That then moves into a Delaware statutory trust, which maintains cash flow, but you've deferred taxes until you pass. You just have to keep doing a ten thirty one exchange to do DST after DST.
Mike:Mhmm. But you're able to defer some of the taxes until you die, if you hold it until you pass, then there's a step up in basis, you don't pay those taxes, and you're maintaining a higher cash flow. Let's say you're getting 4% on the value. Well, you get more money if you get 4% of a million dollars as opposed to 4% of 700,000.
David:Okay.
Mike:So you only get those tax opportunities if you're selling the business with different transactions.
David:Okay.
Mike:You don't get the DST, the ten thirty one, if it's all grouped together. It has to be a real estate transaction for the real estate exit, where it goes real estate to a QI, qualified intermediary, and then it goes into a DST, or maybe it's seven twenty one upreach, or whatever the option is. There's multiple paths here. But you don't just sell a business in one transaction, and it works out that way.
David:And so what if you need income? Does the DST pay you a little bit each year?
Mike:Each month. Yeah.
David:Okay.
Mike:That's quite nice. Or quarterly, depends on how you structure it. But yeah. Alright. That's kinda nice.
Mike:Kinda nice.
David:You're controlling the money, so it's in smaller chunks and
Mike:Well, you don't control it. You're paid out, but it's pretty predictable. Might go up or down based on the rent and things like that. Sure. But it's it should be pretty predictable.
David:Okay.
Mike:That's the idea. And then you've got the other million, which is goodwill, let's say. Goodwill, great. You get the best you can. You're gonna pay taxes on that.
Mike:Maybe you entertain something like an oil and gas partnership, which purposely put the money in there. You suffer all sorts of losses on purpose to offset the gains, and then you make your money back. That is a risky strategy.
David:Alright.
Mike:But it is an option if you want to talk about tax strategy on selling the business. Maybe you don't, you just want to eat the taxes. It is what it is. You embrace it, and then you move forward with a more comprehensive retirement plan on how to adjust. Maybe you split the difference.
Mike:I mean, there's so many things could be done, but it all is based on you setting up so you can get the maximum amount from your business, and when you sell it, someone else can step in and really get the most out of it. And then from there, how do you separate the sales? Yeah. There's a lot of plan that goes into this. And you don't wanna do it willy nilly.
David:Yeah. You don't wanna just take hey. You're bundling the whole thing up, the real estate and the business in one package. You just take the 2,000,000 in cash, and then that's a huge tax bill, sounds like.
Mike:And not all business brokers know these strategies. Brokers, their job is to get you a buyer. Uh-huh. They're not tax professionals.
David:Right.
Mike:Some of them do their own research and know about the stuff, some of them don't.
David:Okay. They're good at what they do, probably. They can
Mike:find the buyer. It's not like you go to the grocery store, I think I'll buy a business today. Not happening. Brokers make these deals happen. So understanding how to structure the deal is gonna be important.
Mike:Understanding the preparation, clean books, operational systems. The true test is if you can just walk away today Yeah. And not do anything, and the business still works, you got a good business. Danny Kennedy, he's a fun marketer. He doesn't pull back.
Mike:He says what's on his mind, and he'll often ask business owners. He'll say, if you walked away today, no more emails, no more daily anything, no more products, no more selling, like nothing. You just walked away today and did nothing. Would your business continue to function? If not, you've just got an expensive hobby.
Mike:You don't have a business. You've got an expensive hobby. A business is supposed to operate without you. So if you wanna sell your business, get it so it can operate without you. Yes.
Mike:Then sell it.
David:So yeah. So if you're not there yet, it might take, I don't know, how much time to get it to that point where you could walk away and it still worked.
Mike:Yeah. And maybe you get a business coach to help you along with that preparation.
David:Yeah.
Mike:But those are important factors as you prepare for your exit.
David:Should you have a plan for what next? Hey. I'm I'm done. I walked away from my business. Now what do I do?
David:Oh, yeah. Yeah. There's some
Mike:big withdrawals that happen for business owners, because you're always dealing with the next fire. You're always dealing with the next deal. You're always looking for the next angle. Uh-huh. Business owners struggle in retirement, because they're just so used to having a challenge, and being done with it, it feels good for a little bit, and then you get stir crazy.
David:So Gotta have a plan. Gotta have a plan.
Mike:Fill the void with something that's going to give you purpose. That's all the time we've got for the show today. If you enjoyed the show, consider subscribing to it wherever you get your podcast. Just search for how to retire on time. Discover if your portfolio is built to weather flat market cycles you're missing tax minimization opportunities that you may not even know exist.
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