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Welcome to How to Retire on Time, a show that answers your questions about all things retirement, including income, taxes, Social Security, healthcare, and more. This show is an extension of the book How to Retire on Time, which you can grab today on Amazon or by going to www.howtoretireontime.com.
This show is intended for those within 10 years of their target retirement date or for those are are currently retired and are concerned about their ability to stay retired.
Hello, and welcome to how to retire on time. A show that answers your questions about all things retirement, including income, taxes, Social Security, health care, and more. This show is an extension of the book, How to Retire on Time, which you can grab today on Amazon or by going to www.how to retire on time.com. My name is Mike Decker. I'm the author of the book, How to Retire on Time, but I'm also a licensed financial adviser, insurance agent, and tax professional, which means when it comes to financial topics, we can pretty much talk about it all.
Mike:Now that said, please remember this is just a show. Everything you hear should be considered informational as in not financial advice. If you want personalized financial advice, then request Your Wealth Analysis from my team today by going to www.yourwealthanalysis.com. With me in the studio today is mister David Fransen. David, thanks for joining me today.
David:Yes. Thank you for having me.
Mike:David's job here is he'll be reading your questions that you've submitted in, and I'm gonna do my best to answer them. Now you can send your questions in right now or really anytime during the week to 913-363-1234. Save that number in your phone. So when you think of it, you can remember and submit the question then. That number again is 913-363-1234.
Mike:Or you can email them to hey mike@howtoreontime.com. Let's begin.
David:Hey, Mike. How do you go through the process of selling a business?
Mike:Oh, this is a very specific question. Yeah. So there are many different ways this could be interpreted, and I wanna kinda give them real quick. Okay? Alright.
Mike:So you've got your standard business, like, let's say, you're a plumber, an electrician kind of business. You've got, and that's based on a skill set that you have. You have businesses, let's say, marketing, like, you produce swag or, like, you have a system, like, a there's a service that's being provided that people could step in and and take over. K. You've got your ownership of a business.
Mike:You don't wanna sell the whole business, but you wanna sell your your part of the business. K? Like, for doctors or attorneys or, you know, whoever it might be. So there's different ways this could be structured. Let's start with one that I'm more familiar with, and that's selling pest control businesses.
David:Oh.
Mike:I know that sounds strange, but I love the pest control business.
David:I didn't see that coming.
Mike:Here's why.
David:Alright.
Mike:Pest control is a is a wonderful service. I have it. Right? Yeah. It's something that if you're you don't necessarily need a huge sophisticated education.
Mike:Like, people can get into the pest control business pretty easily. However, to grow a pest control business, you have to be very business savvy. Here's what I mean by that. I don't wanna demean anyone that's in the pest control business. I wanna say that, like, look.
Mike:Anyone can just get their license and start administering some chemicals. We know that what what is it? Pyrethroids and pyrethrins or whatever that help push the ants away from your house and all that stuff. Like, people can get that pretty easily. It's low cost of entry.
Mike:But that doesn't mean you're good at growing a business. So there have been several people I've met and worked with that scaled. They understood the the ability to market and scale a service. Specifically for them, it was pest control and made a ton of money. I mean, 1,000,000 of dollars Wow.
Mike:From a pest control business because they understand how to run a business. And you could swap out pest control service for leaf blowing or leaf cleaner or things like that. Any of these services that people love. In that business, you can really divide up the the business itself into 3 categories. You've got, first, your basis.
Mike:So did you buy the pest control business? Is there a basis associated with it? Did you just do it from scratch? Maybe there's no basis with it. That's just kinda how much you put into the business.
Mike:It's, yeah, the cost basis. Then you've got real estate. So if you instead of leasing commercial real estate, maybe you bought the property. Dentists do this all the time. So dentists will buy the commercial building that their practice is in and then lease it to themselves, and they have 2 different entities or maybe it's one entity.
Mike:But you can separate the real estate side of the business and then the goodwill or the, you know, the potential of its its profits and so on to happen moving forward. That's that's kind of the basic. So you got your cost basis, your goodwill, and your real estate. If you separate them, then you can get more deliberate on how you structure the sale. So your cost basis, you really shouldn't pay taxes on that.
Mike:It's a basis. Right? You don't pay taxes on your cost basis. Your goodwill, you're gonna pay taxes on, and then we'll talk about different ways you could structure that. And then you've got your, your real estate.
Mike:You don't have to pay taxes on your real estate. So let's say you you section it all out and you wanna maintain some cash flow and you've got, I don't know, 500,000 for a small commercial property that you could sell as a part of the business deal. So they buy the property, and you could 1031 exchange the real estate, the commercial real estate property into, let's say, a Delaware statutory trust that then pays you dividends for as long as the DST is there, and you can keep rolling it over and so on. But you can tenderly exchange it into, let's say, a a Delaware statutory trust, and then the asset cash flows and also appreciates in value, and you didn't pay any taxes in it. So the fact that you separated out, you now took 500,000 of the total business sale, and you're not paying taxes on that part of it.
Mike:You've lowered your overall tax bill. You've deferred the taxes to a future date, whether that's maybe later on you pay the taxes or maybe you keep deferring it until date of death, and then your kids inherit it with a step up in basis so they don't pay taxes. And maybe you've got equipment or, you know, that you can get more granular with how you would structure this, but the idea of just selling a business at one price just doesn't make sense to me. I don't think that's very tax efficient. But what you can get into the the details of your business, then you can find some some efficiencies.
Mike:Yeah. If someone says, hey. Look. I wanna sell the business in the next couple of years. Would you work with me on that?
Mike:K. Let let's talk about it. But here's my process. 1st, get your books in order. If you don't really understand your books, the cost, how much you're doing to market, how much you're in the operational expenses that it just if you don't have clean books, it's really hard to sell your business.
Mike:Because how can someone really know the actual value of your business without clean books?
David:Makes sense.
Mike:So that's the first step. You might think, well, duh. But I've known CPA practices, professional accountants. Oh, no. That did not keep clean books themselves.
Mike:They did not practice what they preached. And so when they tried to sell, it was a nightmare. Anyway, clean books. Then make sure that your business can run without you. That helps increase your overall profitability, in my opinion.
Mike:Here's what I mean by that. If your business is a consultancy of whatever's in your mind, it's really hard to sell that because what are they buying? They can only buy you and you're trying to not work.
David:Right. Yeah.
Mike:So that's why I say, like, a a pest control business, lawn care business, any of these services, if your business can run without you, it's got a better price tag than maybe they're buying you for a little bit and you're training someone up, and that hurts the price.
David:Okay.
Mike:And then the next one separating, you know, the cost basis, the goodwill, and all of that. And then at this point, you haven't put anything up for sale. You're gonna structure the next phase of your life planning. Where do you want the funds to go and why? K.
Mike:Do you need cash flow? Do you not need cash flow? Are you gonna sell it? And maybe most of it's for legacy purposes. Maybe you're gonna be charitable with it.
Mike:Until you understand the purpose of the money that you believe you will get, it's inefficient planning. You want to know, hey. This is the result I wanna get. K? This is the lifestyle I wanna do and then plan backwards.
Mike:Once you understand where you want the money to go and the investments or products that you wanna look for, so maybe some of it's going to a DST, some of it's gonna go to a growth portfolio, some of it's gonna go to whatever it is. Once you know where it's gonna go, then all your ducks are in a row, and you can put your business up for sale. Too often, in my opinion, people put their business up for sale. And when they're closing, they then try and rush through all the planning. But the sale itself can affect the planning itself.
David:Okay.
Mike:It's all connected. So if you're thinking about selling a business within 5 years, that's usually when you'd wanna get someone like us involved. When I say 5 years is because it's hard at time when you sell the business. Things change. But if you can get your ducks in a row, then you can adapt along the way.
Mike:That's that's kind of my my general consensus of of this. And if you're thinking about selling a business, if you're thinking like, you know, gosh, the time's getting close, whether it's a real estate rental business, whether you're a dentist or something else, if it's within 5 years or so, give us a call because there are so many strategies. You you've got oil and gas partnerships you can incorporate. You've got qualified opportunity zones, Delaware statutory trust. I've already talked about you could just pay some taxes there.
Mike:You could structure it in a lump sum sale. You maybe wanna structure it in a multiyear buyout. Maybe you want your business to be kind of like an annuity, for payments for the next 30 years. My my my grandpa had a a Mexican restaurant up in Idaho where he was from. And he sold not the Mexican restaurant itself, but he sold the commercial building itself and structured their 30 year payout.
Mike:And that was a part of his retirement income. Yeah. So there are so many ways you could do this. Do not talk to someone that only just sells stock bond portfolios or someone that only sells insurance products or someone that only does tax planning. You really need to have a comprehensive conversation with either a team or an individual that can talk to all three of those categories because that can influence the exploration of your options and then to customize the solution for you.
Mike:So, yeah, if you're if you wanna sell a business or you're thinking, yo, let's just kind of see what can happen. Go to www.yourwealthanalysis.com, and we'll run the analysis, have that conversation with you. It's fun. It doesn't cost you a dime. We break it down into easy to understand terms, but really can open your eyes to your options.
Mike:Go to www.yourwealthanalysis.com or text analysis to 91 333-31234. And as you're filling out, just say I'm a business owner thinking of of selling a business soon. Give us some details of what type of business it is, dental office, your marketing agency, an engineering firm. The list goes on and on and on. It's fun.
Mike:This is good stuff. Let's get the most out of it as we can. Request that analysis by texting analysis to 913-363-1234 or go to www.yourwealthanalysis.com to learn more and get started. 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.
Mike:Just search for how to retire on time. Discover if your portfolio is built to weather flat market cycles or if you're missing tax minimization opportunities that you may not even know exist. Explore strategies that may be able to help you lower your overall risk while potentially increasing your overall growth and lifestyle flexibility. This is not your ordinary financial analysis. Learn more about Your Wealth Analysis and what it could do for you regardless of your age, asset, or target retirement date.
Mike:Go to www.yourwealthanalysis.com today to learn more and get started.