Business Coaching Case Studies
Owner of a $10 million revenue, $1.5 million EBITDA western business wanted to transition to his next generation. Next-Gen would pay and Owner would accept $6 million. That $6 million was going to cost Next-Gen greater than $10 million.
How? Tax. Next-Gen would have to earn $10 million to pay $4 million income tax to get the $6 million. Regardless of whether they used their own cash, or borrowed it. If they borrowed it, the interest only is deductible, not the principal repayment, which would be income taxable. (They could only amortize the principal amount over 15 years by Code.) Regardless of whether the payment is in a lump sum today or over time. The tax treatment is identical.
Then, Owner would receive the $6 million and again pay…tax. Capital gains tax of 20% plus the Net Investment Tax of 3.8% (totaling $1.43 million) to be paid by Owner. Owner would be left with $4.57 million. You can see how quickly $10 million becomes about $4.5 million—with $5.4 million going down the tax tubes. Mitch and CoFinSol turned that around. Next-Gen paid $9 million, most of it deductible, costing them net after tax $5.4 million (a 45% discount, saving Next-Gen $3.6 million). Owner received $9 million. If taken as a lump sum Owner would have paid tax of $3.6 million, netting him $5.4 million (18.1% increase, or an additional $830,000).
Owner of a $70 million revenue, $7 million EBITDA mid-America business, valued at $50 million wanted to transition to his children working in the company.
Transition would incur significant estate taxes — $9.6 million. We were able to legitimately reduce the valuation by 40% down to $30 million. And then the Next-Gen, were able to buy out the owner/father (and his estate) over a 30-year period for a fixed amount of $1.2 million, with interest. The payment of that buyout will only feel like $300,000 in the final years due to historical inflation rates.
The family saved over $9 million in tax on an appreciating asset. The Next-Gen realized $50 million gain in net worth that was on the way to double in less than 5 years.
Owner of an extremely profitable tech northern company with EBITDA over $5 million, valued at more than $25 million had promised to sell to his insider, minority shareholder.
Obtaining the cash was a big hurdle for the Next-Gen. We structured a buy-in, and buy-out over 10 years. Next-Gen was able to obtain $5 million from SBA for the buy-in, and another $5 million for that buy-out.
Plus, Owner received more $3 million per year for 10 years totaling at least $40 million in payout—guaranteed. A $15 million (a 60%) increase in sale price, without giving up control until the end of the term and fulfillment of the deal.
Owner of large southern health care concern with over $15 million revenue, $6 million EBIDTA, and valued at almost $60 million needed to buy-out ailing family member. By utilizing certain trusts, we deferred almost 90% of the tax for both buyer and seller over 5 years. Each party saved more than $6 million in tax.
And each had a store of liquid capital that accumulated returns completely tax-free. The funds were held in a specially designed trusts for the benefits of Owner and Seller that paid no tax on the amount used to start the trusts. Only on income earned on the amount deposited in the trust incurred tax. When Owner or Seller took funds out of their respective trust he paid tax only those funds he took out.
Owner of small northern law firm was selling his total ownership interests to non-family Next-Gen insiders. Revenues exceeded $3 million, EBITDA $1 million, after fair-market compensation to the legal professionals. Valuation $4 million. By utilizing a “Tax Deferred Cash Out”, Owner was able to defer the $1 million in capital gains tax for 30 years.
Owner of a $60 million revenue, $7.5 million EBITDA eastern financial services company was anticipating and planning well in advance on sale to Next-Gen. He had many risks that were uninsured.
By identifying and quantifying those risks, he was able to deduct from his business $2.2 million per year for 7 years in “risk premium”. Those deductions were transferred into another affiliate company we created and that he owned. Those transfers grew tax-deferred as well. After 7 years and some modest growth, this affiliate now had accumulated $19.3 million in cash that he was able to access completely tax-free for further investment. This alone saved him over $7.8 million in tax and increased the value of his company by more than $15 million.
Owner of second generation western mechanical services company with revenues of $11million and EBITDA of $1 million valued at $6 million, wanted to transition to third Next-Gen family members, who lacked the cash to buy out Owner. By creating long-term consulting agreement for Owner to assist Next-Gen, their deductible purchase price of $7 million cost them only $4 million.
By paying this amount over 20 years, or $300,000 (with interest) per year, Owner would receive $6 million. Owner’s marginal tax rate was as of 2019 was 24%—roughly the same as the capital gains rate plus the Net Investment Tax. Owner had all lifestyle needs covered by the payout. Plus, the company continued to pay for certain of his meals & travel, his health care, and certain other expenses.
Plus, he had rental income property delivering another $200,000/yr and growing by more than inflation. Plus he could transfer the remainder of his $10 million estate 100% tax-free. The Next-Gen saved over $3 million in tax, and is in process of growing the company by more than 18% per year (the company is doing more than $20 million in revenue and EBIDTA increase to $2.3 million). The cash flow is more than enough to pay Owner and for Next-Gen to distribute $1.4 million annually and still reinvest in the company.