Planning for an Acquisition 1 Before Exit Step 1 Establish a Basic Estate Plan Step 2 Outline Your Financial Goals and State of Affairs Step 3 Pre-transition Planning 2 After Exit Step 4 Minimize Tax Impact Step 5 Activate Your Plan 3 Where Do I Start? Prepared by Alina Lloyd Wealth Advisor, Wells Fargo Private Bank Many entrepreneurs who build successful companies from concept to acquisition take utmost care of their customers, employees, and shareholders. This attention can greatly contribute to the success of their businesses. Yet when it comes to getting ready for their businesses to be acquired, their personal planning and finances often don t get the attention they deserve. Based on our extensive experience guiding entrepreneurs through the acquisition process, we have identified several critical planning steps to help protect and maximize their hard-earned wealth. The most effective wealth plans involve a clear framework of personal and professional goals, a team of trusted and experienced advisors, and timely execution of planning steps outlined in this paper.
Before Exit 1 Step One: Establish a Basic Estate Plan Regardless of the current status of your business, we recommend establishing a basic estate plan to protect your personal wealth and make sure that it s distributed according to your wishes. Although an effective estate plan involves more than just a will, your state of residence will have a significant bearing on your plan. In some states (including California), for example, it is important to create a revocable living trust, which acts similarly to a will, but will also avoid probate and address incapacity planning. Consider having a durable power of attorney and an advance health care directive to allow an appointed agent to handle your assets and make medical decisions in the event of your incapacitation. Your family and loved ones deserve to have a well-thought-out plan that addresses your health and wealth should something happen to you. 2 Step Two: Outline Your Financial Goals and State of Affairs This step requires that you ask yourself some important questions about your goals, aspirations, family, and legacy: 1. What are your professional goals after the acquisition? Do you plan to work for the acquirer, join another company, start a new venture, or retire? What will your income look like going forward? What is your ultimate retirement age? 2. What are your personal goals and lifestyle needs? What are your family s goals and needs? How much income will you need to support your desired lifestyle? Will you have any extraordinary expenses, such as buying a new home, paying for children s education, or funding a new company? 3. What are your legacy goals? If you have children and family members you plan to support financially, how much support are you willing to provide? Do you have charitable goals, and what do they look like? 4. What do your balance sheet, liquidity, and estate plan look like now? What is your approach to investing? Are you comfortable with market fluctuations and taking investment risk? What is your view on your company stock performance prior to and after acquisition? 3 Step Three: Pre-transition Planning Depending on your answers in Step 2, take the following steps, preferably at least one to two years prior to the acquisition of your company: 1. Start developing a road map for accomplishing your professional, personal, and legacy goals, given your anticipated range of acquisition outcomes; determine the amount of liquidity and income you will need and investment risk you are comfortable with to support your lifestyle. 2. Perform an in-depth analysis of your equity ownership. Different forms of ownership (stock, restricted stock units, incentive stock options, non-qualified stock options) have substantially different tax implications (including application of the alternative minimum tax, availability of capital gains treatment, and tax incentives associated with qualified small business stock. 1 ) Vesting provisions are also a key factor in determining tax treatment. Early planning may reduce the tax costs associated with different forms of equity holdings, although it is important to consult with your tax and legal advisors. 3. If you expect significant future appreciation in your company ownership, consider transferring a portion of your private stock to your future beneficiaries through either an outright gift or by placing it into a trust. Depending on your specific objectives and financial position, an Intentionally Defective Grantor Trust, a Dynasty Trust, or Grantor Retained Annuity Trust may be used to help mitigate tax impact. Planning for an Acquisition 1
After Exit 4 Step Four: Minimize Tax Impact While most tax-saving opportunities exist prior to the acquisition, there are two main ways to help minimize tax impact after the exit in a taxable acquisition: 1. Charitable giving can be most effective in a high-tax year, particularly with low-basis stock. Several highly effective options have the potential to reduce your tax liability. These include: Donor Advised Fund. Private Foundation. Charitable Remainder Trust. Charitable Lead Trust. The specific strategy you choose will depend on your goals, your level of desired philanthropic involvement, and the acquisition structure for your business. Your team at Wells Fargo Private Bank, working in conjunction with your accountant and/or an estate attorney, can advise you regarding the suitability of each option. 2. If your stock ownership meets the criteria for Qualified Small Business Stock (QSB), you may be eligible for a reduced capital gains tax rate upon sale if you meet certain holding period requirements and the company meets the requirements for a qualified small business. You also may be able to roll your acquisition proceeds into other QSB stock within 60 days of the sale. Make sure you consult with your investment and tax advisors prior to and after the acquisition on the suitability of this option. If your sale proceeds come in the form of stock in the acquiring company, you may be eligible to defer tax on the transaction until you sell the acquirer s stock. As a result, effective planning opportunities may exist after the acquisition, particularly if the acquirer s stock has high appreciation potential. Please refer to Step Two outlined above to prepare for the stock liquidation scenario. 5 Step Five: Activate Your Plan Develop a tailored investment plan for liquid assets, taking into consideration your short- and long-term goals, risk tolerance, and overall balance sheet concentrations; periodically adjust your portfolio to match changing needs and rebalance for appropriate asset allocation. 1. Set aside sufficient liquidity to cover your anticipated tax liabilities and other cash needs; consider putting in place a line of credit for cash management purposes. 2. Consider risk management strategies, such as life, long-term care, and liability insurance to protect your wealth. Planning for an Acquisition 2
Where Do I Start? The acquisition of your company may be the most important financial event of your life. Effective acquisition planning requires discipline, high-quality advice, and timely execution. Regardless of the current status of your business, we highly recommend establishing trusted relationships with key advisors: an estate attorney, an accountant, and a wealth advisor. Make sure to interview two or three candidates for each advisor role, focusing on their prior experience with similar clients, knowledge of relevant planning strategies, and personality fit. There is no one size fits all solution, so focus on advisors who have a deep understanding of your goals and who are willing to work with you to develop a custom wealth strategy. Finally, develop a relationship with a financial institution that has a deep history of working with entrepreneurs and broad capabilities to help meet your diverse needs. Experience in investment management, financial planning, private banking, trustee services, insurance, and commercial banking can be particularly important. Wells Fargo has the depth of experience in all these areas and can work with you and your family prior to the acquisition and for many years to come. End note 1 Qualified small business stock is defined in Internal Revenue Code Section 1202 as any stock in a qualified small business issued to a taxpayer after August 10, 1993, in exchange for money or property or as compensation for services. As of the date the stock was issued, the qualifying small business was a domestic C corporation with total gross assets of $50 million or less at all times after August 9, 1993, and before the stock was issued, and immediately after the stock was issued. Gross assets include those of any predecessor of the corporation. All corporations that are members of the same parent-subsidiary controlled group are treated as one corporation. At least 80% of the value of the corporation s assets were used in the active conduct of one or more qualified businesses, and the corporation was not a foreign corporation, DISC, former DISC, regulated investment company, real estate investment trust, REMIC, FASIT, or cooperative, or a corporation that has made (or that has a subsidiary that has made) a section 936 election. Source: IRS.gov. For more details, visit IRS.gov or speak to your tax advisor. Planning for an Acquisition 3
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