Wealth Management Group Newsletter – Winter 2024
Jacqueline N. Janczewski, Dan Newman

Planning an Exit Strategy For Your Business


Every business owner should have an exit strategy that helps recoup the maximum amount for their investment. Understanding the tax implications of a business sale will help you plan for — and, in some cases, reduce — the tax impact. One option is to sell your business to a third party. Here are some considerations to help ensure the transition is as smooth as possible.

Maximizing value

Start by obtaining a professional valuation of your business to give you an idea of what the business is currently worth. The valuation process also will help you understand what factors drive the value of your business and identify any weaknesses that reduce its value.

Once you have received a valuation, you can make changes to enhance the business’ value and potentially increase the selling price. For example, if the valuator finds that the business relies too heavily on your management skills, bringing in new management talent may make the business more valuable to a prospective buyer.

A valuation can also reveal concentration risks. For instance, if a significant portion of your business is concentrated in a handful of customers or one geographical area, you could take steps to diversify your customer base.

Structuring the sale

Corporate sellers generally prefer selling stock rather than assets. This is because the profit on a stock sale is generally taxable at more favorable long-term capital gains rates, while asset sales generate a combination of capital gains and ordinary income. For a business with large amounts of depreciated machinery and equipment, asset sales can generate significant ordinary income in the form of depreciation recapture. (Note: The tax rate on recaptured depreciation of certain real estate is capped at 25%.)

In addition, if your company is a C corporation, an asset sale can trigger double taxation: Once at the corporate level and a second time when the proceeds are distributed to shareholders as a dividend. In a stock sale, the buyer acquires the stock directly from the shareholders, so there is no corporate-level tax.

Buyers, on the other hand, almost always prefer to buy assets, especially for equipment-intensive businesses, such as manufacturers. Acquiring assets provides the buyer with a fresh tax basis in the assets for depreciation purposes and allows the buyer to avoid assuming the seller’s liabilities.

Allocating the purchase price

Given the significant advantages of buying assets, most buyers are reluctant to purchase stock, but even in an asset sale, there are strategies for a seller to employ to minimize the tax hit. One strategy is to negotiate a favorable allocation of the purchase price. Although tax rules require the purchase price allocation to be reasonable in light of the assets’ market values, the IRS will generally respect an allocation agreed on by unrelated parties.

As a seller, you will want to allocate as much of the price as possible to assets that generate capital gains, such as goodwill and certain other intangible assets. The buyer will prefer allocations to assets eligible for accelerated depreciation, such as machinery and equipment. However, depreciable assets are likely to generate ordinary income for the seller.

Allocating a portion of the purchase price to goodwill can be a good compromise between the parties’ conflicting interests. Sellers enjoy capital gains treatment while buyers can generally amortize goodwill over 15 years for tax purposes.

If your company is a C corporation, establishing that a portion of goodwill is attributable to personal goodwill — that is, goodwill associated with the reputations of the individual owners rather than the enterprise — can be particularly advantageous. This is because payments for personal goodwill are made directly to the shareholders, avoiding double taxation.

You may need to take certain steps to transfer personal goodwill to the buyer. This may include executing an employment or consulting agreement that defines your responsibility for ensuring that the buyer enjoys the benefits of your ability to attract and retain customers. Buyers may want a noncompete agreement. These are common in private business sales and can help protect the buyer from competition from the seller after the deal closes.

Related Read: Family Businesses: Choosing the Right Exit Strategy  

Get started now

Different strategies can help you enhance your business’s value and minimize taxes, but they may take some time to put into place. Whatever your exit strategy, the earlier you start planning, the better.

For more information, contact Jacqueline Janczewski at [email protected] 312.670.7444. Visit ORBA.com to learn more about our Wealth Management Services.

The Section 529 Plan: A Versatile Financial Planning Tool


You are probably aware that the Section 529 plan is one of the most effective college savings vehicles available, but did you know that its benefits extend well beyond financing higher education costs?

For example, you can use these plans to fund limited amounts of elementary and secondary school expenses. Plus, they offer some unique estate planning benefits. Now, under the SECURE 2.0 Act, if your plan is overfunded, you are allowed to roll over some or all unused funds into a Roth IRA.

How do they work?

529 plans are tax-advantaged investment accounts, sponsored by states or state agencies and designed to help families save for education expenses. Although lifetime contribution limits vary from state to state, they can reach as high as $500,000 or more per beneficiary.

Cash contributions to 529 plans are nondeductible for federal tax purposes, but the funds grow on a tax-deferred basis and withdrawals are tax-free so long as they are used for “qualified higher education expenses.” Qualified expenses include:

  • College or vocational school tuition;
  • Fees, room and board;
  • Books and equipment; and
  • Up to $10,000 per year in elementary or secondary school tuition.

If you use 529 plan funds to pay for nonqualified expenses, the earnings portion of the withdrawal is subject to income tax plus a 10% penalty.

There may also be state tax benefits to investing in a 529 plan. Many states offer tax deductions or credits for contributions to plans they sponsor. 529 plans provide financial aid advantages because they are considered an asset of the parents rather than of the student.

What are the estate planning benefits?

Although 529 plans are primarily education savings accounts, they also offer some surprising estate planning benefits. Traditional estate planning vehicles, such as irrevocable trusts, require you to relinquish most control over the assets they hold to insulate them from estate tax. Contributions to 529 plans, like trusts, are considered completed gifts, so they are removed from your taxable estate. Unlike trusts, however, you maintain a great deal of control over the funds. For instance, you can direct the timing and amount of distributions, change the beneficiary, transfer the funds to another 529 plan, or even close the account and get your money back (subject to taxes and penalties).

Although 529 plan contributions are subject to federal gift tax, they qualify for the annual gift tax exclusion of $18,000 per recipient ($36,000 for gifts split with a spouse). However, unlike other vehicles, they can be front-loaded with up to five years of annual exclusions. So you can contribute as much as $85,000 ($170,000 for married couples) to a 529 account in one year without triggering gift taxes or using any of your lifetime gift and estate tax exemption. This is particularly valuable now, because the exemption — currently $13.61 million — is scheduled to be cut in half in 2026.

What if you save too much?

Given the high cost of a college education, it is common for parents to open a 529 plan soon after their children are born, but what if your savings end up being more than you need? Perhaps your child decides not to go to college or receives a scholarship that covers most or all of their college costs. If this happens, you do not necessarily have to close the account and pay taxes and penalties, (see “Options for Unused Plan Funds” below).

Thanks to the SECURE 2.0 Act, you now have another alternative: You can roll over some 529 plan funds into a Roth IRA for your child, tax- and penalty-free, jump-starting your child’s retirement savings. However, these rollovers are subject to several requirements:

  1. Total rollovers cannot exceed $35,000 per beneficiary.
  2. The 529 plan must have been opened at least 15 years before the rollover is made.
  3. Rollovers cannot include contributions made within the preceding five years (or earnings on those contributions).
  4. The rollover must be executed through a direct trustee-to-trustee transfer.

Note: Even if these requirements are met, rollovers are subject to the usual annual limits on Roth IRA contributions — currently, the lesser of $7,000 ($8,000 if over age 50) or the beneficiary’s earned income.

Related Read: Oops, You Overfunded Your 529 Plan

All-purpose financial tool

If college costs are in your future, a 529 plan is a great way to save, and if it turns out you do not need the funds for higher education expenses, these plans are flexible enough to adapt to changing circumstances and serve other financial functions.

Sidebar: Options for unused plan funds

If you save too much and end up with unused funds in a 529 plan, you have several options:

Withdraw the Funds
You will have to pay taxes and any penalties, but you can use the money for whatever you want. Note: If your child receives a scholarship, you can withdraw that amount subject to taxes, but not penalties.

Designate a New Beneficiary
This can be another one of your children, a relative outside your immediate family, or even you or your spouse. Remember, 529 plans are not just for kids. You can also use them for continuing education or for certain trade school programs.

Hold On to the Plan
You may be able to use it for a grandchild who has not yet been born.

Pay off Student Loans
You can also withdraw 529 funds tax- and penalty-free to pay down student loan debt, up to a lifetime maximum of $10,000 per beneficiary.

For more information, contact Dan Newman at [email protected] 312.670.7444. Visit ORBA.com to learn more about our Wealth Management Services.

Forward Thinking