Stalemate

To leave work after thirty-five or forty years may sound like a great idea. You may be ready to go. But when you begin to consider the reality of what life will be like after retirement, the uncertainty can be pretty

intimidating. If you haven’t planned, you may be dragging your heels. You may have to be hauled out of the trench.

We often hear how important it is to prepare a business plan. A good business plan is like a road map. It’s about the future. It shows you where you are and where you are going. In preparing a business plan, unexpected issues may surface. They have to be addressed.

The following is an excerpt from Doug’s book “There’s Always a Way to Sell Your Business

Stalemate

I looked at a business a number of years ago that was quite profitable. It manufactured, remanufactured, and repackaged products. The products were sold to the hardware industry. Victor was enjoying sales of about $5 million a year, showing pre-tax earnings of approximately $350,000.

It’s interesting to note that Victor had bought an old schoolhouse. He was using the facility as his office and manufacturing facility. He used the gymnasium as his warehouse. He turned the classrooms of this small school into his office, a reception area, and a boardroom.

The flaw in this situation was that the business and the real estate were owned by the same company. A purchaser came along who wished to buy the business but didn’t want to buy the real estate. He offered what appeared to be a very attractive lease for ten years.

Victor wanted to sell the shares of his company in order to enjoy the capital gains exemption. To do that he needed to dividend the real estate out of the company. That meant he would have to have the real estate appraised; pay tax on the recaptured appreciation of the depreciated portion of the real estate; and pay capital gains tax on the increase. Then he would have to pay a dividend distribution tax on the amount he dividend out. The real estate was worth about $1 million and the taxes to move it out were about $350,000.

The alternative was to sell the assets of the business and retain the real estate inside the company. However, that meant recaptured depreciation tax on the equipment along with capital gains on the equipment, which would result in a large amount of tax.

As a result of poor tax planning, the business was not sold.