Paul and Hasan co-owned a successful mid-sized business and were preparing to sell. Their goal was to sell the business in a way that provided them with financial security while making the transition smooth.
The Challenge
The key challenge was that while both Paul and Hasan would be able to use the maximum Lifetime Captial Gains Exemption (LCGE) of $1,2500,000 each, a large sum from the $7.5 million business sale would still be subject to tax. They needed a strategy to minimize the immediate tax hit, secure retirement income, and structure the buyout efficiently. Without an innovative approach, the taxable portion could substantially reduce the value they received from the sale.
The Approach
The solution was to incorporate a Retirement Compensation Arrangement (RCA) into the buyout. An RCA is a tax-advantaged plan that allows business owners to shelter pre-tax proceeds, deferring taxes until funds are withdrawn. Withdrawals are flexible and can be made at any time and in any amount. By carefully structuring the RCA:
- Paul was able to defer $2 million of his proceeds into the RCA.
- Hasan deferred $1.8 million into his RCA.
This structure allowed the taxable portion of their sale proceeds to be sheltered in the RCA, providing a flexible income stream.
The Key Results
Paul and Hasan were able to negotiate the sale knowing their after-tax amounts and how potential earn-outs would affect their payout. This clarity removed uncertainty from the negotiations, reduced pressure, and allowed them to focus on securing the best overall outcome, not simply the highest price.
- Business Sale: The business sold for $7.5 million.
- Tax Efficiency: By using their Lifetime Capital Gains Exemption and the RCA, Paul and Hasan paid less than $100,000 each in taxes on the sale.
- Negotiation Advantage: Knowing the after-tax proceeds and earn-out impact removed uncertainty and reduced pressure during negotiations with the buyer.
- Retirement Security: Both owners secured reliable, tax-advantaged income streams for retirement.
Through careful planning and the strategic use of an RCA, Paul and Hasan transformed a potentially heavy tax burden into a secure, retirement-ready outcome while successfully exiting their business.
