October 30, 2024 • 29 mins
Lowering your tax consequence when you sell your business can make a massive impact to your take home net. Trust me, I've enjoyed 2 of my own exits. One of the nation's top attorneys, David Taylor, Esq breaks it all down in this episode. Is it possible to walk away at closing with no tax due? Listen for the answer here.
Enjoy the show. Please direct any questions to me: Chuck@BullStreetMergers.com
Enjoy the show. Please direct any questions to me: Chuck@BullStreetMergers.com
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Episode Transcript
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Speaker 1 (00:12):
Thank you for tuning in to another episode of The
Chuck Crumpton Show, a non for profit podcast making a
difference where conversations are real and raw. We are grateful
for your support as we build one of the fastest
growing podcasts in the US. Please subscribe. More information can
be found at the Chuckcrumptonshow dot com. Thank you for listening.
(00:33):
Here's Chuck.
Speaker 2 (00:34):
Thank you, Julie. Good afternoon. This is Chuck Crumpton and
welcome to another episode of The Chuck Crumpton Show. Today
is a special version of the show as we do
a look in on a recent webinar from the business
owner's form on another topic critical to small business. We
publish a webinar every week and we'd love to have
(00:56):
you join us for one. I love business and I
believe that small businesses in America with two to two
hundred or so employees is the engine that drives our
world economy. At Bull Street Mergers, we are practitioners of business,
not m and a professionals driven by theory. All members
(01:18):
of the forum will receive today's webinar without cost. More
information about the forum can be found at Bullstreet Mergers
dot com. Please enjoy the show. Good afternoon, everybody, and
welcome to the webinar series from Bullstreet Mergers. This is
Chuck Crumpton and I'm so glad that you're with us.
(01:41):
All members of the form will receive a recorded version
of today's talk. If you're not a member yet, please
check out the forum for all of its benefits at
Bullstreetmergers dot com. The Forum is an exclusive membership community
of business owners and their key leaders with the expectation
(02:02):
of growing business faster and more efficiently. With the form,
we are not in this alone. Try it for thirty
days without any cost or obligation. Please check out our
website bullstreek Mergers dot com for more details and registration.
I'm very excited about today's topic, mitigating capital gains taxes.
(02:27):
It's a big deal for the clients that we work with.
We have been extremely blessed and fortunate as we have
built bull Street to have worked with some of these
clients that you see on the screen long term relationships. Obviously,
some of these companies are huge, some are a lot smaller.
(02:50):
We primarily work in the middle market tier from companies
from about a million up to one hundred million. Some
of our clients there. We are really happy in the forum,
and we'll get right to the topic in just a moment.
But we're happy in the forum to have friends of
the Forum, partners that come alongside our membership to provide value.
(03:14):
And I'm just thrilled to introduce to you Eric Cox,
who's a president of Coastal Wealth Management. Eric is a
trusted advisor to me personally to my wife, to the forum.
Community College of Charleston graduate in nineteen ninety three. His
farm operates in South Carolina, Kentucky, New York, and Florida.
(03:37):
He's a co host of It's Your Business, which is
a weekly radio show, and Eric does a great job.
He's on the business Board of Governors at the College
of Charleston, and his beautiful wife Lee and their three
children live in Mount Pleasant, South Carolina, right here in Charleston.
And I can tell you without reservation, if you have
(03:59):
any retirement related question as you look to exit your
business or look to maybe transition some of your money,
I can recommend Eric without reservation. Again, great friend, great
trusted advisor. And I guess the litmus test is he
(04:20):
manages my money and my wife's money, and I can't
think of anything that is a higher validation. So please
if you would check out Eric Cox with Coastal Wealth Management,
and I'll be glad to give you his contact information
if you have a desire to reach out to him.
We are really excited to have our speaker today, David
(04:44):
Glenn Taylor, who is a founding partner of Taylor and Foley,
got his BS degree from Clemson in nineteen ninety three,
University of South Carolina law degree in nineteen ninety six,
and got his Masters of Law from the University of
Denver in nineteen ninety seven. David also is a friend
(05:07):
of mine, a cohort. We collaborate on a lot of
different client applications. He's a real pleasure to work with.
Heck of a nice guy, David. If you don't mind,
I'll say smart as hell, and I'm going to turn
everything over to you in just a moment because what
you guys have and what you have done for all
(05:29):
these years with tax law is just so darn impressive.
And we have brought you into a number of our
client applications and we've seen dramatic, dramatic results with the
work that you guys are doing. So I congratulate you.
I applaud you on the firm that you've built all
(05:50):
these years in your team. And before I close my
mouth for a moment, I just want to give a
shout out, a personal shout out to your chief of staff, Sarah,
who sits in Houston in the middle of a hurricane
to help out with last minute prep for this webinar.
(06:10):
And Sarah, I hope you're listening or will listen. Thank
you for your help. This is a team effort, and Sarah,
you're a great part of that team. And David, I
am I'm thrilled to invite you to the Business Owners
Forum today with this incredible topic. I am proud to
call you my friend. I am proud to call you
(06:33):
my colleague. And with that I will be quiet and
turn the floor over to you, my friend, David Taylor. Welcome.
Speaker 3 (06:43):
Thank you, Chuck. I don't know if I could follow
such a gracious and and kind introduction, but I really
appreciate your friendship and your professional You be my colleague
and all of these business transactions we get work on
and are blessed work all are what our great clients.
And thank you for allowing me to be here. Today.
(07:05):
The topic is something that I'm not sure excites it
everyone like it excites me. When I would read capital
tax mitigation as a as a layperson, I'm not sure
if that would exactly get me very very excited just
based on the terms. But the if you reframe that
(07:26):
thought of that concept a little bit, what you really
can describe this, uh, this approach or these transational techniques
as is, is to yield maximization. As you well know, Chuck.
When a when a client, when a business owner exits
an asset, that's typically a tax realization and recognition event,
(07:48):
which is taxing ner talk or there's going to be
a tax do an owing and paid, and those those frictions,
those tax burdens can be extremely extremely high. If you're
in a twenty million dollar forty million dollars nine digit
enterprise value exit, then you're your tax burden. You know,
(08:11):
you're talking about at the bottom twenty percent in some states,
but another twenty five percent and it can get north
of thirty percent and quite fast. You mentioned at the beginning,
this is a capital tax transaction. The word tax is
not in that it's it's capital tax mitigation. It's not
capital gains necessarily it's often capital gains, but with depending
(08:33):
on the structure of the asset exit, it can be
quite a bit higher than the just capital gains tax.
There is recapture and sometimes ordinary income tax. But let's
go back to slide one. If you don't mind, I
want to start, you know, I want to start just
(08:56):
by framing out some of the parties involved in an
M and a transit action. Some of these are pretty obvious.
You're a broker or your investment banker like Uchuck would
be would be a primary driver of your business deal.
You have an usually lawyers involved in there. In my
(09:17):
view and our view of two different types of lawyers
at least the first is a mergers and acquisitions lawyer.
In our office, call that a contract lawyer or who's handling.
Speaker 4 (09:27):
The the contract and the due diligence and all of
the party's legal negotiations back and forth and documentation and
reps and warranties and all of that.
Speaker 3 (09:40):
So there usually is an m and a lawyer or
law firm involved there. If you have good planning, there
is usually or can be a tax lawyer involved. And
just stopping briefly to describe, we do play both of
those roles. We are often an M and a lawyer,
(10:01):
the M and a lawyer, and the tax law firm.
Sometimes we're just the tax council. Well, some some clients
come to us that already have contract lawyers or M
and A lawyers in place, and that's fine with us
because we love to collaborate with good people like you
and your firm. Show there is almost always a Certified
(10:21):
Public accountant or a CPA firm involved. They're critical to
the team because not only do they assist with us
tax nerds as tax attorneys in structuring the transaction and
making sure that it's as good as it can be,
as pretty as it can be, as effective, and also
are little risk as it can be, but they also
(10:43):
have to file the tax returns that result in the transaction.
So they're a critical part of the team. And then
you have the financial advisors like Eric Cox that you
mentioned earlier is one of the best I've ever met.
They're they're critical because they have a global picture of
our clients, not to this asset, this operating company or
companies that we're helping our clients to exit, but the
(11:06):
entire global financial situation for our clients, which helps us
design the approach to land this realization event from a
company into liquidity usually sometimes roll over EQUI, I mean,
go through all of those. And there are other advisors
that regular lawyers, not just M and ATE lawders or
tax lawyers, general counsel, but there is a usually a
(11:30):
group of professional advisors that are involved. I start here
with this list because I wanted to point out where
we sit. This list will come back up later in
our talk for a different reason. But again, we're always
a tax lawyer in our transactions. Where about fifty to
fifty where the contract lorders and M and A lawyers.
(11:52):
And with that we'll go to the next slide.
Speaker 2 (11:54):
David, I was just going to add one of the
questions that we get when we broker a deal. Right,
we're brought in as the you know, M and A experts,
and we generally get a question around what is y'all's involvement. Obviously,
we were taking the company to market, right, we're confidentially
marketing their business leading up to hopefully a letter of
(12:18):
intent to a purchase agreement through due diligence to a closing.
One of the questions that we get, and I don't
want to unpack the question necessarily right now. But we
get the question all the time, what are we looking
at in terms of fees?
Speaker 3 (12:33):
Right?
Speaker 2 (12:33):
You know, that's a that's a good question. It's a
logical question, and we typically kind of break it down
without details today because every deal is different, we break
it down into three professional services right off the bat.
You know, as we go through the process of closing
the deal. One is obviously our fee. Two is the
(12:55):
attorneys fees, right, and whether you're handling the M and
A side and the tax side, you know, we've got
your fees in that equation. And then typically there is
a CPA fee, right, Your the accounting firm of our
client is going to weigh in because the beauty of
how we work together is we bring a team approach.
Speaker 3 (13:18):
Right.
Speaker 2 (13:18):
We're not we're not out there as loan cowboys trying
to put a deal together. It's a lot of collaboration
between us, your office, perhaps their CPA firm, and it's
beautiful when that team works together so cohesively to bring
a total solution to the client.
Speaker 3 (13:40):
Yes, it is, it's elegant when it's probably it's probably structured.
I agree, that's right. I can speak a little bit
chuck to the fee if you'd like. One of the
things that we we'll get into in this talk later
about some principles that that I and this FURM operate
on standards, values, whatever, But principles is probably the right term.
(14:01):
One of the principles is we like to have a
full range of services or scope of services that all
fall under the same fee. So our law form operates
once we know exactly what we're doing for the client,
from the day we talk of them, through the closing,
all the negotiations, the tax preparation, and the planning, working
(14:25):
with the CPA to make sure that the returns properly,
working with the clients afterwards, because we'll talk about later.
A lot of our plans involved not just exiting the
asset of the operating company, but also taking that liquidity
and putting it out of harm's way into an asset
protection plan for our clients. So you've turned something that
was not liquid into hopefully a lot of liquidity. I
(14:45):
want that to be protected from from all creditors or
all other threats of the world for you and your
family going forward, not just your generation, but generationally sometimes dynistically,
and we'll get into that a little bit, but our
fees cover all of that, and we typically we set
a flat fee once we know what we're going to
(15:05):
do for the clients. But there's certainty as to the
feees well.
Speaker 2 (15:08):
Okay, and by the way, you know this just with
working with us so much, we never quote those fees.
Sometimes we get you know, we get pressed, well, what
do you think David's fees are going to be? We
never go there. But that's an easy question for your
firm to answer. And the approach it we take quite
(15:28):
simply is let's get you linked up with David and
then David and his firm can walk through the value
that they're bringing to this deal equation. So that's a
good way to handle it, right.
Speaker 3 (15:41):
Yes, sir, well, any good tax mitigation plan is going
to pay for itself, and the fees over and over
absolutely be an economic no brainer. What you really need
to get through, as a client and other professionals is
your due diligence, all other parties involved, like our firm,
and the content that we bring to the tables. Once
(16:02):
you're comfortable with the things that we do or are
prudent well healed based on authority, which I'll get into later.
The economics speak for themselves.
Speaker 2 (16:12):
Right, and I will add without obviously without discussing clients.
We had one of our early transactions and deals that
we worked on together. I think my client was looking
at a capital gains taxes somewhere around four million, uh
and with your service and what you guys do, you're
(16:34):
able to mitigate that down to practically practically zero, which
is just incredible. Uh So the net result from my
client was huge. I mean we're talking several million dollars
of impact to their exit, which is just incredible.
Speaker 3 (16:55):
That's that's what gets me excited, Chuck, because again, you
could talk about tax planning and tax laws, and that
can put people to sleep when you talk about that
sort of yield increase and velocity of what that could
do for a family. That's what makes us this practice exciting.
Speaker 2 (17:12):
Absolutely.
Speaker 3 (17:14):
So I want to just run through some of the
things that we do as a law firm. This is
really framing out the topic today more than it does anything.
I'll start at the bottom. It says traditionally, but we're
a traditional law firm. Also, I call it the broke
fixed model. I've had clients for almost three decades. They
call us David, I need X, and we give them X.
(17:38):
So it is very much a when we're indeeded. We
provide solutions and services to our clients. Like most law firms,
we do that too and a half years. The things
that we are going to talk about today, we have
different service verticals in our firm. They're a little different.
They're usually tax mitigation. One is capital tax mitigation, which
(18:02):
we're talking about today. That's just our way of saying
someone's selling something. There's a one time, maybe happens more
than once, more than one asset, but there's a there's
a closing, there's an asset that's going to change hands,
and usually that's a tax file event. We're talking about
mergers and oppositions today and buying and selling businesses. It
(18:24):
could be other things, but that's capital tax mitigation. At
M on the screen is annual tax mitigation. We all
as US persons, base the January first to December thirty
first tax year, and a income tax on what we
did during that year. It's usually taxed ordinary income tax rates,
which are the highest. So our firm also does ATM planning,
(18:47):
and that's very much in collaboration with other professionals, sometimes
with U Chuck, but definitely with the CPAs and people
like Eric as well. With financial planning. The goal again
is to is to have our clients keep more of
the capital than they would have otherwise. The ETM on
the screen is a state tax mitigation we properly called
(19:08):
transfer tax mitigation, a state gifts and generation skipping tax.
You know, the good news is you have you won't
be allowed to pay the tax because you have to
pass away for it to apply. The bad news is
it starts at around forty percent after an exclusion, which
is pretty onerous, and your your lineal descendant or your
family has to bear that tax. We mitigate a state
(19:29):
tax as well. And then asset protection. I'll just say
this very quickly. All of this and my view is
the same, whether it's income tax mitigation, a state tax mitigation,
asset protection, a state planning. My job is to let
you keep as much as your capital as you can
and then decide where it goes. That's asset protection, that's
(19:51):
tax mitigation, that's a state plan So that's really all
we do at a zoomed out level, But those are
some of our service roles and I'm going to discuss
this slide very very quickly, because really all of this
stuff on the screen are the things that we're not
(20:11):
going to talk about today. This is your M and
A lawyer or your contract lawyer world. This is super boring,
but it's necessary, it needs to be done. This is
what gets you to the deal, gets you through the deal,
and protect you as a client selling your business and
the deal. We don't need to go through these lists
of these things on the screen, but you need a
(20:33):
very confident M and A lawyer to get you through this.
And again we do that in our firm, but we
certainly were with some of the best mn A lawyers
and best lawyers I've ever met in the M and
A field, and they're all over the country, you know,
they really are all over this this so this country.
So you need a good M and A lawyer to
(20:53):
do all the things on this We're going to talk
about the tax site the first couple of topics here
before we to the principles I think are sort of
foundational to what we do. And again I won't bore
you guys, but people look at the tax code, which
is huge. I remember the first time I saw it.
I was like, how am I ever going to figure
all this stuff out? Now? I think about it in
(21:14):
my sleep, But that is core. It's a pretty simple formula.
I'm a math guy. Probably not that shocking. It's really
a three factor formula or calculation. One is the base
in an m and a transaction. What's your taxable gain.
So you're selling your business for forty million, I'll say
(21:35):
you've got a ten million dollar basis. No one has
basis anymore, it seems. Let's say you have a million
dollar basis and you're selling your business for forty million.
Now you've got a thirty nine million dollar taxable game.
That's your base for a factor one. The second is
your rate or the ratio in this in this formula,
your rate in the tax world depends on the character
(21:55):
of your game. If you're selling your stock or your
equity in a in a business, generally speaking, that might
be all capital gains. Okay, that's cool, that's a pretty
low rate. But if you're selling assets some of that
some of that characterization might be ordinary, some of them
might be recaptured, some of it might be capital. There's
a blended uh affected rate. So gain tax rate and
(22:20):
then the third factor is win. So you can have
gain and a tax rate, but have some planning that
kicks your tax build down the road for a five years.
That's pretty good capital tax planning. Capital tax mitigation planning
really involves structuring legally to impact one or all of
(22:44):
these UH, these factors which impact your your total tax.
For example, you could have the highest rate that you
want to if you're tax if you're if your taxable
gain is zero, you know, thirty five percent times zero zero.
So impacting these three factors will substantially materially impact your
your end up your ultimate tax retial. And in the
(23:07):
capital tax mitigation world, contrasted with like annual tax planning,
we generally speaking need to be involved as the tax
mitigation lawyers and the CPAs before the clutching. There are
a couple of things we can do post closing. They're
not optimal, and our our toolkit from our CTM toolbox
(23:30):
is very much narrowed. But pre transaction, if we can
get involved before sale and implement pre transactional reorganization so
we're structuring, uh, the results can be very material. So
that's one of the things that one of the things
in CTM world that I want to pour out. Get
your tax professionals involved as early as possible. Certainly when
(23:50):
you have brothers like Chuck involved, they're going to know that.
But I think that's important for everybody to realize afterwards,
often you're there, sometimes there's nothing you can do. It
certainly is not as impactful.
Speaker 2 (24:04):
David. We've got you and I, our firm and your
firm collaborate. We're working together. We've got two deals under
contract right now in excess of ten million dollars. So
a lot of taxeses are you know, at stake and
your you're beautifully working through your process to help both
(24:24):
of those clients of ours you know that are under
contract right now. We've got several more coming. But how
could you say quickly get you involved? Can you give
us an idea of the lee time that is ideal
so we're not in the eleventh hour crunch time?
Speaker 3 (24:44):
Absolutely, yeah, so ideal. The standard we have when that
question is asked, we ask for two months before closing.
That's anything. Two months or more is certainly enough time.
We can certainly get something done and within a one
month period. It it just when when we can. We
(25:09):
would like to have a little a little bit less
pressure on the UH on the reorganization. All that being said,
we closed a ninety two million dollar deal a couple
of years ago in two weeks. Now, I didn't want
to do that, but but the client needed it. So
we perform when our clients needed. So I will tell
you that two weeks is about as as quickly as
we can do anything. But it's unnecessary to wait, and
(25:33):
sometimes the facts dictate that. But I would say two
months is preferable, one month is doable. And you know
we have situations where we got to perform right right.
So I mentioned in the last slide that we will
like to get involved in a transaction and implement pre
transactional reorganization. I'm going to share three slides with you here.
(25:57):
This is These are three slides out of a deck
that is several pages long, because the transaction is several
several steps. And I will tell you that these names
on this screen are fictional. They were they were real,
but they've been changed for for sake of this example.
Attorney click privilege for everybody, but these are pulled from
a real deal, and I wan't bore you with the
(26:20):
steps here. What I'm trying to show you here is
there there is some complexity in the pre transactional reorganization
that is necessary to get to the tax result that
is needed. So I just wanted to kind of show you. Now,
before this we met this client, there was a UBO,
a person in this in this instance it's the named
(26:41):
stag Burton, but that's not the real name. But and
he owned Anes Corporation, so single member and Anes Corporation
that had an asset underneath an operating company that was
that was going to be marketed to SOULT. What you
see here Step four is really more like step seven.
We put a six section six seventy eight trust in place.
That's the up gray box there, that is getting all
(27:03):
the assets out of the estate tax system and asset protected. Uh.
Steps above this transaction, we did an f as in
Frank type reorganization, which is common in an S corporation context. UH.
That's the holding company that you see there. We dropped
and put entity tiers underneath. We then we formed a
management company which is the blue triangle you see that
(27:25):
effectively will end up being a holding company for this family. Again,
not to bore you with these these details, but This
is the kind of pretty transactional reorganizational work that we
tend to implement. Uh, chuck, go to the next screen
and then fairly quickly to the next Let me let
me comp in just on this one. Sure you'll see
here how it begins to play out. This Actually step
(27:48):
ten in the transaction is the sell of the operating
company to the to the acquirer and cash coming over
to to to a tiered entity. You'll also see this
little red box which I'll get to earth I mean
a little bit later, But there's a charitable intent for
this client. It would utilize that charitable intent in a
(28:08):
pretty creative and conservative way, which I'll get to in
a little while. But I wanted to give you guys
a flavor of some of the pre transactional reorganization that
a good CTM mitigation transaction what might look like. And
then one more, this is always the best one. This
is when you have all of your cash and all
over equity under your holding company to the to the
(28:30):
left capital stack. And I will although this transaction or
this slide doesn't say so, that cash and that that
box is typically unreduced by any tax friction. So again,
giving you a little bit of a flavor for what
these transactions look like. And before we go to the
(28:50):
next slide, I'll note in the top left corner you
see a term that says countryside transaction. Countryside is a
tax court case that we use along with other authority
quite often, which will segue into our next slot.
Speaker 2 (29:06):
Thank you for listening to the Chuck Crumpton Show. We
would love your comments and would greatly appreciate your five
star rating on the show. We want to make this
bigger and better so we can serve more folks, more
business owners around the US. If you have any questions,
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(29:26):
please email me directly at Chuck at Bullstreetmergers dot com.
Chuck at Bullstreet Mergers dot com and I hope you
have a great week. Thanks for tuning in.
Thank you for tuning in to another episode of The
Chuck Crumpton Show, a non for profit podcast making a
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(00:33):
Here's Chuck.
Speaker 2 (00:34):
Thank you, Julie. Good afternoon. This is Chuck Crumpton and
welcome to another episode of The Chuck Crumpton Show. Today
is a special version of the show as we do
a look in on a recent webinar from the business
owner's form on another topic critical to small business. We
publish a webinar every week and we'd love to have
(00:56):
you join us for one. I love business and I
believe that small businesses in America with two to two
hundred or so employees is the engine that drives our
world economy. At Bull Street Mergers, we are practitioners of business,
not m and a professionals driven by theory. All members
(01:18):
of the forum will receive today's webinar without cost. More
information about the forum can be found at Bullstreet Mergers
dot com. Please enjoy the show. Good afternoon, everybody, and
welcome to the webinar series from Bullstreet Mergers. This is
Chuck Crumpton and I'm so glad that you're with us.
(01:41):
All members of the form will receive a recorded version
of today's talk. If you're not a member yet, please
check out the forum for all of its benefits at
Bullstreetmergers dot com. The Forum is an exclusive membership community
of business owners and their key leaders with the expectation
(02:02):
of growing business faster and more efficiently. With the form,
we are not in this alone. Try it for thirty
days without any cost or obligation. Please check out our
website bullstreek Mergers dot com for more details and registration.
I'm very excited about today's topic, mitigating capital gains taxes.
(02:27):
It's a big deal for the clients that we work with.
We have been extremely blessed and fortunate as we have
built bull Street to have worked with some of these
clients that you see on the screen long term relationships. Obviously,
some of these companies are huge, some are a lot smaller.
(02:50):
We primarily work in the middle market tier from companies
from about a million up to one hundred million. Some
of our clients there. We are really happy in the forum,
and we'll get right to the topic in just a moment.
But we're happy in the forum to have friends of
the Forum, partners that come alongside our membership to provide value.
(03:14):
And I'm just thrilled to introduce to you Eric Cox,
who's a president of Coastal Wealth Management. Eric is a
trusted advisor to me personally to my wife, to the forum.
Community College of Charleston graduate in nineteen ninety three. His
farm operates in South Carolina, Kentucky, New York, and Florida.
(03:37):
He's a co host of It's Your Business, which is
a weekly radio show, and Eric does a great job.
He's on the business Board of Governors at the College
of Charleston, and his beautiful wife Lee and their three
children live in Mount Pleasant, South Carolina, right here in Charleston.
And I can tell you without reservation, if you have
(03:59):
any retirement related question as you look to exit your
business or look to maybe transition some of your money,
I can recommend Eric without reservation. Again, great friend, great
trusted advisor. And I guess the litmus test is he
(04:20):
manages my money and my wife's money, and I can't
think of anything that is a higher validation. So please
if you would check out Eric Cox with Coastal Wealth Management,
and I'll be glad to give you his contact information
if you have a desire to reach out to him.
We are really excited to have our speaker today, David
(04:44):
Glenn Taylor, who is a founding partner of Taylor and Foley,
got his BS degree from Clemson in nineteen ninety three,
University of South Carolina law degree in nineteen ninety six,
and got his Masters of Law from the University of
Denver in nineteen ninety seven. David also is a friend
(05:07):
of mine, a cohort. We collaborate on a lot of
different client applications. He's a real pleasure to work with.
Heck of a nice guy, David. If you don't mind,
I'll say smart as hell, and I'm going to turn
everything over to you in just a moment because what
you guys have and what you have done for all
(05:29):
these years with tax law is just so darn impressive.
And we have brought you into a number of our
client applications and we've seen dramatic, dramatic results with the
work that you guys are doing. So I congratulate you.
I applaud you on the firm that you've built all
(05:50):
these years in your team. And before I close my
mouth for a moment, I just want to give a
shout out, a personal shout out to your chief of staff, Sarah,
who sits in Houston in the middle of a hurricane
to help out with last minute prep for this webinar.
(06:10):
And Sarah, I hope you're listening or will listen. Thank
you for your help. This is a team effort, and Sarah,
you're a great part of that team. And David, I
am I'm thrilled to invite you to the Business Owners
Forum today with this incredible topic. I am proud to
call you my friend. I am proud to call you
(06:33):
my colleague. And with that I will be quiet and
turn the floor over to you, my friend, David Taylor. Welcome.
Speaker 3 (06:43):
Thank you, Chuck. I don't know if I could follow
such a gracious and and kind introduction, but I really
appreciate your friendship and your professional You be my colleague
and all of these business transactions we get work on
and are blessed work all are what our great clients.
And thank you for allowing me to be here. Today.
(07:05):
The topic is something that I'm not sure excites it
everyone like it excites me. When I would read capital
tax mitigation as a as a layperson, I'm not sure
if that would exactly get me very very excited just
based on the terms. But the if you reframe that
(07:26):
thought of that concept a little bit, what you really
can describe this, uh, this approach or these transational techniques
as is, is to yield maximization. As you well know, Chuck.
When a when a client, when a business owner exits
an asset, that's typically a tax realization and recognition event,
(07:48):
which is taxing ner talk or there's going to be
a tax do an owing and paid, and those those frictions,
those tax burdens can be extremely extremely high. If you're
in a twenty million dollar forty million dollars nine digit
enterprise value exit, then you're your tax burden. You know,
(08:11):
you're talking about at the bottom twenty percent in some states,
but another twenty five percent and it can get north
of thirty percent and quite fast. You mentioned at the beginning,
this is a capital tax transaction. The word tax is
not in that it's it's capital tax mitigation. It's not
capital gains necessarily it's often capital gains, but with depending
(08:33):
on the structure of the asset exit, it can be
quite a bit higher than the just capital gains tax.
There is recapture and sometimes ordinary income tax. But let's
go back to slide one. If you don't mind, I
want to start, you know, I want to start just
(08:56):
by framing out some of the parties involved in an
M and a transit action. Some of these are pretty obvious.
You're a broker or your investment banker like Uchuck would
be would be a primary driver of your business deal.
You have an usually lawyers involved in there. In my
(09:17):
view and our view of two different types of lawyers
at least the first is a mergers and acquisitions lawyer.
In our office, call that a contract lawyer or who's handling.
Speaker 4 (09:27):
The the contract and the due diligence and all of
the party's legal negotiations back and forth and documentation and
reps and warranties and all of that.
Speaker 3 (09:40):
So there usually is an m and a lawyer or
law firm involved there. If you have good planning, there
is usually or can be a tax lawyer involved. And
just stopping briefly to describe, we do play both of
those roles. We are often an M and a lawyer,
(10:01):
the M and a lawyer, and the tax law firm.
Sometimes we're just the tax council. Well, some some clients
come to us that already have contract lawyers or M
and A lawyers in place, and that's fine with us
because we love to collaborate with good people like you
and your firm. Show there is almost always a Certified
(10:21):
Public accountant or a CPA firm involved. They're critical to
the team because not only do they assist with us
tax nerds as tax attorneys in structuring the transaction and
making sure that it's as good as it can be,
as pretty as it can be, as effective, and also
are little risk as it can be, but they also
(10:43):
have to file the tax returns that result in the transaction.
So they're a critical part of the team. And then
you have the financial advisors like Eric Cox that you
mentioned earlier is one of the best I've ever met.
They're they're critical because they have a global picture of
our clients, not to this asset, this operating company or
companies that we're helping our clients to exit, but the
(11:06):
entire global financial situation for our clients, which helps us
design the approach to land this realization event from a
company into liquidity usually sometimes roll over EQUI, I mean,
go through all of those. And there are other advisors
that regular lawyers, not just M and ATE lawders or
tax lawyers, general counsel, but there is a usually a
(11:30):
group of professional advisors that are involved. I start here
with this list because I wanted to point out where
we sit. This list will come back up later in
our talk for a different reason. But again, we're always
a tax lawyer in our transactions. Where about fifty to
fifty where the contract lorders and M and A lawyers.
(11:52):
And with that we'll go to the next slide.
Speaker 2 (11:54):
David, I was just going to add one of the
questions that we get when we broker a deal. Right,
we're brought in as the you know, M and A experts,
and we generally get a question around what is y'all's involvement. Obviously,
we were taking the company to market, right, we're confidentially
marketing their business leading up to hopefully a letter of
(12:18):
intent to a purchase agreement through due diligence to a closing.
One of the questions that we get, and I don't
want to unpack the question necessarily right now. But we
get the question all the time, what are we looking
at in terms of fees?
Speaker 3 (12:33):
Right?
Speaker 2 (12:33):
You know, that's a that's a good question. It's a
logical question, and we typically kind of break it down
without details today because every deal is different, we break
it down into three professional services right off the bat.
You know, as we go through the process of closing
the deal. One is obviously our fee. Two is the
(12:55):
attorneys fees, right, and whether you're handling the M and
A side and the tax side, you know, we've got
your fees in that equation. And then typically there is
a CPA fee, right, Your the accounting firm of our
client is going to weigh in because the beauty of
how we work together is we bring a team approach.
Speaker 3 (13:18):
Right.
Speaker 2 (13:18):
We're not we're not out there as loan cowboys trying
to put a deal together. It's a lot of collaboration
between us, your office, perhaps their CPA firm, and it's
beautiful when that team works together so cohesively to bring
a total solution to the client.
Speaker 3 (13:40):
Yes, it is, it's elegant when it's probably it's probably structured.
I agree, that's right. I can speak a little bit
chuck to the fee if you'd like. One of the
things that we we'll get into in this talk later
about some principles that that I and this FURM operate
on standards, values, whatever, But principles is probably the right term.
(14:01):
One of the principles is we like to have a
full range of services or scope of services that all
fall under the same fee. So our law form operates
once we know exactly what we're doing for the client,
from the day we talk of them, through the closing,
all the negotiations, the tax preparation, and the planning, working
(14:25):
with the CPA to make sure that the returns properly,
working with the clients afterwards, because we'll talk about later.
A lot of our plans involved not just exiting the
asset of the operating company, but also taking that liquidity
and putting it out of harm's way into an asset
protection plan for our clients. So you've turned something that
was not liquid into hopefully a lot of liquidity. I
(14:45):
want that to be protected from from all creditors or
all other threats of the world for you and your
family going forward, not just your generation, but generationally sometimes dynistically,
and we'll get into that a little bit, but our
fees cover all of that, and we typically we set
a flat fee once we know what we're going to
(15:05):
do for the clients. But there's certainty as to the
feees well.
Speaker 2 (15:08):
Okay, and by the way, you know this just with
working with us so much, we never quote those fees.
Sometimes we get you know, we get pressed, well, what
do you think David's fees are going to be? We
never go there. But that's an easy question for your
firm to answer. And the approach it we take quite
(15:28):
simply is let's get you linked up with David and
then David and his firm can walk through the value
that they're bringing to this deal equation. So that's a
good way to handle it, right.
Speaker 3 (15:41):
Yes, sir, well, any good tax mitigation plan is going
to pay for itself, and the fees over and over
absolutely be an economic no brainer. What you really need
to get through, as a client and other professionals is
your due diligence, all other parties involved, like our firm,
and the content that we bring to the tables. Once
(16:02):
you're comfortable with the things that we do or are
prudent well healed based on authority, which I'll get into later.
The economics speak for themselves.
Speaker 2 (16:12):
Right, and I will add without obviously without discussing clients.
We had one of our early transactions and deals that
we worked on together. I think my client was looking
at a capital gains taxes somewhere around four million, uh
and with your service and what you guys do, you're
(16:34):
able to mitigate that down to practically practically zero, which
is just incredible. Uh So the net result from my
client was huge. I mean we're talking several million dollars
of impact to their exit, which is just incredible.
Speaker 3 (16:55):
That's that's what gets me excited, Chuck, because again, you
could talk about tax planning and tax laws, and that
can put people to sleep when you talk about that
sort of yield increase and velocity of what that could
do for a family. That's what makes us this practice exciting.
Speaker 2 (17:12):
Absolutely.
Speaker 3 (17:14):
So I want to just run through some of the
things that we do as a law firm. This is
really framing out the topic today more than it does anything.
I'll start at the bottom. It says traditionally, but we're
a traditional law firm. Also, I call it the broke
fixed model. I've had clients for almost three decades. They
call us David, I need X, and we give them X.
(17:38):
So it is very much a when we're indeeded. We
provide solutions and services to our clients. Like most law firms,
we do that too and a half years. The things
that we are going to talk about today, we have
different service verticals in our firm. They're a little different.
They're usually tax mitigation. One is capital tax mitigation, which
(18:02):
we're talking about today. That's just our way of saying
someone's selling something. There's a one time, maybe happens more
than once, more than one asset, but there's a there's
a closing, there's an asset that's going to change hands,
and usually that's a tax file event. We're talking about
mergers and oppositions today and buying and selling businesses. It
(18:24):
could be other things, but that's capital tax mitigation. At
M on the screen is annual tax mitigation. We all
as US persons, base the January first to December thirty
first tax year, and a income tax on what we
did during that year. It's usually taxed ordinary income tax rates,
which are the highest. So our firm also does ATM planning,
(18:47):
and that's very much in collaboration with other professionals, sometimes
with U Chuck, but definitely with the CPAs and people
like Eric as well. With financial planning. The goal again
is to is to have our clients keep more of
the capital than they would have otherwise. The ETM on
the screen is a state tax mitigation we properly called
(19:08):
transfer tax mitigation, a state gifts and generation skipping tax.
You know, the good news is you have you won't
be allowed to pay the tax because you have to
pass away for it to apply. The bad news is
it starts at around forty percent after an exclusion, which
is pretty onerous, and your your lineal descendant or your
family has to bear that tax. We mitigate a state
(19:29):
tax as well. And then asset protection. I'll just say
this very quickly. All of this and my view is
the same, whether it's income tax mitigation, a state tax mitigation,
asset protection, a state planning. My job is to let
you keep as much as your capital as you can
and then decide where it goes. That's asset protection, that's
(19:51):
tax mitigation, that's a state plan So that's really all
we do at a zoomed out level, But those are
some of our service roles and I'm going to discuss
this slide very very quickly, because really all of this
stuff on the screen are the things that we're not
(20:11):
going to talk about today. This is your M and
A lawyer or your contract lawyer world. This is super boring,
but it's necessary, it needs to be done. This is
what gets you to the deal, gets you through the deal,
and protect you as a client selling your business and
the deal. We don't need to go through these lists
of these things on the screen, but you need a
(20:33):
very confident M and A lawyer to get you through this.
And again we do that in our firm, but we
certainly were with some of the best mn A lawyers
and best lawyers I've ever met in the M and
A field, and they're all over the country, you know,
they really are all over this this so this country.
So you need a good M and A lawyer to
(20:53):
do all the things on this We're going to talk
about the tax site the first couple of topics here
before we to the principles I think are sort of
foundational to what we do. And again I won't bore
you guys, but people look at the tax code, which
is huge. I remember the first time I saw it.
I was like, how am I ever going to figure
all this stuff out? Now? I think about it in
(21:14):
my sleep, But that is core. It's a pretty simple formula.
I'm a math guy. Probably not that shocking. It's really
a three factor formula or calculation. One is the base
in an m and a transaction. What's your taxable gain.
So you're selling your business for forty million, I'll say
(21:35):
you've got a ten million dollar basis. No one has
basis anymore, it seems. Let's say you have a million
dollar basis and you're selling your business for forty million.
Now you've got a thirty nine million dollar taxable game.
That's your base for a factor one. The second is
your rate or the ratio in this in this formula,
your rate in the tax world depends on the character
(21:55):
of your game. If you're selling your stock or your
equity in a in a business, generally speaking, that might
be all capital gains. Okay, that's cool, that's a pretty
low rate. But if you're selling assets some of that
some of that characterization might be ordinary, some of them
might be recaptured, some of it might be capital. There's
a blended uh affected rate. So gain tax rate and
(22:20):
then the third factor is win. So you can have
gain and a tax rate, but have some planning that
kicks your tax build down the road for a five years.
That's pretty good capital tax planning. Capital tax mitigation planning
really involves structuring legally to impact one or all of
(22:44):
these UH, these factors which impact your your total tax.
For example, you could have the highest rate that you
want to if you're tax if you're if your taxable
gain is zero, you know, thirty five percent times zero zero.
So impacting these three factors will substantially materially impact your
your end up your ultimate tax retial. And in the
(23:07):
capital tax mitigation world, contrasted with like annual tax planning,
we generally speaking need to be involved as the tax
mitigation lawyers and the CPAs before the clutching. There are
a couple of things we can do post closing. They're
not optimal, and our our toolkit from our CTM toolbox
(23:30):
is very much narrowed. But pre transaction, if we can
get involved before sale and implement pre transactional reorganization so
we're structuring, uh, the results can be very material. So
that's one of the things that one of the things
in CTM world that I want to pour out. Get
your tax professionals involved as early as possible. Certainly when
(23:50):
you have brothers like Chuck involved, they're going to know that.
But I think that's important for everybody to realize afterwards,
often you're there, sometimes there's nothing you can do. It
certainly is not as impactful.
Speaker 2 (24:04):
David. We've got you and I, our firm and your
firm collaborate. We're working together. We've got two deals under
contract right now in excess of ten million dollars. So
a lot of taxeses are you know, at stake and
your you're beautifully working through your process to help both
(24:24):
of those clients of ours you know that are under
contract right now. We've got several more coming. But how
could you say quickly get you involved? Can you give
us an idea of the lee time that is ideal
so we're not in the eleventh hour crunch time?
Speaker 3 (24:44):
Absolutely, yeah, so ideal. The standard we have when that
question is asked, we ask for two months before closing.
That's anything. Two months or more is certainly enough time.
We can certainly get something done and within a one
month period. It it just when when we can. We
(25:09):
would like to have a little a little bit less
pressure on the UH on the reorganization. All that being said,
we closed a ninety two million dollar deal a couple
of years ago in two weeks. Now, I didn't want
to do that, but but the client needed it. So
we perform when our clients needed. So I will tell
you that two weeks is about as as quickly as
we can do anything. But it's unnecessary to wait, and
(25:33):
sometimes the facts dictate that. But I would say two
months is preferable, one month is doable. And you know
we have situations where we got to perform right right.
So I mentioned in the last slide that we will
like to get involved in a transaction and implement pre
transactional reorganization. I'm going to share three slides with you here.
(25:57):
This is These are three slides out of a deck
that is several pages long, because the transaction is several
several steps. And I will tell you that these names
on this screen are fictional. They were they were real,
but they've been changed for for sake of this example.
Attorney click privilege for everybody, but these are pulled from
a real deal, and I wan't bore you with the
(26:20):
steps here. What I'm trying to show you here is
there there is some complexity in the pre transactional reorganization
that is necessary to get to the tax result that
is needed. So I just wanted to kind of show you. Now,
before this we met this client, there was a UBO,
a person in this in this instance it's the named
(26:41):
stag Burton, but that's not the real name. But and
he owned Anes Corporation, so single member and Anes Corporation
that had an asset underneath an operating company that was
that was going to be marketed to SOULT. What you
see here Step four is really more like step seven.
We put a six section six seventy eight trust in place.
That's the up gray box there, that is getting all
(27:03):
the assets out of the estate tax system and asset protected. Uh.
Steps above this transaction, we did an f as in
Frank type reorganization, which is common in an S corporation context. UH.
That's the holding company that you see there. We dropped
and put entity tiers underneath. We then we formed a
management company which is the blue triangle you see that
(27:25):
effectively will end up being a holding company for this family. Again,
not to bore you with these these details, but This
is the kind of pretty transactional reorganizational work that we
tend to implement. Uh, chuck, go to the next screen
and then fairly quickly to the next Let me let
me comp in just on this one. Sure you'll see
here how it begins to play out. This Actually step
(27:48):
ten in the transaction is the sell of the operating
company to the to the acquirer and cash coming over
to to to a tiered entity. You'll also see this
little red box which I'll get to earth I mean
a little bit later, But there's a charitable intent for
this client. It would utilize that charitable intent in a
(28:08):
pretty creative and conservative way, which I'll get to in
a little while. But I wanted to give you guys
a flavor of some of the pre transactional reorganization that
a good CTM mitigation transaction what might look like. And
then one more, this is always the best one. This
is when you have all of your cash and all
over equity under your holding company to the to the
(28:30):
left capital stack. And I will although this transaction or
this slide doesn't say so, that cash and that that
box is typically unreduced by any tax friction. So again,
giving you a little bit of a flavor for what
these transactions look like. And before we go to the
(28:50):
next slide, I'll note in the top left corner you
see a term that says countryside transaction. Countryside is a
tax court case that we use along with other authority
quite often, which will segue into our next slot.
Speaker 2 (29:06):
Thank you for listening to the Chuck Crumpton Show. We
would love your comments and would greatly appreciate your five
star rating on the show. We want to make this
bigger and better so we can serve more folks, more
business owners around the US. If you have any questions,
any thoughts, any ideas on how the show can get better,
(29:26):
please email me directly at Chuck at Bullstreetmergers dot com.
Chuck at Bullstreet Mergers dot com and I hope you
have a great week. Thanks for tuning in.
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