Business Exit Planning: Navigating Uncertain Times and Key Factors Influencing Valuations

Your business exit plan strategy can enrich more lives than just your own.

In getting to know my clients as they prepare for the transition away from the businesses they’ve built and led for so long, it’s my privilege to see the whole person, not just a collection of assets. Business owners have a sense of community and passions for larger causes. With so much of their resources in motion, they often ask, “Is this an opportunity for me to give back while I protect my own future plans?”

The answer is: yes, absolutely. I can’t promise a one-size-fits all solution, but there are several philanthropic options to explore in the context of a business exit strategy. The trick is to find the one that works for your circumstances.

Donor Advised Funds

Donor advised funds (DAFs) stand out for their versatility and benefits during a business exit. A DAF acts like a charitable investment account where you can contribute cash or stocks, receive tax deductions, and then guide the fund’s charitable giving over time. It’s a powerful tool for those who want to balance personal philanthropic goals with practical financial benefits.

Let’s imagine you’re selling your business for $20 million. By allocating $2 million of that sum to a DAF, you secure a tax deduction for the full amount, while also sidestepping capital gains taxes on assets held in the DAF. In high-tax states, this can translate into significant savings. Hypothetically, in one state the immediate tax benefit could be around 53% of that $2 million, amounting to over a million dollars in tax savings. Plus, avoiding capital gains tax could save you an additional 30% on that amount.

While DAFs offer substantial benefits, they do come with limitations. The first is right in the name: your role in a DAF is advisory. While you can suggest how funds should be distributed, you do not have direct control over the recipient’s final decisions. For example, if your DAF is used to fund a scholarship, you won’t have the last word on who ultimately receives the scholarship funds.

Private Foundations

By contrast, a private foundation is a charitable organization that you can establish and oversee. Unlike donor advised funds, where you suggest how funds should be used, a private foundation puts you in the driver’s seat, allowing you to make direct decisions about charitable activities and grants. As the founder, you have the power to appoint board members, shape the foundation’s mission, and oversee its operations.

This can be especially fulfilling if you want to have an active role in philanthropic endeavors, potentially involving family members and creating a lasting family legacy. However, this control comes with the burden of greater responsibility. You’ll have to adhere to specific regulatory requirements, including mandatory annual distributions of at least 5% of the foundation's assets. This contrasts with donor advised funds, which have no such distribution requirements.

Additionally, private foundations have more stringent rules around investments and activities. For example, they can't co-invest with you in a business deal and must maintain a clear separation between the foundation's activities and your personal business interests. And setting up all the paperwork and gaining the IRS’s approval can take as long as a year, a much longer ramp-up than if you went with a DAF. But if you want to create a structured, long-term philanthropic strategy that aligns as closely as possible with your vision, and you can handle the extra responsibility, a private foundation may be a good fit for you.

Charitable Lead Trusts

Another option worth mentioning is the charitable lead trust, a type of split-interest trust. They cater to two interests: the charity you wish to support and, potentially, you and/or your heirs. The trust distributes a set amount to a charity for a predetermined period, after which the remaining assets are transferred to the beneficiaries you've designated. This can make strategic sense if you need a tax benefit up front, but can’t immediately liquidate assets.

If you want to donate $20,000 a year for the next 15 years, but that $300,000 is tied up in private equity, you can place that equity into a charitable lead trust. Each year, the trust would distribute $20,000 to the designated charity.

I’m only scratching the surface of the possibilities. But my point is to show you that there are several philanthropic vehicles we can consider that could map to your specific needs through your business exit strategy, while using your exit as a springboard to create real change in the community around you. If you’d like to know more, I’m happy to chat. Send me a message or visit Masterpiece Capital and we can look together for ways to exit with a purpose.