$160mn business purchase with no money out-of-pocket or loans

Business Case Analysis: Sale of a $160 Million Business from Father to Son

Introduction

This case revolves around a 73-year-old business owner, the Father, who intends to sell his $160 million S corporation based in San Francisco to his 32-year-old son, the company's COO. The goal is to achieve this transition in the most tax-efficient and financially beneficial manner possible, addressing immediate financial gains and long-term family wealth preservation.

??Company Background

The business operates within San Francisco's stringent tax environment, boasting a fair market value (FMV) of approximately $160 million. As an S corporation, it enjoys certain tax advantages, which the owner seeks to optimize in the sale process.

??Industry Analysis

The case does not specify the industry. However, the business operates in a competitive environment where maximizing post-tax profitability and maintaining control is critical for long-term success and viability.

??Problem Statement

The Father faces multiple challenges in selling his business to his son:

- Significantly reducing business income and capital gains taxes.

- Ensuring the financial well-being and unity of his four children.

- Maintaining control over the business post-sale.

- Achieving this transition without incurring high-interest payments or risking the business’s or family’s financial security.

??Case Data

- The business is valued at $160 million with an annual business income tax responsibility of $3.5 million.

- Current and prospective tax laws threaten the financial efficiency of the sale and subsequent wealth distribution among the family.

??Alternatives

1.? Conventional Sale: Selling the business directly to the son with traditional financing methods.

2.? Solution #1: Implementing an 80% business income tax recapture strategy.

3.? Solution #2: Utilizing a capital gain tax deferral solution.

??Decision Criteria

- Tax efficiency

- Control and future success of the business

- Family wealth preservation and enhancement

- Compliance and risk mitigation regarding tax authorities

??Recommendation

Combine Solutions #1 and #2:

-? Solution #1? reduces ongoing business income tax liability by 80%, increasing business valuation and enabling the funding of life insurance policies for tax-free income for the Father and his children.

-? Solution #2? allows for the sale of the business to the son with no out-of-pocket expense and defers capital gains taxes for 30+ years, effectively reducing the tax burden due to inflation over time.

??Conclusion

This combination ensures a tax-efficient business transition from the Father to the Son while securing the family's financial future. It addresses all the Father’s goals, including maintaining control over the business, eliminating interest payments, providing for his children, and preparing the company for future success with minimized risk.

??Exhibits and Appendices

- Financial Projections and Tax Savings Analysis

- IRS Code Sections and Treasury Department Documents Supporting the Solutions

- Case Studies and Audit Histories of Proposed Solutions