Thread by @Adam_Tkaczuk

Buying a business? You can reduce the cost of an earn out by up to 40% by minimizing, shifting, or deferring the tax burden.

NEW thoughts on Strategy #4 from my white paper "8 Ways to Minimize Taxes When Selling a Business"

Link:sterlingpointcapital.com/wp-content/upl…

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2/ Strategy #4 is an earn out option where the Seller sets up a consulting company and provides some scope of services to the Buyer's new business. In return they receive business income that can be tax sheltered using a Solo 401(K) or a Defined Benefit Pension program.

3/ Up to around $500K/year can be tax sheltered. This is great for the Seller because they can quickly fund a retirement IRA type investment account.

(Note: They will have to pay ordinary income taxes when they withdraw funds. This needs to be weighed against base tax rates.)

4/ But an additional benefit (and perhaps even greater benefit) lies with the Buyer.

In a traditional earn out, the Buyer uses after-tax cash to pay off a Seller's note.

But with Strategy #4, they use pre-tax cash because the consulting contract can be expensed.

5/ This can save up to 40% on the amount you actually have to pay to fund the earn out.

6/ For example, using a tradition earn out, a Buyer would need to generate $1.66M of cash, pay $.66M of taxes (40% tax rate) to pay off a $1M Seller's note.

Using Strategy #4, the Buyer only has to come up with $1M to pay off the $1M consulting contract b/c it is expensed.