Case Study
A lot of financial information online right now is very generalized and unspecified, just random facts about Roth IRA’s for example that get no attention due to the fact that there are so many people online trying to spread the word about financial advice without real context that people can relate to. So here is a story of a way I am helping a client of mine sell her business in a smart and careful process that she can save thousands through.
Recently, a client referred an individual needing advice and guidance on selling her yoga business for a maximum profit. She had been recently approached by a buyer interested in the business due to its success in recent years and was asked what she was willing to sell it for, so she came to me asking what she should do. Here’s how we did it:
First, we valued the business through the income based approach. This process focuses on the potential future income the business can generate. There are several methods under the income approach, with the most common being the Discounted Cash Flow (DCF) method, which is what we used.
We started by estimating her gross profits for the next couple of years, which in this case we used a 10% increase each year as a goal.
After running the preliminary tax numbers for 2024, we found that this particular client’s business is valued at 1.25 times its gross profits in the past 3 years, which is around $50,000.
Income wise, this client will fall into the 0% long term capital gains rate, staying under the $94,050 limit (married filing jointly).
Now after obtaining the $50,000, it will go towards her income from 2024, meaning that her income will now be over the $94,050 limit, making it eligible to be taxed at a 15% rate.
In order to deflect this tax bullet, there are different strategies we can use to maintain her 0% long term capital gains rate:
If we make contributions to a Traditional IRA, the money goes in tax free and grows tax deferred, which means that there are no taxes on dividends, interest, or capital gains.
If we make contributions to a 401k, the money will go in tax free meaning you do not pay taxes on dividends, interest, or capital gains within the account each year.
If we make contributions to an HSA (which she qualifies for), they are tax-deductible, meaning you can deduct them from your taxable income in the year you make the contributions.
Through a meticulous valuation using the Discounted Cash Flow method, we determined that your client's yoga business holds a significant value of approximately $50,000. As you navigate the sale process, the strategic advice to utilize tax-deferred vehicles such as a Traditional IRA, 401(k), and HSA will effectively mitigate potential tax liabilities. These approaches not only aim to preserve her income within favorable tax brackets but also underscore a careful and strategic approach to maximizing the proceeds from the business sale. By implementing these measures, we aim to secure a financially advantageous outcome for your client while ensuring management of her tax obligations.
Disclosure:
Raymond James and its advisors do not offer tax or legal advice. You should discuss any tax or legal matters with the appropriate professional.
