Dec 3, 2023

142: Post-Transaction Tax Strategies, Chuck Goldblum

Succession Stories host Laurie Barkman, The Business Transition Sherpa(™), welcomes Chuck Goldblum, Founder and Financial Strategist of Hurley Capital.

Today’s episode is critical if you’re planning to sell your business. Laurie and Chuck discuss a topic many owners want to know more about – maximizing net proceeds after a sale. 


Listen in as they explore tax strategies when you’re planning to sell your business, navigating life after the sale, and pivotal success factors for a regret-free exit. 

Being proactive can pay off because you need time to implement these strategies. Plan the work, and work the plan.

Enjoy this Succession Stories episode about post-transaction tax strategies to navigate life after the sale with Chuck Goldblum.

Find Chuck Here: https:/hurleycapital.com/

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TRANSCRIPT:

Laurie Barkman
Chuck Goldblum, welcome to Succession Stories. I’m really glad that you’re here with me today.

Chuck Goldblum
Thanks for having me.

Laurie Barkman
Let’s talk about you and how you work with clients. Let’s also talk about this big theme that we’re going to dive into which is life after the sale and our financial life after the sale. We’re also going to talk about some tax strategies for how we can, for business owners, to enjoy and think about strategies that are going to enable them to live the lifestyle they want. That’s a big topic for you and with your clients. So let’s dive in first, tell me a little bit about you and your practice.

Chuck Goldblum
My name is Chuck Goldblum. I’ve got a registered investment advisory firm here in New York City where we focus on maximizing the finances of business owners and business sellers. This is through planning ahead of a transaction, this is through help during a transaction, and then as we’ll talk about today, optimizing their life after a transaction.

I know on other other calls of yours, you’ve really talked about how owners may or may not be prepared for life after a transaction. I think so much of that has to do with I think, as you talk about a lack of knowledge, a lack of planning, and they’re not the first guys to go through this or gals to go through this. If they just had this knowledge and had this preparation, that could be a really springboard to another great phase of life for them, as opposed to I think you’ve put it some sort of depression.

Laurie Barkman
Which is a significant thing. There’s an emotional side to a business transition, as well as the practical side. Today’s conversation is about the practical and the question for you is about tax strategies.

After a sale, we want to try to minimize their taxes during the sale process and that’s a whole other topic we don’t necessarily dive into here. I haven’t yet talked about this on the show, which is why I thought it was an interesting exploration.

Let’s just take a scenario, maybe just give us a client scenario that we can get our head around, you know, a sale, and doesn’t have to be a huge number, but it’s a sale of $10 million, $5 million $1 million, $2 million, we have a total transaction value. We’re paying money to the government and then there’s a net proceeds number after everything that we need to take care of. The business owner now has some money in the bank equivalent of putting it under their mattress, right? What now what?

Chuck Goldblum
Tax savings, post-transaction, I put in two buckets. One is sort of a supersize version of what you’d normally do on a year-to-year basis in savings from taxes and then there are other strategies, which are really more for larger deals, which are a bit more esoteric. The supersize category are things you’ve heard of like supersize retirement saving and supersizing charitable deductions, and that happens to be a retirement savings. You’re going to max out everything you can on the retirement side whether it’s a SEP for a small business, 401ks, IRAs, defined benefit plans, all that–any of those things that you’ve put into place, you’re going to max out.

We used to put up a chart where during the deal year is often the highest tax year for the business owner, so you want a bunch of deductions in that year. You’ll be pushing income to future years when your rates will be lower. Then B, you’ll sort of free up that cash for then. It’s retirement savings.

The second is we talked about donor-advised funds. A typical client, a $5 million sale client, might be someone who gives away 10, 15, or 20 grand a year to the charity. Great, so how about taking five or 10 years worth of that? 100-200 grand, set it aside during the deal year into something called a donor-advised fund. At that point, you get the taxable deduction, the charitable deduction. Over the next 10 years or however, at whatever pace you’d like, you can then sort of pieced that money out from the donor-advised fund, but you got the deduction, most importantly, in that deal year. That’s sort of section one.

Section two, for the larger deals. The two categories are one opportunity zone. We could talk more about that that was a Trump tax benefit that is sort of nearing the end of its timeframe, but people expect it to be renewed. The second one, and this is also something that not many owners take advantage of but some do, and we’re quite familiar with it, are investing in oil and gas partnerships. Now there’s gonna be a big upfront deduction for that and so we could talk about those if you’d like.

Laurie Barkman
Yeah, absolutely. Let’s unpack each of these buckets, the donor advised fund, what scenario? Would you say that’s best for an owner who has charitable causes they care about, or they want to create their own 501C3 charitable donation, organization, that they’re a nonprofit organization to do donations through that? Or is that completely separate?

Chuck Goldblum
Whether you would choose a donor-advised fund or set up your own foundation, the sort of things need to think about are one: what sort of things are you giving to me, if you are saying if you are giving to traditional 501C3, and that donor advised fund is probably fine. If on the other hand, you’re planning on doing charitable work yourself, if you are doing work that larger amounts, where you’re actually going to be intrinsically involved in maybe you’re generating other expenses that might be allocated to a foundation and that sort of work, you might do a private foundation.

The restrictions associated with a donor-advised fund are that that money is out of your control obviously, set aside for tasks set aside for charity, but also the third party. That custody that has to approve of each of the transaction, each of the donations thereafter. They’re going to want to know that it’s going to a 501C3 that they have on their list that they can verify is a 501C3. You’re not going to be using money from a donor-advised fund to buy a table at the charity auction or to buy a foursome at the golf tournament. Those are no good. No personal benefit can be acquired from things associated with money coming out of a donor-advised fund. There, those are some of the things you have to think about.

Laurie Barkman
Gotcha. Let’s talk about the other things. You mentioned the opportunity zone and the oil and gas fund a little more deeply. What opportunity zone, just at a high level, what is that investment? What does that entail?

Chuck Goldblum
Right? So in the 22017, text cuts and jobs tax that the Trump folks put through, they created an opportunity zone model whereby you could take capital gain from a transaction, reinvest it within, I believe it’s six months from the date of the transaction into an opportunity zone fund that invests in specific and specific low-income tracks, which exist in all 50 states. Typically, it’s into a real estate development, it can be into the establishment of a business, but it’s into a real estate development. It’s not, we’re gonna go buy a building, and then rent it out. If you’re typically building something from scratch, or you’re renovating, or you’re investing into the property, at least as much as you used to buy the property. It’s real development.

The first benefit is you get a deferral of your capital gains tax till the 2026 tax year with ttheoretical payment in 2027. Ten the second benefit is that if you hold this opportunity zone investment for more than 10 years, there is no capital gains on this investment. Now we’re nearing that 2026 timeframe, people expect that this will be extended, and there might be additional tax benefits added to it. That’s where the Opportunity Fund works.

Laurie Barkman
You really need to have that lined up, because it’s the six-month you said there’s a maximum duration of when you can roll over those funds, the capital gains funds into an opportunity zone. We really need to know ahead of time where we’re putting our where we’re putting our proceeds. Right?

Chuck Goldblum
The two ways to think about what you might do for opportunityies own investing is one. I’m talking to an owner now, out in the northwest who has done some real estate investing on his own and I thought this might be a great opportunity for you to create your own opportunities, own fund. If in fact, the tracks near you are attractive, you could build a house there for you to rent out at your own funds and maybe you think about that during your sales process that you can really get going for that time.

On the other hand, the second bucket is there are plenty of third-party created opportunities own funds. You’ve got to do a lot of due diligence on them but wherever there’s opportunities, you investors, banks, and third parties are willing to support that so we will help owners start. We’ve got those opportunities. We’ve done that in the past.

Laurie Barkman
If you Google opportunities fund in the United States, you’ll find many different independent funds out there. You’re suggesting that people really need to do their due diligence, which is probably good advice. We don’t necessarily just need to be in our state, right? We can cross borders, as you were saying with your client, the Northwest, correct?

Chuck Goldblum
Correct.

Laurie Barkman
Gotcha. Okay. Interesting. That seems like a really interesting opportunity. If people don’t necessarily have real estate investing experience, when should they shy away? Or do you think this is still something, even if you’re kind of new at this, you can dive into it.

Chuck Goldblum
It really depends upon how much money you have available for something like that. You mentioned that someone doing a $2 million sale probably needs this money and the idea of putting it into something, we’re not going to see it for 10 years. They’re going to still have to pay the tax in three years, really doesn’t feel so good. It’s more likely for larger, larger, larger folks and larger transactions.

Laurie Barkman
Maybe if you have net proceeds or capital gain to use in that type of fund, would you say it’s more like 5 million or higher than that?

Chuck Goldblum
Look at the example of someone who’s doing their own fund and it’s something they’re familiar with, they’re doing themselves, you might be able to do a sort of a higher percentage. I don’t love the idea of doing more than what a $5 million sale person got to put into an opportunity zone, what 250 to 500. You could but you’re not gonna have that giant tax savings. I’m typically seeing this with sort of deal 10 million.

Laurie Barkman
Gotcha, gotcha. Okay. Now, can you explain the oil and gas?

Chuck Goldblum
Like many industries, oil and gas has a tax upfront tax benefit that the government has given to it, and you get, I believe in the first year, you get a 60% depreciation of money you put to work. If you gave a million dollars into an oil and gas partnership on January 1 and they drilled all year, you would get 600 grand right off in year one. I believe you get another 25% right off over the first few years. The idea is, that you’re getting an immediate write-off, immediate income deduction for the money you choose to allocate to that.

Typically, the way these partnerships work is there is an income stream from it. Nowadays, oil and gas wells are shale drilling produces the bulk of their production over the first year to a year or two, so you’re getting a giant amount of cash flow tax protected over the first few years, and then you’ll get a lower and lower income stream over the following years. The one really risk I would point out is you’re involved in the oil drilling business.

The biggest risk is that in order to get the tax benefit, you need to be seen as an at risk participant, you are a general partner. Even though you’re working with a firm that might do billions of drilling every year, God forbid, this is where they hit a blank, or they mess up by blank, you’re sort of on the hook. What are the chances? Who knows? But there’s lots of firms who’ve done this for a lot for a very long time. I know investors have been very pleased with it. But you know, buyer beware.

Laurie Barkman
You’ve worked a lot of clients, and you’ve seen a lot of situations where things go well, and things don’t go well. Can you share any anonymous client examples where something didn’t quite go the way they planned?

Chuck Goldblum
Oftentimes, when things don’t go wrong, it’s predictable. In other words, you go through this planning process and even the most disorganized person can come up with the information that they need to actually get a sense of what the future looks like. When things go wrong, what typically happens is, I got my check for a million, or two, or three or five, and we look at the numbers and say, you’re gonna go broke in 15 years or 20 years, or whatever it is. They’re like, it’s okay, we’ll work it out, when I’ll come back when I need to.

It doesn’t take nearly as long as you might think before they’re actually taking meaningful money out of their account. Even if their account is still quite big, and they say the money I’ve taken out, I took out 150 grand last year, and the market was down or whatever the case may be, all of a sudden that the anxiety just ratcheted straight back up. Hard decisions need to be made. That’s typically what it is like, because like I said, I don’t think the planning process is that complicated. I just think that people, some people that work doesn’t work out, people don’t want to react to what they see.

Laurie Barkman
If we’re going to summarize it for people and summarize to three things, what recommendations do you have for business owners, when it comes to planning, taking control, and avoiding these pitfalls?

Chuck Goldblum
First and foremost, finding the financial comfort you’re looking for after a transaction that you expect to get after a transaction requires developing skills that you developed for your business and applying them towards your personal. It is how you spend, how you pay taxes, how you really plan for each of those things that you were really good at your day job. You now need to be much better at in your personal life. I think that is knowledge building and knowledge application. And then plan the work and work the plan. I think that is that. I don’t know if I gave you three there but that is really the key to it.

Chuck Goldblu,
I’m not really a quote guy but here we are.

Laurie Barkman
You got one in your pocket.

Chuck Goldblum
It’s plan your work, work your plan.

Laurie Barkmam
I’ll take that. That’s your quote. That’s a good one. Chuck, if people want to learn more and they want to get in touch with you, what’s a good way to do that?

Chuck Goldblum
The business is hurleycapital.com. We’re on LinkedIn. Think we’re out some YouTube stuff as well but in any case, hurleycapital.com. It’s he best place to find that.

Laurie Barkman
Wonderful! Chuck, thank you so much for joining me on Succession Stories today and spotlighting this topic.

Chuck Goldblum
Awesome. Thanks, Laurie.

Laurie Barkman
Listeners, be sure to follow Succession Stories and your favorite podcast player and YouTube and leave us a review. To learn more about maximizing the value of your business and planning for transition, sign up for our newsletter and book a complimentary call with me at thebusinesstransitionsherpa.com. Join us next time on Succession Stories for more insights from transition to transaction.



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