Experts From Orion, Savvy And CI KORE Share Keys For Advisors Serving Tech Business Owner Clients To Prepare For A Successful Sale
Not long ago, the vast majority of technology businesses were largely concentrated in a few distinct geographic areas, primarily San Francisco, Seattle and New York. But in modern America, you will find tech hubs from Austin to Atlanta and Boston to Baltimore.
And where you find technology, you will find clients looking to sell startups.
Previously in this column we covered the top three blunders clients make when selling their businesses and liquidity events from a women’s perspective. This month, we look at liquidity events for clients who own technology businesses and the keys advisors must bear in mind to serve this specific clientele.
We spoke with three experts who have experience guiding clients through tech business sales, including one who sold his own technology businesses, to learn the right strategies to implement beginning long before the sale to maximize their post-sale financial position:
- Ryan Beach, President of Orion Wealth Management
- Ritik Malhotra, Co-Founder and CEO of Savvy Wealth
- Adam Katz, Partner at CI KORE Private Wealth
We asked our expert panel the following questions:
What are the top three issues financial advisors and their clients must consider that are unique to the sales of technology businesses? How can a financial advisor guide their client through that process?
Here’s what they shared with us:
Ryan Beach, President, Orion Wealth Management
Advisors and clients must do some pre-sale tax planning. For many technology businesses, there will be little basis in the business to offset the taxable gains. We see a number of our advisors plan for this well in advance by harvesting long-term capital losses which can be carried forward indefinitely and applied against the gains associated with the sale of the business.
For example, we see advisors using index replication strategies offered by Orion to harvest long-term capital losses to minimize the tax bill on the ultimate sale of the business. For many business owners, the vast majority of their net worth is tied up in their business. As a result, their securities portfolios are often broad-based asset allocation portfolios – which are perfect to decompose into index replication strategies.
By holding the underlying securities in an index rather than the index fund itself, you can harvest stock losses on individual positions to offset taxes on capital gains elsewhere – like the sale of the technology business. This is a great way for advisors to show value well in advance of the ultimate transaction itself.
Ritik Malhotra, Co-Founder and CEO, Savvy Wealth
Based on my experience in the sale of two different technology businesses (Streem acquired by Box in 2014 and Elph acquired by Brex in 2019), the three considerations that advisors should keep in mind to best serve clients who are approaching or are in the midst of a sale are:
Tax strategy (e.g., moving your stock into a trust) in advance of any sale is key. If there is a letter of intent to acquire the business already on the table, it’s likely too late. Think about tax strategy years in advance of an exit.
Identify if any of the stock is qualified small business stock (QSBS) eligible and keep supporting documentation of that on file. This is the largest component of increasing after-tax returns.
Model out the future expected cash flow – such as which payments are expected when and in what form – and incorporate that into your financial planning.
Finally, remember that the deal is not done until the money is in the bank, so don’t start counting the dollars ahead of when they are expected to flow to your client!
Adam Katz, Partner, CI KORE Private Wealth
Technology business are typically backed by venture capital, and as such, are usually C corporations. Even if it is a C corporation, a key question to ask is whether it started as an LLC or S corporation? And if so, when did it convert?
If the company is a C corporation, it’s possible the stock qualifies as QSBS, which can lead to significant income tax savings. It’s very important to work on these potential structures before a deal is signed and there is an “assignment of income.”
Various trust and philanthropic structures may help with additional value creation and asset protection for the founder.
If the company is acquired for a mix of stock and cash, make sure the stock portion is structured as a “tax free exchange” so that your client isn’t taxed until eventual disposition of the acquirer’s stock (versus phantom income).
In addition, if it is QSBS stock, understand how that fits into a tax free exchange or even potentially a Section 1045 exchange which has additional QSBS implications.
Moreover, if the deal is contingent on the client continuing to work, is that based on time, performance or other factors? This can have implications for how the client can earn additional money, and whether that is treated as ordinary income, capital gains or QSBS.
And if your client’s company hinges on specific intellectual property, who owns that going forward? In that light, how strong is the non-compete agreement? Is the intellectual property already patented? It will be important to structure the employment agreement in a way that may require separate representation from the deal attorneys.
Janeesa Hollingshead, Executive Editor at Wealth Solutions Report, can be reached at editor@wealthsolutionsreport.com
