Tax Prep for Your Exit, with Richard Ehrlich

Here’s the problem we see at Website Closers. A company gets the big exit it’s looking for, and all of a sudden they have more in their bank account than they’ve ever had before. They’re not just paper rich, they’re actually wealthy. Except when you make a lot of money, Uncle Sam wants his cut as well. So how can you prep your company so that you don’t see the unexpected tax bill?

Today, tax prep expert Richard Ehrlich gives us his tips.

Richard (Linkedin) is the CEO of International Liquid Capital and managing partner of the Secure Wealth Planning Group.

Deal Closers is hosted by Izach Porter and is produced by Earfluence.

Transcript

Izach: Hey, thanks for listening today, you are listening to the Deal Closers Podcast, brought to you by websiteclosers.com, a show about how to build your e-commerce business to be profitable, scalable, and one day even sellable. I’m Isaac Porter, and on the show today, we have Richard Ehrlich. He comes to share his experience on tax planning for your e-commerce exit.

Here’s a problem we see a Website Closers all the time. A company gets a big exit, sell the company, that’s what they’ve been looking for. That’s been the goal and all of a sudden they have more in their bank account than they’ve ever had before. They’re not just paper rich, now they’re actually wealthy, except for when you make a lot of money uncle Sam wants his cut of the profits as well. So how can you prep your company so that you don’t see the unexpected tax bill? 

Richard Ehrlich is the CEO of Secure Wealth Planning Group. I wanted to welcome him here to the show today, Richard, thanks for joining us. Uh, Really glad to have you on the show. 

Richard: It’s sincere pleasure. Thanks for having me 

Izach: So a couple of questions. I know you’ve, you’ve worked with a lot of wealthy people managing their tax bill and helping them with all sorts of, other planning work. Can you, can you tell me a disaster story about when an entrepreneur was completely blindsided by by their tax situation after next. 

Richard: Well, to your point, you’re referring to, you’re a successful business owner. You’ve done some great things, and now someone comes along and writes you a big fat check and you’re like, wow, I have all this money, so what do you do? And, you know, Benjamin Franklin is noted as saying that every American doesn’t have the right to pay the least amount of tax, they have an obligation. And if you think about it, where do we come from? We came from a ship in the Boston Harbor. So of course, you know, people will pay tax. The question is how can we legally, keep more of the hard earned money that we make in our pocket. 

I could tell you on many, many different levels, whether it’s a business or people saving money in a retirement account, different things that have happened because people were not being proactive in terms of their, their tax planning strategy.

I always ask people what I, I say, well, what actions have you put in place to handle future tax concerns moving forward. And what I mean by that is most people go to their accountant. They go to their accountant in January, February, March of the following year. Is there anything that you can do for this year, once you’re in next year? And the answer is no.

I’ll give you two examples. One is just on a retirement account. Somebody had, I remember, uh, it was with a client. The guy had about $2 million in, uh, set up a 401k account and moved into a, into an IRA account. And when he, he wanted to actually transfer that money to his children. And the guy passed away about 70% of the money from where he lived, in the state that he lived, between state and federal taxes, uh, when 70% of that account went to the government. Needless to say that’s not, I don’t care what rate of return you have. That’s pretty ugly. 

scenario, especially in, these are in obviously high tax states like New York and California and Illinois, but other states as well. There was a case where I was working with a gentlemen who was selling a, a manufacturing company. Uh, they, it all kinds of manufacturing and they sold the first substantial amount of money. They did no tax planning, and after all was said and done, uh, he got clipped for about 55% of all the money he had to pay in taxes, state, local, federal. There were a lot of other things that he was missing. And one of the things we talk about is if there are things you can do pre sale that can position yourself for keeping more of the money that you have.

Izach: Gotcha. Yeah, so that’s a great lead in to my next question. So at our Website Closers, you know, we, we help companies. So we come in, we help them plan their exit, and execute on the sale of their business. And in a lot of cases, these sellers are making millions, tens of millions, uh, or, you know, in some cases, even hundred hundreds of millions of dollars on their exit, but let’s go back to the beginning.

Is there anything that should be done when forming a business, if you’re thinking about an eventual exit?

Richard: Well, if you’re, there’s two ways, if you’re, obviously, if you’re thinking about an exit, we’ve helped clients take their companies public. So it’s not really selling it. You’re really going to take it public. If that’s the case, more than likely you’re going to want to set up as a C corporation. There’s a lot of tax structure benefits for that exit.

if you are a, service business and once again, online S-corporation is typically a good way to structure those. You have a lot of, uh, you can do a lot of tax write off for both personal and business expenses. So there’s, uh, there’s a big value in there when it comes to setting up.

Surprisingly, you know, I’ve seen people with some substantial businesses that are not even incorporated. so there’s a lot of issues there, not just from a tax planning standpoint, but also from a liability standpoint that you want to be able to preserve.

Izach: Okay. So thinking ahead for for tax prep, is it any different if you have existing investors versus if you’re, if you’re self-funded or operating as a, you know, effectively a sole proprietor, even if you’ve formed an incorporation?

Richard: Well, typically investors are just that. They’re expecting to get some rate of return on their investment. And also when there is an exit, there will be a capital gain relative to what they’ve contributed. Typically the owner of the company has probably the greatest proportion to that, but in terms of tax planning, the business owner, uh, has some, some strategies they can do, depending on what industry they’re in. More than an investor. Although there are ways that investors can, if it’s, if it’s a collaborative effort, you know, if somebody is going to be acquiring them a private equity group, there’s ways they can exchange, uh, shares. Uh, so they could hold shares and, and take cash that they want and defer or tap capital gains. So there’s many ways they can do that, but the answer would be.

Izach: What are a couple of ideas they’re using, maybe creative ideas, to help reduce tax bills, in 2021. So we’ve got a scenario where I’ve got, uh, sellers who will sell and close on the sale of their business prior to the end of the year. You know, what type of things can those sellers do to help, you know, reduce their tax liability or otherwise, you know, take advantage of any, any deductions or strategies that that might exist right now.

Richard: One of them is saying, look, I have this big capital gain that I’m about to experience. And when I say a big capital gain, I’m working with a client now who started this company with $127, and he just turned down a $40 million offer. Um, so, you know, when we say this capital gains. 

Now, the idea here is to be able to spread out or defer those capital gains for many, many years, I’m talking about 10, 20 or 30 years. And that’s a big deal because now you have money in your pocket and then you can plan, and there is ways that we help people plan, for that eventual tax bill that they’ll pay. But certainly if you’re a smart person with your money. Um, if I keep the money in my pocket, now I could probably do very well. And so that’s one of the ways we do it. We can show you how we, it’s almost like a installment of what you would have paid now, but many, many years from now, down the road. So that’s one, that’s one structure.

Izach: . That’s really interesting. So, so the, just a followup on that. So the idea there is to put in place a plan that allows you to defer that tax liability out and keep your money. And maybe, maybe you can invest that money in the meantime, and, you know, make a return on all of the money that you would have otherwise paid in taxes. 

Richard: Exactly and, you know, we’re a boutique planning firm, so when we, we guide the clients through that, obviously we put in place to them to create investment strategies that are not, that are designed to, to, to solve for that. Or if they’re going to go into another business. Um, but there are ways that you can put into place and you don’t have to worry about that in 10, 20, 30 years from now, when that light, when that tax bill comes due. But once again, a dollar today, It’s worth more than a dollar down the road, and you have created a lot of leverage and create more wealth for you that, that business owner and their family.

Izach: Absolutely. So, can we, can we talk about the magnesium idea? is that, is that something you can, you can share publicly? We, you and I had a conversation about that offline a week or two ago, and I was, I was completely fascinated. Can you, can you just share kind of the strategy you’re using there. 

Richard: Well, part two, strategy two says, look, I don’t want to defer the taxes. I just want my money, and pay less. So most people typically will tell you let’s just keep it high level, right? So you work with a company and you put money into a retirement account and you take a tax deduction, right? So the way this works is that, there’s a program where we basically, in essence, we buy magnesium, which is a commodity, has many, many uses. Medical uses and all kinds of things like that. 

We buy it in bulk, let’s say $25 million tranches, and depending on what you need to offset to, or to help lower your tax bill this year, you buy into this LLC. And as a result of the way we make the acquisitions, we can get about a four to one leverage on that contribution. So a hundred thousand is 400,000. 4 million is, you know, you can do the math there. and what happens is I have yet to see people who want to take possession of magnesium. Uh, what we do is we allow for that, for them to donate that money to a, to an IRS recognized charitable organization, which will use the magnesium for various different medical reasons or whatever they’re using.

Uh, and as a result, then the individual gets gets a K1 which will show this charitable contribution in assets, the distribution from where they’re at. So it’s a really good way for them to lower their tax bill using this, you know, charitable structure and it allows people to say, look, I don’t want to defer my taxes. I just want to, I want to pay the lease now. And then, and then punt from there.

Izach: Totally. That that is so cool because people are looking for creative ideas to manage tax liability. And I think, you know what you’ve just described is a completely legal and really creative idea to help reduce, reduce taxes expenses. You know, you can’t eliminate it entirely, but if you can reduce it and take advantage of a strategy like that, basically you’re saying you could, for every dollar you put in, you’d save $3 on taxes.

Richard: Right, it’s up to, typically it’s up to 30% of adjusted gross income. However, whatever you don’t use can be rolled over in perpetuity. So it never expires there. I’ve spoken to several business owners and they say, look, I don’t mind paying some tax, right. I mean, that’s, I just don’t want to pay an overabundance of tax.

And I think that’s a fair, fair statement. You work, just think, ask the people listening here, how hard, how many hours of blood, sweat, and tears, how much risk they taken, and they took the risk, the government didnt take the risks. So I think it’s reasonable to say how can I keep more of the money that I worked my you know what off to keep that. That’s not a crazy concept.

Izach: Oh, absolutely. And you know, the, the founders that we work with, you’re exactly right. It’s their lives work. They’ve, they’ve invested everything they’ve had. They’ve generally that they founded And, started these companies themselves. They’ve grown them to be very successful.

And so I think you’re you’re right, that most owners are willing to pay their fair share of taxes, but they want to certainly take advantage of any deductions or strategies out there to minimize that tax liability. It can save them a tremendous amount of money on the sale of their business.

So, um, I think that’s really, really fascinating strategy. And, um, it was one of the reasons I wanted to get you on the show and make sure that, you know, all the sellers that we’re working with are thinking about the potential for capital gains tax prior to the sale of their business. And, and, you know, prior to the end of the year.

Richard: Right. And, you know, just to continue that thought, it’s, you know, think about the people who are running these businesses, their entire focus is on employees and production and ordering and maximizing and marketing, all the different ingredients that go into, to make and continue to run a successful company.

They’re not thinking about when they get up to liquidity event of 5, 10, 15, 20, or a hundred, whatever the amount of money is. They’re not thinking, okay, now what do I do? So we take them, once we help them preserve that, now we say, okay, well, what are some. Now you’re at stage two, maybe you’re in this place, financial independence, or maybe, you know, you’re 45 years old.

So what do we do? I think that most people they want to be comfortable with knowing that they’re in a financial good place, um, moving forward and that’s really a combination of the things. So you want to position yourself not only to keep more of the money that you have at the sale, but in perpetuity, I.e., you don’t want to lose half your money in the stock market.

I.e., you don’t want to lose money to future taxes. I come back, I was quoting something that I said. One of the things that I say is I said, what measures have been put in place to safeguard your money from the full effects of taxes moving forward? Were in the second lowest tax bracket this country’s ever had. For about 20 years we were at at 94% tax bracket without state. So given the fact that we’ve been spending money like crazy, trillions of dollars on a, you know, on COVID related, you know, I, uh, relief packages and and the war is, given all that stuff like that, is really only, you know, regardless who is in power. They’re coming after people with money.

They’re not coming at the people that have no money. But there are things that you can legally do to maneuver and keep more than you have. And then that’s also with the money that you want to retain it. So those are some of the key things that we talked about.

Izach: That’s great. And I think one of, one of the things that, you know, that I want to do with my clients at Website Closers to just make sure that they have access to the best advice. I think, you know, getting, getting somebody connected with you, like you said, your plans are custom. It’s going to be dependent on their personal situation and maybe what their goals are.

But, you know, part of my responsibility is to make sure that that my clients have access to the best information, access to the strategies and the advice, and and then they can use that information to make, make the choice that’s right for them. So when do these kinds of strategies need to be put in place?

So, you know, is it, if, we’ve signed an LOI where the company is it, is it too late to do this? You know, when when ideally would somebody talk with you.

Richard: So let’s, let’s put it this way. If somebody is in that process of looking to sell their business, they want to start having this conversation now. Why? Because I don’t know which direction to go. Everybody’s got a different set of a different set of circumstances. So when they’re talking to you and you, you know, you put together their, Hey, here’s what we think and you got the package out there and you start to get. This is where you want to have that conversation, right. So, because you have to plan it out, this is not something that you push a button that, you know, it’s not complicated, but it certainly takes, uh, being proactive, you know, that’s what I would recommend it.

The other thing I would, I want to piggyback on what you said was, you know, one of things that I love about what you do is that you don’t have to do any of this for your clients. Hey, you know what I sold you, you know, I found you the highest bidder and, you know, goodbye, but I think today it’s so important to add additional value.

You know, I talked to you, you know, about potentially clients of mine, you know, how do you get the best value? I don’t get that, that doesn’t benefit me, but it benefits my client. And if you are, if you’re constantly looking for ways to enhance and deliver more, even though you don’t have to, I think, I think it’s a win-win for all, everybody.

Izach: Yeah. And that’s how I’ve thought about it as well. It’s kind of the abundance mindset. You know, I try to make sure that clients, clients work with me because they trust that I’m going to give them the best advice. And part of that is helping them think ahead to the issues that maybe they haven’t thought about.

Some, we work with sellers, who’ve who’ve been thinking about their tax liability and potential capital gains implication for years, you know, that’s sometimes that’s their primary concern, but in other cases, They haven’t thought about it yet, and a lot of cases they’ve just been really focused on, on running their business and that’s, what’s made them successful.

And So, we can bring these concepts to their attention, get them connected with the right professionals. You know, I’m not a tax advisor. I’m not a CPA, but but I know a lot of people who are and, you know, you’ve got a firm that specializes in this area. And so we’ll, you know, we’ll connect our clients with you and you can give them, you can give them great advice.

And then that’s, that’s a, that’s a good value exchange. So, um, w what else are we missing, Richard? What, what should we be… 

Richard: You just mentioned, so I’m not a CPA. Um, one of the things that I tell people, and this is one of the, this is one of the first question you guys will have. How come my accountant never told me about this, right? That would be like the number one question we get over and over again, across the country.

And I say to you, I say, I said you have a good account and they go have a really good account, right. So I said, how many, do you know how many pages there are in the tax code? And they’re like, no. And if you know, there’s like 60,000 pages, some crazy number. I said, so if you have a really good account, they’re not combing through all those pages.

They’re going to do the basic things, and they may even use some creative things with some tax planning, but these strategies are where other CPA firms come to us, and I think it’s important to know that most CPAs, sad to say, and I’m not, there’s not, it’s just reality. I’ve been doing this for over 20 years.

They’re reactive, right? I come to you after I have all my stuff next year, where what we’re looking to do with be proactive so we have the flexibility in which to maneuver and gain advantage for the client. 

Izach: Yeah. And I think that proactivity and that kind of forward-looking advice as what, you know, sellers are just, they’re so hungry for it. They want the best advice. They want the best information. Nobody wants to sell their company and a year later, talk to somebody else who had access to information that they didn’t have. 

Richard: Yeah, and I too, one of the things as well, which is very important, you know, taxes are an across the board concern or factor in our lives. You know, if you’re a successful business owner and you’re making, you know, $2 million a year, you know, when you’re planning out your financial independence, your retirement, and you want to generate a certain amount of money, is that going to be before or after tax?

Right? Because these are key things, you know, when you’re managing your money. All of these areas come into play, and if you put some pieces together and put a plan together and you keep an eye on it, you have a lot of advantages moving forward, and that’s a big, big deal. And a lot of people unfortunately they buy products, they buy investments, but they don’t really understand how these pieces to come together. And that’s what we spend time going through and just educating them so they can make smart, informed decisions. That’s what I want my life, that’s what I want for my clients.

Izach: A hundred percent. Couldn’t agree with you more. So Richard, where can our listeners connect with you?

Richard: So my website is securewpg.com, but that’s more of an informative place for people to understand how we help people manage money,, uh, but they can certainly reach out to [email protected]. They can also reach me at my office, which is 561-340-2669. Or I also take calls on myself, 305-321-7033. 

Like I said, nothing we have is cookie cutter. So it’s getting on a call, understanding what, where they’re at, where they want to go, where the situation is, and then each one of them, everybody we work with is we just take them through a process, lots of questions. And then we build out a plan from there.

Izach: Awesome. Really appreciate the time today, uh, everyone that was Richard Ehrlich, tax planning expert. Uh, you can find him at Secure Wealth Planning Group, securewpg.com. 

Thanks everyone for listening to this episode of the Deal Closers Podcast, brought to you by websiteclosers.com. If you like the show, be sure to rate us, write a review, press the follow button and share it with your network. And of course, if you’re looking for help selling your e-commerce business, be sure to visit websiteclosers.com.