Business Brokers: How To 1031 A Business Into Retirement

The Exit

As a business broker, you understand the importance of helping your clients plan a proper exit strategy. For example, exiting a business can take months or even years because of everything that goes into business sales. 

If a business owner is entering retirement, planning for sales and capital gains tax is essential due to the large amount of taxes due.

Every sale comes with a monstrous capital gains tax that can significantly dent a business owner's retirement. But, unlike real estate investors still in the game and using a 1031 exchange to keep deferring taxes, business owners have no choice but to pay upfront… right?

Can they take advantage of a 1031 exchange to defer taxes? Unfortunately, the answer is no. The IRS does not allow exchanges of businesses like real estate in a 1031 exchange. However, a similar strategy can be used if the business owner doesn’t need a large sum of cash all at once. 

We’ll discuss how business owners can use the Installment Sale Trust to defer taxes like a 1031 exchange.

Similarities to a 1031 Exchange

Like a 1031 exchange, an Installment Sale Trust (IST) allows business owners to defer taxes on the sale of their business. The IST is a legal trust that allows the business owner to sell their business in exchange for installment payments, much like a business's income stream. By doing so, the business owner can defer the tax on the sale proceeds for up to 10 years, allowing them to spread out the tax burden and potentially reduce their overall tax liability.

Additionally, the IST allows the business owner to invest the proceeds from the sale into a diversified portfolio of assets, much like a 1031 exchange. This can help the business owner generate income during their retirement years, providing them with financial security and peace of mind. This income stream is typically close to their current income from their business.

The downside, unlike their business, this income stream can’t grow with elbow grease put into it.

How it Works

To use an IST, the business owner must first establish the trust and transfer ownership to the trust. The business is then sold to a buyer, and the proceeds from the sale are deposited into the trust. The trust then makes installment payments to the business owner over a predetermined period, typically up to 10 years.

This trust can help a seller obtain a larger payout and higher asset appreciation over time. It can also help a buyer get financing for a business they may not have been able to purchase outright.

During this time, the business owner can use the proceeds from the sale to invest in a diversified portfolio of assets, generating income to support their retirement. Meanwhile, the tax on the sale proceeds is deferred until the installment payments are received.

Benefits for Business Owners

For business owners, an IST provides several benefits when planning for retirement. First and foremost, it allows them to defer taxes on the sale of their business, potentially reducing their overall tax liability. Additionally, it provides them with a predictable income stream during their retirement years, helping to ensure financial security.

Furthermore, an IST provides flexibility for the business owner regarding investment options, allowing them to create a diversified portfolio of assets that generates income to support their retirement. This can help to mitigate risks and provide peace of mind during retirement.

What’s in it for the Broker?

I'm sure you’re asking this question in your mind, so we made a list of all the benefits you’ll receive.

• Marketing Material: “Gain up to 30% more cash with our tax strategies.”

• Up to 2x Commission: They decide to move the real estate into the IST for even bigger payouts. 

• Competitive advantage: “By working with us, you get access to our financial specialist that can get you up to 30% more cash at sale.”

• Closing future clients sooner: Most business owners plan for the giant tax when selling, pushing their retirement further into the future. With the IST, they can 

On top of this, you become a hero to your client by adding a significant amount of money for their retirement. 

Conclusion

As a business broker, knowing all the options available to your clients when planning for their retirement is essential. While a 1031 exchange may not be possible for selling a business, an Installment Sale Trust provides a similar strategy to defer taxes on the sale of a business while generating income to support the business owner during retirement. Understanding and implementing this strategy can help your clients achieve their retirement goals and ensure their financial security.

If you're interested in putting this strategy into your brokerage or are a business owner close to retirement, schedule a meeting with us HERE.

Learn more about establishing a competitive advantage in the business broker market in this blog post. Additionally, if you want to learn more about using Google Ads for lead generation, read this post on our blog.

Thank You For Reading!