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Few will admit it, but in the back of many
golf range business owners' minds are
worries about who will carry on the business
some day in the future, whether it can be
sold at a profit, and how much of any profit
from that sale or transfer of the business will
remain after paying the tax bill.
If you're willing to engage in a little planning,
the answers to all of these questions will
emerge. An good exit strategy can make the
difference between leaving your golf range
business on your terms (with a bankable
profit) and being at a disadvantage.
Capital gain is the main consideration.
When a business is sold outright, the
seller's goal usually is to reap as much of
the proceeds and capital gains as possible.
For individuals, including sole proprietors,
net capital gains are subject to a maximum
tax rate of only 15 percent. That rate falls
to 5 percent if the taxpayer is in the 10
percent or 15 percent tax brackets.
In general, you can sell your ownership of
an incorporated golf range business by either
selling or redeeming the owner's stock, or by
selling corporate assets.
Although selling stock is far easier than
either a redemption or an asset sale, buyers
may not pay as much for stock as they will
for the incorporated golf range's assets,
since the business's liabilities generally
remain with the stock. A potential buyer's
ability to obtain financing also may limit his
or her ability to complete a stock sale.
A redemption is payment from the corporation in exchange for some or all of the
owner's shares. Redemptions are often
preferable when the buyer has limited cash
or borrowing ability, and the owner does not
want to finance the sale because corporate
funds are used to redeem an owner's
stock. For a shareholder, a redemption has
the same economic effects as selling stock
(i.e., receipt of sale proceeds and relief
from corporate liabilities).
Combining a sale with a redemption
transaction also may be used to bring a
new owner into the business without an
existing owner withdrawing.
Unlike a sale or redemption, where
ownership of the corporation is transferred
from the shareholder to the purchaser or
remaining shareholders, an asset sale
involves transferring business assets from
the corporation to the purchaser. Buyers
often prefer to purchase assets to protect
themselves from existing liabilities, and to
be able to allocate the purchase price to
assets rather than stock.
In some cases, buyers may prefer to
acquire stock because certain intangibles
(e.g., name recognition) would not be
transferred otherwise. On the downside,
selling corporate assets usually has a
high tax cost for the owner.
An employee stock ownership plan may
be used to raise funds for an incorporated
golf range business -- or to purchase part or
all of the owner’s shares of stock. An ESOP
is formed, and then the money is borrowed
that is used to buy part or all of the owner's
interest in the business. The purchase of
the owner's share is treated as an outright
sale of the golf range operation's stock, and
the owner treats the proceeds as capital
gains or losses.
From the business's standpoint, an ESOP
is much like a fringe benefit for employees.
The golf range operation can distribute profits
in the form of dividends and, unlike dividends
to regular shareholders, claim a tax deduction for these distributions. In fact, the
business treats all contributions to its ESOP,
even amounts used to pay the principal on
loans that were incurred to purchase
employer securities, as a deduction—at
least to the extent that those distributions
don’t exceed 25 percent of the compensation paid to participants.
A family limited partnership is simply a
limited partnership consisting of the members of a family. A limited partnership has
"general partners" (the ones who actually
run the partnership) and “limited partners”
(who are passive or non-involved investors).
With a FLP, the parents or general partners retain control over the assets in the
FLP while the limited partners are granted
very limited rights. Limited partners also
have restrictions on their ability to transfer
their partnership units to others so that
the general partners can prevent units
from being transferred outside the family.
Utilizing a ESOP to gradually transfer the
business to employees, a FLP to transfer
the business to family members or another
tax-favored strategy recommended by your
advisors will ensure that the business you
worked so hard to build and run, will provide
the funds necessary for retirement.
The alternative may be a fire sale of
the abandoned business's assets, and
a high tax bill.
An good exit strategy can make the difference between leaving
your golf range business on your terms (with a bankable profit)
and being at a disadvantage.
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