For many business owners, a business sale is more than a transaction; it’s a major life transition. Their business is often the largest asset that they own, as well as the key part of their financial and estate plans. What’s more — their business has likely played an important role in shaping their daily life and identity. A failure to fully align the sale of a company with their personal plans could potentially undermine the long-term wealth preservation and family engagement opportunities afforded by the business deal. This is especially true for owners with charitable components to their plans.

At a recent forum I attended on the subject of business ownership, the main themes were collaboration and transitions. Preparing for a business sale involves assembling a team of advisors, reviewing financial and estate plans, assessing the transition, and creating a plan of action. This work really needs to begin early in the business formation, because you never know when a transition will occur. Whether it is unexpected happenings like the “5 Ds” (death, disability, disaster, divorce, and disagreements) or the planned changes such as retirement and incorporating the next generation into a family business, the earlier the planning begins with a collaborative team that works with the business owner’s values as its guide, the better chance of success. 

The forum also highlighted the advantages of having people-focused skills and how retaining an advisor with that specialty can be of value. That may mean a psychologist to help coach the business owner on how to have difficult conversations with key employees or a life coach to help plan a purposeful transition into retirement; both areas play a big role in overall success of a business transition if planned and executed well. 

Also, by incorporating effective charitable discernment and planning, business owners can reduce estate tax, avoid capital-gains tax, create a charitable income-tax deduction, reduce tax to heirs and generate charitable resources to help the now former business owners and their family achieve their desired impact. 

How does it work?

In the simplest case, a cash gift to charity can be made either before or after the sale of the business. As long as this is done in the same year as the sale, a tax deduction will help offset the income received. The needed tax deduction is often much greater than the client’s annual charitable giving. Using a donor-advised fund, the gift can be made in the year needed and grants may be distributed from the fund to support charities of the client’s choice for many years into the future.

The cash gift, while simple, does not maximize the tax advantages of gifting. A preferred approach would be to gift stock or ownership shares to a donor-advised fund prior to the business sale. When the sale occurs, the fund receives the proceeds from the sale for its portion. This creates a charitable deduction similar to gifting cash, and also avoids taxation on any capital gains embedded in the ownership because the fund is administered by a tax-exempt public charity.

Using a donor-advised fund at a local foundation also provides ongoing charitable-planning support. Whether it is legacy planning or engaging future generations in giving, there are often extensive resources to deploy. 

There are also more complex planning tools that can be incorporated into a business sale. For example, charitable remainder trusts can be used to create income streams for heirs while ultimately creating a charitable resource. This type of trust planning can be useful for wealth distribution and addressing spendthrift or creditor concerns with heirs. Another tool is the charitable lead trust, which creates an initial charitable resource but allows for tax-efficient transfer of the trust corpus to heirs in the future.

Regardless of your charitable client’s needs, proper planning can result in a more tax-efficient and comprehensive result for their financial and estate plans as well as the inclusion of a steward to their charitable plan.        

Tom Griffith is VP of development at the Central New York Community Foundation. Contact him at tgriffith@cnycf.org or (315) 883-5544.

The United States runs on small business. In fact, small companies made up 99.9 percent of the nation’s total businesses last year. If you own or manage one of these 30.2 million small businesses, you already understand that it’s a big task — it takes time, personal investment, hard work, capital, and the right partners. 

The U.S. Small Business Administration (SBA) exists to assist and protect the interests of American small businesses. When small-business owners need financial assistance, they may look to leverage an SBA loan — its 7(a) loan guarantee program is the most popular one.

Curious to know more about it? Here are four facts about the SBA’s 7(a) loan guarantee program that business owners may be surprised (and excited) to learn.

1. SBA gives rejected business-loan applicants another option.

 It’s understandable that not everyone will be approved for a traditional business loan. This could be due to any number of factors, including a poor credit profile, lack of business history, or inadequate cash flow. It all comes back to the lender being confident in the borrower’s ability to repay the loan over time. 

 However, rejection for a traditional loan doesn’t mean your startup dream is over; another option for entrepreneurs in this situation is the SBA’s 7(a) loan guarantee program. This program is designed specifically to help business owners obtain the funding they couldn’t get through any other means. 

 Among other eligibility requirements, business owners need to exhibit that they cannot obtain the funding they need through other means and that an SBA-backed loan is the only reasonable option left that will work for them. Often, the lender can satisfy this “credit elsewhere” requirement because the borrower has already been declined for traditional financing. 

What makes this program possible is that the loans are backed by the government. The SBA puts a 75 percent guarantee on the debt, therefore reducing the risk for the lender. If the borrower ends up not being able to repay the loan, the financial institution isn’t solely responsible for covering the loss; three-quarters will be covered by the SBA. That is, if the lender has followed all rules and regulations set forth in the standard operating procedure, which is detailed and specific. The idea is to help financial institutions get more comfortable with lending to small businesses, particularly those owned by women or minorities, or in underserved areas. 

2. SBA loans can have high amounts and long terms.

 SBA 7(a) loans can go up to $5 million with terms of up to 25 years. The maximum total loan amount enables small-business owners to accomplish a variety of goals. The longer terms can help ease repayment pressure with lower payments. Funds may be used for just about any business purposes, including the following: 

• Real-estate acquisition

• Business startup

• Renovation/expansion

• Equipment/inventory/supplies purchase

• Business acquisition

• Commercial-debt consolidation

• Working capital

The SBA determines the terms of the loan based on the use of proceeds. Blended terms are available when funds are used for multiple purposes. For the most part, the program follows the terms below:

• Working capital and non-equipment and real estate use: up to 10 years

• Equipment purchases: up to 15 years

• Real estate: up to 25 years

Note that the final term is determined by the lender, based on the cash flow of the business. The repayment period may be shorter than what is listed above, but never longer. 

Another interesting feature about the SBA 7A(a) loan is that borrowers can often receive 100 percent financing for a large-ticket item. For instance, a traditional loan may only finance up to 80 percent of a piece of equipment, with the borrower on the hook for the rest. An SBA-backed loan can finance 100 percent of the purchase price if the lender feels that significant equity is involved in the transaction.

3. The SBA doesn’t directly lend borrowers money.

In 2018, the SBA approved more than 60,000 government-backed loans totaling more than $25 billion in funding. And while the SBA makes it easier for small-business owners to acquire capital, it doesn’t actually provide any of it.

So, where does the money come from? All the funding for an SBA-backed loan comes directly from your bank or other lending partner of choice, whether the loan is for $5,000 or $5 million. The SBA only places a partial guarantee on the loan, which is contingent upon the lender crossing all its “t” s and dotting its “i” s. 

4. You don’t have to get an SBA loan from a traditional bank.
The SBA lending process requires working with an SBA-approved lender to underwrite and provide the funding — but you don’t need to limit yourself to working with a traditional bank. While most of the nation’s thousands of banks may have an SBA program and offer the 7(a) loan, there are only 14 SBA-licensed non-bank lenders in the country. 

These alternative non-bank lenders can often offer more flexible credit requirements or a faster process, compared to a traditional bank. In some cases, you may be able to complete the entire process online or over the phone, saving you time from having to go to a bank.

Owning a small business comes with its own challenges and risks, and funding can often be the biggest hurdle. An SBA loan is a great option for entrepreneurs looking to start or grow their dream business, but can’t obtain a traditional business loan.   

April Brissette is president & chief credit officer at FundEx Solutions Group (FSG), which is one of only 14 licensed non-bank SBA lenders in the country. FSG is a wholly-owned subsidiary of Bankers Healthcare Group, a provider of financing for health-care practitioners and other licensed professionals.