By Laura Malone, CAP®,CEPA, VP-Corporate/Complex Giving
American Endowment Foundation

The scenario may be familiar. A business owner arrives at their financial advisor’s office looking to exit their business, but unsure how to get the most financial benefit from that exit. A topic that both the business owner and financial advisor often miss out on is an understanding of how a charitable plan can help the owner build something of significance beyond their business while enjoying tax savings and preserving their wealth.

What many financial advisors don’t realize about their own clients is how charitably inclined their clients are; a survey from Harris Interactive illustrated that 90% of entrepreneurs donate money, both personally and through their companies, to their favorite charitable causes. The survey further measured that these business owners donated a median of 3% of their company profits to charity.

While the direct giving of cash or inventory to charities may work well when the owner is still engaged in the business, leveraging of non-cash assets or the use of charitable giving vehicles may be more suitable as the owner prepares to exit the business. Implementing strategies prior to the sale of the business can maximize the economic benefit because the owner is often able to avoid significant capital gains tax on their most highly appreciated asset: their closely held stock. Business owners can also give non-voting stock, or stock subject to buy/sell agreements, as well as attach rights of first refusal on stock redemptions if they are concerned about loss of control. Other assets of the business like real estate may provide just as much charitable opportunity while being a less emotional asset to gift.

Owners, naturally, have concerns about how to balance what to give to family and how much to leave to charity. However, many strategies involving donor-advised funds, charitable trusts, and similar vehicles can be implemented so the charities can win without sacrificing the family. With each dollar left to charity, Uncle Sam becomes a smaller “beneficiary”.

Furthermore, the creation of a charitable program by the owner can serve important needs of the community while weaving the company’s values around their products and services. McKinsey & Company surveyed executives to get a better perspective as to what business benefits should accrue from social efforts carried out by a corporation. Roughly 70% felt that their charitable giving enhanced the reputation of the company, brand, or both. They also felt that encouraging their employees to participate in their own charitable efforts bolstered the employees’ skills as well as improved employee respect and pride for the company.  Lastly, about 38% thought these efforts created a differentiation from competitors.

While it is difficult to give quantifiable examples for what kind of “philanthropic ROI” charitable planning can have on a business, a few key components of the exit planning process need to be considered.  When considering the valuation of the business, keep in mind the impact of what the McKinsey & Company survey revealed about reputation and brand.  Also, consider how the broadening of the education of the employees and their respect and pride in the company can impact the length of time they may remain with the company rather than seeking other employment opportunities. The retention and satisfaction of these employees could be considered a value enhancement.  It may also play a role in how the owner evaluates their exit options.  If the ties to the employees and community are strong enough, an Employee Stock Ownership Program (ESOP) may be considered overselling to a third party “outsider”, especially if passing the company directly to family is not an option.

As business owners are determining what they would consider to be a successful exit, they are defining and aligning their goals with the exit plan. If charitable giving is part of their personal and/or corporate culture, then that would more than likely factor into their “post-exit” goals. Charitable planning creates an opportunity for a financial advisor to guide a client in ways that not only financially impact the business owner but help them find community significance after their business exit.