by Carolyn Rothwell on July 19, 2012

2 Steps to Include a Business Sale in your Client’s Financial Plan


“My client is a doctor/dentist/business owner.  How do I show the growth and sale of the business at retirement?”  This is a common question received by technical support and can be handled in two steps.  The answer depends on which financial planning program you are using, Silver or TOTAL.

Example Case:
The client is currently 50 years old and has a business worth $450,000.  The client is planning to sell the business in 15 years upon reaching retirement at age 65.  The client expects the business value to grow by 4% a year between now and retirement. 

Silver Financial Planner

Step 1) This step will capture the current value of the business for the client’s net worth.

Enter the business asset in the Additional Assets/Debts input as an asset.  This will cause the asset to appear on the Net Worth report.

describe the image 

Step 2) This step will capture the proceeds of the business, which will become available after the sale and reinvested into the assets available for retirement. 

Use Special Income Planner in the Income/Expense input to bring in the after-tax income expected when the business is sold. Enter the calendar year of the sale as the “First Year of Income”.  Set the “Number Of Years” to 1 to make sure this is picked up as a single income in the indicated year.  

Per our example above, the business is worth $450,000 in today’s dollars and is expected to increase at 4% per year until the business is sold.  Assuming this income would be fully subject to capital gain taxation, we can take the $450,000 and reduce it by a 15% capital gains tax rate, leaving an after tax income of $382,500.  The program will automatically increase this income amount by 4% per year and it will come into the projection at age 65 with the future value of $688,861.

Silver BusinessSale2

 

 

The surplus from the business sale will be re-invested into the Taxable Savings account, and earn the rate of return entered under the Rates section for “Rate of Return on Taxable Assets”.

TOTAL Planning Suite

Step 1) This step will capture the current value of the business for the client’s net worth.

Enter the business in Asset Details.  Make sure to uncheck the “check if used for retirement” box.  This will allow the asset to be included as part of the client’s current net worth, but not included as an asset available for retirement. 

TOTAL BusinessSale1 

Step 2) This step will capture the proceeds of the business, which will become available after the sale and reinvested into the assets available for retirement. 

Enter the sale of the business in the Other Income/Expenses tab of the Income section.  This will capture the net proceeds from the business upon sale.  The program will treat any other income items as ordinary income, so if the business proceeds will be taxed as capital gains, you will want to enter the after-tax income and make sure to set the “taxable %” as 0%. If the business will experience growth between now and the time is it received, you may enter that growth as an appreciation rate beginning in the current year.  Enter a stop age in the next line of the age change table to make sure the income doesn’t continue past the year of sale. The income from the sale will be considered a surplus to be reinvested into retirement capital.

Per our example above, the business is worth $450,000 in today’s dollars and is expected to increase at 4% per year until the business is sold.  Assuming this income would be fully subject to capital gain taxation, we can take the $450,000 and reduce it by a 15% capital gains tax rate, leaving an after tax income of $382,500.  The program will automatically increase this income amount by 4% per year and it will come into the projection at age 65 with the future value of $688,860.

TOTAL BusinessSale2
The surplus from the business sale will be re-invested into the client's investment accounts according to how you have your surplus allocation setup under the Surplus Allocation tab on the Assumptions input section. 

Special Note for Golden Years Users:

Golden Years is more detailed in the client’s tax analysis, and if you would like to include the capital gain income in the tax analysis, rather than simply entering the after tax amount as noted above you can by following this step.  

Instead of entering the after-tax amount as Other Income, you can enter the before-tax amount, but still leave the “taxable %” as 0%.  Then, you can capture the reportable capital gain income for the tax reports using the Income Tax Data section, Tax Data tab.  This section does not have an increase rate field, so you will need to know the  expected future value of the business to determine the correct amount of capital gain at sale. You may determine this by using a future value calculator, or by generating a Golden Years report and examining the Other Income/Expense Detail report (B11) in Golden Years. You will find the future value amount listed under the “Amount (future $)” column on this report.  For this example case, we would enter age 65 and $688,861 under the Tax $ column and enter the clients age the following year and amounts of 0 to indicate this capital gain income is only occurring for one year. 

TOTAL BusinessSaleGY 

Subscribe to Email Updates

Recent Posts

Planner Guides

Check out our free informational guides for advisors including:
  • Fundamental Financial Planning Interview Guide 
  • Making the Most out of Planning Engagements
  • Social Security: Choices Opportunities, and Decisions
  • Understanding Medicare Fundamentals

Popular Posts

Carolyn Rothwell

Carolyn enjoys spending her time building Money Tree Software's brand and products. Her experience creating and delivering financial plans for a full-service financial planning firm and supporting advisors working to provide the best planning to their clients as a Money Tree support member has provided an excellent understanding of the importance of financial planning.