Retiring business owners and representative business brokers need to be made aware of a tremendous opportunity to maximize seller earn-out and reduce capital gains liabilities.  A relatively new program, called a Structured Sale Annuity, is a product conforming to two IRS Revenue Rulings (82-122 & 75-457) where a business seller can place any portion of their sale proceeds into a fixed annuity under very flexible terms based on the seller’s retirement needs.  The individual can really shape this payout to suit their financial and lifestyle obligations; such as monthly payments over 10-30 years, quarterly or annual payments, recurring  payments plus a balloon payment on a specified date, etc.  All the while the business seller is gaining higher yields and has significantly reduced his tax liabilities by deferring compensation on an annualized basis.  This product converts capital gains tax (if all monies were taken by the seller at closing) into ordinary income tax because monies are distributed through a third party to the individual and reported annually.

Should a business sell for $1MM, the seller can choose to take $500,000 at closing and set up a Structured Sales Annuity for $500,000 with payments spread out over 20+ years.  Should the business seller decease, their estate will be paid the proceeds per the terms of the annuity. 

This is a relatively new product but appears to have significant benefit to retiring business owners who want to responsibly manage their income levels or those business owners who are making major lifestyle changes and planning for the future.  Savvy business owners should investigate this option as part of their exit planning efforts and sophisticated business brokers should advise clients to speak with their financial planners about this product.

For more information on the Structured Sale Annuity and how it all got started, check out Wikipedia’s page.