This successful donation was one of the 72 illiquid asset gifts amounting to more than $350 million managed by Charitable Solutions in 2018. Among these, we noted an uptick in gifts of business interests, similar to the experience of other charities. But either because non-profits don’t have the internal expertise and capacity, or they simply walk away from these opportunities, less than 80 organizations among the top 250 in the country handled a business interest gift in the last reported year – a total of 750 gifts averaging $2 million each.
The growth pop isn’t surprising, as the expansion of businesses and the appreciation of investments in them – publicly and privately held positions – has been strong for the past 20 years, establishing some serious value. And as the generational shift of wealth evolves, these businesses will be transitioned to new buyers, and finding a way to take some or all of one’s business holdings to leverage an interest in philanthropy can be a smart business move AND a savvy tax play.
Let us share a good example of this, and how a donation of a position in a privately held business played out.
Charitable Solutions was approached last summer by a financial advisor to an extended family who had started an on-line quoting product/service as a partnership LLC. It was a classic “tech startup” established in 2006 and principally owned by the four related families who had arrived at the decision to find a buyer for the business. Their desire was to donate about $10 million each of the expected proceeds from the transaction to support favorite charities. With the appraisal of the business in hand – valued at close to $300 million - they donated to Charitable Solutions shares worth $40 million.
The multiple business owners had their “village of support” in the form of their own attorneys, accountants, and other advisors, requiring our team to navigate numerous discussions that also included the new buyer (who was in the wings as the deal was brought to us) and the charities. We were able to execute the purchase agreement with the buyer by the middle of the fall.
Was this good for the donors? Yes - first, they were able to monetize a portion of their ownership in this privately held business in a tax advantageous manner and support favorite causes. The appreciation on their shares in the business over their 12 years was significant, being a very successful startup, and they were looking at an exposure to a large capital gains tax. By donating this business interest in-kind, the families were able to avoid the capital gains tax on the $40 million position they gifted to charity.
They also leveraged the tax deduction from the $40 million donation to offset some of the capital gains tax for which they were liable on the sale of the remaining shares. In addition, the minority owners, many of whom were valued employees in the business, were able to participate in the sale of the business and enjoy the profits of their years of work.
Was this a good arrangement for the other stakeholders? Yes – the financial advisor was wise in using a charitable vehicle on a transaction that could have lost a considerable percent of the profit on the sale to taxes. He knew the interests of his clients and worked to ensure the donors achieved the best results possible, recognizing their charitable desires and the need to balance their tax liability with a tax deduction. Four charities each experienced a windfall with minimal involvement in the legal details and negotiations of the sale of a business.
And what was our take on the gift? In fact, it was a straight-forward transaction. There were altruistic donors and a willing buyer involved to be sure, but this still required multiple calls and communications with all the parties, the negotiation of the purchase agreement with the new buyer, and demanded close attention to the reps and warranties of the sale necessitating carve outs and approvals for CS given certain industry-specific regulations. In all, this transaction took about four months to complete and for which Charitable Solutions received a fixed fee for our activities and responsibilities.
To arrive at these 72 gifts for 2018, we handled over 500 inquiries through the year – yes, that’s right: 1 in 7 inquiries converted to a valid gift. There were many reasons these inquiries didn't all resolve into valid donations and it took many conversations to find appropriate gift situations. As noted though, these opportunities are common and business owners should be aware of the benefits of gifting part or all of their ownership to further their philanthropic goals.