Business Exit Planning

Start With the Number Your Plan Needs

Every exit involves two numbers. The first is what the business might sell for. The second is what the owner needs from the sale, after taxes and terms, to live the next chapter they want, and that number comes from the plan, not from the market. We lean toward working backward from the second number, written down in a Statement of Financial Purpose, rather than forward from a multiple someone mentioned at a conference. The gap between the two, and how much value-building work stands between them, sets the timeline.

The first number deserves more care than it usually gets. A buyer puts a multiple on a normalized measure of earnings, either seller’s discretionary earnings or adjusted EBITDA, and the multiple reflects how risky the earnings are, how fast they should grow, and how much of them turns into cash. Then debt and fees come off the headline, a working capital adjustment moves it up or down, an escrow holds part of it back, and any deferred payments arrive later, if at all. Our article on how buyers turn earnings into a price walks through each step, including an example where a $3,600,000 offer wires $1,905,000 at closing, before any tax. We lean toward a baseline valuation two to five years before a planned sale, which at first need not be a formal appraisal. Our business exit planning timeline lays out what each of the five years before a sale is for, from clarifying the vision to executing the sale.

Six Decisions That Lock Before Closing

Most exit decisions are not hard to make. They are hard to make in time. Six of them stop being available, or become much more expensive, at a predictable point on the way to a sale. Knowing where each one locks gives an owner time to decide while the option is still open.

Entity structure. A sole proprietor, or a single-member LLC taxed as a disregarded entity, has no choice to make: for federal income tax, every sale is an asset sale. A C corporation’s shareholders can sell their stock and may qualify for the QSBS exclusion, or, selling to an ESOP, for a full Section 1042 rollover. An asset sale, though, taxes the gain twice: once inside the corporation and again when the proceeds come out. An S corporation is taxed once either way, with a trap for one that converted from a C corporation within the last five years, which can still owe a corporate-level tax on gain built up before the conversion. Restructuring on the eve of a sale rarely works, which is why entity choice belongs years before the exit. Our article comparing LLCs, S corporations, and C corporations covers the choice itself, and our article on the QSBS exclusion after OBBBA covers the rules for stock acquired after July 4, 2025.

Owner pay and the books. A buyer prices earnings after adjustments, and every adjustment has to survive the buyer’s accountants. Personal expenses run through the company, an owner salary far from market, and rent paid to the owner’s own building all change the earnings a buyer will accept. For an S corporation owner, the salary history is also something the IRS can question, as our article on reasonable compensation for S corporation owners explains. Clean, consistent books for every year a buyer will review are one of the least expensive ways to protect the price. Salary, retirement contributions, and the QBI deduction also move together, as our article on owner compensation as one decision explains. When a sale is still several years out, a cash balance plan can turn the highest-earning years into large deductions, as long as the funding commitment and the sale timeline agree; our article comparing solo 401(k), SEP IRA, and cash balance plans covers that trade.

Gifts and sales of shares to family trusts. Transfers for gift and estate tax are priced at fair market value on the date of transfer. Before a buyer names a number, an appraisal of a minority interest in a private company reflects real uncertainty; once a letter of intent exists, it is very hard to defend a value far below what a real buyer just offered in writing. That is why the window for these transfers closes at the letter of intent, not at closing. Whether to transfer anything comes first. For an owner comfortably under the exemption ($15 million per person, $30 million for a married couple) and outside the reach of a state estate tax, there is no estate tax to avoid. A transfer then achieves little on the estate side and gives up the step-up, because gifted shares carry the owner’s basis while assets held until death receive a stepped-up basis. Our article on estate planning before the business sale works through that keep-or-transfer decision and the tools that follow when transfer wins.

Gifts of shares to charity. For an owner who was going to give anyway, giving shares to charity before a sale can take the gain on those shares off the owner’s return, but only while the sale is genuinely not yet locked. Once it is a practical certainty, the IRS can tax the owner on the gain anyway under the assignment-of-income doctrine, as though the owner sold and then gave away the cash. Our article on charitable remainder trusts covers the trust that pays the owner an income for life or a term of up to 20 years and leaves the rest to charity. It also explains why S corporation stock cannot go into one without ending the company’s S election.

Deal structure. Whether the buyer purchases the company’s assets or the owner’s shares decides how much of the gain is capital or ordinary, whether it is taxed once or twice, and how much of the price the buyer can deduct later. The gap between the two structures is a number of dollars to each side, which is why we lean toward negotiating it as one. Our article on asset sales versus stock sales covers each type of entity and the structures and elections that let a deal be an equity purchase legally and an asset purchase for tax. Salary or consulting after closing, a covenant not to compete, and rent on property the owner keeps belong in the same negotiation. We lean toward pricing each at what it is actually worth, because moving a dollar from the price into any of them changes the tax on both sides.

The payment schedule. When the price is paid over several years, the gain is generally taxed as the payments arrive rather than all at once, which can keep more of it out of the highest brackets. The method has limits. Depreciation recapture that is taxed as ordinary income comes due in the year of sale whatever the schedule. And when installment notes from a year’s sales (counting only sales over $150,000) total more than $5 million at the end of that year, an interest charge applies to part of the deferred tax for each year those notes remain outstanding. Our article on how installment payments and earnouts are taxed works through both. We lean toward treating the schedule as an output of the multi-year tax projection, not a term the buyer proposes and the seller accepts.

Who Buys the Business

The buyer shapes everything else: the price, the structure, how the owner is paid, and how much of the owner’s future stays tied to the company after closing. Most exits follow one of a handful of paths, sometimes in combination.

An outside buyer. A strategic buyer in the same or a neighboring industry, or a financial buyer such as a private equity fund, usually brings the largest check and the most negotiation. The valuation, structure, and payment schedule articles above are built around this path. A financial buyer may also ask the owner to roll part of the proceeds into the buyer’s company, which keeps some of the owner’s money riding on a business the owner no longer controls.

The people who run it. A sale to key employees keeps the business with the people who helped build it, but they rarely have the cash, so the owner usually carries a note for most of the price. Our article on selling a business to key employees covers the price, the note, and the question that decides whether either works: whether the business can carry the payments, after the buyers’ income tax, with room for a bad year.

Ownership in stages. Some owners bring a key employee in as a minority owner years before any full sale. Our article on sharing ownership with a key employee compares five ways to do it and the tax on each. Two companion articles cover what is different for an S corporation: the one class of stock rule, which every share arrangement has to respect, and the F reorganization path to a profits interest, for an owner who wants to share only future growth.

An ESOP. A sale to an employee stock ownership plan keeps the company independent and can defer the owner’s entire gain under Section 1042, for an owner of C corporation stock who meets the conditions. The plan cannot pay more than fair market value, and part of the price is often seller financed, so the deferral has to be weighed against a higher outside price taxed in full. Our article on selling to an ESOP runs that comparison.

Family. A transfer to the next generation is usually some combination of gifts, a sale, and time. For estates well above the exemption, a sale of shares to an intentionally defective grantor trust moves future growth to the family in exchange for a note. Our article on how an IDGT sale works explains when the math works and when a simpler gift moves more.

A co-owner. When a business has more than one owner, the buy-sell agreement decides what happens when one of them retires, dies, or wants out, and at what price. After the Supreme Court’s Connelly decision, how a redemption agreement is funded can change the estate tax value of the business, as our article on how buy-sell agreements are priced and funded after Connelly explains.

Judging an Offer by What Reaches You

Two offers with the same headline can be worth very different amounts. Cash at closing, an escrow, a seller note, an earnout, and equity rolled into the buyer’s company carry different risks and are taxed at different times. We lean toward comparing offers on what reaches the owner after terms and taxes, and a lower headline with more cash and cleaner terms is sometimes the better deal.

The tax side of that comparison has more layers than the capital gains rate. The 3.8% net investment income tax applies to gain on C corporation stock and to what a C corporation distributes after an asset sale. Gain on a pass-through business in which the owner materially participates, whether sold as assets or as S corporation or partnership interests, is generally outside it. A large sale year can also reach the alternative minimum tax. For 2026, the AMT exemption for a married couple filing jointly begins phasing out at $1,000,000 of alternative minimum taxable income, and a sale year can phase it out entirely, which can pull more of that year’s ordinary income into the minimum tax. For families who live outside Texas, or who own property or businesses in other states, the state tax depends on where the owner lives and where the business operates, so we lean toward measuring the result, federal and state, across every state the family touches.

A seller who wants to defer part of a capital gain can also invest the gain, within 180 days, in a qualified opportunity fund. The investment date decides the rules: gain invested by December 31, 2026 falls under the old program, whose deferral ends that same day, while OBBBA’s rebuilt program, with a rolling five-year deferral, applies to gain invested on or after January 1, 2027. Our article on Opportunity Zones after OBBBA covers that transition and the first question to ask of any fund: whether it would be worth owning at full tax freight.

The Estate Plan Belongs Before the Letter of Intent

For many owners the business is most of the estate, and the sale turns it from an illiquid, hard-to-value asset into cash with an exact price. That is why the estate plan and the exit plan are one conversation, and why the decisions about family trusts described above have to be made while the window is open.

The first input is the estate tax itself. OBBBA set the exemption at $15 million per person for 2026 ($30 million for a married couple), indexed for inflation with no scheduled sunset. A future Congress could still change it, as our article on the $15 million estate tax exemption explains. For a family clearly under the exemption in every reasonable scenario, and outside the reach of a state estate tax, holding for the step-up in basis usually beats a lifetime transfer, though both paths are worth modeling. Couples in Texas and the eight other community property states have an extra reason to keep: community property receives a full step-up on both halves at the first death, as our article on step-up in basis in community property states explains. Clearly above the exemption, federal or state (for a married couple, measured at the second death), the transfer tools earn their place, from a spousal lifetime access trust to the IDGT sale described above. Even then, the owner’s own lifetime needs come first, secured by assets outside the trust. In the wide middle, the answer is usually partial and staged.

A sale year is also when many owners do their largest charitable giving, through gifts of shares before the sale or a donor-advised fund funded in the year of the sale. Our article on donor-advised funds and bunching covers how the 2026 rules for charitable deductions work.

After the Sale: The Money and the Life

The sale ends one financial plan and starts another. The proceeds now have to do what the business did: pay for the life the owner wants, through good years and bad ones.

The tax work continues past closing. Nobody withholds tax on the gain, so estimated payments matter in the sale year. For a household whose prior-year adjusted gross income was above $150,000, paying 110% of the prior year’s tax, at least a quarter of it by each of the four installment dates, protects against the underpayment penalty no matter how large the sale year turns out. The rest of the tax is still due the following April, and our article on estimated taxes and the safe harbor explains how to plan for that bill. Medicare premiums are set from income two years earlier, so a sale at 63 or later can raise premiums once Medicare begins, which our article on how IRMAA surcharges work covers. The years after a sale, when income may be lower than it has been in decades and before Social Security and required distributions begin, are often a window for Roth conversions in the gap years.

The portfolio that replaces the business also has to survive a bad market early in retirement, the risk our article on sequence of returns explains. All of it, the sale year and the years after, is modeled together in a multi-year tax projection, because a liquidity year is one number that drives the brackets, the net investment income tax, Medicare premiums, and the minimum tax all at once.

How We Think About It

We lean toward treating an exit as a set of decisions modeled on the owner’s actual numbers, not a sequence of rules of thumb. That starts with the plan’s number and a baseline valuation two to five years out, so the gap between them sets the timeline rather than the first buyer who calls.

The structure of a deal is priced, not free. We lean toward modeling an asset sale and a stock sale side by side and negotiating the gap as an explicit number. We lean toward judging an ESOP by what the seller keeps after tax, the risk carried along the way, and what the sale means for the people who built the business, not by the Section 1042 deferral alone. We lean toward judging every offer by what reaches the owner after terms and taxes. And we lean toward treating the payment schedule as an output of the multi-year tax projection, with the sale year modeled as one number that drives several costs at once.

The estate decisions come before the letter of intent, and the keep-or-transfer question comes before any technique. When an owner sells to key employees or to a trust for the family, we lean toward treating the note as a real loan. With key employees, we also lean toward testing the owner’s own plan against a note that is paid late, renegotiated, or never paid in full; with a family trust, toward securing the owner’s lifetime needs with assets outside the trust and the note. In both cases, the business that pays the note is the business the owner just sold.

None of this replaces the CPA, the attorney, the appraiser, or the deal team. We work alongside them, so the tax, legal, estate, and personal sides of the exit are decided together and early, while every option is still open.

Common Questions

Which exit path leaves an owner with the most after tax?

There is no default answer. An outside buyer often pays the highest price. An ESOP’s Section 1042 deferral, a family transfer that also moves future growth out of the estate, or a sale to key employees that keeps the business with its people can still leave an owner better off by the owner’s own measure. We lean toward comparing the paths on what reaches the owner after terms and taxes, and on what the owner wants for the business and its people, rather than on the headline price.

What is worth settling before signing a letter of intent?

The decisions that lose the most at the letter of intent. Those usually include a baseline valuation, a review of the entity and its governing documents, the keep-or-transfer estate decision (and any gifts or trust sales, if transfer wins), and any charitable gifts of shares the owner intends to make. A multi-year tax projection belongs in the same window, so the structure and payment schedule can be negotiated as numbers. Which of these matter, and how much, depends on the owner and the deal. After a letter of intent, many of these still exist on paper, but they become weaker, riskier, or both.

How does an owner get paid when the buyer does not have the cash?

Usually by financing much of the price. Key employees typically buy with a down payment and a note the owner carries; a sale to a grantor trust for the family’s benefit is paid with a note; and an ESOP is often financed partly by the seller. In each case the business has to be able to carry the payments, and we lean toward testing the owner’s own plan against a note that is paid late, renegotiated, or never paid in full.

How does selling a business affect taxes in the years after the sale?

Under an installment sale, gain is generally taxed as the payments arrive, except depreciation recapture taxed as ordinary income, which is due in the year of sale. A Section 1042 rollover defers the gain until the replacement securities are sold; gain still deferred at the owner’s death can disappear with the step-up in basis. The sale year’s income sets Medicare premiums two years later, and estimated payments are needed because nobody withholds tax on the gain. The lower-income years that often follow a sale can be a window for Roth conversions before Social Security and required distributions begin.