How to Sustain Your Lifestyle During Retirement
When selling your business, it's easy to fixate on the headline sale price, but the number that actually matters is what lands in your account after taxes. Depending on how a deal is structured and how far in advance you plan for it, the gap between those two numbers can be substantial.
The good news is there are tools for minimizing taxes on a sale – but most of the best strategies should happen before a deal is signed, not after.
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The tax clock starts years before deal talks do
Many of the most effective tax strategies: entity restructuring, gifting appreciated shares, and funding trusts; need to happen well before a letter of intent lands on your desk, or they lose their value entirely. Once a buyer is at the table, the IRS treats many of these strategies as an attempt to shelter income you’ve already effectively earned, and the window for using them closes.
Early modeling shows you which strategies are available to you, and, just as importantly, which ones have already closed. This is why a tax plan belongs in your exit timeline three to five years out, not three to five months out.
Your entity structure and stock history impact your tax bill
How your business is structured, and how long you have held your stock, can change your final tax bill dramatically. Owners of qualifying C corporation stock, for example, may be eligible to exclude a meaningful portion of their gain under the Qualified Small Business Stock (QSBS) rules – but only if the stock has been held long enough and the business qualifies. Owners who never check are often surprised at closing, when there is no longer room to fix it.
Have your tax advisor review your entity structure and stock history well before you go to market. If restructuring could open the door to a better outcome, it needs runway to work, not a signature the week before closing.
Gifting and trust strategies lose their power once a sale is in motion
Once a sale is imminent, the value of your business is largely locked in, and so is your tax bill. Owners who gift shares to family members, or fund a trust with business interests, before a sale often transfer that future appreciation – and the tax exposure that comes with it – out of their estate at a lower valuation.
If wealth transfer is part of your goal, talk to your financial advisor and estate attorney well before a deal is on the table. Many of these strategies require the shares to be gifted or transferred before there is a signed agreement, or even a serious buyer in the picture.
The structure of the deal matters as much as the price
Whether a sale is structured as an asset sale or a stock sale, and whether payment comes as a lump sum or over time, can meaningfully change how much tax is owed and when. An installment sale, for instance, can spread the tax liability over several years instead of triggering it all at once.
Model the after-tax outcome of different deal structures before you negotiate. Your financial advisor and tax advisor can help you understand which structure the buyer is likely to prefer, and whether there is room to negotiate for one that works better for your tax picture.
Charitable giving works best before the sale, not after
For owners with charitable intent, donating appreciated business interests – whether directly, through a donor-advised fund, or through a charitable trust – before a sale can reduce the taxable gain while supporting causes you care about. Owners who wait until after the sale to think about giving have already recognized the gain and lost much of that benefit.
If charitable giving is part of your plan, work with your financial advisor to structure the gift before signing a letter of intent.
Where you live can be as important as how you sell
Where you and your business are domiciled at the time of sale can also have a significant impact on your state tax bill. Owners who move, or who have income tied to multiple states, sometimes discover that they owed more in state tax than they expected.
Review your residency status and any multi-state tax exposure with your advisor well ahead of a sale. If a change in domicile is part of your plan, it typically needs to be established and documented long before closing.
None of this works well in isolation
A tax minimization strategy involves your CPA, your estate attorney, and your financial advisor, all working together towards a common plan. Owners who work with each of these professionals separately, without a shared plan, often end up with strategies that do not fit together, or opportunities that fall through the cracks between advisors.
Putting a single point of coordination in place early – someone who can align your tax, estate, and transaction strategies into one plan and keep every advisor working from the same picture, is often what separates a good outcome from a great one.
Keep more of what you built
We work with business owners at every stage of the exit planning process to help minimize taxes and turn your business into personal wealth. From entity structuring to gifting strategy, deal timing, and post-sale planning, we’ll provide guidance to help you reach your goals before, during, and after a sale.
Please consult with an attorney or a tax or financial advisor regarding your specific legal, tax, estate planning, or financial situation. The information in this article is not intended as legal or tax advice.
