Business Exit Planning: Selling Your Company Before You Retire

Start three to five years before the date you want to stop working. That is long enough to make the business sellable without you, to fund a retirement plan in your last high-income years, and to shape the tax structure, and it is the window most exit planners and M&A attorneys recommend. Owners who start in the year they want out usually take the structure the buyer proposes.

An exit plan answers four questions in writing. How much after-tax money do you need from the business, given your other savings, Social Security and any pension? When do you want to stop, and are you willing to stay on for a transition? Who should own it next: a competitor or private equity buyer, your managers, a family member, or your employees through an ESOP? And what happens if the choice is made for you by one of the planning world's "five Ds": death, disability, divorce, disagreement among owners or distress. The last question is the reason a buy-sell agreement and current estate documents belong in the plan whether or not a sale is near.

The first question is the one owners skip. If your investments and Social Security already cover your spending, you can hold out for the right buyer and terms. If the sale must fund most of your retirement, you need a price floor, the after-tax figure below which you keep running the business. Our Human Capital Calculator puts a present value on the earnings you give up by leaving, which is the fair comparison for any offer that asks you to stop now rather than in five years.

There are five, and they trade price against control and certainty. An outside buyer usually pays the most in cash at closing. Insiders usually pay over time, from the profits of the business you just sold them, so you remain a creditor of your own company for years.

A wind-down is not a failure. A practice that depends on the owner's own skill and relationships often has little transferable goodwill, and collecting receivables, selling equipment and closing can leave more than a long, uncertain sale process.

Buyers pay for future cash flow they can count on, and the price is a multiple of normalized profit adjusted for risk. For most owner-run companies the profit measure is seller's discretionary earnings (SDE): pre-tax profit with the owner's salary and perks, interest, depreciation, and one-time or personal expenses added back. Larger companies with a management team are priced on EBITDA, which assumes a market salary for the person running the business. The multiple depends on size, growth, customer concentration, how much of the business walks out the door with you, and what comparable companies have sold for.

Appraisers use three approaches. The IRS's own valuation guidelines list them as the asset-based approach, the market approach and the income approach, and tell its appraisers to consider all three before choosing the best indication of value (IRM 4.48.4.2.3). The market approach compares your company with sales of similar private companies. The income approach discounts expected future cash flow. The asset approach adds up what the assets would bring, which sets a floor and is the real value of a company with no goodwill.

We do not quote typical multiples, because published ranges vary widely by industry and size and are no substitute for comparables for your business. What raises any multiple is well known: clean, reviewed or audited financial statements; recurring revenue; no dominant customer; a second-in-command who can run the company; transferable leases and contracts; and add-backs you can prove. Each takes a year or more to fix.

In a stock sale you sell your shares, the buyer takes the whole company with its history, and your gain is generally long-term capital gain. In an asset sale the company sells its equipment, inventory, customer lists and goodwill, the buyer picks what it takes, and each asset's gain keeps its own character: some capital gain, some ordinary income. Buyers prefer asset sales because they get a fresh basis to depreciate and amortize, and they leave old liabilities behind. Sellers prefer stock sales for the tax result.

The entity type sets how big the difference is. A C corporation that sells its assets pays corporate tax on the gain, and you pay tax again when the proceeds are distributed, so C corporation owners have a strong reason to insist on a stock sale. An S corporation or LLC taxed as a partnership pays no entity-level tax, so the gain passes through once; the cost of an asset sale is the ordinary income on depreciation recapture and inventory, and on any payments to you personally. An S corporation that converted from a C corporation can still owe corporate-level built-in gains tax on appreciation that existed at conversion if it sells assets within five years (26 U.S.C. 1374). Buyers and sellers of S corporations sometimes agree to treat a stock purchase as an asset purchase for tax purposes; if they do, price the buyer's benefit into the deal.

In an asset sale, the price must be allocated across seven asset classes by the residual method, and both buyer and seller report the allocation on Form 8594 with their returns for the year of sale (Form 8594 instructions). A written allocation agreed in the purchase contract binds both parties (26 U.S.C. 1060), so negotiate it as seriously as the price: the buyer wants value in equipment it can depreciate quickly; you want it in goodwill taxed at capital gains rates.

The 3.8% net investment income tax usually does not reach an active owner's business gain. It applies to gain from property held in a trade or business only if that business is a passive activity for you, and a sale of S corporation stock or a partnership interest is tested by looking through to the company's own assets (26 U.S.C. 1411(c)(2) and (c)(4)). The IRS lists gain on partnership and S corporation interests as investment income only "to the extent the partner or shareholder was a passive owner" (IRS). If you materially participate, most of the gain escapes the surtax; the interest on a seller note does not. Owners who stepped back from daily work years ago should have their CPA test material participation before assuming the exclusion.

When at least one payment arrives after the year of sale, the gain is taxed as you are paid, not all at closing, under the installment method (IRS Pub. 537). Each principal payment is part return of basis and part gain, in the ratio of your total gain to the price. Spreading a large gain over several years can keep more of it in the 15% band, and a seller note is often what makes a deal financeable for a buyer, a management team or a family member.

The rules that catch sellers, all from Publication 537:

• •Recapture is taxed up front. Depreciation recapture is reported in full in the year of sale, whether or not you received any cash that year.
• •Some assets never qualify. Inventory and publicly traded stock cannot use the installment method, so their gain is taxed at closing.
• •Large notes carry an interest charge. When the sale price exceeds $150,000 and your installment obligations outstanding at year end exceed $5,000,000, you pay interest to the IRS on the deferred tax (section 453A).
• •Pledging the note triggers the gain. Using the note as security for a loan is treated as receiving payment.
• •The note must carry adequate interest. If it does not, part of the principal is recharacterized as interest. The applicable federal rate sets the floor.
• •Related buyers who resell within two years accelerate your remaining gain.

An earn-out pays part of the price only if the business hits revenue or profit targets after closing. Because the total price is not known at closing, it is a contingent payment sale with its own basis-recovery rules in the same publication. The larger problem is control: after closing, the buyer sets the budget, prices and staffing that decide whether the targets are met. Keep earn-outs short, on a measure you can verify (revenue rather than net profit), with the accounting defined in the contract and a right to audit.

A seller note makes you an unsecured or subordinated lender to a buyer who has just borrowed from a bank. Price it like a loan: personal guarantees, a security interest in the assets, financial reporting and acceleration on default. Never count on the final payments to cover essential spending.

Only if you own stock in a C corporation that you acquired at original issue, and only for qualifying businesses. For stock acquired after July 4, 2025, the law now excludes 50% of the gain after three years, 75% after four and 100% after five, up to the greater of $15,000,000 per company (indexed after 2026) or ten times your basis, and the company's gross assets may not have exceeded $75,000,000 when the stock was issued (26 U.S.C. 1202). Stock acquired earlier keeps the old rules: for stock acquired after September 27, 2010, 100% after five years, with a $10,000,000 cap.

Three limits rule out many owners approaching retirement. S corporation and LLC interests never qualify. Service businesses in fields such as health, law, engineering, accounting, consulting, financial services and any business whose main asset is the skill or reputation of its employees are excluded. And converting an S corporation to a C corporation now does not reach the value already built: stock issued in exchange for property takes a basis equal to that property's market value, so only later growth can qualify, and the holding period starts over. For a 62-year-old planning to sell within a few years, QSBS is usually a question to ask about a C corporation they already own, not a strategy to start.

Insider sales keep the business in known hands, and they almost always mean you are paid over time. For an ESOP, a C corporation owner can defer the entire gain under section 1042 if the ESOP owns at least 30% of the company after the sale, the owner has held the shares for three years, the company has no publicly traded stock, and the owner buys qualified replacement property (stocks or bonds of domestic operating companies) within the period from three months before to twelve months after the sale (26 U.S.C. 1042). Replacement securities keep your old basis, so the gain is deferred until you sell them; held until death, they receive a stepped-up basis. For S corporation stock, a 2022 amendment allows deferral of no more than 10% of the amount realized, and only for sales after December 31, 2027.

An ESOP buys at a price set by an independent appraiser and may not pay more than fair market value, so it rarely matches the top strategic offer. What it offers is continuity for employees, a deductible way for the company to fund the purchase, and, for C corporation owners, the 1042 deferral. The setup and annual administration costs are significant; ask for written estimates.

Management buyouts follow the installment rules above. Family transfers combine gifts and sales. A gift uses your lifetime exclusion, $15,000,000 per person in 2026, and the child takes your low basis; a sale must charge at least the applicable federal rate of interest, and if the child resells within two years your deferred gain is accelerated. Gifting minority interests, installment sales to trusts and buy-sell agreements are estate-planning tools that need an attorney; our estate planning basics guide covers the documents every owner needs, and gifting to children and grandchildren covers the exclusions. Treat the children who are not in the business fairly on paper as well, or the business becomes the estate dispute.

If you planned to leave a large share of your estate to charity anyway, giving part of the company to a charitable remainder trust before the sale lets the trust sell those shares without paying capital gains tax at the sale, pay you an income for life, and give you a deduction for the charity's future share. Our charitable remainder trust guide works through the deduction limits and payout taxes.

Timing decides whether it works. Under Rev. Rul. 78-197, the IRS taxes the sale to you if the trust was legally bound to sell when you made the gift. Fund the trust before a binding purchase agreement is signed, let the trustee negotiate and sign the sale, and do not give the shares once the deal is effectively done. The shares of a private company need a qualified appraisal for the deduction, and a charitable remainder trust is not a permitted S corporation shareholder, so giving it S shares would end the company's S election. In practice this works for C corporation shares or for real estate held outside the company.

Simpler charitable moves fit the sale year too. A year with a very large gain is the year a deduction is worth most, so owners often prefund several years of giving through a donor-advised fund. Gifts of appreciated stock to public charities are deductible up to 30% of AGI and cash up to 60%, with a 5-year carryforward.

The last two to five years before a sale are often an owner's highest-earning years, and a well-designed plan converts some of that income into tax-deferred savings. The base is a 401(k): in 2026, $24,500 of salary deferrals plus a catch-up of $8,000 at 50 or $11,250 at ages 60 to 63, with employer and employee additions capped at $72,000 before catch-ups. If your prior-year wages from the company exceeded $150,000, the catch-up must go in as Roth.

A cash balance plan, a type of defined benefit plan, can sit on top of the 401(k). An actuary sets each year's deductible contribution to fund a benefit, and the maximum annual benefit a defined benefit plan may provide in 2026 is $290,000, with no more than $360,000 of pay counted (IRS Notice 2025-67). Because an owner in their 60s has few years left to fund that benefit, the allowed contribution is often several times the 401(k) limit. Contributions for employees are required under the plan's nondiscrimination rules, which is part of the cost to weigh.

The plan must be intended as permanent. If it ends within a few years of starting, the IRS presumes it was not, unless there is a valid business reason; the IRS's own examiner guidance lists a change in ownership and the liquidation of the employer among the accepted reasons (IRM 7.12.1.3). A sale therefore usually justifies termination, but a plan opened one year before a planned sale needs care and a pension actuary. At termination, your balance can move to an IRA; our 401(k) rollover guide covers direct rollovers and what to watch.

Decide what happens to the company's plans in the deal. In a stock sale the buyer inherits them unless you terminate them before closing; in an asset sale they stay with your company, which must terminate or maintain them.

If you sell before 65, plan health coverage for every month until Medicare, for yourself and a younger spouse. Federal COBRA applies to employers with 20 or more employees, lets you keep the group plan at up to 102% of its cost (U.S. Department of Labor), and lasts up to 18 months after employment ends. It also ends when the employer stops providing any group health plan (29 U.S.C. 1162), which is what happens when a company sells its assets and closes. Many states have continuation laws for smaller employers; check yours. Negotiate coverage in the purchase agreement if you will stay on as an employee or consultant.

For individual marketplace coverage, the enhanced premium tax credits expired at the end of 2025, so in 2026 households with income above 400% of the federal poverty level receive no subsidy (Congressional Research Service). A sale year, and every year you receive installment gain, will almost certainly put you over that line. At 65, Medicare premiums depend on your income from two years earlier, so a sale at 63 or 64, or installment payments after 63, raise the premiums of your first Medicare years. Our Medicare enrollment and IRMAA guide covers the tiers and the appeal for a life-changing event. Stopping work is a qualifying event, but the appeal uses your current-year income, which still includes any installment gain.

Diane is 62 and has run her commercial heating and air-conditioning company, an S corporation, for 28 years. She works in it full time. Tom is 60 and has $120,000 a year of other ordinary income. A regional competitor offers $4,000,000. Diane's stock basis is $400,000, the same as the company's basis in its assets. If the buyer takes assets, the proposed allocation is $300,000 to inventory at cost, $500,000 to trucks and equipment depreciated to $100,000, and $3,200,000 to goodwill.

The asset sale costs Diane $40,633 more. The recapture is taxed at her ordinary rates instead of 20%. Because Diane works in the business, none of the gain is subject to the net investment income tax. Any extra price the buyer adds to goodwill is taxed at 20% at the margin, so Diane needs about $51,000 more in an asset deal to come out even. The buyer can often afford that, since it gets to depreciate the trucks again and amortize $3,200,000 of goodwill over 15 years. The negotiation is over how to split that benefit.

Now the installment alternative. The buyer offers the same $4,000,000 as a stock purchase: $1,000,000 at closing and a $3,000,000 note paid in 5 equal annual principal payments from 2027, at 6% interest (an assumed rate; it must be at least the applicable federal rate). With a 90% gross profit percentage, each dollar of principal carries 90 cents of gain.

Computed by My Finance Platform from 2026 federal brackets, capital gains bands, the 3.8% net investment income tax on the note's interest, and 2026 IRMAA tiers for Part B and Part D. Illustration only.

The installment sale saves tax on the gain, and gives much of it back in Medicare premiums. Of the $722,000 of extra tax over six years, about $606,000 is attributable to the gain, compared with $692,000 on the lump sum: a saving of about $86,000, because more of the gain is taxed at 15% instead of 20%. The rest is tax on $540,000 of interest, which is Diane's payment for lending the buyer $3,000,000. But the lump sum lands in 2026, which sets 2028 Medicare premiums, before either of them is 65. The installment payments land in exactly the years that set their first Medicare premiums, and with MAGI of $696,000 or more they fall at or near the top tier, which starts above $750,000. At 2026 premiums the surcharges total about $53,000.

What Diane should do with this. The installment sale is worth about $33,000 net of Medicare surcharges, before counting the risk that a buyer with bank debt pays late or not at all. That is a thin reward for five years of credit risk. A better use of the note is to take it only if the buyer requires it, keep it short and secured, and have it paid off before the years whose income sets Medicare premiums (the year you turn 63 and later). If Diane had been 64, the lump sum itself would have raised her first Medicare premiums, and the comparison would change. Run your own version with your CPA; the Tax Bracket Calculator shows how much room each year leaves in each band.

After closing, the business that paid you every month becomes a pile of cash, and the job is to rebuild a paycheck from it. Set aside the tax first, and ask your CPA whether estimated payments are needed during the year of sale rather than all of it next April. Then hold enough in cash and short-term Treasuries or CDs to cover spending until other income starts, often the years until Social Security or Medicare. Invest the rest by when you will need it rather than all at once on emotion. Every $1,000,000 withdrawn at an initial 4% rate provides $40,000 a year; the Retirement Withdrawal Calculator tests how long a given draw lasts.

The years right after a sale are often an owner's lowest-income years: no salary, no business profit, Social Security not yet claimed. Those years suit Roth conversions of the old 401(k) and IRA balances, and they make delaying Social Security affordable. Our guides to Roth conversions before RMDs, when to claim Social Security and the order to draw from your accounts cover the sequencing, and taxes in retirement shows how the pieces are taxed together.

The sale gain itself does not count as earnings for Social Security; the earnings test excludes capital gains, interest and investment income (SSA Handbook 1812). Consulting fees or a transition salary from the buyer are earnings, so if you claim before full retirement age while still working for the buyer, benefits can be withheld.

Owners who regret a sale rarely regret the price. They regret what came after: no role, no team, no reason to be anywhere at 8 a.m. Decide what you are moving toward before closing, and be honest about how long you want to stay on under a new owner who may change what you built.

Plan when to tell key employees; the buyer will want them to stay. Your spouse should know the numbers, the note terms and the advisers. And a sale is an estate event: update your will, trusts and beneficiary designations for an estate that is now cash and securities rather than one private company.

• •Signing a letter of intent before the tax structure is settled. The LOI sets asset vs. stock, the allocation approach, the note and the earn-out. Changing them later costs leverage.
• •Negotiating price and ignoring the allocation. On Form 8594 the buyer and seller must match, and value moved from goodwill to equipment or a non-compete is taxed at your ordinary rates.
• •Assuming the installment method defers everything. Recapture is taxed in the year of sale, and inventory never qualifies. You can owe large tax in a year with little cash.
• •Ignoring the two-year Medicare lookback. Income at 63 and later sets your first Medicare premiums.
• •Funding a charitable remainder trust after the deal is binding. The gain is taxed to you, and you still gave away the asset.
• •Counting on QSBS for S corporation or service-business stock. Neither qualifies.
• •Treating a seller note as cash. It is an unsecured loan to a buyer with other creditors unless you negotiate security and guarantees.
• •Forgetting health coverage. COBRA ends when the company stops offering any group plan, and there is no subsidy above 400% of poverty in a sale year.
• •Starting a cash balance plan the year before a sale without advice. The permanency rule and required employee contributions can undo the benefit.