I’ve worked with enough successful business owners to know that almost every one has the same gap in their plans.
Take a scenario I see all the time: Dave built a widget company from nothing into a $30 million business. He’s sharp, disciplined and completely focused on growth.
But when I ask him what his plan looks like after the company’s sale, he stares at me like I’ve asked him to solve a riddle in an unknown language.
Sign up for Kiplinger’s Free Newsletters
Profit and prosper with the best of expert advice on investing, taxes, retirement, personal finance and more – straight to your e-mail.
Profit and prosper with the best of expert advice – straight to your e-mail.
Dave isn’t unusual. Most successful entrepreneurs pour every ounce of energy into building a business and almost none into planning for what happens when it turns into liquid wealth.
It’s not carelessness. Building the company is the priority. If it doesn’t succeed, there’s nothing for which to plan.
The problem is that by the time the exit is real and there’s a signed contract and a closing date, the biggest wealth-building opportunities have already passed. The cost of that timing gap can run well into the millions.
Three things business owners aren’t considering
The same three blind spots come up again and again:
- The first is business structure. How the company and the owner’s personal stake are organized for tax purposes. Whether you’re a C corp, S corp, LLC or LLP affects not just annual income taxes but the tax treatment of any future sale. Get this wrong at formation, and you could be locked in for decades.
- The second is succession planning. For a business to command a strong valuation, it needs to be transferable. This means there is management in place, client relationships are institutional rather than personal, and operations can run without the founder. Buyers pay a premium for businesses they can take over immediately.
- The third is exit and estate planning. This one costs families the most money. A successful sale creates a massive tax event. Without years of advance planning, your options to reduce that burden shrink dramatically.
Why the math gets worse as the business grows
Valuation multiples expand as revenues grow. A company with $200,000 in EBITDA might sell for five times, or $1 million. Scale to $3 million in EBITDA and a 10-times multiple puts the value at $30 million. At $35 million in EBITDA, a 20-times multiple can push it to $700 million.
Industry and revenue quality directly impact these numbers, but the pattern holds: The bigger the exit, the bigger the tax event.
The federal estate tax rate above the exemption is 40%. The current lifetime exemption is $15 million per person ($30 million per couple), which is the most generous in U.S. history.
But Congress can change that number. A sale that pushes your estate above the exemption can trigger an enormous tax bill for your heirs if you haven’t planned ahead.
What early planning looks like
If a business owner shows up with a signed purchase agreement and asks what can be done to reduce the tax hit, the honest answer is: Not much. The valuation is set. The structure is locked. The die has been cast, as we say.
The difference between the business owner who plans five years out and the one who plans five months out can easily be eight figures.
Let’s revisit Dave’s scenario. Five years before his planned exit, we started working on a strategy. Dave created an irrevocable trust for the benefit of his wife and children and transferred 50% of his company, valued at $15 million at the time, into that trust.
When the company sold for $60 million, the trust’s half was worth $30 million, and that $30 million was outside Dave’s taxable estate.
He paid long-term capital gains of 20% on the sale rather than ordinary income rates of 37%, and by moving assets out of his estate at a much lower valuation years earlier, he avoided what could have been $12 million in estate taxes on the growth alone. All told, early planning saved Dave’s family north of $20 million.
Two types of trusts come up most often in these conversations:
- A spousal lifetime access trust (SLAT) is an irrevocable trust that names the spouse as beneficiary during their lifetime, then passes to children and grandchildren. It works well when the business owner might still need access to income or assets from the trust.
- An intentionally defective grantor trust (IDGT) skips the spousal access and goes directly to children and grandchildren.
Both of these options share the same critical advantage: The assets are valued when they go into the trust. For a growing business, that means transferring at a relatively low valuation years before the exit and letting all that appreciation happen outside the taxable estate.
Charitable strategies can strengthen the plan further. Donating appreciated stock to a donor-advised fund — or, for private company shares, to an organization that accepts them — delivers meaningful tax benefits over donating cash. These tools work best when built into the strategy early.
Four things to do now
If you own a business and think you might sell it someday (even if “someday” feels like a decade away) here’s where to start.
2. Assemble your full team and get them on the same page. Alongside your wealth adviser, you also need an attorney and an accountant, all working from the same playbook. These professionals shouldn’t be operating in silos. The value comes from coordination. To ensure this, I encourage you to ask your team four questions:
- What is the plan?
- How are we going to get there?
- Who else needs to be involved?
- What are we not thinking about? This is the one most people forget.
3. Start three to five years before any potential sale. This is the window when the most powerful strategies, including trust planning, ownership restructuring, estate tax reduction, are still available to you. If you wait until a deal is on the table, most of those doors close.
4. Execute aggressively. An unexecuted plan is worthless. Once the strategy is in place, move on it. Every year of delay is a year that asset values grow inside your taxable estate instead of outside it.
The future will arrive faster than you think. Time is your single greatest ally in wealth planning but only if you use it.
The entrepreneurs who start early, build the right team and execute with urgency are the ones who keep the wealth they spent a career creating.
The ones who wait? They pay for it.
