Business Owner Exit Planning: Prepare Your Retirement Transition

Last year, Mike sold his manufacturing company. After 28 years of 60-hour weeks, he thought he was set. The business was worth $3.2 million on paper — enough for a comfortable retirement.

Mike, 62, accepted the first serious offer that came along. He was tired. He wanted out. He assumed his accountant would handle the tax stuff later.

He was wrong.

The deal was structured as an asset sale, not a stock sale. Double taxation on C-corp assets. No installment sale to spread the gain. State taxes he hadn't planned for. After federal taxes, state taxes, and deal fees, Mike netted $1.8 million — barely half of what his business was "worth."

If you want the basics on how business sale profits get taxed, start with capital gains in retirement.

"I spent 28 years building that company," Mike said. "I spent 4 months planning the exit. That ratio should have been reversed."

This is the reality of business exit planning. 80% of businesses listed for sale don't sell. 75% of owners regret selling within 12 months. Most owners spend years building a business but only months planning the exit. The gap between "business value" and "retirement cash" can swallow hundreds of thousands of dollars.

Why the gap between value and cash is so wide

For many business owners, the company represents 50-80% of their net worth. But if your business is worth $2 million on paper and you can't convert that value to cash efficiently, it's not funding your retirement.

Exit planning bridges that gap — and it starts years before the sale. The owners who walk away with the most money aren't the ones with the most valuable businesses. They're the ones who planned the transition properly.

What are your options for getting out?

Not every exit looks the same. Some owners want a clean break; others want to protect employees or keep the business in the family. The path you choose shapes everything that follows.

Selling to a third party offers the highest potential sale price and a clean break, but it's the longest and most complex process. You'll work with strategic acquirers, private equity firms, or individual buyers. The deal structure creates significant tax planning opportunities, but you give up control over your legacy, and your employees face uncertainty until the deal closes. This path works best for owners who want maximum value and are ready to walk away completely.

Selling to employees through an ESOP (Employee Stock Ownership Plan) provides significant tax benefits and rewards the people who helped build the company. It preserves culture and can be structured as a partial sale, allowing you to transition gradually. But ESOPs are complex and expensive to establish, the sale price may be lower than a third-party sale, and there's ongoing administrative burden. This path suits owners who deeply value their employees and want to leave a lasting legacy.

Passing the business to family preserves your legacy and allows for a gradual transition where you maintain involvement. Estate planning benefits can be substantial. But family members may lack business skills or interest, valuation becomes contentious when money and relationships mix, and the sale may not fully fund your retirement. Only choose this path if you have capable, genuinely interested family members — not just children who feel obligated.

Management buyouts offer a smoother transition because the buyers already know the business. Cultural continuity is high, and deals often close faster than external sales. The challenge is that your management team likely doesn't have the capital, so you'll probably need to provide seller financing or accept a lower price. This works best when you have a strong management team already operating independently.

Winding down gradually requires no buyer at all — you extract profits over time and eventually close the doors. It's simple and you control the timeline. But you realize no sale value, your employees lose their jobs, and your legacy doesn't continue. This path fits lifestyle businesses that depend entirely on the owner, where no succession makes sense.

When should you start planning?

The short answer: years before you want out. The timeline below isn't just a checklist — it's the difference between Mike's outcome and a successful exit. Each phase builds on the last.

Five to ten years before exit, you stop being the business and start building a business that runs without you. This means reducing owner dependence systematically — if customers call you directly, if you approve every decision, if the business can't function when you're on vacation, buyers will pay less. Document your systems and processes. Develop a management team that can operate independently. Clean up financials so they're audit-ready. Strengthen customer relationships beyond your personal network. Protect your intellectual property properly. And begin your personal financial planning, because you need to know what the sale must produce.

Three to five years before exit, you start thinking like a buyer. Get a professional business valuation and address whatever gaps it reveals. This is the time to improve financial performance, build recurring revenue streams, and diversify your customer base so no single customer represents more than 15-20% of revenue. Start considering which exit option fits best. Assemble your advisory team — you'll need them.

One to three years before exit, you're positioning for the deal. Optimize your financials for sale, which often means different choices than optimizing for tax efficiency. Identify potential buyers and begin building relationships. Prepare your marketing materials. Address any deal-breaker issues before they kill negotiations. Make sure key contracts and leases are transferable. And critically, plan your tax strategy — this is where Mike lost $1.4 million.

In the final year, you execute. Engage an investment banker or broker if you're selling externally. Market the business, negotiate offers, complete due diligence, execute the purchase agreement, transition operations, and close. This is where most owners rush — don't.

What makes buyers pay more (and less)?

Picture two businesses, both worth $2 million on paper. One sells for $2.5 million; the other struggles to find a buyer at $1.2 million. What's the difference? Buyers pay for certainty — and penalize risk.

Owner independence is the highest-impact factor. If you are the business — if sales depend on your relationships, if operations require your decisions — buyers see risk. Document processes, develop leaders who can function without you, and prove it by taking extended time away.

Recurring revenue dramatically increases value. Subscription models, long-term contracts, and predictable repeat business reduce buyer risk. A business with 80% recurring revenue is worth significantly more than one that starts from zero each month.

Customer concentration kills deals. If any single customer represents more than 15-20% of your revenue, buyers worry about what happens when that customer leaves. Diversify before you sell, not during negotiations.

Financial performance matters obviously — strong margins and consistent growth command premiums. But it's not just the numbers; it's the clarity and reliability of the numbers. Clean financials that a buyer can trust are worth more than higher revenue with messy books.

Management strength determines whether the business survives the transition. Buyers want to see capable leaders who will stay. Develop and retain your key people, or watch buyers discount your price.

What drives value down? Being the rainmaker for sales. Having a key customer who might leave. Messy or unreliable financials. Key employees who might not stay. No clear growth path. Pending litigation. Deferred maintenance.

How do you keep more of what you sell?

This is where Mike lost $1.4 million. Tax planning isn't an afterthought — it's often the difference between a comfortable retirement and a disappointing one.

Stock sale versus asset sale is the first battleground. You, as the seller, generally prefer a stock sale because you pay capital gains tax once on the difference between your basis and the sale price. Buyers generally prefer asset sales because they get a stepped-up basis for depreciation. With a C-corporation, an asset sale can trigger double taxation — once at the corporate level, again at the personal level when you extract the proceeds. The deal structure is negotiable, and the difference can be enormous.

Capital gains treatment is your best friend. Long-term capital gains rates of 0%, 15%, or 20% (plus the 3.8% net investment income tax if applicable) are far lower than ordinary income rates. Structure your deal to maximize capital gains treatment on as much of the sale price as possible.

The QSBS exclusion can eliminate millions in taxes if your C-corporation stock qualifies under Section 1202. You can exclude up to $10 million or 10 times your basis from capital gains — but you must have held the stock for more than five years, acquired it at original issuance, and the corporation must have been an active business with assets under $50 million when you acquired the stock. Work with a tax advisor early to determine if you qualify.

Installment sales spread your gain over multiple years. Instead of recognizing the full gain in year one and potentially jumping to the highest tax brackets, you recognize gain as payments are received. This keeps you in lower brackets but comes with risk: if the buyer defaults, you may have paid taxes on money you never received.

Opportunity Zone investments allow you to defer capital gains by reinvesting into Qualified Opportunity Zone funds. If held for ten years, the gain on the new investment is eliminated entirely. The rules are complex and have changed since the program began, so work with an advisor.

Charitable strategies can convert taxes into philanthropy. Donating appreciated stock before the sale avoids capital gains entirely while providing a charitable deduction. A Charitable Remainder Trust spreads income over years while ultimately benefiting charity. A Donor-Advised Fund provides an immediate deduction with flexibility to grant over time.

What about your personal finances?

The business exit is only half the equation. Your personal financial readiness determines whether the sale actually funds your retirement.

If you're not sure what the sale needs to produce, start by answering one question: When can I retire?.

Before you sell, know your numbers. Calculate how much you actually need from the sale to fund your retirement. Build personal reserves outside the business — don't bet everything on the deal closing. Diversify your investments if you're heavily concentrated in company stock. Model the after-tax proceeds under different deal structures. And plan for healthcare coverage between your exit and Medicare eligibility.

If you're still building tax-advantaged savings before the sale, compare SEP IRA vs Solo 401(k) — the wrong choice can quietly cost you five figures per year.

After you sell, protect what you've earned. Don't rush to invest the proceeds; take time to plan properly. Beware of bad advice — new wealth attracts poor recommendations from people who see a commission. Create an income plan for how the proceeds will generate retirement income. Update your estate planning documents for your new asset level. And find purpose — what will you do with your time?

The biggest mistake is assuming the sale will make everything work out. Know your numbers before committing — don't be like the owners who realize too late that their "comfortable" retirement requires 20% more than they netted.

The part nobody warns you about: life after the sale

Picture Susan at 60, six months after selling her marketing agency for $1.8 million. The money is invested. The healthcare is sorted. Everything she planned for is in place. And she's miserable.

Susan's identity had been "the founder" for twenty years. Her daily purpose came from work. Her closest relationships were with employees and clients. Her sense of achievement came from running the company. Without the business, she felt adrift.

This is more common than the financial mistakes. Owners who planned meticulously for the deal often forgot to plan for themselves. They miss the daily structure, the importance, the control over their environment. Many develop depression or health problems within the first year.

How do you prepare? Develop interests outside the business before you sell. Gradually reduce your day-to-day involvement so the transition isn't abrupt. Plan specific activities for retirement — vague ideas like "travel more" aren't enough. Consider advisory or board roles that use your expertise without demanding full-time commitment. And allow time for adjustment; give yourself permission to struggle.

75% of owners regret selling within 12 months. The most common reasons aren't financial — they sold too early or too cheap, didn't negotiate properly, missed the business more than expected, or had no plan for life after. Thorough planning includes planning for yourself, not just the deal.

Who do you need on your team?

Exit planning isn't a solo sport. The most successful exits involve a coordinated team of specialists — each preventing a different type of expensive mistake.

Your M&A advisor or broker markets the business and negotiates the deal. Your business attorney structures the transaction and protects your interests in the purchase agreement. Your tax advisor (usually a CPA) optimizes the tax treatment — this alone can be worth hundreds of thousands of dollars. Your financial planner ensures the sale aligns with your personal wealth and retirement goals. Your wealth manager will invest and manage the proceeds post-sale. Your estate attorney updates your estate plan for your new asset level.

Timing matters. Bring in your financial planner and tax advisor five years before exit. Add business valuation professionals and your estate attorney three years out. Engage the M&A advisor and business attorney one to two years before the deal. Bring in your wealth manager at close.

Most importantly, your advisors need to work together. A disjointed team creates gaps and conflicts — like Mike's accountant and lawyer who never coordinated on the deal structure until it was too late.

Are you ready?

The readiness question has three parts: Is your business ready? Are you personally ready? Is your deal ready?

Your business is ready when it can operate without you for three months or more, when financial statements are clean enough for due diligence, when key processes are documented, when the management team can run operations independently, when no single customer dominates revenue, when contracts and leases are transferable, and when there's no pending litigation or unresolved liability.

You are personally ready when you know exactly how much retirement income you need, when you understand what you'll net after taxes, when you have healthcare coverage planned, when you have emergency funds outside the business, when your estate plan is updated, and when you have a clear vision for your life after exit.

Your deal is ready when your advisory team is assembled, when you have a realistic valuation, when your exit timeline is established, when you've identified your preferred exit option, when deal-breaker issues are addressed, and when your tax strategy is optimized.

If you can't check all three categories, you're not ready. Start with whatever gaps exist and work backward from your target exit date.

Start planning now, not when you're tired

Exit planning isn't something you do in the months before selling — it's a multi-year process of building transferable value and optimizing the deal structure. The owners who walk away with the most money are those who started planning five to ten years out, not five to ten months. Mike spent 28 years building his company and four months planning the exit. Don't make the same mistake. Your business has given you a living; with proper planning, it can fund your retirement too.

Ready to start planning your business exit? Connect with a retirement advisor who specializes in helping business owners transition to retirement.