Every Season Is Tax Season In A Business Exit Strategy

Tax season is over. But if you’re planning a strategic exit from your business, you probably need to stay in tax planning mode for months, if not years.

The biggest hurdle I see in tax planning around a business exit is simply getting started. Many entrepreneurs put off tax planning until the last minute. This procrastination often translates into steep tax payments and missed opportunities.

Time and taxes

It’s never too early to think about your long-term tax exposure in a business exit. The wheels turn slowly in exit planning. To give you a sense of the time scale, let’s say you aim for an exit in August. It’s not uncommon to kick off some elements of tax planning in January, and fully execute on them in May. And this doesn’t capture the years that may go into deliberate structuring, involving trusts and strategic entity formation, particularly to optimize valuation.

And valuation is, strangely, what can derail your exit plan from a tax perspective. Business owners tend to hyper-focus on equity value as part of an exit strategy. The more their business is worth, the bigger the payout, right? Except that higher valuation comes with the burden of higher taxes. A business making $2 million in yearly profit could pay close to $800,000 a year in taxes right as you’re trying to ramp up for an exit. Careful tax planning can often cut that number in half. That’s more wealth you could invest back into your business or your own financial goals.

Tax planning is the other half of a sound exit strategy. You want a valuable, sustainable business to pass on, but you also want to keep as much of your earned wealth as you can. And tax planning doesn’t stop at the moment of transaction, either. The plan you set in motion depends on a realistic view of your post-exit lifestyle and expenses. If you can’t control your spending, you’ll raid the structure of your deal and incur taxes on capital gains that you could otherwise have avoided.

Choosing the right navigator

The other major tax planning pitfall I see in exit planning is, frankly, going to the wrong professionals. You won’t get the same level of service from every financial professional. You have a lot of potential tools in your tax planning arsenal. If your tax planner is not aware of them, or they exist outside the narrow scope of their professional focus, you’re leaving money on the table. A CPA may model taxes for estate planning. But are they paying attention to your future income, as well?

Philanthropy is another common blind spot that you should account for in your choice of tax planning partner. I truly believe you cannot create the best possible exit strategy for your circumstances without some degree of philanthropic giving. Not only does it present you with opportunities to lower your tax exposure, it adds meaningful impact and intentionality to an exit plan in a way that encourages you to stick with that plan in the long term.

Tax planning isn’t a one-and-done thing. It is a cornerstone of your exit strategy and it demands year-round attention. If you think your own exit strategy might be falling short, or you don’t know where to begin optimizing for long-term tax efficiency, our door is always open.