Essential Planning for Business Owners Prior to Selling a Business

Preparing to sell your business is a monumental step that requires careful consideration and planning to preserve your wealth and ensure your goals are met. Without proactive tax and estate planning, you could lose a significant portion of your business’s value—often more than 50%.

Most business owners do not realize that a basic revocable trust will only shelter $13.9M in 2025 (but reduced to $7M in 2026) from federal estate taxes for each of you and your spouse. Depending on the value of their business, there is a good chance that they will have to pay state and federal estate taxes of more than 50% of their net worth.

Planning starts by considering your personal wealth planning goals:

How much do you want to leave to family members?
Do you want to leave anything to charity rather than to taxes?

Plan for Estate Taxes, Plan Early:

Amid the pressures of running a successful business and preparing it for sale, business owners often put off personal estate planning and see key questions, including tax implications, as items that can wait until after the sale has been completed and they have more time to focus on their personal lives. What they do not realize is that, if they had planned prior to the sale, considerably more value could have gone to family or charity, rather than to taxes.

Valuation discounts allow business owners to transfer closely held business interests via gift or sale to irrevocable trusts for family members. Valuation discounts for lack of marketability and lack of control can often be 30% or more and facilitate moving assets out of your taxable estate for the benefit of your family at a very low cost. Timing is important here. You will only be able to take advantage of discounts if the planning is completed well in advance of a sale being considered.

As an example, a gift of $10 million worth of closely held business interests to an irrevocable trust for the benefit of your spouse and children at a 30% discount results in a gift amount of $7 million. $3 million is transferred to the trust solely from the 30% valuation discount. All of the appreciation on the $10 million worth of assets will appreciate estate-tax free.

Another technique allows you to transfer an interest in the business to irrevocable trusts for family members (which shelters that portion of the equity in the business from estate taxes) while remaining in control of the business. This technique requires several structural steps, such as recapitalizing the business into voting and non-voting stock. The primary benefit of this technique is that it can significantly increase valuation discounts, thereby allowing the business owner to transfer additional wealth outside of their taxable estate. Advance planning is key to take advantage of this opportunity prior to selling the business.

Take advantage of the historically high gift and estate tax exemption ($13.9M per person in 2025). The exemption threshold is currently at an all-time high, but is scheduled to drop to approximately $7M per person in 2026. Planning strategies that depend on the high exemption should be put into place before December 31, 2025, to lock in the high exemption before it is reduced.

Charitable Planning:

Making a significant gift to charity in the year of your business’s sale to offset a large tax bill may make sense if you have charitable intentions.

However, this business owner could reduce taxes even more if he had transferred stock in the business to the charity before the sale. This strategy has two advantages – you still get a charitable deduction for the value of the stock transferred to charity and you avoid paying taxes on the capital gains on the transferred stock because those gains would be allocated to charity which is exempt from income tax.

Income Tax Planning:

Deciding the year in which capital gains from the sale of the business will be realized is a further planning opportunity.

Taxes are due on April 15^th of the year after the sale of the business. Additionally, business owners must make estimated tax payments to avoid penalties for underpayment of taxes. If the sale of the business closes before the end of the year, the business owner will likely have penalties attributed to underpayment of income taxes when he made his estimated payments. However, if the business owner is in a position to delay the closing of the deal until the beginning of the next calendar year, he can avoid those penalties, which can result in significant savings.

Take the Next Step Today

Advance planning is essential to taking advantage of these opportunities and protecting the legacy you’ve built. To discuss your specific situation and how we can help you implement these strategies, please get in touch with our office to schedule a consultation. At BMK Legal, our team is here to guide you through every step of the planning process.

Essential Planning for Business Owners Prior to Selling a Business

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