Exit Planning: What Changes When You Have Five Years vs. Five Months

We get two kinds of business exit calls.

The first is from an owner who is thinking about selling in three to five years. They want to know what they should be doing now.

The second is from an owner with a signed letter of intent on their desk, closing in 90 days. They want to know what they can still do.

The answers are very different — and the gap between them is usually 20% to 30% of the after-tax proceeds.

Why time changes everything

Almost every powerful exit-planning tool requires runway. Some require a holding period. Some require setup before the buyer is identified. Some require the entity to look a particular way for a minimum number of years.

When you have five years, you can change the structure. When you have five months, you can only optimize what already exists.

The five-year toolkit

With three to five years of runway, the playbook expands dramatically:

Entity structure

• Convert from C-corp to S-corp (or vice versa) if the math favors it, observing the five-year built-in gains period
• Spin off real estate into a separate LLC so the buyer can acquire the operating business without the real estate
• Clean up the cap table — eliminate dormant equity holders, document option grants, resolve any ownership ambiguity

QSBS (Qualified Small Business Stock)

• For C-corps held five+ years, Section 1202 can exclude up to $10M (or 10x basis) of gain from federal tax
• Stacking QSBS across non-grantor trusts can multiply the exclusion
• This requires the entity to be a C-corp at original issuance — not a conversion

Valuation lift

• Most lower-middle-market businesses sell at 4x-7x EBITDA
• Three years of work on customer concentration, recurring revenue, management depth, and clean financials can move the multiple
• A move from 5x to 6x on $3M of EBITDA is $3M of additional proceeds

Pre-sale gifting

• Gift minority interests to a grantor trust before the value runs up
• Use today's $13.61M federal exemption before the scheduled 2026 sunset
• A $2M minority interest gifted today that becomes $5M at sale moves $5M out of the taxable estate at a $2M exemption cost

Charitable planning

• Charitable Remainder Trusts can defer and spread the capital gain
• Donor-advised fund contributions of stock pre-sale eliminate the gain on donated shares
• These structures must be set up before a binding sale agreement

The five-month toolkit

With a signed LOI, your options narrow but are not zero:

Deal structure

• Allocate purchase price between asset categories to favor capital gain over ordinary income (personal goodwill, for example)
• Negotiate a portion as an installment sale to spread the gain
• Consider a rollover of equity into the buyer's entity to defer a portion of the gain

Working capital and quality of earnings

• The QofE will find every add-back that wasn't really an add-back
• Cleaning up the trailing twelve months matters more than you think

Personal tax positioning

• Bunch deductions into the sale year (charitable, state tax prepayments where allowed)
• Realize losses to offset a portion of the gain
• Confirm state of residence is locked in well before close — Maryland to Florida moves require documentation

Post-sale planning

• Open the donor-advised fund, the irrevocable trust, the new estate documents — but understand many cannot reduce tax on the sale itself, only manage the proceeds

The proceeds are not the finish line

Most owners we work with discover that selling the business is the easy part. The hard part is what comes after:

• A liquid net worth that is suddenly 5-10x larger
• An income stream that no longer exists
• A daily structure that no longer exists
• Adult children who now know exactly what the family is worth
• A tax bill that arrives in April

The exit is not the plan. The exit is one event inside the plan. We have watched owners who handled the sale brilliantly and the next 20 years poorly — and the opposite. The difference is almost always whether the post-sale picture was built before the sale, not after.

What to do this quarter

If you are three to five years out:

1. Get a defensible baseline valuation
2. Identify the two or three drivers that would move your multiple
3. Stress-test your entity structure with a tax attorney
4. Begin gifting analysis if your net worth is approaching $10M

If you have an LOI on the desk:

1. Run a personal cash-flow projection at the after-tax proceeds
2. Confirm beneficiary designations and trust funding for the post-sale balance sheet
3. Lock in state residency well before close
4. Build the team for the day after closing — investment, tax, legal, family governance

The best exits are not the highest valuations. They are the ones where the seller knows, on closing day, exactly what the next 30 years will look like.