Where They Stand
Owner’s Compensation
$600,000+
Net to owners after payroll and overhead
Estimated Business Value
~$3,500,000
Based on industry multiples — no formal valuation yet
Combined Retirement
$740,000
SEP-IRA and traditional IRAs, all pre-tax
Real Estate
$850,000
Primary home ($550K) + commercial property ($300K)
Exit Timeline
~5 Years
⚠ No tax strategy in place for the sale
Succession Candidate
Internal
Senior ops manager (10 yrs) + oldest son interested
Tax Offset Assets
$0
⚠ No harvested losses or offset strategy in place
Family
2 Sons — 22 & 19
Oldest has expressed interest in the business
The Problem
They’ve built a business worth an estimated $3.5 million. They want out within five years — whether that means selling to their senior ops manager, bringing their oldest son into an ownership role, or some combination of both. The business is healthy and the exit is realistic.
But here’s the problem… nobody’s thought about what happens on the other side of that sale.
A $3.5M business exit — structured as a stock or asset sale — generates a long-term capital gain that could trigger a federal tax bill of $700K or more. Plus state taxes on top. That’s money that should be funding their retirement, not going to the IRS.
Right now they have zero capital losses banked, no tax-offset strategy in place, and no structure designed to spread or reduce the impact of a liquidity event this size. If they sell tomorrow, they pay full freight.
They also haven’t thought through the mechanics. A lump-sum purchase from an internal buyer — whether it’s an operations manager or a 22-year-old son — is unrealistic. The buyer won’t have the capital. And a lump sum concentrates the entire tax hit into a single year.
A $3.5M exit with no tax planning could cost $700K–$800K+ in combined federal and state capital gains taxes. That’s not a line item — that’s a house.
The five-year runway is the asset here. With the right strategy, we can start building tax offsets now, structure the sale to spread the gain, and help them keep significantly more of what they’ve spent 18 years building.
The Playbook
Step 01 — Start Here
Get a Formal Business Valuation
- The ~$3.5M estimate is based on rough industry multiples — a formal valuation from a certified business appraiser establishes a defensible, documented number that every other decision builds on
- The valuation sets the price for a potential internal sale, informs the structure of seller financing, and tells us the size of the capital gain we need to plan around
- It also surfaces what’s actually driving the value — recurring revenue, client contracts, trained crews, equipment, the commercial property — and where the business might lose value without the founder at the helm
- Knowing the number now gives them five years to maximize it. Reduce owner-dependence, lock in key employees, strengthen the revenue base before a transition
Step 02 — The Tax Offset Engine
Invest in a Long/Short SMA to Build Harvestable Losses
- This is the centerpiece of the pre-exit tax strategy. We start investing a significant portion of their annual cash flow into a long/short separately managed account designed to generate harvestable losses
- The strategy holds both long positions (stocks expected to go up) and short positions (stocks expected to decline). The short side generates realized losses when positions are closed — losses that get banked and carried forward indefinitely
- Over five years, the goal is to stack enough capital losses to materially offset the gain from the business sale
- Example: if the business sells for a $3M gain and we’ve accumulated $1.2M in capital losses over the preceding years, the taxable gain drops to $1.8M — potentially saving $250K–$300K+ in taxes
- The SMA doesn’t need to be exotic — it needs to be disciplined. The losses are a natural byproduct of active management, and the portfolio itself still targets positive returns over time
- Timing matters: the earlier we start, the more harvesting cycles we get before the exit. Year one gives us five full years to build the offset
Step 03 — Structure the Sale
Use Seller Financing to Spread the Gain Across Multiple Years
- Rather than receiving the full sale price at closing, we structure it as an installment sale — the buyer pays over time, and the capital gain is recognized proportionally as payments come in
- This is installment sale treatment under IRS rules. It lets us spread the gain across 5, 7, or even 10 tax years instead of recognizing it all at once
- The benefit is twofold: it keeps them in a lower capital gains bracket each year, and it pairs naturally with the harvested losses — we can match annual gain recognition against annual loss offsets for maximum efficiency
- Seller financing also solves the buyer’s problem. Whether it’s the ops manager, their son, or a combination — an internal buyer almost certainly can’t write a $3.5M check at closing. A structured note with reasonable terms makes the deal possible
- The note carries a fair market interest rate (IRS requirement) and includes protective provisions — the business itself as collateral, personal guarantees if appropriate, and acceleration clauses if the buyer defaults
- They also retain leverage during the transition: if the buyer stumbles, the note gives them recourse. It aligns incentives — the buyer succeeds, or the business comes back
Step 04
Define the Succession Path
- The senior ops manager has been with the company for 10 years and knows the business inside and out. The oldest son, 22, has expressed interest but is early in his career. Both are potential successors — but they represent very different timelines and structures
- Option A: sell to the ops manager over 5–7 years via seller financing, with the founder stepping back gradually as the manager takes full ownership
- Option B: bring the son in now with a defined role and a path to partial or full ownership over a longer horizon — potentially 7–10 years — while the ops manager holds the day-to-day together in the interim
- Option C: a hybrid — the ops manager buys a majority stake via seller financing, and the son earns or purchases a minority interest over time as he proves himself
- Whatever the structure, it needs to be documented, agreed upon, and tied to the financial plan. A handshake and good intentions aren’t a succession plan
- The founder should begin transferring client relationships, operational knowledge, and decision-making authority now — a business that runs without its founder is worth more at sale and transitions more smoothly
Step 05
Execute a Buy-Sell Agreement Before Anything Changes Hands
- Before any ownership transfers, we need a buy-sell agreement that defines the terms — price (tied to the formal valuation), payment structure, triggering events, and what happens if the deal falls apart
- The agreement protects both sides: the buyer knows the price and terms in advance, and the sellers have a legally enforceable commitment rather than a verbal understanding
- It should also address what happens if either owner dies or becomes disabled before the sale is complete — does the deal accelerate? Does the note forgive? Does ownership revert?
- If the son is involved, the buy-sell should clearly separate family dynamics from business terms. Fair market value, no family discounts, professional treatment
- This document is non-negotiable. No ownership transition should begin without it
This case study is a fictional example created for illustrative purposes only. It does not constitute investment advice, financial planning advice, tax advice, or a recommendation of any specific strategy or product. Every individual’s financial situation is unique. Please consult a qualified financial advisor before making any financial decisions.