The 7 Mistakes Business Owners Make in the 24 Months Before a Sale
The 24 months before you close a deal may have a significant impact on your overall financial outcome. Most major tax planning windows may become more limited or complex after a letter of intent (LOI) is signed. Most estate planning transfers may have different tax implications post-LOI. And most business owners walk into that final stretch with no one coordinating everything around their personal financial outcome.
These are the seven mistakes that are commonly observed in certain situations. Most are fixable, but only if you start early enough.
Mistake 1: Waiting Until the LOI to Call the Wealth Planner
By the time you have a signed letter of intent, the vast majority of tax planning options are more limited or subject to additional constraints.
Pre-LOI, a wealth manager working with your CPA and attorney can help restructure how you hold equity, make gifts of business interest at a lower valuation, fund charitable vehicles with appreciated stock, and model different deal structures against your personal tax picture. Post-LOI, most of those options may no longer be available or may be more difficult to implement because the asset now carries an established fair market value.
What to do instead: Engage a wealth planner fluent in business exits at least 24 months before you expect to go to market.
Mistake 2: Missing the QSBS/Section 1202 Window
Section 1202 of the Internal Revenue Code allows shareholders in a qualified small business organized as a C-corporation to exclude up to $10 million in gain, or 10 times their adjusted basis, from federal income tax upon sale. That is not a deduction. It is an exclusion.
Requirements are specific: the business must be a C-corp at the time the stock is issued, the shareholder must hold the stock for at least five years, and the business must meet gross assets tests at issuance (generally under $50 million). The exclusion applies per shareholder, so thoughtful equity distribution among family members or trusts can multiply the benefit.
What to do instead: Have a qualified tax advisor determine whether your business and equity structure meet Section 1202 requirements. If the sale is years away, restructuring may still be possible.
Mistake 3: Not Gifting Equity Before the Valuation Spike
The IRS values your business at the time of transfer. Act before the LOI, and you may move equity at a value reflecting minority interest discounts and no transaction premium. Once the deal is reasonably certain, the IRS can challenge last-minute transfers based on valuation, facts, and circumstances determined at the time.
Tools available pre-LOI include the annual gift exclusion ($19,000 per recipient, $38,000 with gift-splitting), Grantor Retained Annuity Trusts that transfer future appreciation with minimal gift tax cost, and Intentionally Defective Grantor Trusts that move equity to heirs at today’s price without triggering capital gains on the installment sale.
Valuation discounts and transfer strategies are subject to IRS review and may not be sustained.
What to do instead: If a sale is two to five years out, have your wealth planner and estate attorney run a valuation-based gifting analysis now.
Mistake 4: Confusing Asset Sale vs. Stock Sale Tax Treatment
Buyers often prefer asset sales for tax reasons. Sellers who do not understand why pay for that preference.
In an asset sale, the buyer gets a stepped-up basis and future depreciation deductions. The seller faces ordinary income tax rates on recaptured depreciation and gains in certain asset classes. In a stock sale, the seller’s gain is generally long-term capital gain at preferential rates. The difference in after-tax proceeds can be material. Buyers know this, and their deal teams model it.
Actual tax outcomes depend on deal structure, jurisdiction, and individual circumstances.
What to do instead: Before you respond to any term sheet, have your CPA model the deal in both structures against your personal tax situation. Know your number and negotiate with it.
Mistake 5: Ignoring Charitable Pre-Sale Stock Gifting
If you wait until after the deal closes to give, you may be donating assets after taxes have been realized.
Donating appreciated business equity before the liquidity event to a donor-advised fund (DAF) or charitable remainder trust generates a deduction at fair market value which may allow for a charitable deduction and deferral or avoidance of certain capital gains. A charitable remainder trust (CRT) also pays you an income stream for a term of years before the remainder passes to charity.
What to do instead: If philanthropy is part of your plan, talk to your wealth planner about establishing a DAF or CRT before you go to market.
Mistake 6: Treating the Estate Plan as “Done”
Most business owners signed their wills and trusts years ago, when the business was worth a fraction of today’s value. Common problems include irrevocable life insurance trusts sized for a much smaller estate, bypass trusts now creating unexpected income tax exposure for heirs, and beneficiary designations on retirement accounts and life insurance that you have not revisited in years.
What to do instead: If you have not reviewed your estate plan in three or more years, or if the business has grown significantly, have your estate attorney conduct a full audit.
Mistake 7: Having No Post-Sale Decumulation Plan
The closing wire hits. You sell the business. And then paralysis sets in.
Post-sale decumulation planning involves withdrawal rate modeling, tax-efficient sequencing across account types, concentrated position management, and a long-term spending framework. A business owner who establishes a post-sale financial architecture before closing may improve the likelihood of sustaining that wealth across time than one who deposits the proceeds without a specific plan.
What to do instead: Have a detailed post-sale financial plan in place before you close, covering income needs, tax exposure, estate goals, and risk tolerance over a multi-decade horizon.
This is intended for informational purposes only. You should not assume that any discussion or information contained in this document serves as the receipt of, or as a substitute for, personalized investment or tax advice from Savant. Please consult your investment or tax professional regarding your unique situation.
Scooter Thomas
Financial Advisor
CFP®, ChSNC®, ChFC®