By: Andrew Parker
Millions of small and mid-sized business owners are approaching retirement age at the same time. Few have done the planning needed to keep what they have built.
By 2035, an estimated six million small and mid-sized businesses in the United States will face an ownership transition as their owners retire, according to a recent McKinsey report. More than a million of those businesses are considered viable candidates for sale, representing as much as $5 trillion in enterprise value. Nearly half of the country’s small business owners are already 55 or older, and according to Forbes data cited by Fox Business, only 54 percent of them have a formal succession plan in place.
Most of that planning gap is about finding a buyer or preparing the business for sale. Far less attention goes to what happens to the proceeds once the deal closes, and that is where many owners are leaving money on the table without realizing it.
A Predictable Problem With an Unpredictable Cost
The math behind a business sale is not complicated in theory. A business owner sells the company, realizes a capital gain on the difference between what they originally invested and what they sold it for, and pays tax on that gain. In practice, the size of that tax bill can be the difference between a comfortable retirement and a tight one.
Federal capital gains rates alone can claim a meaningful share of the proceeds, and state taxes add more depending on where the seller lives. For owners in higher-tax states, the combined bite can be significant enough to materially change retirement plans that were built around a specific sale price.
The frustrating part, advisors say, is that most of this is avoidable with enough lead time. The problem is timing. Owners typically do not start thinking seriously about the tax consequences of a sale until a buyer is already at the table, and by then, many of the more effective planning strategies are no longer available.
Why the Timing Window Closes So Fast
Kevin Brunner, president of The Q Companies, a multi-family office in Orange, California, has spent more than two decades working with business owners on this exact problem. His firm has handled exit planning for thousands of clients, and he says the pattern is remarkably consistent.
“Most advisors tell you to pay full price,” Brunner said, describing the gap between what is legally possible and what most sellers actually do.
Strategies like the installment sale trust, sometimes referred to as a 537 trust, are structured to defer capital gains so that proceeds are recognized over time rather than taxed upfront in a lump sum. But these structures generally need to be established before a sale agreement is signed. Once the deal is in motion, the options narrow considerably, and by the time a letter of intent is on the table, it is often too late to implement the more effective strategies.
Real estate investors have a more familiar version of this same problem. The 1031 exchange has long been the standard tool for deferring gains on the sale of investment property, but it comes with a tight timeline and requires reinvesting in like-kind property to preserve the tax benefit. For sellers who want to walk away with cash rather than another property, that structure does not always fit.
A Gap in the Advisory Model
Part of the reason this problem persists, according to Brunner, is structural. Most financial advisors are not equipped to administer trust-based exit strategies, which require coordination between legal, tax, and investment functions that fall outside a typical advisory relationship. CPAs handle the tax filing. Business brokers handle the sale. Few professionals are positioned to handle the planning that needs to happen before either of those steps begins.
That has left a gap that mostly affects business owners who do not have a family office or a dedicated wealth management relationship already in place, which describes the overwhelming majority of small and mid-sized business owners preparing to exit.
Brunner’s firm built an in-house installment sale trust program, marketed through a platform called TaxFreeYou, specifically to close that gap. He says demand has grown steadily as more owners reach the age where selling becomes a real conversation rather than a general idea.
What Owners Can Do Now
The advice from specialists in this space is consistent: the planning has to start well before a buyer is in the picture. Owners who begin thinking about the tax structure of a future sale two or three years out have access to a much wider set of options than those who wait until they have a signed offer.
For a generation of business owners approaching the end of a multi-decade run, the decision of when to start that planning may end up mattering as much as the decision of when to sell.
Disclaimer: This article is for informational purposes only and does not constitute investment advice, a recommendation, or an offer to buy or sell any securities. Consult a qualified financial advisor for advice specific to your situation.
