Business Exit Planning Guide

An honest framework for the decisions at hand. Not tax or investment advice — your specifics matter.

Asset sale vs stock sale — the first big lever

• Asset sale: buyer cherry-picks assets, leaves behind liabilities. Buyer gets step-up in basis, better future depreciation. Seller typically has partial ordinary-income treatment (recapture).
• Stock sale: buyer gets the whole entity (pros: simplicity; cons: assumes all liabilities). Seller gets clean LTCG treatment.
• C-corp stock sale often preferred by seller due to QSBS eligibility. LLC asset sale often forced by buyer.
• Tax difference is often 5-20% of sale price — multi-million-dollar decision.

QSBS (Section 1202) — the most under-utilized benefit

• Qualified Small Business Stock: original-issue C-corp stock, qualifying trade or business, held for the required period.¹
• Company asset ceiling at issuance: $50M (for stock issued on/before July 4, 2025); $75M (for stock issued after July 4, 2025, per OBBBA).²
• Exclusion cap: greater of $10M or 10× adjusted basis (pre-OBBBA stock); greater of $15M or 10× basis (post-OBBBA stock). Fully excluded from federal capital gains tax.
• Holding period (post-OBBBA tiered): 3 years → 50% exclusion; 4 years → 75%; 5 years → 100%. Pre-OBBBA stock requires the full 5-year hold for any exclusion.²
• State conformity: most states conform; California and a handful of others do not — California taxes the full gain at state rates.³
• QSBS stacking: gifting stock to non-grantor trusts (each trust = separate taxpayer) multiplies the $15M cap. Requires trust to hold the stock long enough to meet its own holding period. Specialist territory.
• Plan QSBS 5+ years before exit, not 5+ months.

Installment sale — when it still makes sense

• IRC § 453: report gain as payments are received rather than all at once. Spreads tax across years.⁴
• Works best when: buyer wants seller financing, seller wants to avoid a one-year income spike, seller values capped tax rate over maxed liquidity.
• Does not apply to publicly-traded stock (§ 453(k)) or inventory. Depreciation recapture is taxed in year 1 regardless of payment schedule.
• 2024-2026 interest-rate environment: AFR rates in the 4-5% range (up from 1-2% in 2020) make installment sales more interest-bearing but also more competitive with market financing.

ESOP alternative

• Employee Stock Ownership Plan: sell your company to a trust for employees. 100% tax deferral via IRC § 1042 rollover — proceeds must be reinvested in Qualified Replacement Property (US operating company stocks/bonds) within 12 months of sale.⁵ Requires C-corp at sale (S-corps can elect to become C-corps for this purpose).
• ESOPs work well at $5-100M valuations, employee-dependent businesses, sellers willing to stay engaged 3-7 years during transition.
• ESOP valuations typically discount 10-25% relative to strategic-buyer valuations.⁶ But net proceeds after the § 1042 tax deferral often beat a strategic sale after federal + state capital gains.

Pre-sale planning windows

• 5+ years out: QSBS planning, entity structure, clean up cap table.
• 2-3 years out: normalize EBITDA, clean financials, resolve any tax positions.
• 12-18 months out: engage investment banker, pre-sale tax planning (CRT funding, non-grantor trusts for QSBS stacking).
• At LOI: negotiate structure (asset vs stock, earnout terms, rep-warranty, rollover equity).
• Post-close: investment policy, wealth transfer planning, trust funding.

The specialist case

• Investment bankers optimize for deal-close (their fee). M&A attorneys optimize for legal structure. CPAs catch tax optimization only if looped in early.
• Exit-planning-specialist fee-only advisors coordinate across all three, model pre-sale and post-sale scenarios, and have no conflict with which decision you make.
• The best-case for specialist engagement: 2-5 years pre-exit. The worst case: after LOI is signed.

Sources

1. IRC § 1202 — Partial Exclusion for Gain from Certain Small Business Stock.
2. Holland & Knight — OBBBA Changes to Section 1202 (July 4, 2025 effective date). Asset ceiling: $50M → $75M; exclusion cap: $10M → $15M; tiered holding period (3/4/5 years = 50%/75%/100%).
3. Startup Law Blog — 2026 QSBS State-by-State Conformity Guide.
4. IRC § 453 — Installment Method. Publicly-traded securities excluded per § 453(k).
5. IRC § 1042 — ESOP Rollover / Qualified Replacement Property. 12-month reinvestment window.
6. National Center for Employee Ownership — ESOP Valuation.

QSBS and Section 1042 rules were significantly updated by the One Big Beautiful Bill Act (July 2025). Stock issued before July 5, 2025 retains the prior $10M/$50M caps and mandatory 5-year hold; post-July 4, 2025 stock uses the enhanced $15M/$75M/tiered-hold rules. Specialist review essential for material holdings.