Insights

A Proactive Approach to Selling a $40M Business

June 13, 2025

Selling a business is an emotionally and financially significant milestone in the lives of the owners who take the leap.

Key Strategies

• Lower capital gains tax on sale.
• Plan for your legacy.
• Transfer wealth in line with your goals.

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A Proactive Approach to Selling a $40M Business

Alex plans his $40M business sale with strategies for tax efficiency, wealth preservation, and legacy planning.

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An Example
Alex, a successful owner and operator of a highly regarded software development company, who after 20 years of dedicated service, is making his exit. A dependable buyer has made a preliminary offer for $40 million, and Alex would like to accept. Although excited for this next phase of life, he is giving careful consideration to the tax implications of this transaction and has proactively engaged a team of financial and estate professionals to guide him. He has stated three clearly defined goals, ones commonly shared by departing owners: (1) sell at a high price; (2) in a tax efficient transaction; and (3) using strategies to extend preserved wealth for future generations.

With a generous offer already in hand, Alex is ready to explore his planning options for tax efficiency and wealth preservation. Alex learns from his team that he could owe taxes as ordinary income, as capital gains, or as a combination of the two, and this is dependent on the terms and structure of the deal. Alex has negotiated a deal that will result only in capital gains tax. While this is a positive result at the federal level, California taxes capital gains the same as ordinary income, which can result in a significant tax bill.

Additionally, with his total net worth exceeding the current federal estate tax exemption of $13.99 million, or $27.98 million for him and his spouse (amounts subject to change), Alex is also seeking to efficiently transfer wealth to his heirs. After careful consideration of the facts and circumstances

1. Installment Sale

This is an agreement reached between the parties to the sale, often incorporated into estate planning, allowing for the $40 million purchase price to be paid periodically, over a stated term. This spreads out the realization of income in smaller increments, potentially lowering the overall tax rate by keeping Alex in a lower tax bracket each year. The deferred payment structure will also provide additional interest income agreed to and assessed under the installment note or contract for sale.

2. Grantor Retained Annuity Trust (GRAT)

A mechanism providing a retained interest in the sale proceeds while tax efficiently passing assets to heirs is the concept of GRAT planning. Here, Alex transfers the business, or a portion of it, to a trust vehicle benefitting his heirs, but not until he receives his desired portion of the sale proceeds through annual annuity payments from the trust for a set term. Any appreciation of the business value, or of the proceeds from the sale, which exceeds payments

3. Charitable Remainder Trust (CRT)

Alex has long considered incorporating his philanthropic activity into his planning. With a CRT, Alex would transfer a portion of business assets to the trust, in exchange for a stream of income payments for life or a specified term. Assets remaining at the end of the trust’s existence would pass to a chosen charity. This strategy provides a charitable deduction, reduces estate taxes, and supports philanthropic goals.

4. Family Limited Partnership (FLP)

One strategy that accomplishes Alex’s desire to provide for his family in a tax-efficient estate plan, while actively incorporating the family in the sale transaction, is the FLP. Using this tax-favorable entity available to families who co-own or invest as a unit, Alex can transfer a certain type of ownership interest to the family, taking permissible discounts on the value of the asset. The result here the heirs will receive more in value than will be reported for purposes of federal estate tax. Additionally, achieving a reduction in the value of the taxable estate, while Alex retains decision making authority over the business operations during the transition period.

Conclusion

By implementing one or more of these strategies, Alex has created the opportuity to minimize the tax bills he is facing, using legally sound structures. The measurable results – lowering the capital gains tax on the business sale and a tax efficient plan for his legacy and the eventual transfer of wealth to the next generation. The options presented to Alex provide a comprehensive estate planning approach that aligns with Alex’s goals.