Exit tax planning for business owners is often overlooked until a buyer is at the table. By then, some of the most useful planning opportunities may have passed. For many East Tennessee business owners, the business is their largest asset, and how it is sold or transferred can shape retirement, family wealth, and legacy for years to come.
Exit planning in East Tennessee is not simply a business decision. It is a financial transition that can affect retirement planning, tax strategy, investment management, and legacy considerations. This article outlines where to start and the tax questions business owners may want to raise with their advisors well before a sale.
Why Start Exit Planning Early?
Many business owners begin thinking seriously about an exit only a year or two before they want to leave. Starting earlier can create more options.
More Time Means More Choices
Improving business value: Time to strengthen operations, management, and financial records.
Tax planning flexibility: Some strategies need to be in place well before a sale agreement.
Choosing the right buyer: More time to consider family, employees, or outside buyers.
Personal readiness: Time to plan what life looks like after the business.
The Cost of Waiting
When planning is rushed, owners may have fewer ways to manage taxes and may feel pressure to accept terms that do not fully reflect their goals.
Key Tax Questions in Selling a Business
Tax rules for business sales are complex and depend on your entity type, deal structure, and personal situation. The following are general topics to discuss with your tax and legal professionals. Rules can change, so check current IRS guidance.
Asset Sale vs. Stock Sale
Buyers and sellers often have different preferences. In an asset sale, the buyer purchases individual assets of the business. In a stock or equity sale, the buyer purchases the ownership interest. The structure can change how proceeds are taxed for the seller.
Capital Gains vs. Ordinary Income
Some portions of a sale may be taxed as long term capital gains, while others, such as certain payments for equipment or noncompete agreements, may be taxed as ordinary income. How the purchase price is allocated matters.
Entity Type
Whether your business is a C corporation, S corporation, partnership, or LLC can affect your tax outcome. Some special rules apply only to certain entity types.
Installment Sales and Earnouts
Receiving payment over time may spread out taxable gain across years. Earnouts tie part of the price to future business results. Each carries its own risks, including the risk that future payments are not received.
Tennessee Considerations
Tennessee does not tax most individual investment income at the state level. Business level taxes and federal taxes still apply, so the federal picture often drives planning.
Planning Strategies Business Owners May Discuss
Not every strategy fits every owner, but these are common conversation starters.
Charitable Planning Before a Sale
Some owners with charitable goals consider giving a portion of business interests to charity or a charitable vehicle before a sale. Timing is important, because gifts made after a sale is effectively agreed upon may not provide the same benefits.
Estate and Gift Planning
Transferring part of a business to family members or trusts before a sale may allow future growth to occur outside of your estate. Valuation and timing are key.
Retirement Plan Contributions
In the years before a sale, some owners consider whether business retirement plans can help them save more on a tax-advantaged basis.
Succession to Family or Employees
Transferring a business to the next generation or to employees involves different tax and financing questions than a sale to an outside buyer.
After the Sale: Planning for Liquidity
A business sale can turn a concentrated, illiquid asset into a large amount of cash. That transition brings its own set of decisions.
Setting aside taxes: Reserve funds for taxes owed on the sale.
Building an investment plan: Decide how proceeds may support your goals through asset allocation and diversification.
Replacing income: Plan how investments and other sources may replace your salary.
Revisiting your estate plan: Your net worth and goals may look very different after a sale.
Planning your next chapter: Consider how you want to spend your time and energy.
A Simple Exit Planning Checklist
Clarify your goals: Timing, desired price, and what you want for your employees and family.
Understand your business value: Consider a professional valuation.
Assemble your team: Financial advisor, CPA, attorney, and possibly an investment banker or broker.
Review your entity and records: Clean financials can support a smoother process.
Model tax outcomes: Compare deal structures with your tax professional.
Plan for life after the sale: Income, investments, and purpose.
For more on this topic, read how exit planning fits into a broader wealth strategy for East Tennessee business owners.
How ProffittGoodson Works with Business Owners
Firms such as ProffittGoodson often coordinate with tax and legal professionals when financial planning discussions involve business succession or ownership transitions. We consider asset allocation, tax planning, and the valuation and sale of business interests as part of a broader picture.
Our approach is built around multidimensional service, disciplined investing, and clarifying counsel:
Understanding you first: Gaining a deep understanding of your financial life and your business.
Connecting money to meaning: Aligning your money decisions with your life goals.
Objective guidance: Recommendations guided by the objective of supporting your long-term goals, without the influence of hidden motivations.
Who We Serve in Knoxville and East Tennessee
ProffittGoodson Private Wealth works with private clients and nonprofits. We offer personalized financial planning in Knoxville and East Tennessee for business owners, multigenerational families, women managing wealth, retirees, foundations and endowments, and trusts and estates.
Visit our Who We Serve page or meet our team.
Start the Conversation
The best time to begin exit and tax planning is often years before a sale. If you would like to talk through how a future transition may fit within your broader financial picture, we invite you to contact ProffittGoodson. You can also join our Wealth Journal for monthly financial market perspectives and wealth management insights from our team.
Frequently Asked Questions
How can I reduce taxes when selling my business?
Approaches may include choosing a deal structure carefully, planning the allocation of the purchase price, using installment payments, and charitable or estate planning before a sale. Work with your tax professional on current rules.
When should a business owner start exit planning?
Many owners benefit from starting several years before a planned sale, which can allow more time for tax planning and improving business value.
What is the difference between an asset sale and a stock sale?
In an asset sale, the buyer purchases individual business assets. In a stock sale, the buyer purchases the ownership interest. The structure can affect how proceeds are taxed.
Is the sale of a business taxed as capital gains?
Often, part of the sale may be taxed as capital gains, while some portions may be taxed as ordinary income. It depends on the structure and purchase price allocation.
Can I give part of my business to charity before selling?
Some owners consider charitable gifts of business interests before a sale. Timing matters, so it is important to plan with tax and legal professionals before a sale is agreed upon.
What should I do with the money after selling my business?
Common steps include reserving funds for taxes, building an investment plan, planning replacement income, and updating your estate plan.
ProffittGoodson Private Wealth provides this content for informational and educational purposes only. It is not intended as, and should not be relied on as, individualized investment, tax, or legal advice. Tax laws are complex and subject to change; please consult a qualified tax professional regarding your specific situation. All investing involves risk, including the possible loss of principal. No strategy can guarantee a profit or protect against loss. Past performance is not indicative of future results. Please refer to the firm's Form ADV and disclosures for additional important information.
DISCLOSURES: The information provided in this letter is for general informational purposes only and should not be considered an individualized recommendation of any particular security, strategy, or investment product, and should not be construed as investment, legal, or tax advice. Proffitt & Goodson, Inc. makes no warranties with regard to the information or results obtained by third parties and its use and disclaims any liability arising out of, or reliance on the information. The information is subject to change and, although based on information that Proffitt & Goodson, Inc. considers reliable, it is not guaranteed as to accuracy or completeness. Source information is obtained from independent financial data suppliers (Interactive Data Corporation, Morningstar, etc.). The Market Categories illustrated in this Financial Market Summary are indexes of specific equity, fixed income, or other categories. An index reflects the underlying securities in a particular selection of securities picked due to a particular type of investment. These indexes account for the reinvestment of dividends and other income but do not account for any transaction, custody, tax, or management fees encountered in real life. To that extent, these index numbers are artificial and cannot be duplicated in real life due to the necessity of paying those transaction, custody, tax, and management fees. Industry and specific sector returns (technology, utilities, etc.) do not account for the reinvestment of dividends or other income. Future events will cause these historical rates of return to be different in the future with the potential for loss as well as profit. Specific indexes may change their definition of particular security types included over time. These indexes reflect investments for a limited period of time and do not reflect performance in different economic or market cycles and are not intended to reflect the actual outcomes of any client of Proffitt & Goodson, Inc. Past performance does not guarantee future results.