# What is exit planning and when should a business owner start?

By James Ustby, CFP®, APMA®. Published 2026-10-17. Canonical URL: https://jamesustby.com/articles/exit-planning-business-owner-start

> Exit planning is the work of turning a business into after-tax wealth on your terms. Many of the moves that matter need three to five years of lead time.

## Key takeaways

- Exit planning is the work of turning the value of your business into money you can live on, on your timeline, after tax. The sale itself is the last step, not the first.
- Many of the planning moves that matter most need years, not months. A retirement plan funded for five years, a gift made before a price is set, and stock held long enough for Section 1202 all depend on starting early.
- In our hypothetical $12,000,000 sale, federal and North Carolina tax on an $11,000,000 gain comes to about $2,638,900, or $3,056,900 if the 3.8 percent net investment income tax applies.
- Starting five years out instead of one, the same hypothetical owners could make five years of cash balance plan contributions instead of one and give shares at a lower value. In this example that is $462,500 of federal tax deferred instead of $92,500.
- A useful test: if a buyer called tomorrow, would you know your number, your structure and your team? If not, the planning window is already open.

## The short answer

Exit planning is the work of turning the value of your business into money you can live on, on your timeline, after tax. Many of the moves that matter most need three to five years of lead time, so the useful time to start is well before a buyer calls.

The sale is the last step of exit planning, not the first. By the time a letter of intent sets a price, several of the most valuable choices have already closed.

## What is exit planning, in plain English?

Exit planning answers four questions before the deal answers them for you:

1. What is the business worth, and what would make it worth more to a buyer?
2. How much of the price would you keep after federal and state tax?
3. How much do you need from the sale to fund the rest of your life?
4. Who gets the business, and who gets the money, if something happens to you first?

An exit can be a sale to an outside buyer, a sale to managers or employees, a transfer to family, or a planned wind down. The questions are the same in every case. What changes is who pays you and how.

For most owners, the business is the largest asset they have, and it is also the one they understand least as an asset. It pays a salary and distributions today. After the exit, the proceeds have to do that job alone. That is why exit planning is as much about retirement income as it is about the transaction. If you have not put a number on the business yet, [how to value a business before a sale](https://jamesustby.com/articles/how-to-value-business-before-sale) walks through the methods buyers use.

## When should a business owner start exit planning?

Many owners start three to five years before they want to leave. The reason is not ceremony. Several of the rules that shape an exit run on clocks that cannot be sped up:

- **Retirement plan funding.** A cash balance plan can let an owner put large deductible contributions into a retirement plan each year, but each year is limited. For 2026, the IRS caps the annual benefit a defined benefit plan can pay at $290,000. More years of contributions can move more money out of the company before the sale.
- **Qualified small business stock.** Under Section 1202, gain on qualifying C corporation stock issued after July 4, 2025 can be partly excluded once the stock is held at least three years (50 percent), four years (75 percent) or five years or more (100 percent), subject to a cap that is generally $15,000,000. The corporation's gross assets cannot exceed $75,000,000 when the stock is issued, and many service businesses do not qualify.
- **Built-in gains after an S election.** When a C corporation becomes an S corporation, gain that built up while it was a C corporation can still be taxed at the corporate level if assets are sold during the five year recognition period under Section 1374.
- **Gifts before a price is set.** Shares given to family or a trust are valued when the gift is made. Once a buyer has named a price, there is little room left to argue the shares are worth less.
- **Owner dependence.** Buyers pay more for a company that runs without its owner. Building a management team and documented systems takes years, not a quarter.

Whether any of these apply to your company is a question for your CPA and attorney. The point is that each one rewards time.

## What does starting five years early change? A hypothetical example

Here is a hypothetical example. It is an illustration, not a projection, and your numbers can differ.

Example: Dave, 57, and Karen, 55, married filing jointly, own all of a Charlotte manufacturing company organized as an S corporation. They hope to sell in 2031, when Dave is 62, for a hypothetical $12,000,000. Their tax basis is $1,000,000, so the gain would be $11,000,000. In each year before the sale, about $900,000 of taxable income flows to them from the business. For the illustration, we use 2026 tax figures for every year and ignore deal costs, debt and inflation adjustments.

First, the sale itself in a stock sale:

| Line | Amount |
|---|---|
| Sale price | $12,000,000 |
| Tax basis | $1,000,000 |
| Long term capital gain | $11,000,000 |
| Federal tax at 20 percent (their other taxable income is already above $613,700) | $2,200,000 |
| North Carolina tax at 3.99 percent | $438,900 |
| Total before the 3.8 percent tax | $2,638,900 |
| 3.8 percent net investment income tax, if it applies | $418,000 |
| Total if it applies | $3,056,900 |

For 2026, the IRS taxes long term gain at 20 percent above $613,700 of taxable income for a married couple filing jointly. The 3.8 percent tax applies above $250,000 of modified adjusted gross income for joint filers, and an owner who actively runs an S corporation may owe less of it, or none, on the gain. That difference alone is $418,000 here, which is why the structure gets reviewed early.

Now compare two starting points with the same sale date:

| Planning lever | Start in 2026 | Start in 2030 |
|---|---|---|
| Years of cash balance plan contributions before the sale | 5 | 1 |
| Contributions at a hypothetical $250,000 a year | $1,250,000 | $250,000 |
| Federal income tax deferred at the 37 percent rate | $462,500 | $92,500 |
| Value of 20 percent of the shares given to a family trust | $1,600,000 (company valued at a hypothetical $8,000,000) | $2,400,000 (at the $12,000,000 price) |
| Growth on the gifted shares kept outside their estates | $800,000 | $0 |
| Time to build a team that runs without Dave | 5 years | 1 year |

Some notes on the math. The 37 percent federal rate applies above $768,700 of taxable income for joint filers in 2026, and their $900,000 of income puts the deduction in that bracket. A cash balance plan contribution defers tax; it does not erase it, because withdrawals in retirement are taxed as income. An actuary sets the real contribution, and covering employees adds cost. The gift figures assume no valuation discounts. In 2026 the federal basic exclusion amount is $15,000,000 per person and the annual gift exclusion is $19,000 per recipient, so a $1,600,000 gift uses part of one spouse's exemption. The full mechanics are in [what a cash balance plan can move out of the company before a sale](https://jamesustby.com/articles/cash-balance-plan-owner-contribution).

The 2030 column is not a failure. It still has one year of contributions and a clean sale. It simply has fewer moves left.

## Which exit planning steps should come first?

A reasonable order, years out:

1. **Know the number.** Get a realistic value range and run the after-tax proceeds under an asset sale and a stock sale. You can test your own price and basis in the [business sale calculator](https://jamesustby.com/business-sale-calculator).
2. **Know your income target.** Decide how much yearly income the proceeds have to replace. At a 4 percent withdrawal rate in this example, $8,943,100 left after the full tax bill supports about $357,700 a year before tax. That is an illustration, not a safe rate.
3. **Pick the levers with clocks.** Retirement plan design, entity questions, gifting and estate documents go first, because they need time to work.
4. **Reduce owner dependence.** Customers, key relationships and decisions that run through you lower the price and raise deal risk.
5. **Clean the books.** Buyers rely on several years of financial statements, so consistent records matter well before a sale.

## What is different in North Carolina?

North Carolina taxes capital gains as ordinary income at a flat rate, which is 3.99 percent for tax years after 2025, according to the North Carolina Department of Revenue. There is no lower state rate for long term gains, so the state bill on an $11,000,000 gain is $438,900. The Department notes that additional rate changes may apply for 2027 and later based on rate reduction triggers, so the rate in the year you actually sell may differ. North Carolina does not tax Social Security benefits, which can help once sale proceeds replace your paycheck. If you are thinking about moving before a sale, residency rules decide which state taxes the gain, so talk to a tax professional before you plan around it.

## The bottom line

Exit planning is retirement planning for owners whose retirement is locked inside a company. The sale price gets the attention, but the after-tax amount, the income it can support and the choices made years earlier decide what you keep. In our hypothetical, starting five years out instead of one meant five years of retirement plan contributions instead of one and a gift made at $8,000,000 instead of $12,000,000. Neither column is a forecast for your company. Both show what time buys.

If a buyer offered you a price tomorrow, do you know how much you would keep, and how long it would need to last?

To see where your business stands today, take the free [exit readiness scorecard](https://jamesustby.com/scorecard), and read [Before You Sell](https://jamesustby.com/book) for the full runway from valuation to the day the wire hits. After the sale, [what to do with the money after you sell your business](https://jamesustby.com/articles/what-to-do-after-selling-business) covers the first 90 days.

## Questions people ask next

### What is exit planning for a business owner?

Exit planning is the process of preparing the business, the owner and the owner's family for the day the owner leaves, whether by sale, transfer to family, sale to employees or closing. It covers value, tax, retirement income, estate plans and what the owner does next. The transaction is one part of it.

### How many years before selling should I start exit planning?

Many owners start three to five years before they want to leave, and some start earlier. Several tax rules run on multiyear clocks, including the Section 1202 holding period for qualified small business stock and the five year recognition period for built-in gains after a C corporation becomes an S corporation. Starting late does not end the planning, but it removes options.

### Is exit planning only for owners who plan to sell?

No. A transfer to children, a sale to managers or employees, and a planned wind down all need the same groundwork: a realistic value, a tax picture, retirement income that does not depend on the business, and estate documents that match the plan. An unexpected illness or offer can also force an exit early.

### Who should be on an exit planning team?

Most owners need a CPA for tax projections, an attorney for entity, deal and estate documents, and a financial planner to connect the sale to retirement income. Owners who sell to an outside buyer often add a valuation professional and an investment banker or business broker. The earlier they work together, the more choices remain.

## Sources

- [IRS, Revenue Procedure 2025-32, 2026 inflation adjusted amounts (capital gains rate thresholds, 37 percent bracket, estate basic exclusion amount, gift annual exclusion)](https://www.irs.gov/pub/irs-drop/rp-25-32.pdf)
- [IRS, Notice 2025-67, 2026 retirement plan limitations (defined benefit plan annual benefit limit)](https://www.irs.gov/pub/irs-drop/n-25-67.pdf)
- [IRS, Net Investment Income Tax](https://www.irs.gov/individuals/net-investment-income-tax)
- [26 U.S. Code Section 1202, Partial exclusion for gain from certain small business stock (Cornell Law School, Legal Information Institute)](https://www.law.cornell.edu/uscode/text/26/1202)
- [26 U.S. Code Section 1374, Tax imposed on certain built-in gains (Cornell Law School, Legal Information Institute)](https://www.law.cornell.edu/uscode/text/26/1374)
- [North Carolina Department of Revenue, Tax Rate Schedules](https://www.ncdor.gov/taxes-forms/individual-income-tax/tax-rate-schedules)

---

Author: James Ustby, CFP®, APMA®, Wealth Advisor, LPL Financial, Durham and Chapel Hill, North Carolina. This material is for general information only and is not intended to provide specific advice or recommendations for any individual. Examples are hypothetical and for illustration only. Securities and advisory services offered through LPL Financial, a registered investment advisor. Member FINRA / SIPC. Certified Financial Planner Board of Standards Center for Financial Planning, Inc. owns and licenses the certification marks CFP® and CERTIFIED FINANCIAL PLANNER® in the United States to Certified Financial Planner Board of Standards, Inc., which authorizes individuals who successfully complete the organization’s initial and ongoing certification requirements to use the certification marks.