Selling the business in three years

Who

A couple in their mid-fifties, with one child in high school and one in college. One spouse owns a specialty contracting business organized as an S corporation, with about 30 employees and a bank line the owner personally guarantees. They expect to sell in two to four years, most likely to a larger competitor or a private equity group that had already called twice.

What they came in with

• Roughly 80% of the family's net worth was the business. Retirement savings outside it were a SEP IRA, funded in good years and skipped in lean ones, because a SEP requires the same contribution percentage for every eligible employee and the cost of covering 30 people made it an all-or-nothing decision each year.
• Nobody had put a number on what a sale would leave after tax, or on what the family actually needed to retire. The owner's working assumption was the headline price.
• The entity, and its S election, dated from a different line of business a decade earlier. No one had revisited whether the current split between salary and distributions still held up as reasonable compensation, or how the entity choice affected an asset sale versus a stock sale. The owner had also read about the qualified small business stock exclusion and assumed it might apply.
• The buy-sell agreement named a former partner who left years ago. The wills were from before the second child was born.
• The CPA prepared the returns well but did not do planning. An insurance agent had recently proposed a large whole life policy as a "retirement supplement."

What we did

The engagement started with a comprehensive plan, built over the usual Exploration, Vision and Obstacles meetings and a document collection phase. Implementation followed over the next nine months.

• Modeled the sale. We built after-tax proceeds estimates under an asset sale and a stock sale, and under a lump-sum close versus an installment note. The model used 2026 federal capital gains rates, depreciation recapture at ordinary rates on the equipment in an asset sale, whether the 3.8% net investment income tax applies (generally not on the sale of an active business by an owner who materially participates), and the Texas franchise tax. The difference between the best and worst structure for the seller was large enough to change how they planned to negotiate.
• Reviewed the entity and compensation. We tested whether the current salary was defensible as reasonable compensation for an S corporation owner, documented the analysis, and handed it to the CPA to implement on the next payroll cycle. We also closed the QSBS question early: the exclusion applies only to C corporation stock acquired at original issuance, so S corporation shares don't qualify, and revoking the S election now wouldn't make shares issued years ago eligible. The family stopped counting on it and focused on deal structure instead.
• Built a pre-sale retirement savings plan. With sale proceeds a few years away, the goal was to shift as much income as possible into tax-advantaged accounts first. A solo 401(k) was not an option with 30 employees, so we compared three company-wide designs: keeping the SEP IRA, a safe harbor 401(k) with a profit-sharing allocation weighted toward the owner within the nondiscrimination rules, and that same 401(k) paired with a cash balance plan. We costed each design, including the contributions it would require for employees. The owner chose the 401(k) with profit sharing as the better fit for their headcount and cash flow, and kept the cash balance plan as a later option if earnings stayed high.
• Equipment timing. The business had a habit of buying equipment in December to cut the tax bill. With 100% bonus depreciation permanently available, the deduction was the easy part. The real questions were whether the business needed the equipment and whether a December purchase would depress earnings in the years a buyer would scrutinize. See Should I buy equipment before year-end?
• Estate and gifting. We coordinated with a referred estate attorney on new wills, powers of attorney and a buy-sell agreement that matched today's ownership, and discussed gifting minority interests before a sale fixes the value, using a trust that qualifies as an S corporation shareholder. The family decided to use the $19,000 per person annual exclusion for cash gifts now and revisit the trust once a buyer was identified. See How much can I give tax-free in 2026?
• Insurance. We reviewed the proposed whole life policy against the family's actual need, which was term coverage through the sale and the bank guarantee. They kept the term policy, declined the permanent policy, and redirected the premium to the new 401(k).

Outcome

• A written target in the plan: the after-tax amount from a sale that, combined with their other savings, covers the family's spending for life. Anything above that number is optional, which changed how the owner thinks about offers.
• A compensation structure and retirement plan design the CPA and plan administrator could implement, with the first full year of contributions made before the sale process began.
• Current estate documents and a buy-sell agreement that reflect who actually owns the company.
• A one-page summary of preferred deal structure, with the tax reasoning, to hand to the M&A advisor when the time comes.

What it cost

See the fee summary at the top of this page. The family keeps their accounts where they are; Mercer Street does not manage investments and charges nothing on the eventual sale proceeds.