Direct answer: Ask your CPA five diagnostic questions before selling: do I have QSBS status, what is my exit-optimal entity, have you reviewed my state residency implications, what installment options exist, and what trusts should I consider. Non-answers signal a non-exit-ready CPA.
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The Conversation That Costs Founders Millions When They Skip It
When it comes to selling your business, there is a conversation that really needs to happen sooner rather than later — and it has to do with CPAs and tax CPA attorneys. The question comes down to this: what should your CPA have been doing for the last five years before your sale?
This question catches a lot of entrepreneurs, business owners, and practitioners off guard. And it costs them a ton of money in taxes. The gap between what a standard-service CPA does and what an exit-ready CPA does is often measured in millions of dollars on a mid-market transaction. This concept sits inside the Exit Ratio 360™ system as one of the highest-leverage upstream decisions available.
Standard Disclaimer — Talk To Qualified Professionals
Huge disclaimer up front. I am not a CPA. I am not a tax accountant. I am not a tax attorney. You absolutely, positively should talk to one of these individuals and pay them the money. Everything in this post is a rough framework you can take to a qualified professional — it is not tax advice, and it is not a substitute for a licensed CPA or tax attorney reviewing your specific situation.
The Hardest Advisor To Find On Your Exit Team
Here is the order-of-operations insight most sellers miss. When you are finding people to help you with your exit, the hardest player to find is that exit-ready tax CPA. That is the person you really want to start looking for as soon as you can — years before you need them.
Why they are so hard to find:
- They play within specific industries. If your industry isn’t in their book, they may pass.
- They get busy and backed up months in advance.
- If they work with a larger firm, they may look at their existing roster and identify a conflict of interest.
- They may only take a few new exit engagements per year, choosing selectively.
For related context on hiring quality advisors, see before you hire an advisor or consultant, understand this one rule.
Lever #1 — QSBS (Qualified Small Business Stock)
Section 1202 in the IRS code. QSBS stands for Qualified Small Business Stock — a potential federal capital gains exclusion for shareholders of qualifying C corporations. This one lever alone can shift the tax picture on your exit by millions.
What has to be in place:
- The business must be structured as a C corporation
- Stock certificates must be properly issued and documented
- Specific years matter — holding periods matter
- Milestones matter
- Anniversary dates matter
If you are structuring a business, or even buying a business to bolt onto what you already have, QSBS eligibility sometimes matters more than the operational fit. Ask your CPA or tax attorney specifically about Section 1202. If they cannot walk you through the requirements from memory, that is diagnostic information.
Lever #2 — Entity Structuring
There is a huge difference between an LLC, an S corporation, and a C corporation. Entity structure affects how the sale gets executed. It affects the taxes. It affects your QSBS eligibility. It affects everything downstream.
Here is the honest problem. If your CPA has been filing your returns for 10 years by rubber-stamping the existing structure, and they have not had a conversation with you about whether your current entity is the right one for exit — that CPA has been doing the minimum job, not the exit-ready job. The difference in what you keep post-sale can be enormous.
You have one shot, one chance, one opportunity to get this right. You can restructure S to C or C to S, but it takes time. If you are 5, 4, 3, or 2 years out from selling, you have runway to make the change work to your advantage. If you are 6 months out, you do not.
Do not attempt this without qualified help. But do initiate the conversation.
Lever #3 — State Residency Planning
State income tax varies dramatically. California can add 10-13% to your tax burden on the sale. Nevada, Texas, Florida, and a few other states have zero state income tax. That is millions in difference on a larger sale.
Most states have a residency rule that requires 6 months and a day of physical presence to establish residency. California specifically applies a 183-days-out-of-the-year test. If you spend 183 days in California in the tax year, you are a California resident and you owe California taxes on the sale proceeds.
If you want to establish residency in a lower-tax state, documentation matters. You want to document every single day you are living outside the state you are trying to leave. Things that trigger residency determinations:
- Voter registration — where are you registered to vote
- Driver’s license state
- Physical address on tax returns
- Where your primary residence is located
- Where your family lives
- Where your professional relationships are anchored
For related context on the specific tax planning levers that determine what actually hits your bank account after the sale, see what actually hits your bank account after selling a $10M business.
Lever #4 — Installment Sales And Structures
Installment sales let you spread the capital gain over multiple years, keeping you out of the top tax bracket for any single year.
Simple example. You have a $10 million sale. You need $5 million up front to pay off vendors, lenders, and immediate obligations. You are willing to take the other $5 million in an installment structure with interest — or in an escrow account where it compounds — because you do not want to touch that money until next tax year to avoid an enormous single-year tax bill.
Installment options get negotiated during the LOI. This is exactly why LOI is a fancy French term for negotiation. The specific installment structure, interest rate, escrow terms, and timing are all negotiable. See what is a purchase price in an LOI contract and what are payment terms in an LOI provision for the specific mechanics.
Lever #5 — Grantor Trusts, Gift Trusts, And Charitable Trusts
Trust structures let you strategically manage where the proceeds land and how they are taxed. There are grantor trusts. There are gift trusts. There are charitable trusts including church-related structures. Each does something specific to the tax picture.
The conversation with your CPA and tax attorney is — how do we structure the business so we pay the taxes we are supposed to pay, but not a cent more than that? In some trust structures, you can add a family member who receives payments through the trust. In others, you shift assets pre-sale to reduce the taxable base. In others still, you use charitable structures for both tax reduction and philanthropic goals.
Each of these requires specific legal setup. Each has specific rules. None of them can be set up in the 60 days before your sale. All of them need years to work properly.
The Five Diagnostic Questions To Test Your CPA
Here are the specific questions to ask any CPA you are evaluating for exit work:
| Question | What Their Answer Should Sound Like |
|---|---|
| Do I have QSBS status? | If you are a C corp with proper documentation and holding periods, the answer should be a confident yes with the specifics laid out. If it’s a shrug, that’s a red flag. |
| What is my exit-optimal entity structure? | They should walk you through C corp vs S corp vs LLC in the context of your specific exit timeline, industry, and structure. Not generic answers. |
| Have you reviewed my state residency implications? | They should know your current state’s tax burden, the alternatives, the timing requirements for a residency change, and the documentation you would need. |
| What installment options exist for my situation? | They should be able to describe installment sale mechanics, interest rate considerations, escrow structures, and timing to manage bracket exposure. |
| What trust structures should I consider? | They should walk you through grantor trusts, gift trusts, and charitable options relative to your specific goals — family, philanthropy, or tax reduction only. |
These are the bare minimum questions. If your CPA cannot answer them confidently, they are not exit-ready. These are not the hard questions. There are harder questions to ask. But these five separate CPAs who file returns from CPAs who plan exits.
Credit Where Credit Is Due
I want to give credit where credit is due. I learned a lot about this topic from Roland Frasier, Ryan Deiss, Grant Teeple, and Nate Dotson. If it weren’t for these guys giving me coaching and training along the way, I would not know nearly as much as I do about the intersection of exit strategy and tax planning.
The point is not that these specific advisors are the right ones for you. The point is that this level of knowledge does not come from filing tax returns — it comes from years of watching exits happen at scale. The professionals you want on your team have that same kind of specific-domain experience. If they got their exit knowledge from generic CPA continuing education alone, they are not the exit-ready professional you need.
If you are looking to sell your business in the next zero to thirty-six months, doing at least $2 million a year in revenue with a ten percent profit margin, the deal hotline is 888-DEAL-919. One of the team members will get back to you. No deal is too big.
Related cluster reading: what actually hits your bank account after selling a $10M business, why your first buyer isn’t your best buyer, the five times to fire your advisor mid-deal.
Frequently Asked Questions
What should your CPA have been doing for the last 5 years before selling your business?
Five specific things: evaluating QSBS eligibility if you are a C corp, reviewing entity structure for exit optimization, planning state residency implications, mapping installment sale options, and structuring grantor or gift trusts if applicable to your goals. Standard-service CPAs skip most of these. Exit-ready CPAs raise them proactively 3-5 years in advance.
What is QSBS (Qualified Small Business Stock)?
QSBS refers to stock in a qualifying C corporation covered by Section 1202 of the IRS code. Under certain conditions, holders can receive federal capital gains exclusion on the sale of that stock. Eligibility requires proper entity structure, stock certificate documentation, specific holding periods, and other requirements. Talk to a qualified tax attorney about your specific situation.
How does entity structure (LLC vs S corp vs C corp) affect your business sale?
The entity type determines how the sale is executed, how the tax hits, and what optimization levers are available. LLCs, S corporations, and C corporations each have different implications. A CPA who has been filing your returns for years by rubber-stamping your existing structure without discussing exit optimization has done the minimum job, not the exit-ready job.
How does state residency affect your business sale taxes?
State income tax varies from zero in states like Nevada, Texas, and Florida to 10-13% in states like California. On a mid-market sale, that difference is millions. Most states use a 6-months-and-a-day residency rule. California specifically applies a 183-day test. Establishing residency in a lower-tax state 12-24 months pre-sale can meaningfully affect proceeds.
What is an installment sale structure?
An installment sale spreads the sale proceeds over multiple tax years to keep you out of the top bracket in any single year. Example: on a $10M sale, take $5M at close and $5M in an installment structure with interest or in escrow that compounds. You do not touch the second portion until the following tax year, spreading the capital gains recognition across years.
What are grantor trusts and gift trusts in business sale planning?
Trust structures let you strategically manage where sale proceeds land and how they are taxed. Grantor trusts, gift trusts, and charitable trusts each do specific tax and estate work. In some structures, family members are named to receive distributions. In others, assets are shifted pre-sale to reduce the taxable base. Setup requires years, not weeks.
What five diagnostic questions should you ask your CPA before selling?
One, do I have QSBS status? Two, what is my exit-optimal entity structure? Three, have you reviewed my state residency implications? Four, what installment options exist for my situation? Five, what trust structures should I consider? These are bare minimum. If your CPA cannot answer them confidently, they are not exit-ready.
Why is a tax CPA the hardest professional to find for a business sale?
Because exit-ready tax CPAs specialize in specific industries, get busy and backed up months in advance, may have roster conflicts with larger firms, and often only take a few new exit engagements per year. This is why you want to start searching for one 3-5 years before your sale, not months before. The good ones do not have short waiting lists.
Can you restructure your business entity 5 years before selling?
Yes. You can convert S corporation to C corporation, or C corporation to S corporation, if you have the time. Each conversion has specific rules and timing requirements. Working with a qualified tax attorney and CPA, entity conversions completed 3-5 years before a sale can significantly change the exit tax picture. Six months out is usually too late for meaningful restructuring.
What is the 6-months-and-a-day rule for state residency?
Most states use a physical presence test of 6 months and a day (183 days) to determine residency for state income tax. If you spend 183 days or more in California during the tax year, you are a California resident for tax purposes and owe California taxes. Establishing residency in a lower-tax state requires documented physical presence outside your prior state for more than half the year, plus supporting evidence like voter registration, driver’s license, and primary residence.
Full Transcript
When it comes to you selling your business, there is a conversation that really needs to happen sooner rather than later, and it is going to have to do with CPAs and tax CPA attorneys. The question comes down to — what should your CPA have been doing for the last five years before the sale? This question catches a lot of entrepreneurs, business owners, and practitioners off guard, and costs them a ton of money in taxes. I am Scott Sylvan Bell coming to you live from Consulting Secrets on a perfect day to talk about business exit strategies, taxes, CPA planning, and a fantastic day to talk about you.
Huge disclaimer up front. I am not a CPA. I am not a tax accountant. You absolutely, positively should talk to one of these individuals and pay them the money. When it comes to order of operations of finding people in business to help you with your exit, the hardest player to find is that tax CPA. That is the person you really want to start looking for as soon as you can. The reason is there are industries they play within, they get busy, they get backed up. There might be times where it is a larger company and they have to look at their roster and say — I might have a conflict.
When you are looking for somebody to do this deal with, you have to understand you are going to want to get qualified help. I am not giving you tax advice. I am giving you some rough ideas you could go ask your tax accountant, your attorney, or your CPA.
First on this list is QSBS — a Qualified Small Business Stock. This really happens with a C corp. There are things you have to have in place with stock certificates. There are years that matter, milestones that matter, anniversary dates that matter. If you are structuring a business, or even buying a business to bolt on to what you have, sometimes these things matter. If you are having a conversation with your CPA or tax attorney, you may find things like Section 1202, which is QSBS in the IRS code. That is what it is — Section 1202.
Number two, entity structuring. There is a huge difference between an LLC, S corp, and C corp because it affects how the sale is going to be made. It affects the taxes. If somebody who has just been filing your returns has been rubber-stamping them and does not know the difference on your advantages for S corp and C corp, that can really hurt you. You have one shot, one chance, one opportunity to make a change. You can go from an S to a C or C to an S, but you definitely want to get help. It takes a little time. I am not a tax accountant. I am going to say that multiple times in this video. You definitely want to talk to qualified help. But there is a time period where you can restructure if you are five, four, three, or two years out, and have it work to your advantage. Talk to somebody qualified about that.
State residency planning, number three. There are residency things you can do to become a resident of another state, and a good tax accountant and tax attorney can help you do this. A lot of states have a rule that it needs to be 6 months and a day. You need to live in a state for 6 months and a day. California, as of today, right now, says that if you live here for 183 days out of the year, you are a resident of the state of California, which means you owe California taxes. If you are not a resident, then you are subject to the state that you live in.
There might be times where you want to document every single day you are living outside of the state, because it is going to help you with your proof of where you were living. Things that matter — voter registration. Where are you registered to vote? That is something that triggers residency. I am registered to vote in Hawaii. Well, I wish I was. I am not, but I wish I was. I would have to pay Hawaii taxes if I was registered to vote in Hawaii. There are states that have no income tax. Nevada is one of them. Nevada is like right next to me. It is 90 minutes away. There are opportunities for you to take a look and say — what state could I live in?
Installment sales and structures. You can spread the capital gain over a couple of years. If you are willing to only take a little bit of money up front — it is a $10 million sale, and for me to pay everything off and all of the vendors it is going to take $5 million, I am willing to take $5 million in installment with some interest, or put it into an escrow account so it compounds. But I do not want to touch it until next year because I do not want to get hit with a ton of taxes.
There are grantor trusts and gift trusts. There are things like church charitable trusts. There are conversations you want to have to say — how do we structure the business so we pay the taxes we are supposed to, but pay the least amount?
The specific questions you can ask your CPA are — do I have QSBS status? You are going to know that if you are a C corp. If you have held it, then yes. But once again, talk to them. What is my exit-optimal entity? Is it a C corp? Is it an S corp? Have you reviewed my state residency implications? What state am I going to be taxed in? What installment options exist? These installment options are going to happen during the LOI. These are all things you negotiate for. LOI is a fancy French word for negotiation. What trust structure should I consider? In some trusts, you put a family member on there and they can get paid.
If they cannot answer that, they are not really an exit-ready CPA. These are the bare minimum. These are not the hard ones at all. There are harder questions to ask.
I want to give credit where credit is due. I learned a lot about this from Roland Frasier, Ryan Deiss, and from Grant Teeple and Nate Dotson. If it were not for these guys giving me coaching and training along the way, I would not know nearly as much as I do. This is why it is super important for you to be around qualified professionals who understand these rules, these structures, how things could be, and the direction you could take things.
