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Structuring the Sale of Your Business

Maintaining the Proceeds & Creating Passive Income

As an entrepreneur, you may eventually be fortunate enough to build your company to a level where you can sell it for a considerable profit. At that time, you will probably be faced with the formidable task of what to do with perhaps the most significant single influx of funds in your working lifetime.

I have been involved in numerous purchases and sales of businesses over my career. From my experience, I’ve learned that it’s essential for the entrepreneur, both before and after the sale of a company, to act expeditiously to protect proceeds, minimize taxes, and plan for their family’s financial future.

In short, founders who sell out must revisit plans for personal finances that were in place before the sale and adjust for the new and improved reality. What follows are suggestions I’ve given to other entrepreneurs that, I believe, will be helpful as you move to the next chapter of your life. Make sure you consult with local professionals as tax laws vary from one area to another. 

Protect your proceeds

The most important step you should take after successfully selling your business is to protect the proceeds. Here are three ways, you may want to consider:

  • Diversify your holdings. If you received cash from the sale, immediately consider a diversification plan for the proceeds. Think about a combination of mutual funds, municipal bonds, money market accounts, and real estate. Your specific diversification plan will depend upon the total proceeds from the sale, your other assets, and your age. Think about hiring an experienced financial planner to guide you through the process.
  • Hedge your bets. If you received stock instead of cash as a result of selling a company, immediately determine the best way to hedge against a downside on the stock you receive. There is no worse feeling than walking away with what you think is a significant return, only to see it evaporate when the stock you received starts to plummet. And this has happened to plenty of people. Start planning your hedge strategy even before you close the sale of the business. Enlist the help of a knowledgeable stockbroker or financial planner.
  • Review your liability protection. Now is the time to review what exposure you have to liability. After all, you now have significant assets that someone could go after. Make sure you have adequate primary and umbrella insurance coverage. Analyze whether you are exposed to personal financial risk in any other businesses you own—for instance, if you are involved in general partnerships or sole proprietorships—get out of those quickly by incorporating or forming an LLC. Incorporation can ensure (if done properly) the entity, rather than you are personally, liable. 

Minimize your taxes on the sale

One of the major considerations connected with the sale of your business concerns is minimizing taxes that result from the sale. Here are some suggestions, though we always suggest consulting a tax professional before making any decisions.

  • Structure the transaction beneficially. If you are getting stock instead of cash from the sale of the company, you should be able to receive the stock tax-free if you structure the transaction properly. Make sure you have an experienced corporate and tax lawyer to ensure proper tax treatment.
  • Seek capital gains treatment. Capital gains on the sale of stock receive much better tax treatment than ordinary income tax treatment. So, review with your tax advisor the types of payments you are to receive under the sale. You can optimize tax treatment by reconfiguring the payment. For example, you may decide that a two-year, $200,000 consulting agreement after the sale is not as advantageous as a higher purchase price and lower consulting payments.
  • Take a loss on other investments. Before year-end, consider selling a losing venture or losing stock to offset some of the gains from selling your business.
  • Consider tax-free investments. Returns are not very high, but if you are looking for a safe, tax-friendly investment, consider investing some of your money in tax-free government or municipal bonds for at least a portion of your portfolio. This is particularly advantageous for a high-income individual.
  • Remember charitable donations. While donations should not be made simply for tax purposes, but for philanthropic reasons, you can always make a couple more at year-end to lower your tax bite. Remember to get receipts.
  • Consider gifts. As of 2021, you can give up to $15,000 a year away tax-free to each person you choose. (By splitting their gifts, married couples can give up to twice that amount.) You may even be able to give more by using your lifetime amount of $5,430,000 per Internal Revenue Code Section 2501.
  • Max out your IRA or other retirement plan contributions. This is a legitimate way to lower your taxes for the year, so make sure you have taken advantage of IRA or other retirement plan contributions that you are allowed to make.
  • Prepay your state and/or local taxes. If you are certain that your personal income tax bracket will not be higher next year, and you are not affected by the alternative minimum tax, you can make state and/or local tax payments before the end of this year so you can take a deduction this year.
  • Pay your January 1 mortgage payment early. If you pay your January 1 mortgage payment on or before December 31, you can take an additional deduction for interest paid. Remember to add the interest amount to the amount reported by your lender when they send you the 1098 form.
  • Defer income. Unless you have reason to believe that next year will bring you a higher income and move you into a higher personal income tax bracket, you may want to defer income until after the first of the year. If you are self-employed, for example, send the last invoices out late in December so you will more likely receive payment in January.


Generating Passive Income After the Sale of Your Business

You put in many years and long hours building your business, now it’s time to let it go.  The following are some suggestions to entrepreneurs, I believe, will be helpful to retain the proceeds from your sale. And as you move forward into new adventures.

Selling your company doesn’t necessarily mean giving up ongoing income from the business.  In fact, a carefully structured sale can create lucrative, sweat-free revenue opportunities.  By holding onto a building or working out a consulting or non-compete agreement, you may be able to derive significant income from the business for several years with little or no involvement in the company.

If you’re an owner planning your eventual business exit, calculate your future cash flow needs by considering how much income the company currently provides you personally, and how much you’ll need after the deal closes.

Ask yourself, “What is the business paying you that you’re trying to replace?” said Dean Deutz, an RBC Wealth Management private wealth consultant.


One popular practice involves selling your business while maintaining ownership of the building housing your company, then leasing it to the new owner. This is a terrific way to maintain income coming after the sale.

Owners need to establish these options years in advance, buying a building and essentially paying rent to themselves as they pay off the mortgage. The lease and rent should be structured to create a positive cash flow, while the building has a mortgage, increasing considerably once the mortgage is paid off.  Be sure to consult a commercial real estate professional to structure the lease to cover all expenses, so as not to become a cash flow negative after the business is sold.

This strategy generally requires planning and the building being purchased years ahead in advance, to create a more beneficial cash flow to the seller and the business owner either little or no mortgage by the time they sell the company and can enjoy as much cash flow from leasing the property.

A business owner who’s been earning $1 million a year from the company might be able to generate $400,000 annually in rent by maintaining ownership of a $4 million building, under the right circumstances.

A good attorney and financial advisor can help you organize your business entities to achieve not only the greatest benefit when you sell but also the most advantageous tax treatment while you run the company.


A comparable but more unique strategy involves maintaining ownership of your company’s equipment, patents, intellectual properties, etc., and leasing them back to the buyer.
If the seller is no longer capable or interested in running their business. But a key employee has the knowledge and experience to take over the business. But they aren’t able to come up with the necessary funds to purchase the business. In this case, the owner and the purchaser can create a lease and or royalty agreement providing the opportunity for the buyer to be able to purchase the business with their available funds, a win-win for both sides. (Side note: With the correct business continuation planning, implemented by a financial planner, and business capital advisor, experienced with these matters, can develop and fund a plan for such a case. That type of plan takes years to implement, so good planning is always on your side.
Such an arrangement may be more advantageous under some state’s laws than in others. Always consult the correct professionals for advice.
If you’re doing any sort of reorganization to remove real property or other assets as part of a sale. It is always recommended that you do so in consultation with a knowledgeable business tax attorney, business financing consultants, and the appropriate financial planners and accountants, to avoid an unexpected tax implication while structuring the best deal. An improperly structured lease arrangement and/or reorganization could trigger an additional tax liability if the IRS views it as a sale.


A non-compete or consulting agreement with your business successor can allow you to enjoy significant residual income for years. Owners selling their business may secure a multi-year consulting agreement to gain an annual salary from their business after the sale. Owners passing a business to the next generation or key employees can also implement this strategy.  

A note to all those owners planning on passing their business to the next generation. This strategy requires long-term planning and blunt conversations with all involved parties. Don’t assume the next generation wants to or is capable of running the business. Also, don’t assume key employees will be happy with your choice to run the company in your absence.  Make sure you discuss with all key employees your intentions. They may not be on board with your decision. Your choice of a successor may invoke a mass exodus of talent, necessary to run the business in your absence. Also given enough time to plan properly for the owner’s departure, there are multiple ways to fund the transition to a family member or key employee. That doesn’t require draining potentially necessary funds from the business to fund the owner’s departure.   

Even if you do little or no hands-on work to earn the revenue from leasing property, consulting, or non-compete agreements, you’d be wise to consult a professional to determine if the cash qualifies as passive or non-passive income for tax purposes, as the IRS treats these income types differently. 


Besides advantageous deal agreements, entrepreneurs selling their companies can sometimes find other income sources that don’t demand their full energy and attention.

Some owners aren’t ready to fully retire when they sell their companies, so they look for new business ventures, many choosing relatively hands-off businesses. 

Many business owners replace a significant portion of their income by investing in a passive portfolio of cash, bonds, and dividend-producing stocks. 

Whichever strategy you’re considering to generate income during and after your business sale, take steps to ensure optimal results by consulting with a knowledgeable lawyer, CPA, and financial advisor.

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