From a handshake plan to a term sheet the owner could actually accept.

The situation

The owner had inherited the business from his father in the mid-2010s. By the time he came to us, revenue was just under $18M and two unsolicited approaches from strategic buyers had landed in his inbox in the prior year. He had no intention of selling immediately, but he did not want to be caught flat-footed if the right offer showed up.

His existing CPA filed the returns on extension every October, ran a clean bookkeeping process, and had never once had a conversation with him about what a sale would look like from a tax perspective.

What we found

In the first working session we pulled three years of returns, mapped the entity structure, and walked through what a diligence process actually asks for. The gaps were the ones we see almost every time an owner has been running lean:

• Entity structure. Operating as an LLC taxed as a partnership with a single owner on paper. No holding company. Personal ownership of the building the business operated out of, with no formal lease in place.
• Add-backs and owner benefits. Legitimate owner benefits were run through the P&L in ways that would be defensible in an audit but painful in a Quality of Earnings review. EBITDA was understated on paper, which directly lowers the sale price a buyer will underwrite.
• Working capital. Inventory and A/R practices had never been formalized against a peg. Whatever the buyer's working capital target ended up being, we had no baseline to negotiate from.
• Estate. No trust. No documented plan for what proceeds would look like after federal and California tax.

What we did

We were not the valuation firm and we were not the investment banker. We coordinated with both. Our lane was tax, structure, and getting the books ready to survive diligence.

Year 1. Structure and clean books. We elected S-Corporation status for the operating entity effective January 1. We formed a holding LLC to own the building and put a market-rate lease in place. We rebuilt the chart of accounts so owner benefits and one-time items were coded consistently, then produced three years of adjusted EBITDA schedules the way a QofE provider would want to see them.

Year 2. Retirement, estate, and the pre-diligence dry run. We layered in a 401(k) with profit sharing and a cash balance plan, moving meaningful pre-tax dollars off the eventual sale proceeds and into a protected retirement structure. We coordinated with his estate attorney to establish a trust and, where appropriate, move a portion of the business interest outside the estate ahead of a sale. We ran an internal dry run of a Quality of Earnings review so nothing in year three would be a surprise.

Year 3. The transaction. When a strategic buyer came back with a serious offer, we worked alongside his investment banker and M&A attorney on deal structure, allocation of purchase price across asset classes, and installment sale mechanics on the seller-financed piece. We modeled federal and California tax under three different structures before he signed.

Where he is now

• Net-of-tax proceeds materially higher than the pre-engagement projection on the same headline sale price.
• Retirement plan assets funded to a level that changes his post-close picture on its own.
• Estate work in place before the sale, not scrambled after.
• A clean diligence process where the buyer's advisors found no accounting surprises, which kept the price where the letter of intent had set it.

What we would say to another owner in the same seat

A note on scope. We do not perform business valuations and we do not sit in the investment banker's chair. What we do is make sure that when a valuation professional and a banker do their work, the underlying company is structured and reported in a way that supports the number, and that the after-tax outcome for the owner is a decision, not a byproduct.

If a sale is on the horizon in the next three to five years, the work to get ready starts now. Waiting until the letter of intent is signed is waiting too long.