A Succession Checklist for Owners

Merger and acquisition activity has remained strong in recent years. Part of this trend is driven by aging entrepreneurs seeking retirement or succession plans, while another factor is the continued growth of private equity firms looking to acquire successful businesses.

For many owners, however, selling a business creates more than just a liquidity event—it can also result in a significant tax liability. The good news is that proactive planning can help reduce, defer, or potentially offset a portion of those taxes.

The most important factor is time. In general, the earlier you begin planning for an eventual sale, the more options you will have. While every situation is unique, the following strategies have become increasingly popular among business owners and their advisers.

Direct Indexing

Direct indexing allows investors to own the individual stocks that make up a market index, such as &P 500, Russell 1000, or Russell 3000.

One of the primary benefits is tax-loss harvesting. Throughout the year, losing positions can be sold to realize losses that may be carried forward and used to offset future capital gains, including gains generated from the sale of a business.

This strategy is most effective when implemented several years before a liquidity event, allowing losses to accumulate over time. However, during extended bull markets, portfolios can eventually run out of opportunities to harvest losses, leaving investors with appreciated holdings.

Long/Short Strategies

A more sophisticated approach is a long/short investment strategy. Similar to direct indexing, these strategies seek to generate tax losses, but they incorporate leverage to increase opportunities.

In a typical long/short portfolio, an investor may be 145 percent long equities while maintaining 45 percent short exposure. This can potentially generate losses regardless of market direction. If markets rise, losses may be harvested from short positions. If markets fall, losses may be harvested from long positions.

Because leverage is used, losses can accumulate more quickly than in traditional portfolios.

Ideally, a long/short strategy is implemented several years before a sale. However, many business owners have most of their wealth tied up in their companies and do not have the liquid assets necessary to fund the strategy beforehand. In those situations, implementation after the sale may be considered. If possible, closing a transaction early in the calendar year can provide additional time to generate losses that may offset gains.

Business owners should carefully weigh the tradeoffs. Minimum investment requirements often range from $1 million to $3 million or more. The use of margin introduces additional risk, and while losses may offset gains from the sale of the business, successful portfolios can also generate future capital gains that eventually create their own tax liabilities.

Given the complexity involved, experienced financial and tax professionals should be consulted before pursuing this approach.

Charitable-Giving Strategies

Charitable planning can be one of the most powerful tools for reducing tax liability associated with the sale of a business.

One particularly effective strategy is donating a portion of the business interest before the sale occurs. By gifting appreciated business interests to a qualified charity in advance of the transaction, an owner may avoid capital gains tax on the donated shares while also receiving a charitable income-tax deduction. Because a qualified charity is generally tax-exempt, it may be able to sell its portion without incurring the same tax consequences as an individual owner.

Timing is critical. The gift must be completed before the sale becomes a binding obligation, making early planning essential.

Another popular option is a donor-advised fund. A DAF allows business owners to make a charitable contribution in the year of the sale, generating an immediate tax deduction. The assets can then be invested within the fund, and grants can be made to charities over time. Many owners use a DAF to “bunch” several years of charitable giving into a single tax year, maximizing deductions when they are most valuable.

Other charitable strategies include direct gifts to charitable organizations and Charitable Remainder Trusts, which can provide an income stream for life or a specified term while ultimately benefiting charity.

The Bottom Line

Selling a business is often the culmination of decades of hard work. While a successful sale may create a substantial tax obligation, advance planning can significantly improve the outcome. Whether through tax-loss harvesting, long/short investment strategies, or charitable planning techniques, business owners who begin planning early typically have the greatest number of options. Working with a coordinated team of tax, legal, and financial professionals can help ensure that more of the sale proceeds remain available to support future goals rather than being lost to unnecessary taxes.

PUBLISHED JULY 2026