Exit Planning For Business Owners

David had been running his IT services firm for eighteen years. Good revenue, loyal clients, a small team that mostly ran itself. When he came to me at 54, he had a number in his head: $2 million. That’s what he figured the business was worth. That’s what he was counting on to fund his retirement.

When we actually ran the numbers, the business was worth closer to $800,000.

Not because the business was struggling. It was profitable. The problem was structural. Most of his revenue was tied to three clients. He was still the primary relationship on all of them. There was no documented process for anything. And his industry — managed IT services — was trading at two to three times EBITDA for businesses his size, not the five times he’d assumed.

David had spent eighteen years building what he thought was a $2 million asset. In reality, he’d built a job with overhead.

This is not a rare story. It is, in my experience, the most common financial planning blind spot I see among business owners — and the most expensive one.

Your Business Is Probably Your Largest Asset. Do You Know What It’s Worth?

For most small business owners, somewhere between 50% and 90% of their net worth sits inside the business. Yet most have never had a formal valuation, never stress-tested what a sale would actually look like, and never built a plan to maximize what they’ll eventually receive.

The reason is understandable. You’re busy running the thing. Exit feels distant. And frankly, it’s uncomfortable to think about — especially if the answer might not be what you expected.

But here’s the problem with waiting: the decisions that determine your exit price aren’t made at the closing table. They’re made years before it. By the time you’re ready to sell, it’s largely too late to change the outcome.

How Buyers Actually Value a Small Business

Most business owners assume their company is worth some multiple of revenue. It’s not. Buyers — whether private equity, strategic acquirers, or individual buyers — pay based on earnings, specifically EBITDA (earnings before interest, taxes, depreciation, and amortization) or, for smaller businesses, seller’s discretionary earnings (SDE).

The multiple applied to those earnings depends on several factors: industry, growth trajectory, customer concentration, owner dependency, recurring vs. one-time revenue, and how transferable the business is without you in it.

For most small service businesses doing under $2 million in revenue, SDE multiples typically range from 1.5x to 3x. Businesses with strong recurring revenue, diversified client bases, and documented systems command the higher end. Businesses where everything runs through the owner command the lower end — or don’t sell at all.

A few specifics worth knowing:

1. Buyer concentration is a ceiling on your multiple. If your top three clients represent more than 30–40% of revenue, every sophisticated buyer will apply a discount — or walk away. The fix isn’t complicated, but it takes time: actively diversifying your client base years before a sale.
2. Owner dependency is the silent killer. If the business can’t operate without you for 90 days, you don’t have a sellable business — you have a self-employment arrangement. Buyers are acquiring future cash flows, not your calendar. The more you can systematize, delegate, and document, the more transferable the asset becomes.
3. Recurring revenue is worth more than project revenue. A business with 60% of its revenue on retainer or subscription will command a meaningfully higher multiple than one that re-earns its revenue from scratch each year. If you have the option to shift clients toward retainers, that structural change is one of the highest-return moves you can make years before an exit.

The Tax Conversation Nobody Has Early Enough

Let’s say you do everything right and negotiate a $3 million sale. How much of that do you actually keep?

It depends entirely on deal structure — and this is where a CPA in the room before you sign anything is worth every dollar.

Asset sales vs. stock sales carry dramatically different tax treatment. In an asset sale, the IRS treats different categories of assets differently: equipment, goodwill, non-compete agreements, and inventory are each taxed at their own rates. Goodwill — typically the largest component of a service business sale — is taxed at long-term capital gains rates (currently 20% federally, plus the 3.8% net investment income tax for high earners, plus California’s 13.3% state rate on top). Structure matters enormously.

An installment sale — where the buyer pays over several years rather than all at once — can spread the gain across tax years and potentially keep you out of the highest brackets in any single year. Done well, it can save six figures in taxes on a $2–3 million transaction. Done wrong — or not considered at all — you hand the IRS a check you didn’t have to write.

If your business is structured as a C-corp, the tax picture is different and often more painful — another reason entity choice planning years in advance matters.

When Should You Start Thinking About This?

The conventional answer is “five years before you want to exit.” My answer is: now, regardless of when you plan to sell.

Here’s why. Exit planning isn’t really about exits. It’s about building a business that’s worth more — to a buyer someday, yes, but also to you today. A business with diversified revenue, documented systems, a team that doesn’t depend on you for every decision, and clean financials is a better business to own. It generates more cash flow, creates less stress, and gives you options you don’t currently have.

The owner who starts at 45 with no exit plans and stumbles into one at 62 almost always leaves money on the table. The owner who starts deliberately at 45 often doubles their exit value by the time they’re 55 — not by working harder, but by building differently.

David, for his part, spent the next three years working with us to systematize his service delivery, reduce his top-client concentration from 61% to 38%, and move two anchor clients to annual retainer agreements. He also restructured his entity and began keeping cleaner books specifically with a buyer’s due diligence in mind. When he eventually sells, the business will look entirely different to a buyer than it did when he walked into my office.

The Bottom Line

If you’re a business owner and your retirement plan includes “selling the business someday,” that plan deserves the same rigor you’d apply to any other major investment. Get a realistic sense of what your business is worth today. Understand what drives your multiple. Make the structural changes that move the number up. And get a CPA and financial advisor in the room before you sign anything.

Axis Capital Management works with small business owners on exactly this kind of integrated planning — connecting the value of your business to the rest of your financial picture, years before you need it.

If you would like to discuss exit planning, click Book A Meeting.

Frequently Asked Questions About Exit Planning

1. How is a small business actually valued when it's sold?

Buyers don't pay based on revenue — they pay based on earnings. Larger businesses are valued on a multiple of EBITDA (earnings before interest, taxes, depreciation, and amortization), while smaller businesses are typically valued on a multiple of seller's discretionary earnings (SDE). The multiple applied depends on industry, growth trajectory, customer concentration, owner dependency, recurring vs. one-time revenue, and how transferable the business is without the current owner involved.

2. What's the difference between EBITDA and SDE?

EBITDA is earnings before interest, taxes, depreciation, and amortization — it's the standard valuation metric for larger businesses and reflects what a financial buyer can expect after replacing the owner with a hired executive. SDE (seller's discretionary earnings) is EBITDA plus the owner's compensation and personal benefits added back in. SDE is the standard metric for small owner-operated businesses because it reflects the total economic benefit available to a working owner-buyer.

3. What's a typical sale multiple for a small service business?

For most small service businesses doing under $2 million in revenue, SDE multiples typically range from 1.5x to 3x. Businesses with strong recurring revenue, diversified client bases, and documented systems trade at the higher end of that range. Businesses where everything runs through the owner — and where revenue is concentrated in a few clients — trade at the low end, or don't sell at all. Industry matters too: managed IT services, for example, often trade at 2x to 3x EBITDA for small firms.

4. When should a business owner start exit planning?

The conventional answer is five years before you want to exit. The better answer is: now, regardless of when you plan to sell. The decisions that determine your exit price — diversifying clients, documenting systems, shifting to recurring revenue, optimizing entity structure — take years to play out. Owners who start deliberately at 45 often double their exit value by 55, not by working harder but by building differently. Owners who start when they're already ready to leave almost always leave money on the table.

5. Why does owner dependency reduce a business's sale value?

If your business can't operate without you for 90 days, you don't have a sellable business — you have a self-employment arrangement. Buyers are acquiring future cash flows, not your calendar. The more decisions that route through you, the more risk a buyer takes on after closing, and the lower the multiple they'll pay (if they'll buy at all). The fix is to systematize, delegate, and document — which also makes the business better to own in the meantime.

6. How does customer concentration affect what my business is worth?

Customer concentration is a hard ceiling on your multiple. If your top three clients represent more than 30–40% of revenue, sophisticated buyers will apply a discount — or walk away entirely — because the loss of any one of those clients could materially damage the cash flows they're buying. Diversifying your client base is one of the highest-leverage exit-prep moves you can make, but it takes years to do well, which is why starting early matters so much.

7. What's the tax difference between an asset sale and a stock sale?

In an asset sale, the IRS taxes each category of asset differently — equipment, goodwill, non-compete agreements, and inventory each have their own rates. Goodwill, usually the largest piece of a service business sale, is taxed at long-term capital gains rates (currently 20% federally, plus 3.8% net investment income tax for high earners, plus state tax — 13.3% in California). Stock sales are simpler and often more favorable to sellers but less favorable to buyers, which is why structure is heavily negotiated. C-corp owners face an additional layer of complexity that can make entity-choice planning years before a sale especially important.

8. How much of a business sale do you actually keep after taxes?

It depends almost entirely on deal structure. A $3 million sale in California can lose 35–40%+ to federal and state taxes if structured poorly. An installment sale — where the buyer pays over several years rather than all at once — can spread the gain across tax years and potentially keep you out of the highest brackets in any single year. Done well, this strategy can save six figures in taxes on a $2–3 million transaction. Done wrong, or not considered at all, you write the IRS a check you didn't have to write. Getting a CPA and financial advisor in the room before you sign anything is one of the highest-ROI moves an exiting owner can make.