NEW HERE? Every Thursday, this newsletter covers what it actually takes to build, protect, and eventually sell a business at the seven- to nine-figure level. This week, we start the month by building with tools that last.
It’s America’s 250th Independence Day celebration, so what better way than to think about what a new life (could) look like.
HOT TAKE
Imagine if you had an hour to pick everything you needed for a camping trip or if you are a world traveler, to Europe. You’d probably forget something, pack the wrong things, and have a semi-decent time, with a small or large regret about how stressful the process was. Like anxiety at 8 and stress at a 9 kind of feeling! A feeling you can feel in your heart kind of time. Worst yet, you prepare for the trip and then forget your ID or passport at the house. Could you imagine? That feeling of preparing and dreaming of it for life on the other side, then denied entry.
Mid-year is when this question starts to show up, even for founders with no immediate plans to sell. Trip to Europe? Why not twice? If you’re able to enjoy it as a vacation and as a business test.
Sometimes stepping away is the best thing you can do for yourself and your business. Somewhere in the back of an entrepreneur's mind, a question forms that they rarely say out loud: what would it look like if I sold, not that I’m going to but could I?
Every season seems to slip by until you decide that you need to or want to. Several statistics say 70-80% of businesses that do over seven figures don’t sell. Being prepared to sell doesn’t mean you have to and today we will walk through how the process will help you run a better business with less concern for its success (or sale).
Entity structure and business system are your ticket to travel and your ID to get you through.
This is also needed for a private equity injection, a podcast episode later this month. If you want to join the live call, reply to me and I’ll send you the invite.
ACTIONABLE PLAYBOOK — THE ENTITY STRUCTURE DIAGNOSTIC
Four questions that reveal what your current structure is telling a buyer or PE injection, whether you are selling this year or not.
1. What entity type are you actually operating as, and does it fit your income level?
An LLC taxed as a sole proprietorship or partnership exposes all business income to self-employment tax. An S-Corp election can reduce that exposure significantly once income crosses a meaningful threshold, but the election has to be made and maintained correctly. A C-Corp changes the entire tax treatment of a future sale, sometimes for the better with Qualified Small Business Stock exclusions, sometimes for the worse with double taxation exposure.
When was the entity election last reviewed against current income, and who reviewed it? Do they know or do they have experience?
2. Is there a clean, documented operating agreement that reflects how the business actually runs?
Many founders are operating on a template operating agreement drafted at formation that has never been updated as the business changed. A buyer's attorney reads this document closely. Inconsistencies between what the agreement says and how the business actually operates are red flags that slow diligence and create negotiating leverage for the buyer.
Does your operating agreement reflect your current ownership, your current decision-making structure, and your current exit provisions?
3.Is your cap table clean, current, and free of ambiguity?
Equity grants that were promised verbally and never documented. Vesting schedules that exist in someone's memory but not on paper. Phantom equity arrangements with key employees that were never formalized. Each of these creates a question mark a buyer has to resolve before they can close, and every question mark is leverage they use to adjust price or terms.
If a buyer's attorney asked for a complete, current cap table tomorrow, could you produce one without having to track down verbal agreements or reconstruct history?
4. Does your entity structure support the type of exit you actually want?
Nothing you need to focus on today but knowing helps tomorrow. An asset sale and a stock sale are taxed completely differently, and which one is available to you, or favorable to you, depends heavily on your entity type. A C-Corp structured to qualify for Section 1202 Qualified Small Business Stock treatment can exclude a significant portion of gain at sale. An S-Corp or LLC has different considerations entirely.
Has anyone modeled what an asset sale versus a stock sale would actually mean for your after-tax proceeds, given your current structure?
COPY-PASTE TEMPLATE
This week the email to the CPA is different. Too often I see how you find someone who is responsive and knowledgeable but doesn’t have experience with M&A or exit structuring. If your $4M business goes to sell, do they also work with $40M businesses? They would know how to guide you more.
Subject: Entity Structure Review
Hi [name],
I am not actively planning a sale, but I want to understand where my entity structure stands in case that conversation becomes real in the next year or two.
A few specific things:
1. Is my current entity election still the most efficient structure given my income level today?
2. Does my operating agreement accurately reflect current ownership and decision-making authority?
3. Is my cap table clean and fully documented, with no verbal or informal equity arrangements outstanding?
4. Given my current structure, what would the difference be between an asset sale and a stock sale in terms of after-tax proceeds?
I want to know now whether there is cleanup work worth doing, rather than finding out during a deal process.
Thanks,
Asking questions that are important to you about their experience should also be asked. Someone who has been there and done that is probably a good starter
REAL-WORLD CASE SPOTLIGHT
I will call this pattern Derek, because it repeats often enough to have a name.
Derek built his business as a single-member LLC when he was the only employee. That made sense at the time. Five years later, with twelve employees and $4M in revenue, nothing had been revisited. Not the entity election, not the operating agreement, not the informal equity promises he had made along the way to keep good people around.
He had never done formal equity grants. Instead, he gave cash bonuses, which felt simpler in the moment and created a tax event for employees every year without building the ownership culture he actually wanted. The promises were real. The documentation was not.
When an informal acquisition conversation prompted a preliminary diligence review, three issues surfaced that had nothing to do with how well the business performed. They had everything to do with how it was built. The operating agreement did not reflect current reality. The verbal equity arrangements had no paper trail. The entity election had never been evaluated against his income level as the business grew. Employees weren’t tied to the business they were part of it so if they wanted to leave, they would. A cash bonus wasn’t enough to keep them if they wanted to build something that lasted.
None of those issues were unfixable. But each one added time, added legal cost on Derek's side, and gave the buyer's team a reason to revisit the terms. The deal did not close. No serious follow-on interest came. And by the time Derek understood the full picture, his motivation to fix it had dropped faster than the business's value.
The structure was never the problem. The delay was.
WANT TO GO DEEPER?
Review your entity with a team that has done over $2B in M&A transactions for legal and CPA oversight. Our business and legacy planning team reviews entity structure, operating agreements, and cap tables in-house.
TOOLBOX & RESOURCES
Four references worth understanding before your next entity conversation, plus one structural change moving through the regulatory landscape right now.
ON THE RADAR THIS WEEK
The IRS has continued to scrutinize S-Corp reasonable compensation as a top enforcement priority into the second half of 2025, with particular attention to owners taking distributions that significantly exceed W-2 wages relative to their role in the business. If your entity is an S-Corp and your compensation structure has not been benchmarked against industry standards recently, this is directly relevant to both your audit risk and your eventual exit story, since a buyer's diligence team will ask the same questions the IRS does.
Source: IRS Small Business and Self-Employed Tax Center - irs.gov/businesses/small-businesses-self-employed
Asset Sale vs. Stock Sale - The Core Difference
Asset sale: buyer purchases specific assets and liabilities. Seller often faces higher tax due to depreciation recapture and ordinary income treatment on some assets. Stock sale: buyer purchases ownership shares directly. Often more favorable to seller from a tax standpoint, particularly for C-Corps. Buyers often prefer asset sales for liability protection. Which one is available and favorable depends heavily on your current entity type. This should be modeled specifically for your situation, not assumed generically.
Intellectual property: buyer can also buy the IP in a different entity, this gets complex and varies so if you have an eight-figure company, reach out on how this might apply.
Section 1202 Qualified Small Business Stock
For C-Corps meeting specific requirements, Section 1202 can exclude up to 100% of gain on sale up to the greater of $10 million or 10 times the original investment, if the stock was held for at least five years. This is one of the most powerful exit planning tools available and one of the least understood. Eligibility depends on entity type, timing, and structure decisions made well before the sale.
What a Buyer's Diligence Team Reviews First
Operating agreement or bylaws. Cap table and equity grant history. Material contracts including any change of control provisions. Outstanding equity promises, whether documented or verbal. Most founders are surprised this comes before financial diligence. Entity formation documents and good standing certificates.UNTIL NEXT TIME
Live Podcast
Learn How Tim Kelly Scaled to $1M Months by Breaking His Mindset Ceiling
He'll share why most plateaus are mindset + the exact shift and tactics to take his business to $1M months. Register for live Q&A.
Most entrepreneurs think about their entity structure once. Don’t be behind the curve and think about it again when something forces the conversation like an offer, a dispute, or an audit.
By then the structure has been quietly shaping outcomes for years without anyone noticing. It has determined how much self-employment tax was paid. It has determined what happens if a partner wants out. It has determined, without anyone deciding it on purpose, what a buyer will see first and what they will ask about second.
Mid-year is a good time to look at this, not because you are selling this year, but because the answer to that question is more honest in July than it will be in December, when the calendar starts pressuring every decision toward whatever is fastest rather than whatever is right.
This is the family office way. Being prepared for situations of opportunity and prosperity.
Until next time, Paul.
Paul H. Graham
P.S.
I joined the second cohort of the YAP challenge, which means I’ll be talking more about tax strategy, family office and investments at a high level. Stay tuned for more.
DISCLAIMER: The information in this newsletter is not intended as, and shall not be construed as, tax, financial or legal advice. A professional should be made aware of your individual situation.