Exiting & Selling a Business
Everything business owners need to know about selling, exiting, or transitioning out of their company — from valuation to tax strategy to deal structure.
Tools & Resources
What Is My Business Worth?
Estimate valuation using real industry multiples and 8 quality factors
CalculatorExit Planning Timeline
Map your path from today to closing day
GuidePreparing Your Business for Sale
Everything you need to do before going to market
GuideHow to Sell a Tech Business in California
Deal structures, timelines, and CA-specific tax implications
GuideHow to Sell an Entertainment Business in California
IP valuation, talent dependencies, and deal structures for media companies
GuideView All Industry Exit Guides
Guides for manufacturing, distribution, retail, real estate, personal services, and marketing
ChecklistExit Readiness Checklist
Score your preparation across 40+ factors
ChecklistDue Diligence Preparation Checklist
Get your documents and data room ready before buyers ask
ComparisonAsset Sale vs Stock Sale
Side-by-side tax and liability comparison
ComparisonPrivate Equity vs Strategic Buyer
Which buyer type is right for your business and goals
Key Terms to Understand
Enterprise Value (EV)
The total value of a business including equity and debt, minus cash. Used as the starting point for most business acquisitions because it reflects what a buyer actually pays to take control of the operating business, regardless of how it's financed.
Seller's Discretionary Earnings (SDE)
Net income plus owner's salary, benefits, and non-recurring expenses added back. The standard profitability measure for businesses under $1M in earnings, because it shows what a new owner-operator would actually take home.
EBITDA Multiple
The ratio of enterprise value to earnings before interest, taxes, depreciation, and amortization. A tech company selling at 8x EBITDA means a buyer pays $8M for $1M in annual EBITDA. Multiples vary dramatically by industry, growth rate, and deal size.
Quality of Earnings (QoE)
A financial due diligence report prepared by an independent CPA firm during an acquisition. It verifies that the seller's reported earnings are real, recurring, and sustainable — not inflated by one-time events or aggressive accounting. Costs $15K–$50K and is now standard for deals over $2M.
Add-Backs
Expenses added back to net income when calculating SDE or adjusted EBITDA because they wouldn't exist under new ownership. Legitimate add-backs include owner perks, one-time legal fees, and above-market rent to a related party. Inflated add-backs are the #1 deal-killer in small business sales.
Due Diligence
The investigation period after a letter of intent where the buyer verifies everything the seller claimed — financials, legal, operations, customers, employees, IP, environmental. Typically 60–90 days. Most deals that die, die here.
Letter of Intent (LOI)
A non-binding (usually) document outlining the key terms of a proposed acquisition — price, structure, timing, contingencies. It's not a contract, but it sets the framework for negotiation and typically includes a binding exclusivity period of 60–90 days.
Holdback (Escrow)
A portion of the purchase price (typically 10–15%) held in escrow for 12–18 months after closing to cover breaches of representations, undisclosed liabilities, or working capital adjustments. Sellers often don't realize 10–15% of their proceeds will be locked up for over a year.
Earn-Out
A portion of the purchase price contingent on the business hitting performance targets after the sale. Common when buyer and seller disagree on value. The risk: sellers stay involved but lose control, and the buyer can manipulate results. Structure carefully or avoid entirely.
Asset Sale
A transaction where the buyer purchases specific assets (equipment, inventory, contracts, IP, goodwill) rather than the entity itself. The seller keeps the legal entity and its liabilities. Buyers prefer asset sales for liability protection and tax benefits (stepped-up basis). Sellers often prefer stock sales to avoid double taxation.
Stock Sale (Equity Sale)
A transaction where the buyer purchases the ownership interests (stock or membership units) of the entity itself. The buyer inherits all assets AND all liabilities. Sellers prefer stock sales because proceeds are typically taxed as capital gains. Buyers bear more risk.
Goodwill
The portion of a purchase price that exceeds the fair market value of identifiable tangible and intangible assets. It represents brand reputation, customer relationships, workforce, and other value that can't be separated and sold independently. In an asset sale, goodwill is amortized over 15 years by the buyer.
Personal Goodwill
Goodwill attributable to the individual owner rather than the business entity — their personal relationships, reputation, and skills. Critical in both business sales (can be structured as a separate payment taxed as capital gains) and divorce (personal goodwill is NOT community property in California).
Stepped-Up Basis
When assets are inherited at death, their tax basis resets to fair market value at the date of death, eliminating all built-in capital gains. Critical for succession planning: transferring a business at death can be more tax-efficient than gifting during life. Also relevant in asset sales where buyers get a stepped-up basis on purchased assets.
Valuation Discount (DLOM / DLOC)
Reductions applied to the fair market value of a business interest to reflect lack of marketability (DLOM, typically 15–35%) and lack of control (DLOC, typically 15–25%). Used in gift and estate tax planning to transfer more value within exemption limits. Discounts on minority interests in family businesses are a powerful succession planning tool but face increasing IRS scrutiny.
Representations and Warranties
Contractual statements by the seller in a purchase agreement about the condition of the business — accuracy of financials, ownership of assets, absence of undisclosed liabilities, compliance with laws. Breaches discovered post-closing are the basis for holdback claims and indemnification demands.
Qualified Small Business Stock (QSBS) Exclusion
Section 1202 allows exclusion of up to $10M (or 10x basis) in capital gains on the sale of qualified small business stock held for 5+ years. The business must be a C-Corp with under $50M in gross assets. One of the most powerful tax benefits available to founders and early employees of tech companies.
Non-Compete Agreement (California)
A contractual restriction preventing one party from competing with another after employment or sale. In California, non-compete agreements between employers and employees are generally void and unenforceable under Business & Professions Code §16600 — one of the strictest non-compete prohibitions in the country. The major exception: non-competes signed in connection with the sale of a business are enforceable for a reasonable geographic and time scope. This dramatically affects how California businesses are sold and how key employees can be retained.
Proposition 13 (California Property Tax)
California's 1978 constitutional amendment capping property tax at 1% of assessed value with annual increases limited to 2%. Properties owned for decades may be assessed at a fraction of fair market value, creating enormous embedded tax savings. The catch: 'change in ownership' triggers reassessment to current market value. For businesses, transferring real estate to a new entity, selling a corporation that owns real estate, or transferring partnership interests above 50% can all trigger reassessment — potentially increasing property taxes 5-20x overnight.
Capital Gains Tax
Federal tax on profit from the sale of a capital asset (stock, real estate, business interest). Long-term rate (held over 1 year): 0%, 15%, or 20% based on income, plus 3.8% Net Investment Income Tax for high earners. Short-term rate: ordinary income rates up to 37%. California adds an additional 1-13.3% — California does NOT have a preferential capital gains rate, taxing it as ordinary income. The combined federal + California rate on long-term capital gains for high earners reaches 37.1%.
Equity Value
The value of a company attributable to its equity holders, calculated as enterprise value minus net debt (debt minus cash). When a buyer 'pays $5M for the business' in a stock sale, that $5M is the equity value — the buyer also assumes any debt. In a typical purchase agreement, the headline price is enterprise value, but the cash actually received by sellers is equity value minus transaction costs and any holdbacks.
Dealing with exit planning? Let's talk.
Dennis Duitch has guided hundreds of business owners through exit planning situations across technology, entertainment, manufacturing, and professional services.
MBA, Northwestern University · CPA · Certified Business Appraiser · Mediator · 30+ years of practice