Exit PlanningBy Owen P.February 24, 2025Updated September 19, 2026

Exit Planning Checklist: What to Do Three Years Out, and in What Order

A sequenced exit planning checklist from three years out to closing, with the reason for each step and the published rule or IRS form behind it.

A useful exit planning checklist is ordered by lead time rather than by importance, because several of the items have dates attached that you cannot compress. The quality of earnings report an SBA lender must obtain from October 1, 2026 on a purchase price of $3 million or more reconciles your statements, tax returns and bank records across the trailing twelve months and the last two fiscal years. A seller note has to have been “in place and current for 36 months” before it can be refinanced. Work backwards from those and the sequence writes itself.

The short version: the records take three years, the valuation and the route take one, and everything else fits inside the last twelve months.

Each item below says what to do, why it is on the list at that point, and where the rule comes from. This is a checklist of published rules, not tax or legal advice about your business.

The sequence at a glance

Phase	What it is for	The fixed rules inside it
Three years out	Making the financial records survive an outside accountant	The cash proof window: trailing 12 months plus two fiscal years
Two years out	Getting a real number and choosing a route	The SBA’s accredited “Qualified Source” list; conclusion of value
Twelve months out	Structure, tax reporting and the team	IRC section 1060 and Form 8594; the 36-month seller-note rule
Under offer	Surviving diligence	The quality of earnings requirement at $3 million
Closing and after	Filing what the transaction creates	Form 8594, Form 6252, Form 966, record retention

Three years out: make the records tell the truth

Pick the level of financial statement you will be able to offer, and start the engagement. The SBA ranks financial reporting “by terms of thoroughness: (1) Audited Financial Statements, (2) Reviewed Financial Statements (Prepared to AICPA SSARS AR-C 90 standards), (3) CPA Compiled Financial Statements, and (4) Corporate Tax Returns”, and tells lenders that “the credit analysis must primarily focus on the highest level of financial statements available.” Moving up a level is an engagement with a CPA firm and a calendar, not a document you order during diligence. Creating a successful exit strategy covers what each level involves.

Reconcile the management accounts, the tax returns and the bank statements to each other. This is the single item with the longest tail, because the quality of earnings cash proof “reconstructs cash receipts and disbursements by reconciling bank statement data to the income statement and tax return for each period under review” and “must be performed on both a trailing 12-month basis and the last two fiscal years.” Anything that does not tie out will be found.

Take the personal items out of the business. The same SBA requirement has the report “identify and document all add-backs and adjustments to the seller’s reported earnings, including non-recurring revenue or expenses, above- or below-market owner compensation, related-party transactions, deferred maintenance, and accounting methodology differences between cash-basis and accrual-basis reporting.” Every one of those is cheaper to clean up than to defend.

Work on customer concentration and contract continuity. A quality of earnings report has to assess “the quality and sustainability of the business’s revenue base, including customer concentration risk, contract continuity, and the likelihood that existing revenue and margins will be maintained post-sale.” Three years is enough time to change that mix; three months is not.

Have the buy-sell agreement reviewed, particularly if it is funded with company-owned life insurance. In Connelly v. United States, decided June 6, 2024, a unanimous Supreme Court held that “a corporation’s contractual obligation to redeem shares is not necessarily a liability that reduces a corporation’s value for purposes of the federal estate tax.” The case involved a company holding $3.5 million of life insurance on each of two brother shareholders to fund a redemption, and the Court reasoned that “Crown’s promise to redeem Michael’s shares at fair market value did not reduce the value of those shares.” The Court also observed that “the result here is simply a consequence of how the Connelly brothers chose to structure their agreement.” Anything written about redemption-funded buy-sell agreements before that date is unsafe to rely on, and what to do about your own agreement is a question for your attorney and your CPA together. Exit planning for partnerships covers the agreement in more detail.

Two years out: get a number, then choose the route

Commission a valuation engagement, and know which kind you are buying. NACVA’s Professional Standards distinguish a valuation engagement, which “results in a Conclusion of Value”, from a calculation engagement, which “results in a Calculated Value” and whose report must state that it “did not include all the procedures required for a Conclusion of Value.” SBA SOP 50 10 8.1 requires a conclusion of value, from a valuation “requested by and prepared for the Lender”, and a lender “may not use a business valuation prepared for the Applicant or the seller.” Your own valuation is for planning; the lender will order its own. How to value a small business sets out the approaches and the credentials.

Check the appraiser’s accreditation against the list that has consequences. For a 7(a) change of ownership the SBA accepts a valuation only from an accredited Qualified Source: ASA, CBA, ABV, CVA or BCA, independent of the loan production function and free of any appearance of a conflict of interest.

Choose the route, because the rules follow from it. A third-party sale, an owner buyout, a family transfer, an ESOP and a liquidation each carry their own financing constraints and tax reporting. Business exit strategies and options sets out all five and the rule governing each.

Know which SBA procedure will be in force. SOP 50 10 8.1 takes effect on October 1, 2026 and changes three things a seller should care about: the quality of earnings requirement at a $3 million purchase price, an equity injection on an Initial Acquisition that “cannot be reduced or eliminated”, and a seller-note refinancing window extended from 24 months to 36. Guidance written against the June 1, 2025 procedure describes the old versions of all three.

Twelve months out: structure, tax reporting and the team

Understand that you are probably selling assets, not a company. The IRS position is that “the sale of a business usually is not a sale of one asset. Instead, all the assets of the business are sold. Generally, when this occurs, each asset is treated as being sold separately for determining the treatment of gain or loss”, and that “the residual method must be used for any transfer of a group of assets that constitutes a trade or business.” That is why parts of a sale price are ordinary income or depreciation recapture rather than capital gain, and why the allocation is negotiated rather than assumed.

Put Form 8594 on the agenda before the price is agreed, not after. The instructions are explicit: “both the purchaser and seller must file Form 8594 and attach it to their income tax returns (Forms 1040, 1041, 1065, 1120, 1120-S, etc.) when there is a transfer of a group of assets that makes up a trade or business and the purchaser’s basis in such assets is determined wholly by the amount paid for the assets.” The form reports how the price was allocated across seven asset classes, ending with Class VII, goodwill and going concern value. Under IRC section 1060 a written allocation agreed by the parties binds both of them “unless the Secretary determines that such allocation (or fair market value) is not appropriate.” Buyer and seller have opposing interests in that allocation, which makes it a term of the deal.

If payments will be spread over years, price the tax timing in. IRS Publication 537 defines an installment sale as “a sale of property where you receive at least one payment after the tax year of the sale”, reported on Form 6252, and notes the trap: “you must report any depreciation recapture income in the year of sale, whether or not an installment payment was received that year.” Regular inventory sales, dealer dispositions and publicly traded securities are not eligible.

If part of the price is a seller note, learn the standby rules before you agree to one. Under SOP 50 10 8.1 seller debt counts toward the SBA’s required equity injection only where it is on full standby, and limited sources including standby seller debt “may provide no more than half of the required Equity Injection.” The note is eligible to be refinanced only “after it has been in place and current for 36 months.” That number was 24 months under the previous procedure.

Assemble the team. A CPA for the statements and the tax reporting, an accredited appraiser for the valuation, an attorney for the sale agreement, and a broker or intermediary if you are going to market. Ask any broker for their fee schedule and their minimum fee in writing before signing a listing agreement; no fee schedule is published by the trade body and the number is negotiated.

Under offer: getting through diligence

Get confidentiality dealt with before information leaves the building. What goes into a nondisclosure agreement, and what is binding in a letter of intent, are questions for your attorney; the sequencing point is that the documents come before the data room, not after.

Expect diligence to be broad rather than deep at first. The IBBA defines it as “a process where a buyer inspects a potential transaction”, one that “often includes a detailed review of accounting history and practices, operating practices, customer and supplier references, management references and market reviews.”

Know who the quality of earnings report belongs to. On a Business Expansion or Initial Acquisition at a purchase price of $3 million or more, from October 1, 2026, the lender must obtain one in addition to the valuation. The SOP requires it to be performed by “an independent, experienced financial professional” and says it “may not be prepared by or for the borrower or seller”, and the lender “must use the earnings from the QoE in the Debt Service Coverage (DSC) determination.” Owner Buyout and ESOP transactions are exempt from the requirement.

Read any earn-out as what it is. The IBBA’s definition: “a contractual provision stating that the seller of a business is to obtain additional future consideration based on the business achieving certain future business goals.” How much of a price typically arrives at closing, by deal size, is in business exit strategies and options.

Keep running the business. The SBA’s own guidance to owners tells them to settle in advance how the business will be run before close and how much access the buyer has to information.

Closing, and the filings that follow

Have an attorney review the sale agreement. The SBA states it plainly: “You must prepare a sales agreement to sell your business officially. This document allows for the purchase of assets or stock of a corporation. An attorney should review it to make sure it’s accurate and comprehensive.” Its guidance also says to name seller, buyer and business and to include all inventory in the agreement.

File Form 8594 with the return for the year of sale, matching the allocation the other side files.

If the entity is being wound up as well as sold, work the IRS closing list. File a final return for the year you close, handle final employment tax forms and W-2s, pay what is owed, report payments of $600 or more to contract workers, cancel the EIN by letter giving the business name, EIN, address and reason for closing, and keep the records. Corporations also file Form 966 for a corporate dissolution or liquidation, plus Form 1120 or 1120-S with the final return box checked. Employment tax records are kept at least four years, and property records until the statute of limitations expires.

Keep the file for the buyer’s questions. Post-closing adjustments, an earn-out measurement or an amended allocation all reach back into the records you have just closed out, and Form 8594 itself has to be refiled if the purchaser’s cost or the seller’s amount realized later changes.

Who to bring in, and when

Bring the CPA in first and earliest, because the three-year items are all accounting items and the tax reporting of the deal is decided long before closing. Bring in the accredited appraiser at the two-year mark, checking the credential against the SBA’s list if any buyer is likely to borrow. Bring in the attorney before the first confidential document goes out, and keep them through the sale agreement and, where a buy-sell agreement or an estate plan is involved, through the review that Connelly made necessary. Bring in a broker or intermediary when you decide to go to market, with their fee schedule in writing. A Certified Exit Planning Advisor can coordinate the whole sequence, and it is worth knowing that the credential is a training program rather than an appraisal accreditation, and does not appear on the SBA’s Qualified Source list. Our directory lists CPA firms by state and city, and where the work is a monthly reporting pack and diligence-ready records rather than an annual filing, fractional CFO work is the better description of what you need.

Frequently Asked Questions

How long before a sale should I start working through an exit planning checklist?

Three years, if the goal is that nothing on the list is rushed. The financial records are the constraint: the cash proof inside an SBA quality of earnings report covers the trailing twelve months and the last two fiscal years, and moving up from internal statements to a compilation, review or audit is an engagement with its own calendar. The valuation and the choice of route need about a year, and the structuring and filing items fit inside the final twelve months.

What documents will a buyer ask for?

Broadly, everything that shows how the business earns its money. The IBBA describes diligence as often including “a detailed review of accounting history and practices, operating practices, customer and supplier references, management references and market reviews.” Where the buyer borrows through the SBA at a purchase price of $3 million or more, the lender also commissions a quality of earnings report that reconciles accountant-prepared statements, tax returns, internal statements and IRS transcript data.

Who pays for the quality of earnings report, and can I use my accountant?

The requirement exists for the lender’s benefit, and the SOP says the report “may not be prepared by or for the borrower or seller” and must be performed by “an independent, experienced financial professional.” It does not name the CPA credential. If a buyer is financing at or above the $3 million threshold, ask the lender who it will accept before anyone is engaged.

What is the 36-month rule on a seller note?

Under SBA SOP 50 10 8.1, effective October 1, 2026, seller debt is eligible to be refinanced only after it “has been in place and current for 36 months”, and where standby seller debt is used toward the required equity injection it may provide no more than half of it. The equivalent window was 24 months under the previous procedure, so older articles describe the shorter one.

Does the checklist change if I am selling to a partner or to my family?

The accounting items do not change at all. The financing and tax items do. A sale to someone already in the business can qualify as an SBA Owner Buyout, which is exempt from the quality of earnings requirement and where the lender may reduce the equity injection. A transfer to family moves the question to the transfer tax figures for the year, which are set out in business exit strategies and options.

Sources

12 links