When Richard Levychin joined Galleros Robinson as a partner in 2018, he brought with him decades of experience helping entrepreneurs navigate the complex world of mergers and acquisitions. Based in their New York City office, Richard leads the firm's private sector practice, working with both privately and publicly held companies while specializing in the emerging business market. His expertise spans tax preparation, tax mitigation, financial reporting, and client advisory services related to M&A transactions.

In this episode of Startups with Stu with host Stuart Draper, Richard shed light on one of the most overlooked aspects of entrepreneurial success - strategic tax planning that can save founders millions during exit events. The conversation revealed how proper entity structure, timing, and professional guidance can mean the difference between keeping your wealth and losing substantial portions to taxes. Through real client stories and practical insights, Richard demonstrated that while most founders focus on building their businesses, the smartest ones also prepare for the day they sell them.

Understanding the $10 Million Tax Exclusion Nobody Talks About  

The Qualified Small Business Stock exemption under Section 1202 of the tax code represents one of the most significant tax advantages available to entrepreneurs, yet most founders remain completely unaware of its existence. This provision allows qualifying shareholders to exclude up to $10 million or ten times their adjusted basis from federal capital gains taxes when selling their company stock. For many entrepreneurs, this exclusion can represent millions in tax savings that would otherwise go directly to the government.

However, accessing this benefit requires meeting specific criteria that must be established long before any exit event occurs. Companies must be structured as C Corporations, maintain assets below $50 million at the time of stock issuance, and operate in qualifying industries. Service businesses, including consulting, law, and financial services, are specifically excluded from participation. Additionally, shareholders must hold their stock for a minimum of five years before selling to qualify for the exclusion.

The timing aspect proves particularly tricky for founders who start as LLCs or S Corporations. While conversion to C corporation status is possible, the five-year clock starts ticking only from the conversion date, not from the company's original formation. Richard emphasized that founders who discover this opportunity late in their journey often find themselves choosing between selling immediately at a significant tax disadvantage or waiting five additional years to qualify for the exclusion.

Real Stories of Million Dollar Tax Savings and Costly Mistakes  

Richard shared a particularly striking example of how proper tax planning can transform an entrepreneur's financial outcome. One client invested approximately $100,000 in a startup that eventually generated a liquidating event worth $8.9 million. After celebrating the windfall for several weeks, the reality of owing taxes on the massive capital gain motivated the investor to seek aggressive tax mitigation strategies.

The investor initially engaged another professional who proposed what appeared to be a sophisticated tax avoidance scheme involving insurance products. When Richard's team reviewed the strategy, they immediately recognized it as potentially fraudulent - describing it as "a great strategy if you want to go to jail." Instead, they implemented legitimate tax mitigation techniques that legally reduced the taxable capital gain from $8.9 million to under $1 million, saving the client millions in taxes while keeping him on the right side of the law.

Conversely, Richard described situations where founders believed they qualified for QSBS benefits but discovered too late that they hadn't met the requirements properly. In one case, a company was preparing for an exit specifically because they thought the QSBS exclusion would make the deal attractive. When Richard's team determined they didn't actually qualify, the founders ultimately decided against selling because the tax burden made the transaction financially unappealing. The money they would have lost to taxes was substantial enough to kill the entire deal.

The Risk-Rated Approach to Advanced Tax Strategies  

Beyond the basic QSBS exemption, Richard's firm employs a sophisticated approach to tax mitigation that acknowledges both opportunities and risks. They categorize tax strategies into multiple layers, starting with completely bulletproof approaches that carry zero risk and progressing to more aggressive positions that require careful evaluation. The firm's unique contribution involves not just identifying tax-saving opportunities but also qualifying and quantifying the associated risks.

Their risk assessment system rates strategies on a scale of one to ten, where zero means potential jail time and ten represents completely safe approaches. For example, they might rate a particular complex strategy as a seven, meaning it offers substantial tax benefits but comes with moderate risk that clients need to understand before proceeding. This transparency allows entrepreneurs to make informed decisions based on their personal risk tolerance and financial situation.

The most sophisticated strategies often involve multiple tax opinions from large firms, extensive documentation, and careful structuring that can withstand IRS scrutiny. Richard emphasized that reputable tax professionals should always explain both the benefits and the risks of any strategy, allowing clients to evaluate whether the potential tax savings justify the complexity and uncertainty involved. This approach protects entrepreneurs from both overly conservative advisors who miss legitimate opportunities and aggressive promoters who push dangerous schemes.

Common Deal-Killing Mistakes in M&A Transactions  

Richard's extensive experience with mergers and acquisitions has revealed patterns in why promising deals fail to close. While some failures result from factors beyond anyone's control - such as market timing or unexpected industry changes - many stem from inadequate preparation and poor due diligence processes. Entrepreneurs often become so excited about potential transactions that they neglect the skeptical evaluation needed to protect their interests.

The quality of due diligence emerges as the single most important factor determining deal success. This process involves a comprehensive evaluation of financial records, legal compliance, operational systems, and potential liabilities that could affect the transaction. Richard stressed that founders need experienced advisors who can identify potential problems before they derail negotiations. Areas requiring particular attention include:

• Quality of earnings analysis to verify financial performance

• UCC searches to identify any liens or encumbrances

• Trademark and intellectual property verification

• Outstanding liability assessment

• Operational system documentation

• Customer concentration and retention analysis

Successful entrepreneurs balance optimism about their deals with healthy skepticism about potential problems. Richard noted that founders must resist the temptation to ignore red flags or rush through critical evaluation phases. The most expensive mistakes often occur when entrepreneurs become so emotionally invested in closing a deal that they overlook obvious warning signs or fail to engage qualified professionals for thorough review.

Building Your Tax-Smart Exit Strategy Today  

The conversation with Richard on Startups with Stu reinforced a critical message for entrepreneurs at every stage of their journey - tax planning cannot be an afterthought addressed only when exit opportunities arise. The most successful founders integrate tax considerations into their business structure decisions from day one, positioning themselves to maximize their financial outcomes when the time comes to sell.

For founders currently operating as LLCs or S corporations, the window for QSBS qualification remains open, but it requires immediate action and professional guidance. The conversion process involves complex legal and tax considerations that demand expertise from qualified attorneys and CPAs experienced in these transactions. While the five-year holding period might seem lengthy, the potential millions in tax savings make early planning worthwhile for qualifying businesses.

Richard's firm, Galleros Robinson, maintains a comprehensive knowledge center on their website where entrepreneurs can research specific topics related to tax strategy and M&A planning. Their weekly newsletter provides ongoing education on emerging opportunities and changing regulations that could affect business owners. For entrepreneurs serious about maximizing their exit value, establishing relationships with experienced tax and M&A professionals represents one of the smartest investments they can make in their company's future success.

Ready to discover tax strategies that could save you millions on your exit? Visit GallerosRobinson.com to explore their comprehensive knowledge center and subscribe to their weekly newsletter for ongoing tax insights. Don't forget to subscribe to Startups with Stu for more entrepreneur success stories that reveal the financial strategies most founders never learn until it's too late.

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