5 Strategic Tax Planning Moves for a High-Value Business Sale

Selling a middle market business involves far more than negotiating a purchase price. Even before reaching the negotiating table pre-sale diligence demands meticulous tax planning to preserve value and avoid costly pitfalls. Given the potential for tax liabilities to substantially reduce sale proceeds, it is essential to implement proactive strategies based on a thorough understanding of your tax position, attributes, and exposures.

In this issue of GaP insights we review some of the most effective tax strategies that have preserved our clients’ net proceeds after the sale. While we are not tax specialists, and this is not meant as a substitute for consulting with a qualified M&A Tax Specialist, our extensive experience in M&A enables us to understand the tax landscape and identify the following 5 key steps to optimizing your exit.

‍1. Understanding Your Tax Position: Attributes vs. Exposures

Before engaging buyers, conduct a comprehensive assessment of your tax profile

• Tax Attributes: Identify assets such as net operating losses, tax credit carryforwards, or step-up basis opportunities. These can be marketed to buyers as value drivers, potentially increasing your sale price. For example, a step-up basis allows buyers to revalue assets to market prices, boosting their depreciation benefits and reducing long-term tax liability.
• Tax Exposures: Examine historical compliance across all tax areas (federal/state income, sales/use, payroll, property). Undiscovered liabilities such as uncollected sales tax from multi-state nexus issues or misclassified workers often surface during buyer due diligence, leading to price reductions or holdbacks.

Hold a mock tax due diligence call covering all tax domains. This exposes vulnerabilities (e.g., unreported nexus in a state where online sales exceeded thresholds) and refines your response strategy to prevent buyer teams from overestimating exposures.

 2. Leveraging Sell-Side Tax Due Diligence

Reverse tax due diligence isn’t optional; it’s strategic armor

• Proactive Remediation: If material exposures exist (e.g., sales tax non-compliance), pursue voluntary disclosure agreements (VDAs) to limit lookback periods and penalties. This preempts buyer negotiations and preserves deal momentum.
• Streamlining Negotiations: A sell-side tax report shared with buyers accelerates their due diligence, shifting their focus from broad scrutiny to targeted confirmation. This builds confidence and avoids delays.
• Highlighting Value: Quantify tax attributes (e.g., $500K in R&D credits) to position them as deal sweeteners. Buyers paying a premium for such benefits can offset your remediation costs.

‍3. Structuring the Deal for Tax Efficiency

Your transaction’s architecture directly impacts after-tax proceeds

• Asset vs. Stock Sale
  • Seller Preference: Stock sales typically yield capital gains treatment (max 20% federal rate). Allocate purchase price to capital assets like goodwill to minimize ordinary income tax.
  • Buyer Preference: Asset sales allow step-up basis, accelerating depreciation deductions. Compromise by offering a partial asset sale or gross-up payment to cover the seller’s extra tax burden.
• Installment Sales: Spreading payments across years defers capital gains tax, easing cash flow strain.
• Charitable Remainder Trusts (CRTs): Transfer the business pre-sale to avoid immediate capital gains tax. The trust sells it tax-free, pays you income, and donates residuals to charity.

‍4. Navigating Common Tax Traps

Middle market deals face predictable pitfalls so plan accordingly to avoid them

• State & Local Tax (SALT) Complexity

                -  Nexus Risks: Expanding sales or remote work can unintentionally trigger tax obligations in new states. Pre-sale, review physical/virtual footprints and remediate past                     liabilities. 

                 - Apportionment Issues: Misallocating income across states inflates tax exposure so be sure to use specialized software for accuracy.

• Last-Minute Structural Shifts: Tax terms often change near signing. Model multiple scenarios (e.g., switching from stock to asset sale) to quantify after-tax implications beforehand, preventing rushed decision
• Buyer Diligence Overreach: Buy-side teams frequently inflate exposure estimates (e.g., $1M sales tax liability vs. your $200K assessment). Pre-empt this with third-party exposure analyses to justify counter arguments.

 5. Timing and Tactical Opportunities

• Long-Term Holding: Holding assets >12 months qualifies gains for preferential capital gains rates (15–20% vs. 37% ordinary rates).
• Opportunity Zones: Reinvest gains within 180 days into Opportunity Funds to defer tax until 2026 and reduce liabilty by 10–15%.
• Low-Income Years: Schedule closings in years with reduced personal income (e.g., post-retirement) to leverage lower tax brackets.

Tax efficiency in a business sale hinges on early, holistic preparation and not on reactionary fixes. By conducting sell-side diligence, strategically structuring the deal, and neutralizing exposures pre-market, you transform tax from a liability into a value lever. Buyers will always reward transparency and minimized risk, while haste or omissions invite erosion of your hard-earned proceeds. Engage experienced M&A Tax Advisors early, simulate negotiations, and enter the deal room armed with correct data. Your exit isn’t just a transaction; it’s the culmination of your business legacy so it is incumbent upon you to ensure its optimized.

If you're thinking about selling, contact us to help get you started.

‍If any of this resonates with you, we encourage you to complete our M&A Discovery Questionnaire and talk with us to see if your business makes the cut as one who can still command a great exit in this M&A environment. We will be in touch quickly to discuss the results. Click here to take the assessment.

Gilbert & Pardue Transaction Advisors (GaP) is a Houston-based business advisory firm serving lower middle market business owners from coast to coast through representation for Mergers & Acquisitions (M&A).

Matt Gilbert and Bret Pardue established GaP to provide owners of lower middle and middle market businesses – those businesses generally enjoying annual revenue of $10-$80 million – with the quality of M&A representation and value-enhancement services previously only available to upper middle and large businesses. GaP brings highly experienced executives, sophisticated financial and marketing products, proven-effective processes, and fully-integrated expertise to every engagement. No other M&A firm serving the lower middle provides the quality of representation and transactional expertise that we do.

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