The Funnel, Ep. 14: How Much Will You Pay In Taxes?
As you reach the final steps of the funnel, the conversation shifts from valuation and deal structure to what ultimately matters most: what you keep. Taxes are one of the largest—and most misunderstood—variables in a business sale. Two deals with identical headline prices can result in dramatically different net outcomes depending on how they’re structured, when decisions are made, and which advisors are involved early.
This episode explains how taxes factor into a sale, where founders often get surprised, and why tax planning should begin long before the purchase agreement is finalized.
Net Proceeds Matter More Than Price
Founders often focus on gross purchase price. Buyers often do too. But neither number tells you how much money you’ll actually walk away with after the transaction closes.
Taxes directly affect net proceeds, and they are influenced by:
Entity structure
Deal structure
Timing
State of residence
How payments are classified
Understanding these variables early allows you to negotiate more effectively and avoid preventable losses.
The Baseline: Capital Gains Is the Default, Not the Guarantee
In many straightforward transactions—such as the sale of a pass-through entity like an LLC or S-corp—proceeds are typically taxed as capital gains at the federal level. Depending on where you live, state capital gains taxes may also apply.
For founders in high-tax states, state taxes alone can materially reduce proceeds. Combined with federal capital gains, this may result in the highest tax rate you’ve ever paid on a single event.
This is the baseline—but it is not the whole story.
How Deal Structure Changes the Tax Outcome
Stock Sale vs. Asset Sale
Buyers often prefer asset purchases because they can depreciate or amortize acquired assets over time. Sellers often prefer stock sales because they usually result in cleaner capital gains treatment.
In some cases, agreeing to an asset sale can increase your tax burden—but that doesn’t mean it’s always a bad deal. Buyers may be willing to gross up the purchase price to offset the seller’s additional tax cost, creating a better net result for both sides.
Retained Equity and Rollovers
Retained equity can create future upside, but it also introduces tax complexity. If structured improperly, you may owe taxes on value you haven’t actually received yet—and that equity could later decline.
This is one of the most common areas where founders unintentionally overpay in taxes.
Employment and Retention Payments
Any portion of the deal tied to continued employment is often taxed as ordinary income, not capital gains. Ordinary income is usually taxed at significantly higher rates.
This distinction matters. A poorly structured retention or consulting agreement can convert what should be capital gains into higher-taxed income.
Timing Matters: The LOI Is the Best Moment to Address Taxes
While taxes are finalized in the purchase agreement, they are best negotiated at the letter of intent (LOI) stage.
The LOI sets expectations around:
Deal structure
Equity rollover percentages
Earn-outs
Payment timing
Addressing tax treatment early gives you leverage. Waiting until late-stage legal documentation often limits your ability to improve outcomes.
Special Situations That Require Extra Planning
Some transactions involve added complexity, including:
Recent conversion from C-corp to S-corp
Large taxable estates
Multi-state exposure
Prior distributions or basis issues
In certain cases, specialized insurance products can even be used to mitigate tax risk related to historical structure changes. The common theme: the earlier you plan, the more options you have.
How Candor Advisors Helps Founders Protect Net Proceeds
Taxes are not just an accounting issue—they are a transaction issue. The best deal is the one that maximizes what you keep, not the one with the biggest headline number.
Candor Advisors works with founders and their tax and legal advisors to identify tax implications early, structure deals intelligently, and avoid unnecessary exposure. By addressing tax considerations at the right point in the funnel, founders preserve leverage and improve net outcomes.
At the bottom of the funnel, smart planning beats last-minute fixes. The earlier taxes are part of the conversation, the better the result.
