The $2.7 Million Question Every Business Owner Should Ask
Sarah Martinez built her manufacturing company from a startup in her garage to a $25 million revenue powerhouse over 15 years. When three buyers came knocking with attractive offers, she was ready to sign—until her tax advisor ran the numbers.
The difference between accepting the first offer immediately versus implementing a strategic tax plan first? $2.7 million in after-tax proceeds.
This story plays out countless times across America, where business owners leave millions on the table simply because they focus on when to sell rather than how to structure their exit for maximum tax efficiency.
The New Tax Landscape: Recent Changes That Demand Attention
The passage of the One Big Beautiful Bill Act OBBBA in 2025 has fundamentally changed the exit planning landscape, creating both new opportunities and urgency for business owners:
Revolutionary QSBS Enhancements
50% tax exclusion after just 3 years (previously required 5 years for any benefit)
75% tax exclusion after 4 years
100% tax exclusion maintained at 5 years
Maximum benefit: Up to $10 million in tax-free capital gains
Current Federal Capital Gains Environment
With 2024 federal capital gains rates remaining at:
0% for income up to $47,025 (single) / $94,050 (married filing jointly)
15% for income between $47,026$518,900 (single) / $94,051$583,750 (married filing jointly)
20% for income above these thresholds
Additional 3.8% Net Investment Income Tax on high earners Source: IRS Topic 409
Why Market Timing Fails: The Data Behind Structure-First Strategies
Recent market analysis from Capstone Partners reveals that middle-market M&A valuations averaged 9.4x EBITDA in 2024, down from 9.6x in 2023. While some owners might see this as a reason to wait for “better timing,” the data tells a different story. Capstone Partners
The Reality Check:
Private equity deal activity increased 19.3% in value and 12.8% in count during 2024 Cherry Bekaert
Lower middle market multiples for deals $5M$50M ticked up to 6.0x from
5.3x year-over-year 37th & Moss
$3.2 trillion in global M&A value transacted in 2024 10% YoY despite fewer total transactions
The bottom line: Good businesses with proper structure are finding buyers and achieving strong multiples regardless of broader market conditions.
The Five Pillars of Strategic Tax Structure
1. Entity Structure Optimization
The Challenge: Most business owners operate as CCorporations, S Corporations, or LLCs without considering exit tax implications.
The Strategy:
C-Corp advantages: Potential QSBS benefits, more flexible deal structures
S-Corp/LLC advantages: Pass-through taxation, potential for installment sale treatment
Timing considerations: Entity conversions require advance planning (often 5 years for QSBS.
Action Item: Review your current entity structure with your tax advisor before
engaging with buyers.
2. QSBS Qualification and Maximization
With the new OBBBA provisions, QSBS has become the single most powerful tax planning tool for business exits.
Qualification Requirements:
CCorporation status
Gross assets under $50 million when stock was issued
Active business (not passive investments)
Original issuance to taxpayer (not purchased from another shareholder)
Maximization Strategies:
Family gifting: Transfer QSBS to family members to multiply the $10 million exclusion
Section 1045 rollovers: Defer gains by reinvesting in other QSBS
Stacking multiple years: Issue new QSBS annually to reset holding periods
3. Deal Structure Engineering
Asset Sale vs. Stock Sale Tax Implications:
| Structure Type | Seller Tax Treatment | Typical Use Case |
| Asset Sale | Ordinary income on some assets, capital gains on others | Buyer wants to step up basis, seller has NOLs |
| Stock Sale | Capital gains treatment on entire transaction | QSBS qualification, cleaner transaction |
| Installment Sale | Spread gain recognition over multiple years | Large transactions, buyer financing needs |
Pro Tip: The structure that minimizes your tax liability should drive deal negotiations, not the reverse.
4. Timing Coordination Across Multiple Tax Years
Rather than rushing to close in a specific year, strategic timing can involve:
Split closings: Structure deals to optimize income across multiple tax years
Earnout structuring: Design earnouts to qualify for capital gains treatment
Deferred consideration: Use installment sales or seller financing strategically
5. State Tax Optimization
State capital gains taxes range from 0% to 13%, making location strategy crucial:
Zero State Capital Gains Tax States:
Florida, Nevada, South Dakota, Tennessee, Texas, Washington, Wyoming
Planning Options:
Pre-sale relocation: Establish residency in zero-tax states before closing
Deal structure modifications: Use tax-deferred exchanges or installment sales
Trust strategies: Implement state-specific trust strategies where applicable
Real-World Case Study: The Power of Structure
The Business: Regional distribution company, 8-figure revenue, 25 employees
The Owner: 58-year-old founder, considering retirement
Original Approach: Accept highest offer, close quickly Offer: $18 million
Tax liability: $4.5 million 25% effective rate)
Net proceeds: $13.5 million
Strategic Restructuring:
QSBS qualification analysis: Business qualified for partial QSBS treatment
Deal structure optimization: Negotiated stock sale vs. asset sale
Timing coordination: Structured closing to optimize holding periods
State planning: Seller relocated to zero capital gains tax state
Result:
Same $18 million gross proceeds
Tax liability: $1.2 million 6.7% effective rate)
Net proceeds: $16.8 million
Additional value captured: $3.3 million
The 90-Day Pre-LOI Action Plan
Days 1-30: Assessment Phase
- Complete comprehensive tax structure analysis
- Review entity structure and qualification requirements
- Evaluate QSBS eligibility and optimization opportunities
- Assess state tax implications and planning opportunities
Days 31-60: Strategy Implementation
- Execute necessary entity structure modifications
- Implement family gifting strategies if applicable
- Coordinate with exit planning team (M&A advisor, tax counsel, estate attorney)
- Model various deal structure scenarios
Days 61-90: Deal Preparation
- Prepare tax-optimized deal parameters for M&A advisor
- Create buyer education materials on preferred structure
- Finalize team coordination protocols
- Establish decision-making framework for negotiations
Warning Signs: When Tax Tail Wags the Dog
While tax optimization is crucial, avoid these common pitfalls:
Over-engineering deals: Don’t sacrifice significant value for marginal tax savings
Ignoring business fundamentals: Tax planning can’t fix operational problems
Timing obsession: Don’t wait for “perfect” tax conditions while business value erodes
One-size-fits-all approaches: Every business requires customized tax strategy
The Bottom Line: Your Next Steps
The M&A market has shown remarkable resilience in 2024, with private equity firms actively seeking quality businesses despite broader economic uncertainty.
The window for strategic tax planning is now—before you receive that first serious offer.
Three immediate actions every business owner should take:
Schedule a comprehensive tax structure review with qualified professionals
Evaluate QSBS qualification and optimization opportunities under new rules
Model various exit scenarios to understand your tax optimization potential
The difference between reactive tax planning and strategic structure optimization often measures in the millions. In Sarah’s case, it was $2.7 million.
What could it be worth for your business?
About Your Exit Planning Team
At Horizon M&A Advisors, we understand that successful exits require more than just finding buyers—they require strategic tax planning, optimal deal structuring, and coordinated execution. Our team works closely with qualified tax professionals and estate planning attorneys to ensure our clients maximize their after-tax proceeds while achieving their broader exit goals.
Ready to explore your tax optimization opportunities? Contact us for a confidential consultation.
Sources and Further Reading:
Capstone Partners M&A Valuations Index
Cherry Bekaert Private Equity Report 2024
IRS Publication on Capital Gains
Baker Donelson: OBBBA QSBS Analysis
This article is for informational purposes only and does not constitute tax or legal advice. Consult with qualified professionals regarding your specific situation.