If you’ve ever been part of an acquisition buy or sell side you already know that it’s not the press release that defines the outcome. It’s the terms, the structure, and, more than most people admit… the tax strategy.
I’ve watched great deals sour because someone didn’t think through the tax consequences early enough. And I’ve seen average deals become highly lucrative not because of a better valuation, but because the exit was structured intelligently.
When it comes to M&A, what you keep matters more than what you earn. And tax is often the biggest silent player in the room.
Why Tax Planning Should Start on Day 1 of a Deal
Too many founders and even PE firms treat tax planning as an afterthought. They assume someone in legal or accounting will “sort it out.” But by the time lawyers are papering the deal, most of the big tax levers are already locked in.
Some early decisions with long-tail consequences:
- Asset sale vs. stock sale
- Entity type (C-Corp vs. S-Corp vs. LLC)
- Deferred payments, earnouts, and rollover equity
- Treatment of intangibles and goodwill
Ignore these, and you risk paying more in taxes than you ever expected especially if you’re not based in a zero-income-tax state or you’re holding onto QSBS (Qualified Small Business Stock) without realizing it.
Asset Sale or Stock Sale: What’s the Difference?
In a stock sale, the buyer purchases the shares of the company directly. In an asset sale, they buy the company’s individual assets (IP, contracts, equipment, etc.).
From a seller’s perspective (especially founders), a stock sale is usually better. It’s cleaner. Capital gains apply. And you’re not stuck with leftover liabilities.
But from a buyer’s perspective? An asset sale is often preferred, because they get a stepped-up basis in the assets (which helps with future depreciation) and can sidestep unwanted obligations.
Tax-wise, this one decision can change your effective tax rate by tens of percentage points.
Smart dealmakers don’t wait to “see how the deal plays out.” They position early especially if they’re planning to leverage rollover equity or qualify for QSBS benefits.
The Power of QSBS (If You Qualify)
If you’re a U.S.-based founder with stock in a qualifying C-Corp (held for 5+ years), you may be eligible to exclude up to $10 million in capital gains or 10x your cost basis from federal taxes under Section 1202.
That’s not a typo. That’s tax-free upside if structured correctly.
But it only works if:
- The company is a qualified small business (assets < $50M at issuance)
- You acquired original issue stock
- You held it for 5+ years
- And you’re not a service business (e.g., law, consulting)
Too many founders miss out on QSBS simply because no one told them early enough. Or they inadvertently disqualified themselves through a bad recap or a C-to-S conversion right before an acquisition.
Earnouts & Rollover Equity: Know What You’re Really Getting
It’s one thing to agree to an earnout. It’s another to realize later that a huge chunk of it gets taxed as ordinary income, not capital gains.
Or that your rollover equity gets jammed into a new entity with different rules and timelines that don’t benefit you at all.
This is where real tax strategy comes in:
- Can the earnout be restructured to align with capital gains treatment?
- Is there a way to elect Section 338(h)(10) or 336(e) to balance buyer-seller preferences?
- Can the rollover be placed in a way that preserves QSBS treatment for the next exit?
You won’t solve this in a closing call. You need to be thinking about it when the LOI is being drafted.
What Buyers Care About (and Why You Should Too)
If you’re the acquirer, your tax play isn’t just about deductions it’s about long-term structure.
- Are you buying IP you can amortize under Section 197?
- Can you create a tax shield from interest or NOLs (Net Operating Losses)?
- Does the purchase price allocation align with your strategic use of assets?
Tax-smart buyers shape deals that give them flexibility and write-offs. That’s part of how they outperform the IRR model not by getting better terms, but by keeping more of what they win.
Don’t Just Close a Deal Engineer an Outcome
Tax isn’t exciting. No one puts “Section 1202 wizard” in their Twitter bio.
But I’ve seen firsthand after multiple exits, investments, and founder calls gone sideways that the people who think about tax early, often, and strategically walk away wealthier and less surprised.
The difference isn’t visible on closing day.
It shows up the next April. And for years after.
In M&A, Tax Isn’t a Line Item. It’s a Lever.
If you’re a founder getting ready to sell, an investor structuring a deal, or a finance lead reading term sheets ask the tax questions before the legal docs get finalized.
Don’t assume the default is in your favor. It rarely is.
Because M&A is full of dealmakers who know how to negotiate well.
But the ones who walk away with the most?
They structured smart and they taxed smarter.
Enjoyed this piece?
If it sparked a thought or helped you see things differently, feel free to explore more articles on the site there’s plenty more where this came from.
You can also connect with me here: Facebook | Instagram | LinkedIn | X
Let’s keep the conversation going.
