- The headline price is not the check you receive. It is enterprise value, the price for the business before its debts are paid off. Debt and a working capital adjustment come out first to reach equity value, and your transaction expenses then come out of what the owners receive.
- Part of the price is often paid later, or never. Escrows, earnouts, seller notes, and rollover equity move money out of the closing wire and into future years, with real risk that some of it does not arrive.
- Taxes are usually the largest single deduction. The rate on the same gain can run from 20% to well above it, depending on what kind of company you own, how the price is split among its assets, and where you live.
- Most of the levers work only before the letter of intent. Structure, allocation, personal goodwill, gifting, and installment terms are hard to change once a buyer has exclusivity, meaning you have agreed not to talk to other buyers.
Tax and legal outcomes depend on entity type, tax elections, residency, buyer structure, and negotiated terms. This guide provides general information rather than legal or tax advice. Qualified M&A counsel and tax advisors should model your specific transaction.
How the headline price differs from what you keep
In the example this guide follows, a $20 million offer turns into $12.1 million of cash on closing day, before taxes. Another $4 million may arrive later, or may not. Taxes then come out of what is left.
The number in a letter of intent (the nonbinding offer letter that sets price and key terms) is usually an enterprise value: the price for the business itself, before its debts are paid off and before the other adjustments below. Buyers price it on a cash-free, debt-free basis. As Whiteford, Taylor & Preston explains, that convention lets you take the company’s cash before closing, while the buyer expects the business to arrive with a normal level of working capital. Debt is paid off from the price at closing. Our guide to how EBITDA multiples build enterprise value covers where the headline number comes from. This guide covers where it goes. New to these terms? See our M&A glossary.
The example is the same hypothetical offer used in our guide to evaluating an unsolicited offer: a $20 million enterprise value, $3 million of debt, a $500,000 working capital shortfall, $400,000 of transaction expenses, a $1 million escrow, and a $3 million earnout. Every figure is illustrative and is not drawn from a documented Salt Creek transaction.
The 10 things that come out of the price
What comes out at closing
1. Debt and debt-like items
Bank loans, lines of credit, equipment notes, and capital leases are paid off at closing from the purchase price. Purchase agreements often define “debt” more broadly, to include items such as unpaid taxes, deferred revenue, accrued bonuses, or deferred compensation. Ordinary bills to suppliers usually stay in working capital instead. The definition is negotiated, so read it closely: every item added to the debt list reduces your proceeds dollar for dollar. In the example, $3 million comes out first.
2. The working capital adjustment
Working capital is, roughly, what customers owe you plus inventory, minus the bills you owe: the money tied up in running the business day to day. Buyers set a target level, often called the peg, that the business is expected to hand over at closing, based on a look-back period that Whiteford describes as typically 6 to 12 months. Deliver less than the peg and the price falls by the shortfall. Deliver more and the price can rise. The SRS Acquiom working capital study reports that these adjustments now appear in more than 90% of private-target deals, up from 50% a decade ago. An estimate is paid at closing and corrected once the final numbers are in, usually within a few months. Our working capital peg guide covers how sellers lose money here after closing. The example assumes a $500,000 shortfall, which leaves $16.5 million of equity value.
3. Transaction expenses
You usually pay your own sell-side advisor, M&A counsel, accountants, and any transaction bonuses to employees out of the proceeds. The Firmex 2023-24 US M&A Fee Guide, a survey of 189 advisors, built a typical engagement letter from the most common answers, with a success fee (the advisor’s fee, paid only if the deal closes) of 6.3% for a $5 million transaction, 3.9% for a $20 million transaction, and 2.0% for a $100 million transaction. A sell-side quality of earnings report, an accountant’s independent check of your earnings, commonly costs $25,000 to $50,000, as our quality of earnings guide explains. Minimum fees change the math on smaller deals (see our M&A advisor fees guide). The example assumes $400,000 of transaction expenses. That figure is deliberately low to keep the example simple: at the Firmex figure, the success fee alone on a $20 million sale would be about $780,000, before legal and accounting costs.
What gets paid later, or never
4. The escrow or holdback
Buyers commonly hold back part of the price to cover claims that something you stated about the business in the purchase agreement turns out to be wrong. According to Fasken’s summary of the SRS Acquiom 2026 Deal Terms Study, the median indemnification escrow in 2025 was 10% of deal value in deals without representation and warranty insurance, compared with 0.5% in deals that used it. That insurance is a policy the buyer buys so claims go to an insurer instead of your escrow. General representations commonly survive 12 to 18 months after closing, as our guide to protecting yourself after closing explains, along with caps and baskets (limits on how much the buyer can claim and when). Escrowed money is generally released to you if no valid claims are made, but it is not in the closing wire. The example holds back $1 million.
5. The earnout
An earnout pays part of the price only if the business hits future targets. SRS Acquiom’s lower middle market analysis found earnouts in 29% of deals with closing payments up to $50 million, and 35% of deals up to $25 million. Collecting is the harder part. SRS Acquiom’s earnout data shows that, outside life sciences, deals with some earnout success paid about 50 cents on the dollar, and about 21 cents on the dollar once deals that paid nothing are included. The same data shows lower middle market deals generally fare worse. Treat an earnout as upside, not as price. Our guide to earnouts, escrows, and holdbacks explains how to negotiate the terms. The example includes a $3 million earnout.
6. Seller notes and rollover equity
A seller note is a loan from you to the buyer, repaid over time. Rollover equity means reinvesting part of the price in the buyer’s company. Our guide to M&A deal structure cites one industry guide putting seller-note interest at 6% to 8% over three to seven years, and notes that rollover often falls in the 10% to 30% range in middle-market deals. Neither is cash at closing. A note depends on the buyer’s ability to pay, and rollover depends on a future sale of the buyer’s company. Both can defer tax. Payments on a note can be taxed as you receive them rather than all at closing (the installment method under Section 453). A properly structured rollover can defer tax on the part you reinvest (under Section 351 for corporations or Section 721 for partnerships). A poorly structured one can be taxed as if you took all cash and reinvested it.
Adding it up: from the $20 million offer to cash at closing
| Line | Amount | Running total |
|---|---|---|
| Headline enterprise value | $20.0M | $20.0M |
| Debt and debt-like items | ($3.0M) | $17.0M |
| Working capital shortfall | ($0.5M) | $16.5M |
| Equity value | $16.5M | |
| Transaction expenses | ($0.4M) | $16.1M |
| Escrow held back | ($1.0M) | $15.1M |
| Earnout, paid later if earned | ($3.0M) | $12.1M |
| Cash at closing, before taxes | $12.1M |
What taxes take
Taxes are figured on your gain, not the price: roughly what you receive minus your tax basis, which is what you have invested in the business less the depreciation you have already deducted. Three things decide the rate: what kind of company you own, how the price is split among its assets, and where you live. Deferred pieces such as installment payments and earnouts are generally taxed when you receive them. Part of each deferred payment may be treated as interest, and an earnout tied to your continued employment can be taxed as compensation.
Your entity type matters most. A C corporation pays its own tax, while an S corporation, partnership, or LLC usually passes income through to its owners. A C corporation that sells its assets pays the 21% federal corporate tax on the gain, and its shareholders are taxed again when the proceeds are distributed to them. An S corporation that converted from a C corporation within the past five years can also owe a corporate-level tax on value that built up while it was a C corporation (Section 1374). Our guide to asset sales vs. stock sales explains how structure changes this.
7. Federal capital gains tax
Long-term capital gain, on assets held more than a year, is taxed at 0%, 15%, or 20% depending on your income. For a sale this size, nearly all of the gain lands in the top 20% bracket, which for 2026 starts above $613,700 of taxable income for married couples filing jointly and $545,500 for single filers, according to IRS Revenue Procedure 2025-32.
8. Gain taxed as ordinary income
Not all of the gain qualifies for capital gains rates. Some is taxed as ordinary income, at the same rates as wages. When a business sells its assets, IRS Publication 544 explains, each asset is treated as sold separately. Gain on equipment up to the depreciation you already deducted is taxed as ordinary income (Section 1245 recapture), inventory produces ordinary income, and the part of the gain on real property that reflects past depreciation is taxed at up to 25%. Payments to you for a noncompete are ordinary income rather than capital gain, and consulting fees are ordinary compensation. Recapture is taxed in the year of sale, even if the rest of the price is paid over time on a note (Section 453(i)).
This is why the purchase price allocation matters. In an asset sale, you and the buyer agree in writing how the price is split among equipment, inventory, goodwill (the value of your name, customers, and reputation beyond your physical assets), and so on. Under Section 1060 that written split binds both sides, and both report it to the IRS on Form 8594. Buyers generally prefer more of the price assigned to equipment they can depreciate quickly. Sellers generally prefer more assigned to goodwill, which is usually capital gain.
9. The 3.8% Net Investment Income Tax
For many owners this is the most avoidable line on the list. Section 1411 adds a 3.8% federal surtax on investment income to the extent your modified adjusted gross income exceeds $250,000 for joint filers or $200,000 for single filers. An owner who materially participates in an S corporation, partnership, or sole proprietorship, meaning works in the business regularly and substantially rather than just owning it, generally avoids it on the share of the gain tied to the business’s operating assets. A passive owner does not, and gain on the sale of C corporation stock is generally investment income regardless of how active the owner was. Whether you qualify is a factual question for your tax advisor.
10. State and entity-level taxes
State tax on the gain varies more than most owners expect.
| State | Tax on individual capital gain | Note |
|---|---|---|
| Texas | None | No personal income tax; the franchise tax can apply to a company’s own gain |
| Florida | None | No personal income tax; C corporations are taxed at the entity level |
| Illinois | 4.95% | Plus a 1.5% replacement tax charged to the company when an S corporation or partnership itself recognizes the gain, as in an asset sale |
| Washington | 7% on the first $1 million of taxable gain, 9.9% above that | Applies to long-term gains such as business interests; depreciable business assets and real estate are exempt, and qualified family-owned small businesses can take a deduction |
| California | Up to 13.3% | No lower rate for capital gains; 12.3% top bracket plus 1% on taxable income above $1 million |
Sources: Illinois Department of Revenue, California Franchise Tax Board and its rate schedules, the Washington Department of Revenue, the Texas Comptroller, and the Florida Constitution, Article VII, Section 5 and the Florida Department of Revenue. Residency often determines which state taxes gain on stock and goodwill, so moving shortly before a sale is a question for counsel, not a shortcut.
What that means in dollars
For an Illinois resident with a large capital gain, the top federal rate of 20%, the 3.8% surtax if it applies, and Illinois’ 4.95% add up to a combined top rate of roughly 28.75% on the last dollars of capital gain. An owner who materially participates in an S corporation and avoids the 3.8% would face roughly 24.95%. Put simply, at these top rates, every $1 million of long-term capital gain costs roughly $250,000 to $288,000 in federal and Illinois tax. Recapture taxed at ordinary rates, C corporation double tax, the Illinois replacement tax, or a higher-tax state push that higher. Only your tax advisor’s model, built on your actual basis and allocation, can tell you the real number.
Planning moves that can change what you keep
- Model after-tax proceeds before the letter of intent. Two offers with the same headline can produce very different after-tax cash once structure and allocation are known.
- Negotiate the allocation, not just the price. Moving value between equipment, noncompetes, and goodwill changes how much is taxed as ordinary income.
- Ask whether personal goodwill applies. In a C corporation sale, the owner’s own relationships and reputation may be sold by the owner directly, avoiding the corporate layer of tax. The Tax Court recognized this in a case called Martin Ice Cream, but The Tax Adviser cautions that an existing employment agreement or noncompete with the company can transfer that goodwill to the corporation.
- Size deferred payments deliberately. An installment note can spread tax over several years. But if installment notes from sales over $150,000 that arise in one year total more than $5 million at that year-end, Section 453A adds a yearly interest charge on the tax you have put off. Pledging the note as loan collateral can trigger the tax early.
- Check whether your stock qualifies as small business stock. Section 1202 can exclude much or all of the gain on C corporation stock you received directly from the company, outside excluded fields such as financial services, consulting, health, and law. Stock acquired after September 27, 2010 and held more than five years can exclude 100% of the gain, up to the greater of $10 million or 10 times your basis per company. For stock acquired after July 4, 2025, the exclusion is 50% after three years, 75% after four, and 100% after five, limited to the greater of $15 million or 10 times your basis. S corporation stock and LLC interests taxed as a partnership do not qualify.
- Plan gifts before value is locked in. Transferring company interests to family or trusts before a letter of intent can move future appreciation out of your estate. For 2026, each person can give away $15 million during life or at death before federal estate or gift tax applies.
Frequently asked questions
How much of the sale price will I actually keep? It depends on debt, working capital, deal structure, entity type, and where you live. In the illustrative $20 million example in this guide, cash at closing before taxes is $12.1 million, with another $4 million in escrow and earnout that may or may not be paid later. Taxes then come out of the gain.
Is the purchase price taxed at capital gains rates? Not all of it. Gain on goodwill and on stock held more than a year is generally long-term capital gain, taxed at up to 20% federally. Depreciation recapture, inventory, and payments for noncompetes or consulting are generally taxed as ordinary income.
Do I pay tax on money held in escrow or an earnout before I receive it? Contingent payments such as earnouts are generally reported on the installment method and taxed as received. The treatment of escrowed amounts depends on the escrow terms, so confirm it with your tax advisor.
Does the 3.8% Net Investment Income Tax apply to a business sale? It can. An owner who materially participates in an S corporation, partnership, or sole proprietorship generally avoids it on the gain tied to operating assets. Passive owners, and sellers of C corporation stock, generally do not.
When should I talk to a tax advisor about selling my business? Before you sign a letter of intent. Structure, allocation, personal goodwill, and gifting are hard to change once a buyer has exclusivity.
Working with an advisor on proceeds
Salt Creek Advisory helps owners turn each buyer’s headline number into estimated cash at closing and compare deferred terms side by side before a letter of intent is signed. Jack and Connor stay involved throughout, alongside your M&A counsel and tax advisor, who review the final structure and tax treatment. Owners evaluating a potential sale can schedule a confidential conversation with Salt Creek Advisory or start with a free preliminary valuation.