When preparing for the sale of your tech consulting business, it’s natural to focus on price — but what really matters is how much you keep after taxes. Understanding taxes on selling a tech consulting business ensures you minimize surprises and maximize your net proceeds.

At Merge, we help founders think holistically about their exit — not just about valuation, but about after-tax outcomes too. Here’s what you need to know about tax considerations before you sell.

Why Tax Planning Is Essential

Taxes can significantly reduce your net proceeds. Without proactive planning, 30%–50% of your sale proceeds may go toward taxes, depending on structure, rates, and location.

Effective planning helps you:

  • Structure your deal efficiently

  • Understand what portion qualifies for lower capital gains rates

  • Account for state taxes

  • Prepare for how payment timing impacts your tax bill

Starting this planning early — ideally before negotiations — puts you in a stronger position to protect your interests.

Asset Sale vs. Stock Sale: Key Differences

The structure of the deal will have a direct impact on your tax outcome.

Asset Sale

In an asset sale, the buyer purchases individual business assets — such as contracts, goodwill, intellectual property, and equipment — rather than acquiring your company as a whole.

  • Buyers often prefer asset sales because they receive tax benefits, such as depreciation deductions on purchased assets.

  • Sellers may face higher taxes because certain assets (like equipment or non-compete agreements) are taxed at ordinary income rates, while goodwill may qualify for capital gains treatment.

In many small business transactions, especially where the buyer is acquiring selected assets rather than stock, asset sales are common.

Stock Sale

In a stock sale, the buyer acquires ownership of your company entity itself, assuming both its assets and liabilities.

  • Sellers generally prefer stock sales because all gains are typically taxed at favorable long-term capital gains rates.

  • Buyers may hesitate at stock sales because they also assume potential liabilities and may not receive certain tax deductions.

Negotiating structure is part of the process — and it’s critical to understand the tax implications of both structures before agreeing to terms.

Capital Gains vs. Ordinary Income Rates

When selling your business, the goal is often to have as much of the gain as possible taxed at the more favorable long-term capital gains rates (typically 15% or 20%, plus a possible 3.8% net investment income tax for high earners).

Certain components of a sale may be taxed as ordinary income (at rates up to 37% at the federal level), such as:

  • Earn-outs tied to future services you’ll provide

  • Consulting agreements post-sale

  • Certain asset allocations in an asset sale (e.g., depreciation recapture)

Planning in advance allows you to negotiate allocations and structures that minimize ordinary income exposure.

Purchase Price Allocation in Asset Sales

When selling assets, the way the purchase price is allocated among asset categories will impact your tax outcome. Typical categories include:

  • Goodwill (usually capital gains treatment)

  • Equipment or depreciable assets (often partially taxed as ordinary income due to depreciation recapture)

  • Covenants not to compete (ordinary income)

  • Consulting agreements (ordinary income)

Buyers and sellers negotiate this allocation as part of the deal. Understanding these categories ensures that you can advocate for a structure that protects your after-tax proceeds.

State Tax Implications

Where you live and operate your business will impact state tax obligations:

  • Some states, such as California and New York, impose significant state income taxes.

  • Others, such as Florida and Texas, have no state income tax.

Relocation planning must happen well in advance of a sale to change residency for tax purposes — typically requiring at least a year or more of genuine relocation.

If you operate in multiple states, consider whether any nexus or apportionment rules will apply and consult a tax advisor to clarify exposure.

Timing and Installment Payments

Many deals include installment payments or earn-outs, which spread payments over time.

  • Installment sales may allow taxes to be spread out as payments are received, which can reduce tax rates in some years or help with cash flow.

  • Earn-outs contingent on performance can introduce ordinary income treatment depending on structure.

Understanding timing considerations ensures that you plan appropriately for cash flow and tax liabilities.

Qualified Small Business Stock (QSBS) Exclusion

If your business is a C-corporation, you may qualify for the Qualified Small Business Stock (QSBS) exclusion, which can exempt up to $10 million (or 10 times your basis) from federal capital gains tax.

To qualify:

  • You must have held the stock for at least five years.

  • The business must meet size and industry requirements.

If you think you may qualify, it’s essential to review eligibility with a tax advisor well before going to market.

Preparing Documentation

Tax planning depends on having well-organized documentation:

  • Ensure financial statements match tax returns

  • Document adjustments to EBITDA clearly

  • Maintain records of ownership structure, equity, and basis

  • Gather contracts and agreements that affect purchase price allocation

Good documentation simplifies due diligence and avoids delays that could jeopardize closing.

Work with Advisors to Maximize Net Proceeds

Tax law is complex and no two deals are identical. An experienced team — including an M&A advisor, tax professional, and attorney — ensures that you’re informed, prepared, and able to negotiate terms that maximize your net proceeds.

At Merge, we work closely with founders and their advisors to ensure that tax considerations are part of the exit plan from the beginning.

Final Thoughts

Understanding taxes on selling a tech consulting business gives you the clarity and confidence to plan ahead, negotiate effectively, and keep more of what you’ve built.

By starting early, maintaining clean records, structuring your deal thoughtfully, and working with trusted advisors, you can minimize surprises and maximize your net proceeds — ensuring that your exit is as rewarding financially as it is professionally.

At Merge, we help founders navigate every step of the sale process — from valuation to tax planning to closing — so they can exit on their terms and keep more of what they’ve built.