When you’re preparing to sell your professional services firm, the sale price is only part of the story. What really matters is how much you keep after taxes. Planning ahead for taxes on selling a professional services firm helps reduce surprises, maximize your net proceeds, and ensure a smooth transaction.

At Merge, we help founders think holistically about their exit — not just about valuation, but also about after-tax outcomes. Here’s a guide to help you understand key tax considerations so you can plan your sale thoughtfully.

Why Tax Planning Is Essential

Many founders focus primarily on the sale price and leave tax planning until late in the process. But without proactive planning, you could lose 30%–50% of your proceeds to taxes.

Early planning allows you to:

  • Structure your deal for tax efficiency

  • Understand what portion of your proceeds will be taxed at lower capital gains rates

  • Plan for state tax exposure

  • Prepare for how payment timing affects taxes

Being informed before negotiations gives you the opportunity to protect your interests.

Asset Sale vs. Stock Sale: Why It Matters

The structure of your transaction has a major impact on your tax outcome. Buyers and sellers often negotiate whether the deal will be an asset sale or a stock sale, and the choice determines how taxes apply.

Asset Sale

In an asset sale, the buyer purchases the firm’s individual assets (contracts, intellectual property, goodwill, equipment) rather than its stock.

  • Buyers prefer asset sales because they get to “step up” the tax basis of acquired assets and reduce future taxes.

  • Sellers may face higher taxes because different asset categories are taxed differently.

In an asset sale:

  • Goodwill and most intangibles typically qualify for long-term capital gains treatment.

  • Certain items, like depreciable assets and covenants not to compete, may be taxed at higher ordinary income rates.

Stock Sale

In a stock sale, the buyer purchases your ownership interest directly, acquiring the entire company as a going concern.

  • Sellers generally prefer stock sales because the entire gain is usually taxed at long-term capital gains rates, which are lower than ordinary income rates.

  • Buyers take on all liabilities and may not get tax benefits from depreciation deductions.

Negotiating the right structure is a key part of your strategy — and working with experienced advisors helps you understand tradeoffs.

Capital Gains vs. Ordinary Income Tax Rates

In most cases, you want as much of your sale proceeds as possible to qualify for long-term capital gains rates, which are lower than ordinary income rates.

  • Long-term capital gains rates: Typically 15% or 20%, plus a 3.8% net investment income tax for high earners.

  • Ordinary income rates: Up to 37% at the federal level, plus state taxes.

Some parts of a deal, such as consulting agreements or earn-out payments tied to future services, may be taxed at higher ordinary income rates. Understanding this distinction early lets you structure the deal to your advantage.

Purchase Price Allocation in Asset Sales

In an asset sale, purchase price allocation between different asset categories directly impacts how proceeds are taxed.

For example:

  • Proceeds allocated to goodwill and intangible assets typically qualify for capital gains treatment.

  • Proceeds allocated to furniture, fixtures, equipment, or non-compete agreements may be taxed at ordinary income rates.

Negotiating allocation with the buyer is part of deal structuring — and planning in advance helps you reduce your tax burden.

State Taxes and Residency Considerations

Where you live at the time of sale affects your tax rate. Some states, such as California and New York, impose high personal income taxes, while others like Florida and Texas have no state income tax.

If you’re considering relocating to a lower-tax state, timing matters. Simply moving shortly before the sale may not change your tax residency for that year.

Plan ahead and consult with a tax advisor to ensure that you meet residency requirements if location-based tax planning is part of your strategy.

Installment Sales and Earn-Outs

Many transactions include installment payments or earn-outs (payments contingent on future performance). These structures affect when and how taxes are paid.

  • Installment sale: Taxes on the gain are generally paid as payments are received, spreading liability over multiple years.

  • Earn-out: Tax treatment depends on how payments are structured — if tied to future services, they may be taxed as ordinary income.

Careful planning helps you understand tax timing and avoid surprises.

Qualified Small Business Stock (QSBS) Exclusion

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

To qualify:

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

  • The company must meet size and business activity requirements.

If QSBS might apply, get advice early to confirm eligibility and document your position.

Clean Documentation Reduces Tax Surprises

Well-organized records help avoid tax disputes and delays during due diligence. Before selling:

  • Ensure that financial statements align with tax returns.

  • Identify and document adjustments (like above-market owner salary) that affect true EBITDA.

  • Maintain current contracts and agreements that support purchase price allocation.

Good documentation builds buyer confidence and simplifies the tax review process.

Why Work with Advisors

Tax planning is complex and every deal is different. A team of experienced advisors — including an M&A advisor, tax professional, and attorney — helps ensure your deal is structured for tax efficiency and that you understand your net proceeds before signing.

At Merge, we collaborate closely with founders’ advisors to help them navigate these issues and protect their financial interests.

Final Thoughts

Understanding taxes on selling a professional services firm helps you prepare, negotiate, and exit with clarity.

By planning early, maintaining clean records, working with expert advisors, and structuring your deal thoughtfully, you can reduce surprises, maximize your net proceeds, and achieve a smooth, successful exit.

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.