Selling Your MSP: What You Keep After Taxes

▶️ Watch: Selling Your MSP: How Much Will You Actually Keep?

https://youtu.be/r-0FriN9T_4

Prefer to read? The key ideas from the video are expanded below.

When you run an MSP, total revenue is not really the number that tells you how well the business is doing. What matters is how much is left after you pay the expenses. Selling the business is similar. The headline sale price obviously matters. But that is not the amount you put in your pocket. What you actually keep can depend a lot on how the transaction is structured, how the purchase price is allocated, and even when you get paid. Two MSP owners can sell businesses for exactly the same price and end up keeping materially different amounts after taxes.

Asset Sale or Equity Sale?

So one of the first questions is: what exactly is the buyer buying? Are they buying your ownership in the company, or are they buying the assets of the business? When I say ownership, I mean the stock, LLC interests, whatever it is that you actually own. You may hear this called an equity sale or a stock sale. In an asset sale, the buyer is buying the things that make up the business. That could include customer relationships, contracts, equipment, intellectual property, goodwill, and other assets.

Buyers often prefer an asset purchase because they get a new tax basis in the assets they buy. Depending on the asset, they may be able to depreciate or amortize that purchase price over time, which can reduce their taxable income after the acquisition. An asset purchase can also give the buyer more ability to choose what liabilities they are taking on. Exactly what they assume depends on the deal, but they are generally buying specified assets and assuming specified obligations rather than simply stepping into ownership of the seller’s existing entity. From the seller’s side, an equity sale is often more attractive because more of the gain may qualify for capital-gain treatment. The exact answer depends on how the company is taxed and what it owns, but the important point is that the structure the buyer prefers may create a much larger tax bill for you.

That does not mean you automatically say no to an asset sale. It means you need to understand the tax difference before you agree on the price. If the buyer is insisting on a structure that costs you substantially more in taxes, that may need to show up somewhere else in the negotiation. Otherwise, you may think you agreed to one price when economically you agreed to something quite different.

Purchase-Price Allocation Can Change What You Keep

If it is an asset sale, there is another question that becomes really important: how is the purchase price allocated? Let’s say you sell your MSP for $5 million. For tax purposes, you do not just report $5 million of generic business-sale income. That $5 million has to be divided among the things the buyer actually acquired. Depending on the transaction, that might include accounts receivable, equipment, customer-related assets, a noncompete agreement, goodwill, and other assets. Those categories are not all taxed the same way.

The buyer may want more of the purchase price allocated to assets that give them deductions sooner. As the seller, you may want more of it allocated to assets that receive more favorable capital-gain treatment. You cannot just pick whatever numbers you want. The allocation has to follow the tax rules and be supported by the value of the assets. But there can still be meaningful room to negotiate. The purchase price has not changed. It is still $5 million. But depending on the allocation, the amount you keep after tax can change quite a bit.

For many business asset acquisitions, both the buyer and seller also report that allocation to the IRS on Form 8594, and the two sides should be reporting the same transaction. This is one of those things I think a lot of owners miss. They spend all their time negotiating the sale price, which makes sense, and then assume the allocation is something the CPA will figure out later when it is time to prepare the tax return. That is too late. You want to be talking about the allocation during the sale process and dealing with it in the purchase agreement. If you wait until after the major terms are signed, you may have already given away a lot of your ability to negotiate it.

When You Get Paid Matters Too

Then there is the question of when you actually get paid. Maybe you receive the entire purchase price at closing. Maybe you get some of it now and some of it over time. Suppose, just as a simple example, you had a choice between receiving $1 million at closing or receiving $200,000 a year for five years. Depending on what you are selling and the rest of your tax situation, spreading eligible payments over several years may let you defer part of the gain and may change the overall tax result.

But now you have introduced another issue: you have to actually collect the money. A lower projected tax bill does not help you very much if the buyer never makes the later payments. Installment-sale treatment also does not work the same way for every part of the sale. Depreciation recapture, for example, generally gets recognized in the year of the sale even if you do not get all the cash that year. So this is something your CPA really needs to model. And your attorney needs to help make sure that, if you are supposed to get paid later, you have done what you reasonably can to protect your ability to collect. This is a tax question, but it cannot be answered based on taxes alone.

Model the Alternatives Before You Sign

Which really brings me back to the bigger point. Before you sign a letter of intent or agree to the structure of the transaction, I want the CPA modeling the realistic alternatives. What happens if this is an equity sale instead of an asset sale? If it is an asset sale, what do the realistic purchase-price allocations look like? What changes if you get the money at closing versus getting some of it over time?

And I do not just want to know, “Here’s your estimated tax bill.” I want to know when the income is being recognized, how it is being taxed, what state taxes look like, and at the end of all of this, after taxes, professional fees, debt, and everything else, how much money do you actually expect to walk away with?

The model is not there to make the decision for you. There may be perfectly good business reasons to accept a structure that is not the most tax-efficient option. But I want you to know what that decision is costing you before you make it.

For a lot of MSP owners, selling the business is going to be the largest financial transaction of their life. This is not the time to agree on the headline price and just assume everything else will work itself out. The sale price matters. But what really matters is how much of it you keep.

This article is for educational purposes only and is not tax or legal advice. Every business is different, and you should talk with your own professional about what makes sense for your situation.