Keep More of What You’ve Built: Pre-Sale Tax Strategies Every MSP Owner Should Know

Key takeaways from a recent webinar featuring Greg Northrop of IT Tax Advisors and Bryan Handing of iT Valuations

For many MSP owners, selling the business represents the culmination of decades of work, sacrifice, and risk. Yet one of the biggest mistakes owners make is waiting until they have a Letter of Intent (LOI) in hand before thinking about taxes.

By then, many of the most impactful planning opportunities are already gone.

In a recent webinar, Greg Northrop, Managing Partner at IT Tax Advisors, and Bryan Handing, CFO and VP, Valuations at iT Valuations, discussed how MSP owners can maximize what they keep from a future transaction—not by negotiating a higher valuation, but by planning years in advance for the tax consequences of a sale.

The Costly Mistake Most Owners Make

According to Northrop, the most common call he receives sounds something like:

“I have an LOI. What can I do to save on taxes?”

While there may still be some opportunities available, the reality is that the biggest tax-saving strategies often require years of advance planning. Owners who begin thinking about their exit three to five years before a transaction have significantly more flexibility than those who wait until a deal is imminent.

That doesn’t mean all hope is lost if a sale is near. Even last-minute planning around state taxes, payment structures, escrows, and deferred compensation can create meaningful savings. But the largest opportunities generally come from entity structure decisions made long before a buyer enters the picture.

Start with the Right Question: Is Your Entity Structure Still Right?

Many MSPs were formed decades ago, and their tax structures were chosen based on circumstances that may no longer exist.

Northrop encourages owners to periodically revisit key questions:

• What are my long-term goals?
• Am I planning to sell in the next few years or the next decade?
• Do I want outside investors?
• Do I plan to issue equity to key employees?
• Am I optimizing for tax efficiency or operational simplicity?

The answers can dramatically influence whether an S Corporation, partnership, or C Corporation structure makes the most sense.

Why Most MSPs Operate as S Corporations

Bryan Handing shared that his MSP operated as an LLC taxed as an S Corporation for most of its life. That mirrors what Northrop sees across the industry.

Approximately 75–80% of MSPs he works with are structured as S Corporations. The model offers simplicity, pass-through taxation, and avoids many of the complexities associated with C Corporations.

However, that doesn’t automatically mean it’s the optimal structure for every future exit.

The Growing Interest in C Corporations and QSBS

One of the most discussed topics was Qualified Small Business Stock (QSBS) under Section 1202.

For certain businesses, converting to a qualifying C Corporation and holding the stock for at least five years can create extraordinary tax advantages. Under current rules, eligible owners may exclude a substantial portion—or potentially all—of the gain above their original business value when they sell.

Northrop emphasized that this strategy is not for everyone.

The ideal candidate typically:

• Has at least a five-year runway before selling
• Expects significant growth in company value
• Can leave substantial capital inside the business
• Has the operational maturity to manage additional corporate complexity

For example, a company worth $5 million today that grows to $25 million after conversion could potentially shield much of that future appreciation from federal capital gains taxes.

The catch? If the company doesn’t grow significantly, the benefits may not justify the complexity and costs.

State Taxes Can Be Just as Important as Federal Taxes

Many owners focus exclusively on federal taxes and overlook the impact of state taxation.

Northrop explained that pass-through entities such as S Corporations are generally taxed based on where the business operates. Simply moving personally from California to Nevada before a sale often won’t eliminate state taxes if the business remains concentrated in California.

C Corporations can be different.

Because stock sales are generally treated as investment income, taxation often follows the owner’s state of residence rather than the company’s operating footprint. For owners planning well in advance, this can create additional planning opportunities in states with no income tax.

The key takeaway: state tax planning should be part of every exit conversation, especially for businesses operating across multiple states.

Understanding the F Reorganization

Another major topic was the increasingly common “F Reorganization.”

Many private equity buyers cannot directly acquire S Corporation shares due to ownership restrictions. Instead, sellers often complete a tax-free reorganization that creates a holding company above the operating business, converting the operating company into an LLC.

Handing shared that his own MSP completed an F Reorganization the day before closing.

The process:

• Preserved the transaction timeline
• Allowed the deal to proceed smoothly
• Avoided unnecessary restructuring years in advance
• Shifted the reorganization costs into the transaction itself

For many MSP owners, this highlights an important lesson: not every structural change needs to happen years ahead of a sale. Some can be implemented at the transaction stage with the right advisors involved.

Equity, Phantom Stock, and Rewarding Key Employees

Many owners want to share future success with key team members but aren’t sure how to do it.

Northrop cautioned that giving employees direct equity isn’t always the best answer. Instead, he often recommends alternatives such as:

• Profit-sharing programs
• Phantom stock plans
• Partnership profits interests

These structures can align incentives without creating immediate tax consequences or ownership complications. They also provide greater flexibility if an employee leaves before a liquidity event occurs.

As Handing noted from his own acquisition experience, phantom stock arrangements can also help facilitate transactions by reducing upfront cash requirements while still rewarding stakeholders when future milestones are achieved.

When Is It Too Late to Make Major Changes?

One attendee asked perhaps the most important question of the webinar:

If I’m planning to sell in the next 6–24 months, should I change my entity structure?

Northrop’s answer was generally no.

At that stage, owners are often better served by focusing on:

• State tax planning
• Estate planning
• Trust strategies
• Gifting strategies
• Transaction structuring
• Working capital and escrow negotiations

Major entity conversions typically require a longer planning horizon to deliver meaningful value.

Final Thoughts

For most MSP owners, the biggest tax savings opportunity isn’t found during due diligence or at the closing table. It’s found years earlier.

The owners who maximize what they keep from a transaction are usually the ones who:

• Begin planning well before an exit
• Regularly evaluate their entity structure
• Understand state tax implications
• Consider future growth opportunities
• Build an advisory team that includes valuation, tax, and transaction expertise

As Northrop summarized throughout the discussion, the goal isn’t simply to sell your business for the highest price. It’s to keep as much of what you’ve built as possible.

Planning for an exit? The best time to start the tax conversation is before you think you need it.