Transactions & Taxes: What Every IT Business Owner Needs to Know Before a Sale

By Dr. Aaron Mahl, EVP Business Development, iTValuations

When it comes to selling your IT firm or MSP, taxes aren’t just a footnote—they’re a fundamental part of the transaction. Yet, most business owners only go through one major transaction in their lifetime, and few feel prepared for the tax implications that come with it.

That’s why I sat down with Greg Northrop, Managing Partner at IT Tax Advisors, to break down the financial, structural, and strategic tax decisions that can make or break your deal.

Here are some of the key takeaways from our recent webinar:

1. The F Reorg: Your Inevitable First Step

If you’re structured as an S Corporation (like 90% of IT businesses), you’ll likely need to go through what’s known as an F reorganization before a sale. This restructuring creates a new holding company above your current entity to streamline the legal and tax aspects of a transaction.

Why it matters:

• Enables a legal stock sale (which transfers contracts, staff, and vendors more cleanly)
• Allows for a tax treatment that mimics an asset sale, giving buyers the depreciation benefits they’re looking for

Even if you’re years away from a transaction, this structural move gives you more flexibility for growth, equity sharing, and future exits.

2. Offering Equity? Structure Matters

S Corps restrict your ability to offer meaningful equity to employees or co-investors. If you want to offer ownership based on future growth—not what you’ve already built—restructuring into an LLC taxed as a partnership can allow for “profits interests.”

This lets you reward key contributors without giving up current value—and sets you up to compete with private equity-backed buyers who often include rollover equity in their deals.

3. Section 1202: A Powerful (but Niche) Tax Advantage

For the right owner, converting to a C Corporation to qualify for the Section 1202 gain exclusion can lead to significant tax savings—potentially up to $10 million or 10x your basis, tax-free.

However, it requires:

• A new legal structure (not just converting your S Corp)
• Holding your shares for at least five years
• A buyer willing to do a straight stock deal (with no asset step-up)

It’s not for everyone, but if you have high growth plans and a longer exit runway, it can be a game-changer.

4. Thinking of Relocating for Tax Savings? Think Again.

Moving your business to a no-income-tax state like Texas or Florida might sound like a smart tax strategy, but many high-tax states (like California and Minnesota) will still claim taxing rights if you created value while resident there.

The only true way to reset your tax exposure is through a legitimate restructuring—and even then, you need to document it properly with legal and financial advisors.

5. One Small Change That Can Save You Big

Still on the cash basis for accounting? It might be time to switch to accrual.

Here’s why: Most deals are structured on accrual-based financials, which means revenue you haven’t yet “earned” (like deferred revenue) goes to the buyer. But if you’re on a cash basis, you’ve already paid tax on that money.

Flipping to accrual ahead of time—ideally in a year where it benefits your tax position—can help you avoid surprise liabilities.

6. Buyers: Don’t Skip Tax Diligence

While sellers typically shoulder the tax burden in a transaction, buyers can inherit big problems—especially with sales and use tax or state-level SaaS taxes.

One example we’ve seen? Nearly $1 million in missed sales tax liability from years of oversight. Bottom line: hire a tax expert to dig into these issues before you sign.

In Summary

Selling your MSP or IT business is likely one of the most important financial events of your life. And how you prepare for the tax implications will dramatically affect the outcome. The earlier you structure, plan, and align your business with your goals, the better the outcome for you—and your buyer.

At iTValuations and IT Tax Advisors, we’re here to help owners like you navigate the complexity and come out on the other side with clarity and confidence.

Need help planning your next move or preparing for an eventual sale?
Let’s connect. We’d be happy to talk through your business goals and help you build a tax strategy that supports them.