Sell My Business: What to Do Before You Sign

On a $3,000,000 sale in California the tax on a one-year cash close is $998,079. Spread the goodwill over 10 years and it is $757,388. Same buyer, same price. Here is the whole process, in order.

What selling a business involves

Selling a business is six steps. Most take longer than owners expect, so start a year out if you can.

1. Valuation. Know what the business is worth before anyone makes an offer. Buyers price off cash flow, so clean up the books and separate personal expenses first.
2. Broker or sell it yourself. A business broker or M&A advisor finds buyers and runs the process for a success fee. Selling on your own saves the fee but you do the marketing, screening and negotiating.
3. Letter of intent (LOI). The buyer's offer: price, cash at close vs. seller note vs. earn-out, asset or stock sale, and exclusivity. This is where the tax gets locked in.
4. Due diligence. The buyer checks your financials, contracts, leases, employees and taxes. Expect 30 to 90 days.
5. Purchase agreement. The final contract, including the purchase price allocation across assets.
6. Closing. Money moves, ownership transfers, and the tax year of the gain is set.

Why the tax has to come before the LOI

Most of the tax on a business sale comes from one fact: the whole gain lands in one year. Once the LOI says "all cash at close," that is usually where it stays.

Three things in the LOI decide your tax:

• Asset sale or stock sale. Buyers usually want an asset sale so they can depreciate what they bought. Sellers usually prefer a stock sale, because more of the price is capital gain. Equipment you depreciated is recaptured in an asset sale, taxed as ordinary income in the year of sale.
• Purchase price allocation. Goodwill you built yourself has zero basis and is taxed as capital gain. Equipment, inventory and a non-compete are taxed differently. The split gets negotiated, so negotiate it.
• How you get paid. Cash at close puts the whole gain in one year. A Section 453 installment sale spreads the goodwill over the years you are paid, so each year lands in lower brackets. See how a structured installment sale works.

How much tax you pay when you sell your business

Here is a typical owner-operated business: $3,000,000 price, $2,700,000 of goodwill with zero basis, $300,000 of fully depreciated equipment. Married filing jointly, $150,000 of other income, owner materially participates. Numbers are from our business sale tax analysis, 2026 tax tables.

The interest paid on a spread-out balance is extra ordinary income and is not in these figures. Your numbers will differ, so run your own.

Selling a business in Texas

Texas does not tax capital gains. The state constitution bars an individual income tax (Art. 8, Sec. 24-a) and, since voters approved Sec. 24-b on November 4, 2025, any tax on an individual's capital gains. Federal tax is the whole bill for an individual seller. If the business is an LLC or corporation, check the Texas franchise tax, which Sec. 24-b does not exempt.

Selling a business in Massachusetts

Massachusetts taxes long-term gains at 5% and short-term gains at 8.5% for 2026. A 4% surtax hits taxable income above $1,107,750, and a business sale crosses that line easily. The threshold is the same for single filers and married couples, so spreading the gain over several years can keep more of it under the line.

Sell my business in Sacramento

My office is at 1401 21st St, Ste R, Sacramento, CA 95811, so this is the case I see most. California has no capital gains rate. A gain is taxed as ordinary income at up to 12.3%, plus 1% on taxable income over $1,000,000, so 13.3% at the top. That $1,000,000 line is not doubled for married couples, and a single sale year crosses it.

If real estate is part of the deal, Sacramento County charges a documentary transfer tax of $1.10 per $1,000 of value. See California local transfer taxes for the county and city rates.

Moving out of California before closing can cut the state tax, but only with a genuine change of domicile before the sale. The FTB looks hard at moves made right before a big sale.

How to pick a broker to sell your business

A good business broker earns the fee by bringing more buyers and a better price. Before you sign a listing agreement:

• Ask about deals their size. A broker who sells $500,000 main-street businesses is not the same as an M&A advisor for a $10M company.
• Get the fee and the term in writing. Know the success fee, any upfront retainer, how long the listing runs and what happens if you find the buyer yourself.
• Ask how they handle the tax side. Most brokers price the deal, not your after-tax number. Bring the structure in early so the LOI is written the way you want it.

Can you sell a business fast?

Yes, but speed costs money. The fastest sales go to a buyer you already know (a competitor, a partner, a key employee) or come with a lower price or more seller financing. Even a fast sale needs time for due diligence and the purchase agreement. A deferral structure does not slow a closing down if it is in the LOI from the start.

When spreading the gain fits, and when it does not

It fits when the sale is $1.5M or more, most of the price is goodwill with little basis, and the buyer's counsel will paper the assignment at closing. It does not fit when the deal is mostly equipment (recapture is due in the year of sale anyway), when you are rolling all of your equity into the buyer, or below about $1M.

More on the deferral side: selling your business and deferring the capital gains and selling your business when you retire.

Frequently asked

Q: Do you have to pay taxes on selling a business? A: Yes. The gain over your basis is taxed. Self-created goodwill is usually capital gain, and depreciated equipment is recaptured as ordinary income in the year of sale.

Q: How is selling a business taxed in an asset sale vs a stock sale? A: In an asset sale each asset is taxed on its own, so equipment recapture is ordinary income and goodwill is capital gain. In a stock sale the whole gain on the shares is generally capital gain, which is why sellers prefer it and buyers push for an asset sale.

Q: Can I lower the tax when I sell my business? A: The biggest lever is when the gain lands. A Section 453 installment sale spreads the goodwill over the years you are paid. On the $3M California example above that cuts the tax from $998,079 to $757,388.

Q: Do I need a broker to sell my business? A: No, but most owners use one. A broker finds and screens buyers and runs the process for a success fee. If you already have a buyer, you may only need an attorney and a tax plan.

Q: When should I start planning the sale? A: Before the letter of intent. The LOI sets the asset or stock structure and how you get paid, and those decide most of the tax.

Educational. Not tax or legal advice. Hans Goldstein, Enrolled Agent, admitted to practice before the IRS.