When most business owners think about selling, they focus on the purchase price. A buyer offers $5 million, so that’s what you’ll get. Right?
Not quite. Between the headline number and what you actually deposit in your bank account lies a gauntlet of costs that can consume 30-50% of the purchase price. Some are obvious. Others catch sellers by surprise.
Understanding these costs upfront helps you set realistic expectations, negotiate more effectively, and make better decisions about whether and when to sell.
Taxes: The Biggest Bite
Taxes typically represent the largest cost of selling a business. Depending on your entity structure, deal structure, and personal tax situation, you might pay 20-40% or more of the gain in taxes.
Federal capital gains tax: Long-term capital gains rates range from 0-20% depending on income level, plus an additional 3.8% Net Investment Income Tax for high earners.
State income tax: Most states tax capital gains as ordinary income. Rates vary from 0% in states like Texas and Florida to over 13% in California.
Ordinary income portion: In asset sales, some portion of the proceeds (allocated to inventory, accounts receivable, or consulting agreements) may be taxed at ordinary income rates up to 37%.
Double taxation: C corporations face taxation at both corporate and shareholder levels in asset sales, potentially exceeding 40% combined.
Tax planning should begin years before a sale, not during negotiations. Strategies like Qualified Small Business Stock exclusions, installment sales, opportunity zone investments, or entity restructuring can significantly reduce the bite, but they require advance planning.
Transaction Fees
Selling a business requires a team of professionals. Their fees add up:
M&A advisor or business broker: Typically 8-12% for smaller deals (under $2 million) and 3-6% for mid-market transactions. Some charge monthly retainers plus a success fee.
Legal fees: Transaction attorneys typically charge $25,000-$75,000 or more depending on deal complexity. Purchase agreement negotiation, due diligence support, and closing documents all require legal work.
Accounting fees: Quality of earnings reports, tax analysis, and deal structuring guidance might run $15,000-$50,000. Some sellers also need to produce audited or reviewed financials.
Other specialists: Environmental assessments, equipment appraisals, real estate appraisals, or industry consultants may be needed depending on your business.
On a $5 million deal, transaction fees can easily reach $300,000-$500,000. These costs come directly out of your proceeds.
Escrows, Holdbacks, and Earnouts
Most deals don’t pay 100% at closing. Buyers typically require:
Escrow holdback: A portion of the purchase price (often 10-20%) is held in escrow for 12-24 months to cover potential claims under the seller’s representations and warranties. If no claims arise, you eventually get this money, but it’s not liquid at closing.
Earnouts: Additional payments contingent on post-sale performance. These align incentives but introduce uncertainty. Studies suggest 40-60% of earnouts don’t pay out fully. The conditions, measurement periods, and potential disputes all affect what you actually receive.
Working capital adjustments: Deals typically include a target working capital level. If actual working capital at closing falls short, the purchase price adjusts downward.
When evaluating offers, look beyond the headline number. An offer of $5 million with $1 million in escrow and a $500,000 earnout is very different from $4.5 million all cash at closing.
The Time Tax
Selling a business is a full-time job on top of your existing full-time job. The process typically takes 6-12 months and demands significant owner attention:
Preparing information memoranda, answering buyer questions, attending management presentations, participating in due diligence, negotiating terms, reviewing documents. It’s exhausting and distracting.
Meanwhile, your business needs to perform. Buyers are evaluating current results, and any decline during the sale process weakens your negotiating position or gives buyers grounds for price reduction.
Some owners lose deals because they took their eye off operations. Others see performance decline just as they’re trying to demonstrate value. The time tax is real, even if it doesn’t show up on a bill.
Opportunity Cost
What else could you have done with the time and energy you spent selling?
You might have landed a major new customer, developed a new product line, or expanded into a new market. Those growth investments might have increased the business’s value more than the sale process delivered.
If a sale falls through after months of work (which happens more often than people realize), you’ve lost that time entirely. Failed processes are particularly costly because they extract maximum time with zero return.
Post-Close Obligations
The sale doesn’t end at closing. Most transactions include:
Transition services: You’ll likely spend 3-12 months helping the new owner. Even if you’re paid a consulting fee, you’re still tied to the business during what you hoped would be your freedom.
Non-compete restrictions: Standard non-competes prevent you from starting or working for competing businesses for 2-5 years. If you planned to start another venture in your industry, this limits your options.
Ongoing liability exposure: Your representations and warranties survive closing. If problems emerge that you warranted against, you may face claims against the escrow or beyond. This uncertainty can linger for years.
Emotional and Relational Costs
These don’t appear on any spreadsheet, but they’re real:
Loss of identity if your business defined who you are. Strained relationships if family members disagree about selling. Guilt about employees whose lives are affected. Regret if the buyer takes the company in a direction you wouldn’t have chosen.
Many sellers report a period of depression or purposelessness after closing. The financial windfall doesn’t automatically produce happiness, especially if you haven’t planned for what comes next.
Putting It All Together
Let’s return to that $5 million sale and see what the owner might actually walk away with:
Purchase price: $5,000,000. Less transaction fees (8%): -$400,000. Less legal and accounting: -$75,000. Less taxes (25% effective): -$1,131,250. Less escrow holdback: -$500,000. Cash at closing: $2,893,750.
If the escrow releases fully and any earnouts pay out, the owner might eventually receive more. But on closing day, they’re getting roughly 58% of the headline number in liquid proceeds.
This isn’t meant to discourage selling. It’s meant to promote realistic planning. When you understand the true economics, you can negotiate more effectively, plan taxes more efficiently, and set appropriate expectations.
Planning Ahead
Many of these costs can be reduced with advance planning. Tax strategies implemented years before a sale can dramatically improve after-tax proceeds. Understanding deal structures helps you negotiate terms that protect your interests. Preparing your business properly reduces due diligence friction and escrow demands.
If you’re thinking about selling someday, even if that day is years away, understanding these costs now gives you time to plan around them.
We’re happy to walk you through how these factors might affect your specific situation. A complimentary Opinion of Value includes not just what your business might sell for, but a realistic picture of what you might actually keep.
What you keep matters more than what you sell for.
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If you’d like to know what your company might be worth in today’s market, with no obligation and complete confidentiality, we’d be glad to help.
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