Tax Leakage

Two deals with the same headline price can leave the founder with very different amounts after tax. Tax leakage is the gap — proceeds lost not to the buyer, but to the tax treatment baked into how the deal is structured. It shows up in a few predictable places. Depreciation recapture is taxed as ordinary income in the year of sale rather than at lower capital-gain rates. In an asset deal, purchase-price-allocation choices move dollars into buckets the seller is taxed on as ordinary income — equipment above basis (recapture), non-compete payments, consulting fees — while goodwill gets capital-gain treatment. Stated or imputed interest on a seller note is ordinary income, not capital gain. And there’s a timing trap: a seller note or earnout is normally taxed under the installment method, so tax tracks the cash as it arrives — but if the seller elects out, or the earnout is structured without a fixed cap, gain can be taxed before the cash is in hand. None of these reduce the price on paper, which is why founders miss them — the LOI number looks intact while the after-tax reality erodes underneath it. The defense is to model net-of-tax proceeds, not headline price, before signing, and to bring in a deal-savvy tax advisor early enough to influence structure rather than report the damage afterward.