Selling Your Business? This Tip Could Put More Money in Your Pocket
6 April 2026: Selling Your Business? This Tax Tip Can Put Money in Your Pocket
If you’re thinking about selling your business, you’re probably focused on the obvious questions:
- What is my business worth?
- How do I find the right buyer?
- How do I structure the deal?
But there’s one critical factor many business owners overlook—how the deal is taxed.
Two deals with the same purchase price can leave you with very different amounts of money after taxes.
One powerful—but often overlooked—strategy that can make a real difference is called a 338(h)(10) election.
Most small business owners (and even some attorneys) have never heard of it. Yet in the right situation, it can help you:
- Negotiate a higher price
- Attract better buyers
- Potentially reduce your tax burden
And it only requires filing a short, two-page form with the IRS.
Buyers and Sellers Want Opposite Things
When selling a business, deals are usually structured in one of two ways: a stock (equity) sale or an asset sale. A stock sale is exactly what it sounds like: You sell your shares (or membership units, if an LLC) directly to the buyer. In an asset sale, the buyer purchases the business’s individual assets: equipment, customer lists, goodwill, etc. – but not necessarily ALL the assets. And often few, if any of the liabilities.
Sellers prefer a stock sale because it’s generally a simpler transaction, the gain is taxed at the lower capital gains rate, existing liabilities usually go with the business; all in all a cleaner exit.
Buyers generally prefer an asset sale in which they purchase the business’s individual assets—equipment, customer lists, goodwill, etc. Buyerz like this approach for several reasons including valuable tax deduction going forward and a much lower risk of inheriting liabilities.
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But what’s good for the buyer is not so good for the seller – and vice versa. And that’s where the 338(h)(10) election comes in.
A “Best of Both Worlds” Approach
A 338(h)(10) election allows you to structure the deal as a stock sale legally, while treating it as an asset sale for tax purposes. This approach can unlock real financial advantages for you as the seller.
Here’s how this strategy can benefit you directly.
1. You May Be Able to Negotiate a Higher Price
This is often the biggest win. Because the buyer gets significant tax benefits from the deal (through future deductions), they may be willing to pay more for your business, offer better terms and compete more aggressively.
Think of it this way:
You’re giving the buyer something valuable—so you can ask for something in return.
Many sellers leave money on the table simply because they don’t realize this leverage exists.
2. You Can Attract More Serious Buyers
Sophisticated buyers—especially private equity groups and experienced operators—strongly prefer asset deals for tax reasons.
If your deal structure can give them that benefit without the complications of a traditional asset sale, your business becomes more attractive. That can mean more interest, better offers and faster negotiations.
In competitive situations, this can make a meaningful difference.
3. You Still Get a Clean Exit
One of the biggest advantages of a stock sale is its simplicity. With a 338(h)(10) election the legal structure remains a stock sale, ownership transfers cleanly and fewer contracts need to be assigned, reducing or even eliminating any third party holding up the sale.
For the seller, that often means fewer headaches during the transaction and a smoother transition out of the business.
4. You May Still Benefit from Capital Gains Treatment
Taxes are where things get a bit tricky—but also where planning pays off. In many cases (especially if you file as an S corporation), a large portion of your gain—like goodwill—may still be taxed at favorable capital gains rates. That said, some parts (like equipment depreciation) may be taxed at higher rates.
The key is how the purchase price is allocated across different asset categories. With proper planning – and a knowledgeable account or tax attorney – you can often optimize this mix and improve your after-tax outcome.
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Our course, “Learn How to Value and SUCCESSFULLY Sell Businesses“, teaches you how to accurately value and successfully sell businesses.
5. You Gain Flexibility in Negotiations
Deals often stall because buyers and sellers want different things. A 338(h)(10) election can help bridge that gap. Instead of a tug-of-war, it creates room for compromise. The buyer gets tax benefits while the seller gets better pricing or terms.
This flexibility can be the difference between closing a deal—or losing one.
6. It’s Surprisingly Simple to Execute
Here’s what surprises most business owners: The election itself is not complicated. It typically involves filing a short, two-page form with the IRS, signed by both buyer and seller.
Of course, the strategy behind it requires proper planning and the input of an experienced professional tax specialist, but the actual implementation is pretty straightforward.
Our new series The 6 Essential Elements of Selling a Business Successfully starts 2 February ’26 on our YouTube channel.
Proceed With Caution
CAUTION: THIS ISN’T ALWAYS THE RIGHT MOVE.
Before you get too excited, it’s important to understand that this strategy isn’t a fit for every situation. It’s also important to consult with a tax specialist.
Here are a few things to consider:
- You Must Qualify. This election generally applies if your business is structured as an S corporation (and LLCs filing as S corporations), or a qualifying subsidiary.
- Some Income May Be Taxed at Higher Rates. Certain portions of the sale—especially related to depreciated assets—can be taxed as ordinary income.
- It Requires Buyer Agreement. Both you and the buyer must agree to make the election.
- State Taxes Can Vary. State-level tax treatment may differ, which can affect your final outcome.
When You Should Explore This Strategy
You should consider a 338(h)(10) election if:
- You’re planning to sell your business in the next 1–3 years
- Your business files as an S corporation. (This is often how LLCs and certain partnerships file.)
- You want to maximize after-tax proceeds
- You’re open to negotiating deal structure—not just price.
Even if you don’t end up using it, understanding the option gives you leverage in negotiations.
The Bottom Line
Most business owners spend years building value—but lose a significant portion of it at the finish line due to taxes and deal structure. The 338(h)(10) election is one of those “hidden levers” that can change that outcome.
It won’t apply in every case but when it does, it can help you:
- Put more money in your pocket
- Attract stronger buyers
- Structure better deals
And all it takes to activate it is a simple IRS form—paired with the right advice.
Don’t Go Into a Sale Blind If you’re considering selling your business, don’t wait until you have a buyer to think about tax strategy. By then, most of your leverage is gone.
Instead, talk to a tax advisor early. Explore different deal structures and understand your options before negotiating, because when it comes to selling your business, what you keep matters more than what you get.
I’d like to hear from you. What topics would you like me to cover? How can we tailor these posts to be more useful to you and your business. Let me know in the comments box, below, or email me at jo*@*******************og.com.
Check out our video series, “How Much is My Business Worth“on our YouTube channel.
“When we strive to become better than we are, everything around us becomes better too.”
–Paulo Coelho
If you have any questions or comments on this topic – or any topic related to business – I’d like to hear from you. Put them in the comments box below. Start the conversation and I’ll get back to you with answers or my own comments. If I get enough on one topic, I’ll address them in a future post or podcast.
I’ll be back with you again next Monday. In the meantime, I hope you have a safe and profitable week.
Joe
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The author is the founder, in 2001, of Worldwide Business Brokers and holds a certification from the International Business Brokers Association (IBBA) as a Certified Business Intermediary (CBI) of which there are fewer than 600 in the world. He can be reached at jo*@*******************og.com
