Good morning, everyone — and thank you for joining us for our bi-monthly construction webinar series. This session was themed around mergers and acquisitions, and this portion focused on what may be the most important part for an owner: the tax and wealth planning that determines how much of the proceeds you actually keep, and what you do with them after the deal closes.
For this portion, we turned to Ryan McEntire, who leads Brown Edwards Wealth Strategies, our registered investment advisory firm, and who serves as chair of our board. Ryan works with clients through the sale process — preparing for a sale, negotiating deals, planning for taxes, and managing the proceeds afterward — and we lean on him greatly. What follows is a write-up of the tour he gave us through pre-closing planning, deal structures, hidden tax traps, and planning techniques to mitigate taxes.
Featuring Ryan McEntire, Brown Edwards Wealth Strategies and Chair of the Board, Brown Edwards & Company
Ryan's opening point was that having the right team and spending as much time as possible pre-transaction — on the letter of intent, on the purchase agreement, whatever form it takes — is critical to understanding the deal and getting comfortable with it. The more work you do up front, the smoother the deal goes. His presentation focused on pre-closing planning, purchase price allocation, common sale structures (including a detailed walk-through of an F reorganization), hidden tax implications, and planning techniques to help mitigate taxes.
Ryan called timing the biggest planning lever there is — the time you have preparing for a sale can make a real difference. He offered a helpful mental model for the two main structures. Think of a stock sale as handing someone the whole box: the company is the box, you hand it over, and you get a check back. That's usually very tax-efficient for sellers but less so for buyers. An asset sale is the opposite: you open the box, the buyer picks and chooses the items they want, and you're left to deal with the rest of the box.
He emphasized that what's good for the seller often isn't good for the buyer. Allocations to equipment, for example, let buyers depreciate and write off quickly — but on the seller's side that means depreciation recapture, which is taxed as ordinary income. The seller's goal is to get allocations into the most seller-friendly position possible, and that requires a team where the accounting and legal sides work well together.
Ryan stressed that you should never sign an LOI before the team takes a look. One reason is personal goodwill. Citing the Martin's Ice Cream case, he explained that a buyer can sometimes pay a shareholder directly for personal goodwill. In an S corp or partnership that may not matter much, but with a C corp and two layers of tax, moving a million or two of the purchase price directly to the shareholder can save roughly 20 to 28% in tax — but only if you get in at the LOI stage and make the change.
This was a point Ryan feels strongly about. He's seen deals where the contract says the buyer will provide the allocation 60 days post-close. By then, you've already sold your stock and have no leverage. You can disagree and go to a mediator, who will tell you it's all about fair market value — but you've lost your ability to move the needle. Setting the allocation while the contract is being written gives you far more leverage. As he put it, building good fences in the agreement makes for an easier process, especially post-close.
To avoid deal breakdowns and maximize value, Ryan recommended:
Ryan flagged several clauses that shape the economics. If you have a retirement plan and it's an asset deal, you'll go through a plan shutdown process. More importantly, closing consideration does not always equal the cash you take home. LOIs often lead with enterprise value — EBITDA times a multiple — a big number that makes your eyes light up. But liabilities, transaction costs, net working capital adjustments, and earnouts all come off of it, and you may not be selling the whole company. He urged owners to understand the purchase-price formula, to map out the specific timeframes for responding to post-close adjustment disputes (miss them and you lose your right to dispute), and to review earnout terms carefully — increasingly, deals pay 40–50% in cash up front and set the rest as an earnout tied to specific benchmarks. Make sure those benchmarks are attainable, and understand whether a private equity buyer will layer in a management fee that affects your ability to hit them.
After a poll in which about 64.5% of attendees favored a stock sale, Ryan confirmed that sellers generally prefer stock sales because the whole transaction is treated as capital gains. He laid out the trade-offs: in a stock sale, the buyer gets no step-up in assets and assumes the liabilities — great for the seller. In an asset sale, the buyer gets to step up and re-depreciate assets and usually leaves liabilities behind, while the seller faces the full spectrum of taxes: ordinary income on cash-basis receivables and depreciation recapture, capital gains on goodwill and intangibles, and potential 1231/1250 components on real estate. That's exactly why purchase price allocation matters so much.
He noted that the old 338(h)(10) election — legally a stock deal that both parties elect to tax as an asset sale — has largely given way to the F reorganization.
Ryan called the F reorg probably the number one deal structure he's seeing today, and he walked through it using a typical S corporation, ABC Company, owned by three shareholders:
The advantages, Ryan explained, are significant: the buyer gets a step-up in basis; the seller can retain partial ownership without gain recognition; contracts remain in place because there's no entity change (which is why medical practices use this to avoid patient notification); assets and liabilities can be selectively purchased; and the seller maintains S corp treatment — meaning, if active, no 3.8% Medicare surcharge — and can use installment sales. A C corp can do something similar, but the contracts would likely have to be rewritten. In a poll, 100% of attendees agreed a buyer would want a structure that allows a basis step-up without rewriting contracts — which, Ryan said, is exactly why the sub-F has become so popular.
Ryan doesn't see many partnership deals in the contractor space, but he flagged a few essentials. Check whether a 754 election is in place — it lets a buyer of partnership units step up basis on the underlying assets and take a special depreciation allocation. Beware "hot assets": selling a partnership interest is not the same as selling stock, and cash-basis receivables or depreciated equipment will still generate ordinary income at fair market value. He also noted that, with pre-planning, partnerships have a unique ability to liquidate assets out to individual partners first — which can create tax advantages, especially where real estate is involved and partners might later pursue 1031 exchanges.
The heart of Ryan's tax message: the rate differential between ordinary income and capital gains is large. On an S corporation, the max capital gains rate runs around 20% federal plus state, while ordinary income can hit 37% federal plus state — a roughly 17% swing. That's why allocation is worth fighting over.
He explained the "waterfall": allocations start with the ordinary-income assets and work down to capital-gains assets, so when a purchase price adjustment occurs (and in his experience the price almost never goes up), it tends to hit goodwill at the bottom. Cash and accounts receivable, inventory, and depreciation recapture generally create ordinary income; fixed assets bring 1231 gain plus 1245 recapture; goodwill and going concern are capital gains; and — a frequent surprise — a covenant not to compete comes out as ordinary income, which buyers often want to allocate to for enforceability reasons.
Ryan shared sample allocation language he commonly recommends — allocating receivables and inventory at face or book value, fixed assets ideally at tax net book value (to avoid recapture, though buyers often push back and settle near gross book value), 197 intangibles at fair value, and everything left over dropping into goodwill. He illustrated the stakes with an example: moving just $250,000 of allocation onto fixed assets created an extra ~$42,000 of tax (about $21,125 after the full QBI deduction) — and these differences scale up quickly when the numbers are in the millions.
Ryan devoted real time to net working capital, which he called one of the most disputed areas after closing. The enterprise value in the LOI becomes the base purchase price; from there you add cash, subtract indebtedness, and adjust to a net working capital target (current assets minus current liabilities). The target locks in what the buyer priced the deal on — preventing, say, an owner from drawing down receivables and pocketing the cash before handing over a depleted company. It cuts both ways: run the company well and exceed the target, and the seller walks away with more.
His practical recommendation: start building a monthly net working capital trend now, and set the target on a 12- or 24-month rolling average to wash out seasonality (think snow-removal businesses with heavy winter months). Watch for items smaller businesses often miss — accrued vacation and PTO liability frequently surface post-close — and adjust the target for cash and debt in a cash-free, debt-free deal.
Ryan shared an example to set expectations. A $2 million base purchase price, reduced by a net working capital shortfall, then by two escrows (one of $50,000 and an indemnification escrow of $140,000, typically held for different periods based on risk) and some seller indebtedness and transaction costs of $22,000, left a seller at roughly $1,776,000 at closing. For an owner expecting $2 million, that can cause heartburn — which is why he likes to build this schedule while the contract is being drafted and walk the seller through it early.
Ryan ran through several traps. In installment sales, ordinary income tax comes out first — so run the numbers to be sure there's enough cash up front to cover the ordinary income tax, or you risk a year-one liability with no cash to pay it. Where an S corporation's stock basis exceeds the inside asset basis, the company should be liquidated within the year of sale so the loss on liquidation can offset the gain (wait too long and you're left with a capital loss you can't carry back). For a C corp recently converted to an S corp, watch the five-year built-in gains window — sell too soon and the BIG tax effectively taxes the gain as if you were still a C corp. And the 3.8% net investment income tax can be avoided by active owners of S corps and partnerships, but hits C corps — making a C corp asset sale, followed by liquidation, especially punitive with its double taxation plus the surcharge.
Ryan closed with a tour of planning techniques, noting each could fill its own session:
I asked Ryan what he sees go wrong most often. His answer: the combination of net working capital adjustments and the gap between the purchase price owners thought they'd receive and what actually lands at closing. Those are expectation differences — which is exactly why he likes to pull the numbers together early, before the contract is too far along, while there's still room to negotiate. Once you close, you can't go back and ask for more proceeds.
My thanks to Ryan McEntire and Brown Edwards Wealth Strategies for a genuinely valuable presentation.