Selling your business? Don't let sales tax derail the deal

When founders begin thinking about selling their business, the focus is usually on valuation, growth, and finding the right buyer. But as we discussed on a recent episode of It Depends: A Sales Tax Podcast by TaxConnex, what often makes or breaks a deal isn’t performance, it’s preparation.

More specifically, it’s how well a company can withstand due diligence.

If you’re considering a merger, acquisition, or other equity event, whether it’s months or a few years away, here are a few realities every seller should understand.

The Process Is More Rigorous Than Most Expect

Even experienced operators are surprised by how detailed today’s diligence process has become. Buyers aren’t just validating revenue, they’re underwriting risk across the entire business.

That review often includes:

• Financial reporting (including cash-to-accrual adjustments)

   

• Revenue quality and retention

   

• Sales and use tax exposure

   

• Cybersecurity and AI usage

   

• Contract assignability

   

• Cap table accuracy

   

• Intellectual property ownership

It can feel like a full operational audit, because it is. And one consistent truth remains: time kills deals. The longer the process drags on, the more pressure there is on value.

Sales Tax Exposure Is a Growing Deal Risk

Buyers today, particularly private equity firms, have little appetite for unresolved sales tax exposure. In many cases, they expect issues to be fully remediated before closing or they require significant escrows.

Sales tax is especially problematic because it’s meant to be collected from customers. If it wasn’t collected, that liability often becomes the seller’s burden.

For SaaS, software, and telecom businesses operating across multiple states, exposure can expand quickly due to:

• Economic nexus thresholds

• Remote delivery models

• Rapid multi-state growth

• Misunderstood taxability of products/services

Unaddressed exposure can result in escrow demands, valuation reductions, or delayed closings. The earlier it’s evaluated, the more options a seller has.

Legal and Structural Readiness Matters

Performance alone won’t carry a deal across the finish line. Buyers also examine what we might call “legal hygiene.”

Common issues that surface include:

• Incomplete cap tables or undocumented equity promises

• Independent contractors with unclear IP ownership

• Non-assignable customer contracts

• Open-source licensing risks

• Privacy, AI, or fintech compliance gaps

These issues are fixable, but they’re far easier to address before a deal is underway.

Valuation Is About the Future, Not the Past

Headline valuations rarely tell the whole story. Deal structure, including earn-outs, rollover equity, and performance conditions, significantly impacts the real outcome.

Buyers are investing in future scalability. That means valuation reflects:

• Growth trajectory

• Market demand

• Risk profile

• Operational readiness

Strong performance combined with low perceived risk creates leverage. The opposite creates friction.

Start Preparing Before You Need To

If an exit may be on the horizon, preparation should begin early.

From a sales tax standpoint, that may involve:

• Reviewing your nexus footprint

• Assessing historical exposure

• Strengthening compliance processes

More broadly, it may mean tightening financial reporting, reviewing contracts, and confirming IP ownership.

The best time to prepare is before there’s pressure to close.

An exit event should reward years of work, not become a scramble to fix preventable issues.

When sellers proactively address risk areas, sales tax included, they protect valuation, shorten timelines, and maintain control of the narrative.

Because in M&A, surprises rarely benefit the seller.

To learn more about this topic, listen to our podcast episode - Winning Strategies for a Successful Exit: Avoiding Risk and Maximizing Value in M&A. In this episode, host Brian Greer brings together a panel of experts from sales tax, M&A advisory, and legal to break down the key steps business owners should take to position their company for a smooth and successful exit. Jeff Meigs, Chris Weingartner (Founders Advisors), and John Yates (Gunderson Dettmer) share real-world examples of issues uncovered during due diligence - from unexpected sales tax exposure and valuation surprises to contract, IP, and governance pitfalls that can delay or derail a transaction.