I recently met with a CPA that I often partner with, she discussed a story of a physician she knew who had spent 22 years building a respected orthopedic practice in the Houston Medical Center. She was ready to sell. A private equity group had come knocking with a letter of intent that made her eyes water in the best possible way. But when her CPA started peeling back the structure of that deal, she had to deliver uncomfortable news: the way the earn-out was written, a significant chunk of physician's exit proceeds would be taxed as ordinary income, not as capital gains. That's the difference between a 23.8% tax bill and a 37% one on the same dollars. On a multi-million dollar transaction, that gap is not a rounding error.
If you are a business owner in Houston and you're thinking about an exit, the question of how you structure the deal matters as much as how much someone offers you. This post walks through the key levers you need to understand before you sign anything.
"What's the actual tax picture for a business sale in 2026?"
The good news is that the tax landscape is more predictable today than it was a year ago. The One Big Beautiful Bill Act (OBBBA), signed in July 2025, made the major provisions of the Tax Cuts and Jobs Act permanent. No more sunset cliffs to worry about.
Here's what that means in plain numbers. If you sell your business and the proceeds are structured as a long-term capital gain (meaning you held the asset for more than one year), the federal tax rate tops out at 20%. But if your income is high enough, the IRS also layers on the Net Investment Income Tax, or NIIT, which is a 3.8% surtax on investment income above certain thresholds. Add those together and your effective top federal rate on a practice sale is 23.8%, according to the [Tax Foundation, January 2026] (https://taxfoundation.org/2026-tax-brackets/).
Compare that to ordinary income, which is taxed at up to 37% under the now-permanent top bracket. That 13-point spread is exactly why the structure of your earn-out provisions, holdbacks, and employment agreements can either protect your wealth or quietly drain it.
And yes, Texas still has no state income tax. That remains one of the genuine advantages of doing business here.
"What is an earn-out, and why does it matter how it's written?"
An earn-out is a provision in a business sale where the buyer agrees to pay you additional money after the closing, usually tied to the business hitting certain revenue or profit targets over the next one to three years. They're common in most deals because buyers want to reduce their risk, and sellers often believe their business will keep growing.
The problem is that the IRS looks very carefully at what an earn-out payment is for.
If the language in your agreement ties those payments to your continued employment or your personal production after the sale, the IRS can recharacterize that income as compensation for services. That means ordinary income tax rates topping out at 37%, not capital gains rates at 23.8%.
The fix is in the drafting. To protect earn-out payments as capital gains, the structure should tie future payments to the overall performance of the business, not to your individual contribution post-sale.
Your M&A attorney and your CPA need to be in the same room for this conversation. I have seen deals where the business owner's lawyer did great work on the purchase price and completely missed the tax treatment of the earn-out. It's a costly oversight.
"I've heard about QSBS. Can I use that to exclude gains from my sale?"
QSBS stands for Qualified Small Business Stock. Under Section 1202 of the tax code, certain shareholders can exclude a significant portion of their gains from federal tax entirely. The OBBBA actually increased that exclusion limit to $15 million for stock issued after July 2025. That sounds incredible, and sometimes it is.
But there are important catches for some business owners.
First, QSBS does not apply to S-Corporations. If your business is structured as an S-Corp (which is very common for many businesses), you cannot use the Section 1202 exclusion without first converting to a C-Corp and then meeting a holding period requirement. That is a multi-year strategy, not a last-minute move.
Second, professional service firms face stricter scrutiny. Medical practices are generally classified as "disqualified" under QSBS rules because they are in the field of health, where the principal asset is the reputation or skill of the employees.
If you're three to five years from selling and you're currently structured as an S-Corp, this is a conversation worth having now, not the month before closing.
"Are there any pre-sale moves I should be making right now?"
Absolutely. Several, in fact.
One of the most underused tools I see with business owners is the 401(k). In 2026, you can contribute up to $24,500 as an employee. If you're 50 or older, you get an additional $8,000 catch-up contribution. And if you're between ages 60 and 63, there's a "super catch-up" provision that bumps that extra amount to $11,250, per the [IRS, April 2026](https://www.irs.gov/newsroom/2026-retirement-plan-limitations). In a high-income year, especially a year when you're selling a practice, maximizing these contributions can meaningfully reduce your taxable income.
I had a client, a Houston-based civil engineering firm owner, who was so focused on negotiating his purchase price that he hadn't touched his retirement plan contributions in two years. We caught it during our review and got him back on track. Not a dramatic story, but it was real money back in his pocket.
Also worth noting: the 2026 Texas Franchise Tax "no-tax-due" threshold has risen to $2.65 million in annualized revenue. If your entity's revenue is above that, the standard 0.75% rate applies to your taxable margin, per [BPM, May 2026](https://www.bpm.com/insights/texas-franchise-tax-changes-2026/). This is often overlooked in exit planning because people focus on federal tax, but it belongs in your total cost-of-sale calculation.
Beyond retirement contributions, consider charitable giving strategies, installment sale elections, and timing the closing across tax years where it makes sense. These are all tools a coordinated financial planning team can help you model before you sign a letter of intent.
"When should I bring in a Financial Planning Team?"
Before you talk to a buyer. Ideally, 12 to 24 months before.
I know that sounds like a long runway, but the strategies that move the needle require time. Converting your entity type for QSBS eligibility, building out your 401k contributions, restructuring compensation before the sale, timing earn-out payments; none of these are month-before-closing moves. The month before closing is too late for most of them.
I have been working with business owners in Houston for over 30 years. The ones who walk away from their practice sale feeling genuinely satisfied are almost always the ones who planned the exit before the buyer showed up. The ones who feel like they left money on the table usually made their decisions reactively.
Remember my physician from the opening? Luckily, she caught it in time. She restructured the earn-out language, worked with her attorney to tie the payments to enterprise performance rather than her personal production, and she held on to a meaningful amount of money that would have otherwise gone straight to the IRS. That's what planning before the letter of intent looks like.
Your business took decades to build. The exit deserves the same intention.
If you're a Houston-area business owner thinking about a sale in the next one to three years, I'd genuinely enjoy a conversation. Reach out through the contact page or email me at BryonT@WRAnderson.com. Let's talk through where you are.
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Cetera Advisors LLC exclusively provides investment products and services through its representatives. Although Cetera does not provide tax or legal advice, or supervise tax, accounting or legal services, Cetera representatives may offer these services through their independent outside business. This information is not intended as tax or legal advice.
Sources
- [Tax Foundation, January 2026 - 2026 Tax Brackets and Rates](https://taxfoundation.org/2026-tax-brackets/)
- [Withum, July 2026 - QSBS and S-Corp Conversion Rules 2026](https://www.withum.com/qsbs-s-corp-conversion-rules-2026/)
- [Focus Bankers, April 2026 - Physician Practice Valuation Multiples 2026](https://focusbankers.com/physician-practice-valuation-multiples-2026/)
- [Matthews, July 2026 - Houston Medical Office Market Report Q2 2026](https://www.matthews.com/houston-medical-office-market-report-q2-2026/)
- [IRS, April 2026 - 2026 Retirement Plan Contribution Limitations](https://www.irs.gov/newsroom/2026-retirement-plan-limitations)
- [BPM, May 2026 - Texas Franchise Tax Changes 2026](https://www.bpm.com/insights/texas-franchise-tax-changes-2026/)