If you’re planning to sell your business in the next 3–5 years, you may be making tax decisions today that could quietly shrink your future valuation.
At Washington & Co. Inc — Strategic Tax & Advisory, we work with founders earning $1M–$20M in revenue, and many of them ask the same question:
“How do I reduce taxes now… without hurting my eventual exit?”
This guide breaks down the balancing act between tax savings and valuation growth — and how to time deductions with an exit in mind.
Why Deductions Can Backfire When You’re Preparing to Sell
Most business owners are focused on reducing taxable income. Which makes sense — until you realize that the same deductions that save you money now… can reduce the multiple you’re offered later.
Here’s the tension:
- Tax strategy says: Lower net income, pay less tax.
- Exit strategy says: Maximize EBITDA, increase valuation.
That’s because most buyers value your business based on EBITDA (Earnings Before Interest, Taxes, Depreciation, and Amortization) — not gross revenue. Every write-off that reduces that number lowers your valuation unless it’s clearly a one-time, add-back expense.
And if the buyer can’t clearly identify and reverse that expense? You could be leaving 6–7 figures on the table.
What’s Considered a “One-Time Add-Back” (And What’s Not)
In M&A deals, buyers often allow for certain one-time, non-recurring, or discretionary expenses to be “added back” to EBITDA — if they’re well-documented.
Examples of add-backs:
- Owner’s salary above market rate
- Travel or meals not required for day-to-day operations
- One-time legal, marketing, or consulting projects
- Unusual bonuses or incentives
But here’s the issue: recurring deductions like inflated contractor costs, home office reimbursements, or layered tech tools may not qualify as add-backs — especially if they’re baked into operations.
So unless your books clearly show what’s discretionary and what’s essential, many buyers won’t take the time to adjust.
How to Time Deductions Before a Planned Exit
If you’re looking at selling in the next few years, here’s a timeline you can follow:
3–5 Years Out: Maximize Deductions
Use every legal strategy to reduce taxable income:
- Accountable plans
- Retirement contributions
- Cost segregation
- Family payroll
- Meals, travel, and depreciation
This builds cash reserves, funds wealth vehicles, and reinvests into growth — without impacting valuation yet.
2 Years Out: Start Trimming the Fat
Begin identifying and reducing expenses that may be hard to explain or justify to a buyer.
Clean up your books. Eliminate low-value subscriptions. Standardize vendor rates.
Keep taking deductions — but document everything.
12–18 Months Out: Shift to EBITDA Optimization
Now your focus shifts:
- Cut unnecessary deductions that reduce EBITDA
- Normalize owner comp to market rate
- Prepare clean financials that show profit margins clearly
Model how small changes in net income can impact sale price. (e.g., $50,000 in added EBITDA at a 4x multiple = $200,000 in added value.)
Real-World Example: $450K in Added Valuation from Deduction Planning
A SaaS founder earning $2.3M annually had aggressive deductions in place: travel-heavy networking, overpaid contractors, and family payroll strategies.
We helped them:
- Reclassify personal expenses as owner discretionary
- Normalize books for a buyer-friendly EBITDA view
- Reduce $115K in annual deductions that weren’t essential
By doing so, they raised reported EBITDA by $87,000 — and secured a 4.9x multiple on that difference.
That’s $426,300 in added sale value, just by strategically adjusting expenses in the final 18 months.
Action Checklist
- Review your current deductions: Which are recurring vs. one-time?
- Run a “buyer lens” review of your last 2 years of financials
- Normalize compensation, vendor rates, and contractor payments
- Begin separating discretionary vs. operational expenses in your books
- Model EBITDA impact of reducing select deductions
- Align your tax and exit planning strategy 18–36 months in advance
Book a Pre-Exit Tax Strategy Session
If you’re planning to sell in the next 1–3 years, it’s time to coordinate your tax strategy with your exit timeline. The sooner you align your deductions with your EBITDA goals, the more leverage (and cash) you’ll have at the table.
Request a Pre-Exit Tax Strategy Session with Washington & Co. Inc — Strategic Tax & Advisory today.