The LOI decides structure, and structure is where most of the tax lives
Two owners can sell identical companies for identical headline prices and keep materially different amounts. The difference is usually structure, and structure is usually named in the LOI.
The first fork is whether the buyer acquires assets or equity. Buyers generally prefer assets, because the purchase price gets allocated across asset classes and much of it becomes depreciable or amortisable for them. Sellers often fare differently under an asset deal, because the allocation splits the price into pieces taxed at different rates — some at capital gain rates, some as ordinary income, some as recapture on equipment already depreciated. The IRS treats that allocation as a substantive matter, not a formality, and both sides report it. A one-line reference to 'an asset purchase' in an LOI has already moved a great deal.
The second fork is what the entity is. A C corporation selling assets and then distributing proceeds faces tax at two levels. Whether any portion of value is properly attributable to the owner personally rather than to the company is a fact-driven question that turns on contracts, non-competes and customer relationships — and it is close to impossible to build that record credibly after a buyer has already been told what they are buying.
None of this requires a finished tax opinion before signing. It requires knowing which structural terms in the draft are worth negotiating and which are cosmetic, before exclusivity starts and leverage shifts.
Estate and charitable moves expire when a price appears on paper
This is the single most common irreversible loss, and it happens quietly.
Transferring part of a company to a trust or to family members is valued as of the transfer date. Before a buyer is in the room, that value rests on appraisal, on the company's own performance, and on arguments about marketability and control. After a signed LOI names a number, the credible value of those shares is much closer to the number in the LOI. Owners who intended to move a slice of future appreciation outside their taxable estate find the appreciation has already happened on their side of the line. Whether federal estate tax is a live concern at all depends on the size of the estate and on current exemption levels, which change — the current position is worth confirming against the IRS before assuming it does not apply.
Charitable transfers have a sharper edge. Giving appreciated shares to a donor-advised fund or a charitable trust, so the charity sells rather than the owner, generally depends on the gift happening before the sale is effectively locked in. Once the seller has a binding commitment, the income is treated as the seller's regardless of who holds the paper at closing. Where exactly that line falls is a legal judgment on specific facts. What is clear is that the line sits somewhere in the LOI-to-signing window, not at closing.
Both of these are all-or-nothing in a way price negotiation is not. A worse price can be renegotiated. A missed transfer window cannot be reopened.
Two offers with the same number are not the same offer
Headline price is the least reliable comparison point in a deal. What changes the net figure is timing and form.
An earnout defers part of the price and ties it to performance the seller may no longer control. An escrow or holdback withholds part of it against later claims. Rollover equity converts part of the price into a stake in the buyer's entity, which may be taxed now or deferred depending on how the exchange is built. Each of these changes both how much tax is owed and when it is owed — and in some arrangements tax comes due on amounts not yet in hand.
Installment treatment, where available, spreads recognition across years. That can help or hurt depending on what else is happening in those years and on where rates sit. It also interacts with state residency, with any deferred compensation, and with whether the owner has other income in the closing year.
An after-tax comparison of the two or three structures actually on the table is a modelling exercise, and it takes days rather than hours. Done before the LOI, it informs which terms to push on. Done after, it becomes an explanation of what happened.
The gap is not in any one adviser's work — it is between them
Transactions rarely fail because a professional made a mistake inside their own lane. They fail in the space between lanes.
The deal attorney owns the LOI and negotiates it well. The CPA owns the return and files it correctly. The estate attorney owns the trust documents and drafts them properly. Nobody owns the sequence. So the estate attorney gets called in the month before closing, when the useful window shut at the LOI. The CPA sees the structure for the first time in a draft purchase agreement, after exclusivity. The wealth manager is introduced once proceeds exist, which is after every decision that shaped their size.
This is compounded by how each of these people is engaged and paid. Some are paid for the transaction closing, some for hours worked, some for assets they will eventually manage. Those incentives are not sinister, but they are different, and none of them naturally rewards raising a question that belongs to somebody else's file. Understanding how each adviser is compensated is a reasonable thing to ask about directly.
The practical fix is unglamorous: get the tax adviser and the estate adviser into the same conversation while the LOI is still a draft, and ask each of them what the current draft closes off. The question 'what stops being possible if this is signed as written' produces different answers than 'is this document acceptable'.
What is still open after signing, and what is not
Not everything is lost at signature, and it helps to know which is which.
Still open in most deals: the detailed purchase price allocation, if the LOI left it unspecified; the working capital adjustment mechanics; the wording of non-competes and consulting agreements, which affects how that consideration is taxed; the escrow terms; and whether any portion is restructured by mutual agreement. Also still open — and often neglected — is the plan for the closing year itself: estimated tax payments, because a large gain arriving mid-year can create underpayment exposure if withholding and instalments are not adjusted; and whether retirement plan contributions in the final year of operations are useful, which depends on the plan type in place.
Effectively closed: the choice between asset and equity sale, once the buyer has priced the deal around it; the estate and charitable transfer window; a change of tax residency, where the timing of a move relative to the deal is exactly what a state examiner looks at; and anything requiring a holding period that has not yet run — including whether shares might qualify under the small business stock rules, which have eligibility and holding-period conditions worth confirming with a tax adviser well before a deal exists.
Exclusivity is the mechanism that makes the closed list closed. Once the seller cannot talk to other buyers, reopening structure means asking for a concession from the only party at the table.
The closing-year picture is a second decision, and it starts before the LOI too
Sale tax planning is usually framed as one question: how much goes to tax. There is a second question that arrives immediately behind it and is often unplanned — what the proceeds are supposed to do.
That matters before the LOI because it changes which structure is acceptable. An owner who needs liquid capital at closing to fund three decades of spending has a different tolerance for earnouts and rollover equity than an owner with other assets who is optimising for total value. An owner planning to claim Social Security in the same window has a timing interaction to consider, since claiming age affects the benefit amount permanently and pre-retirement-age earnings can be tested against a limit — both worth checking against the current SSA rules rather than assumed.
These are not separate projects that can be sequenced neatly. The structure of the deal sets the shape of the income stream, and the income stream determines what the deal needed to look like. Owners who treat them as one question before signing tend to end up with fewer surprises than those who treat the second one as something to sort out after the wire clears.
What to actually do
- Get the current draft LOI in front of the tax adviser and the estate adviser at the same time, and ask each what becomes impossible if it is signed as written.
- Establish whether the transaction is contemplated as an asset sale or an equity sale, and have the after-tax proceeds of each modelled at the same headline price.
- Ask whether the LOI specifies purchase price allocation. If it does not, decide whether leaving it open is an advantage or an unresolved risk, and confirm how allocation is reported with the IRS guidance on business sales.
- Settle any intended transfer of ownership to family, trusts or charity before a price is on paper — or make a deliberate, documented decision not to, understanding that the window narrows sharply after signing.
- Separate the price into its parts — cash at close, escrow, earnout, rollover equity — and identify for each part when tax is likely to be due relative to when the money arrives.
- Confirm how each adviser on the deal is engaged and paid, so it is clear who has an incentive to raise a question that sits outside their own file.
- Set the closing-year mechanics before signing: estimated payment schedule, cash held back for the tax bill, state filing obligations, and any final-year retirement plan contributions.
How this shows up
An owner of a manufacturing business signs an LOI at a strong price, with structure described in one line as an asset purchase. Six weeks later the CPA runs the allocation and finds that a substantial portion of the price lands as depreciation recapture on equipment written down over fifteen years, taxed as ordinary income. The price was excellent. The net was ordinary. Nothing in the negotiation was handled badly; the allocation question simply arrived after exclusivity had started.
A founder intends to move a minority stake into a trust for her children and to fund a donor-advised fund with shares before the sale. Both plans are real, both are documented in emails, and both are scheduled for 'once we know the deal is happening.' The LOI is signed in March. When the estate attorney is finally engaged in June, the value of the shares is no longer arguable and the charitable gift now sits on the wrong side of a binding commitment. Two years of appreciation and a deduction both stayed on her side of the line.
An owner accepts a structure with a meaningful earnout because the headline total is the highest offer received. He retires at closing. The earnout depends on revenue targets set by a buyer who reorganises the sales team in the first year. He has no operational control and no contractual protection over the inputs. The tax questions turn out to be secondary to a simpler one nobody asked before signing: who controls the thing the payment depends on.
Frequently Asked Questions
Most letters of intent are non-binding on price and terms, with specific exceptions that usually are binding — exclusivity, confidentiality, and sometimes expense allocation. The practical effect is different from the legal one. Once exclusivity runs, the seller cannot approach other buyers, so any request to restructure the deal is made without leverage.negnegotiated later, but rarely for free.
Often yes, because many LOIs do not specify it. But the buyer has already priced the deal based on assumptions about what they can amortise, so shifting allocation in the seller's favour usually means the buyer wants something back. Allocation is reported by both parties and the IRS treats it as substantive, so an arrangement that suits both sides on paper still has to be defensible.
There is no single number, because it depends on the facts of the transaction and how binding the commitment has become. What is consistent is that earlier is stronger — a transfer made before a buyer exists rests on a valuation that stands on its own, while one made after an LOI is priced against the LOI. Appraisals and trust drafting also take real weeks, which pushes the practical start date earlier than most owners expect.
Sometimes, and it depends heavily on the state, the entity type, and where the business operates. What matters is that the timing of a move relative to the transaction is precisely what a state examiner scrutinises, and a residency change made in the same window as an LOI carries a weaker record than one established well beforehand. This is a question for a tax adviser familiar with both states, not a general rule.
It is possible, depending on structure. Escrowed amounts, earnouts and certain rollover arrangements can create recognition on a different schedule from cash receipt, and a large gain in one year can also trigger underpayment exposure if estimated payments are not adjusted. Confirm the current estimated tax rules and penalty mechanics with the IRS before assuming the closing-year payment schedule takes care of itself.