Tax Planning Before Signing a Business Sale Letter of Intent
Before signing a business sale LOI, compare deal structure, allocation, cash proceeds and review responsibilities with your tax advisor and deal counsel.
By AE Tax Advisors Team · Updated October 24, 2026
Start with the decision
Tax planning before signing a letter of intent starts with turning the proposed deal into an after-tax comparison. An LOI may settle important commercial expectations before the detailed purchase agreement exists. The legal effect of its provisions belongs with deal counsel; tax review should happen alongside that discussion.
The goal is a short decision memo: the alternatives still available, the assumptions behind each model, and the terms that require further diligence. There is no universal rule that all planning remains possible until signing or that every option disappears once an LOI is signed.
Separate deal value from cash you can use
List the headline price, debt payoff, working-capital adjustment, fees, escrow, retained equity and contingent payments. Then estimate taxes using the actual seller, basis and proposed structure. Avoid applying one capital-gains percentage to the entire purchase price.
Ask which amounts arrive at closing and which depend on future events. A seller note or earnout is not equivalent to cash, and installment treatment does not defer every type of income. Keep the financing and tax assumptions separate so one does not conceal the other.
Identify the structure before negotiating allocations
An asset sale, a stock sale and a partnership-interest sale can produce different results for seller and buyer. If a deemed asset transaction or another election is proposed, identify who must consent and who calculates the consequences.
For a covered asset acquisition, the allocation connects the negotiated price with the assets reported by each party. Have the tax team review proposed equipment, inventory and intangible allocations before they become an unexplained exhibit in the final agreement.
Use the LOI as a review agenda
| LOI item | Question to resolve |
|---|---|
| Assets or ownership interests | Exactly what is being sold and by which entity? |
| Retained building | What lease or property transaction will be required? |
| Earnout or continued employment | Which payments depend on services or performance? |
| Rollover equity | What is retained, at what value, and with which tax assumptions? |
| Timing and diligence | Who supplies the model and when can terms still change? |
An LOI is not a substitute for the final documents. Ask counsel to identify binding provisions and keep an explicit list of commercial terms that remain open. Reconcile the model whenever proposed terms change.
Do not rely on a last-minute planning checklist
Ownership changes, charitable planning and other pre-sale steps can depend on facts and timing beyond the date printed on a document. If any are being considered, bring them to the appropriate tax and legal specialists early. Avoid assuming that an unsigned purchase agreement alone establishes the outcome.
A practical team also considers what happens if the transaction fails. Evaluate costs, administration, control and business purpose before implementing a change solely for the projected sale.
Illustrative comparison and required records
A hypothetical owner compares an all-cash asset offer with an ownership-interest offer containing rollover equity and an earnout. The useful result is not a single “best tax rate.” It is a side-by-side model of timing, estimated taxes, uncertainty and accessible proceeds. This is a planning illustration, not a completed transaction.
- Current LOI and prior revisions, ownership history and entity elections.
- Recent returns, basis records, depreciation schedules and debt balances.
- Proposed allocation, employment or consulting terms and rollover documents.
- A written list of model assumptions, responsible reviewers and decision dates.
Use the LOI review workbook to organize questions. Detailed agreements and financial records should move through the agreed secure channel.
Questions owners ask
Is it too late to seek tax advice after signing an LOI?
Not necessarily. Provide the signed LOI and transaction status. Counsel and your tax advisor can identify the terms still open and the decisions requiring immediate review.
Does an earnout postpone all taxes until payment?
No. Treatment depends on the arrangement and the income involved. Some amounts may be compensation or otherwise require different timing; depreciation recapture can also limit deferral.
Discuss the advisory scope
Strategic Tax Advisory: $7,800. Complex Tax Advisory: $9,800. Returns, amendments, cost segregation and additional work are separately scoped. Confirm the entities, written deliverables, implementation responsibilities and support period in your agreement.
Pre-sale and exit advisory · Fees and engagement scope
Read a sale and earnout cash-reserve planning example. Check the case facts and status: a planning recommendation or engagement scope does not establish completed implementation or realized tax savings.
Sources and editorial context
General educational information prepared with AI assistance; no individual professional review or client result is represented. Sources provide background, not approval of a transaction. Conclusions require the applicable rules and your records. Editorial policy · AI disclosure