A letter of intent sets a price, a structure, and a timeline. The confidentiality and exclusivity terms in it usually bind. The economics usually do not, and diligence, negotiation, and closing adjustments can change all three. Even when the price holds, what reaches the owner after tax, debt, escrow, and rollover is a different figure, and it is one many owners arrive at closing without having written down.
Most of what I have written about selling assumes a year or two of runway: gift shares while the value is uncertain, fund the trust before a buyer appears. That advice stands, but it does not answer the question an owner with a signed LOI is actually asking, which is what still needs attention between now and closing.
The weeks between the LOI and the purchase agreement are not a legal drafting exercise you wait out. They are when the deal terms and your personal finances get connected, and when it becomes clear who on your side is responsible for what. Here is what I'd want handled.
What the LOI closes, and what it doesn't
In July I published a conversation with estate attorney Jake Slowik in which he said that once the deal is signed, most of those doors close, and the planning that could have saved millions is often worth nothing. He was talking about the valuation discounts that make gifting a business interest so effective, and about moving appreciation out of the estate before the price is set, and on both points he is right: an appraiser has to account for a known offer, and a signed LOI is hard evidence of value. The discount shrinks as the sale gets more certain, and by the time there is a signed LOI it is often close to nothing.
That is not the same as saying gifts are off the table. A signed LOI does not automatically rule out a gift to a child, a trust, or a charity, though your shareholder agreement might, and so might the deal itself, especially in a stock sale, since buyers want every holder at the closing table and will resist a new trust appearing as a seller late in the process. It also does not by itself fix the gift-tax value at the deal price. The appraisal has to account for the offer and for whatever contingencies remain, so the value lands much closer to the headline than it would have a year earlier. A gift at that value can still make sense for someone with exemption to use. It just will not do what it would have done before the buyer appeared.
Late gifts have a second problem, and it is not limited to charity. If the sale is binding, or close enough that it is almost certain, the IRS can treat the gain as yours even though the shares went to someone else the week before closing. That applies to a child or a trust as much as to a donor-advised fund, and charity adds its own layers. A nonbinding LOI by itself is not the line, and the absence of a signed purchase agreement is not a safe harbor either; the Tax Court has taxed a donor on shares given two days before the definitive agreement was signed, roughly three months after the LOI. Add the appraisal and substantiation rules, and the fact that the fund sponsor has to agree to take the stock at all, and a last-minute stock gift is a conversation to have with counsel, not a move to make on your own.
So the right response to a signed LOI is neither to assume everything is lost nor to assume a late gift will work. It is a fast, specific review of what you have, what you have already used, and what is worth doing at the deal price.
Five terms in the purchase agreement
These are negotiated by a deal team whose job is to get to closing. None of them is buried in fine print, and each of them gets decided with or without your input.
The allocation. In an asset sale the price gets divided among the things being bought, and each piece carries its own tax. Inventory and depreciation recapture are ordinary income. Goodwill is usually long-term capital gain, though goodwill you previously bought and amortized has recapture of its own. If the seller is a C corporation, an asset sale can produce tax at the corporate level and again at the shareholder level when the cash comes out.
Two items are often mislabeled. A payment for your noncompete is ordinary income to you. A consulting agreement is compensation for services, subject to employment or self-employment tax depending on how it is set up, and it has to be for real services; purchase price relabeled as consulting does not hold up. And the buyer does not get a quick deduction for the noncompete the way people assume: under Section 197, an acquisition noncompete amortizes over fifteen years, the same as goodwill. The buyer's pull toward faster write-offs is in equipment and in consulting fees, not in the noncompete.
Have your CPA model two or three allocations that reflect what is being sold before anyone agrees to one. Buyer and seller each report the allocation on Form 8594, and the two should be consistent with the agreement, even though the dollar figures can differ once each side's transaction costs are layered in.
The rollover. Taking equity in the buyer instead of cash does not defer the tax by itself. Sections 351 and 721 can make it a nonrecognition exchange, but the entity type, who else is contributing, liabilities, and any cash you receive alongside the stock all are important. Get it in writing: what is taxed at closing, what is deferred, and what basis you carry into the new investment. Deferred is not gone, and the equity is still a bet on the buyer's business.
The closing date. A closing on January 5 instead of December 30 moves the gain into the next tax year, but not necessarily all of it. Installment payments, earnouts, escrow releases, recapture, and constructive receipt each have their own timing. Have the CPA compare two realistic dates on both tax and cash flow before you agree to one.
Working capital and net proceeds. The working capital target is a negotiated definition, not the balance in the operating account. It usually excludes cash and debt, which are handled separately, so a distribution before closing does not by itself reduce working capital, though it can trip other covenants. Read which accounts are in the definition, what accounting methods apply, where the target was set, and how the true-up works. Then build the reconciliation from price to proceeds: less debt, transaction costs, escrow, holdbacks, and rollover, and then a second line that sets aside the tax and the known obligations. The number below that second line is the one to plan around.
Personal guarantees. The sale of the company does not release you from a guarantee of its line, its lease, or its equipment notes. Only the lender or landlord can do that. List every guarantee, and either get the creditor's written release at closing or confirm that the payoff documented in the agreement extinguishes the obligation. A buyer's promise to obtain a release later, or to reimburse you if one is called, is a promise, not a discharge.
Two tax questions to settle before closing
Qualified small business stock. Section 1202 can exclude a large share of the gain on a C corporation's stock, and owners who qualify often do not know it. Being a C corporation is not enough. The shares generally have to have been acquired at original issuance, the company has to have passed the gross-asset test when they were issued, it has to have been running an active business outside the excluded fields (most professional services among them), and the shares have to have been held long enough. The 2025 tax law added partial exclusions at three and four years, but only for stock acquired after July 4, 2025, so those tiers are no help on a 2026 exit. Older stock still needs more than five years, and the exclusion percentage depends on when it was acquired. If your company started life as an S corporation or LLC and converted, that history is where the analysis gets careful. Have it reviewed before the closing date is set.
Estimated payments. Federal law measures your withholding and estimated payments against the lesser of 90 percent of this year's tax or 100 percent of last year's, and that 100 becomes 110 once prior-year adjusted gross income passes $150,000 ($75,000 married filing separately). The prior-year method needs a filed return covering twelve months. Installments are still due on their dates, and a gain late in the year may call for annualizing income. Whatever remains is due by the April filing deadline, whether or not you extend the return. On a large gain, the gap between the safe-harbor amount and the real tax is your money to hold for several months, which is a reason to run this before closing rather than at tax time.
Georgia runs its own test. Under the state code and Form 500 UET, the comparison is 70 percent of this year's tax after credits or 100 percent of last year's on a twelve-month return, with its own installment rules. There is no 110 percent tier. Do not assume the federal result covers the state.
The day after
The account and the wire. Open the receiving account before closing, in the name of whoever is entitled to the proceeds under the closing documents. In a stock sale that is usually you. In an asset sale it is usually the company, with a distribution to you as a separate step, and the wrong account at closing is a mess to unwind. Confirm the wire instructions by calling a number you already had, not one in the email that delivered them. Every M&A attorney has a wire-fraud story. Set aside the tax and the known obligations first, then decide how to hold the rest. FDIC coverage is $250,000 per depositor, per bank, per ownership category, so a large balance in one checking account is mostly uninsured. Short-term Treasuries, with maturities matched to when the tax and other payments come due, are the usual answer for the holding period; SIPC covers a brokerage's custody failure up to its limits, not the market. How long the money sits there is a planning question. There is seldom a reason to hurry.
Benefits and company-paid expenses. Health coverage does not automatically stop at closing, and it does not automatically continue either. Find out the actual termination date, whether the buyer's plan or a replacement is available, and what the COBRA election and payment deadlines are if that is the bridge. Then go through what the company has been paying for that you use: the life insurance it owns on you, the car, the phone, the memberships. Each one transfers, ends, or needs a new home.
The retirement plan. An asset sale does not automatically terminate the 401(k) and a stock sale does not automatically preserve it. The buyer may require yours to be terminated before closing so that participants can take distributions, and there are rules about successor plans that make the sequence matter. If you have a cash balance plan, it needs an actuary's review of funding, benefits, and costs, and if it is underfunded, closing it out means a final contribution that may not be deductible in the year you would like. Bring your third-party administrator and, for anything beyond a plain 401(k), ERISA counsel in at the LOI, not the week of closing.
Estate documents and titling. The day after closing you are a person with a large liquid account instead of a person who owns a company. Your will, beneficiary forms, and account titling should say where that account goes if something happens to you that week. The full estate conversation can come after; this part cannot.
What can wait
The second home, the new venture, the private deal someone mentioned the week the sale was announced. These are discretionary and don't have a date on them. They can wait.
Before the purchase agreement is final, get the deal attorney, the CPA, and whoever handles your personal finances looking at the same proceeds reconciliation and the same closing checklist, and assign a name to each item: the allocation, the rollover analysis, the estimated-tax schedule, the guarantee releases, the benefits transition. Thirty minutes, and a written list of who owns what and by when. In my experience owners don't lose money on the price. They lose it on the three or four items that nobody was assigned.
Frequently Asked Questions
Is a letter of intent binding?
Usually not on the terms that matter most to you. The price, structure, and timeline in an LOI are proposals that the purchase agreement will confirm, change, or drop. What typically does bind is the exclusivity period, during which you agree not to shop the company to other buyers, and the confidentiality terms. Read the LOI to see which provisions are marked binding; the answer varies by deal.
Can I still gift shares to a trust or to my children after signing an LOI?
Nothing in the gift-tax rules prohibits it, but three things change. The appraisal has to account for the offer and the remaining contingencies, so the valuation discounts that make pre-sale gifting effective shrink or disappear. Your shareholder agreement and the deal documents may restrict transfers or require the buyer's consent, and buyers generally resist new parties joining a stock sale late. And if the sale is practically certain on the gift date, the income tax on the gain can still be yours even though the trust owns the shares at closing. A gift can still make sense for an owner with exemption to use. It needs counsel's review first.
Can I donate company stock to a donor-advised fund after the LOI?
It is possible, and it is where owners get hurt. If the sale is practically certain when the gift is made, the IRS can tax the gain to you rather than to the charity. A nonbinding LOI alone is not the line, but the Tax Court has taxed a donor on shares given two days before the definitive agreement, roughly three months after the LOI was signed. The gift also needs a qualified appraisal, and the fund sponsor has to agree to accept private stock, which takes time. If a stock gift cannot be done safely, a cash gift in the year of sale still produces a deduction.
How is a noncompete payment taxed in a business sale?
To the seller it is ordinary income, not capital gain. To the buyer it is a Section 197 intangible amortized over fifteen years, the same period as goodwill, so the buyer does not get the fast deduction many people assume. Payments under a consulting agreement are compensation for services, subject to employment or self-employment tax, and they have to reflect real work; purchase price relabeled as consulting does not survive examination.
What is the estimated-tax safe harbor when I sell my business?
Federal rules require withholding and estimated payments equal to the lesser of 90 percent of the current year's tax or 100 percent of the prior year's, rising to 110 percent of the prior year once prior-year adjusted gross income exceeds $150,000 ($75,000 if married filing separately). Installments are due on their dates, a gain late in the year may be addressed by annualizing income, and the remaining balance is due by the April filing deadline whether or not the return is extended. Georgia applies its own test, 70 percent of the current year or 100 percent of the prior year, with no 110 percent tier.
Does my business qualify for the qualified small business stock exclusion?
Only if it is a C corporation, and C corporation status alone is not enough. The shares generally must have been acquired at original issuance (a gift or inheritance can carry the status over), the company must have met the gross-asset test when the shares were issued, it must have been running an active business outside the excluded fields, and the shares must have been held long enough. For stock acquired after July 4, 2025, partial exclusions begin at three years; stock acquired before that date still requires more than five years. A business that converted from an S corporation or LLC needs a careful look at when the C corporation stock was actually issued.
Does selling my company release my personal guarantees?
No. A guarantee is between you and the lender or landlord, and the buyer's purchase of the company does not undo it. You need a written release from the creditor at closing, or a documented payoff that extinguishes the guaranteed obligation. A buyer's promise to secure a release later, or to reimburse you if the guarantee is called, is not the same as being released.
Related Reading
- What Your Business Is Worth and What You'll Keep Are Two Different Numbers
- The Tax Is the Easy Part
- Why Estate Planning Can't Wait Until After You Sell Your Business
- Why Is Your Business Worth More to Private Equity Than It Is to You?
- Cash Balance Plans: One of the Most Powerful Ways to Move Wealth Out of Your Business
Disclosure
This article is for informational purposes only and should not be construed as legal, tax, or investment advice. Tax treatment depends on entity classification, transaction structure, and each owner's facts and circumstances. HWM Wealth Management, LLC is a registered investment adviser.
