Why the LOI Matters More Than Most Sellers Realize
A letter of intent feels like early-stage negotiation, but it often establishes the structure, economics, and tax direction of the entire transaction. Many of the decisions that influence a seller’s final outcome take shape before the purchase agreement is drafted. Once the LOI is signed, the flexibility to make meaningful adjustments can narrow quickly.
Key Structural Issues to Understand Before Signing
The LOI should be evaluated not only for business terms but also for tax and structural implications. Sellers should understand how the buyer expects to treat the transaction and how that treatment affects their position. Important considerations include:
- whether the deal is intended to be an asset sale or stock sale
- how different classes of equity may be treated
- ordinary income exposures created by certain assets or compensation structures
- multi-state or cross-border tax effects
- the anticipated timeline for recognition of income
These details influence the seller’s tax liability as much as the final sale price. Addressing them early helps prevent surprises that surface later in negotiations.
Alignment With the Advisory Team
Before signing the LOI, sellers benefit from alignment between their financial advisor, CPA, corporate counsel, and tax attorney. Each plays a different role, but the structure of the deal must support the broader plan. Early coordination reduces friction, ensures consistent expectations, and allows the advisory team to guide the seller with clarity.
Why Early Review Protects Value
A thoughtful review of the LOI often preserves options that disappear once diligence begins. It allows potential issues to be resolved before they create delays or limit tax planning opportunities. Even when a seller is eager to keep momentum, taking the time to review the LOI through a tax lens can materially improve the outcome.
The Practical Next Step
Sellers who are preparing to sign a letter of intent should ensure that the structure aligns with their goals and that their advisory team has had an opportunity to evaluate the implications. Early review helps create confidence in the path forward and preserves the opportunity for strategic tax planning as the deal progresses.
If you are evaluating an LOI or expect one soon, Covello Tax Law can help you understand the structural and tax considerations that matter most so you move forward with clarity and confidence.
