The Apollon Wealth Management Guide to a Letter of Intent Checklist for a Business Sale

What does a letter of intent actually lock in?

Most letters of intent bind you on only two clauses, usually exclusivity and confidentiality. But the price, the asset-or-stock structure and the cash-versus-note mix become the base the buyer's lender and lawyers build on. Grant exclusivity and your other bidders walk away, which weakens your position on every other term.

Which eight terms change what you keep after tax?

Eight terms in a letter of intent move your after-tax proceeds: asset or stock structure, the cash, note and earnout mix, price allocation, what's included, the working capital target, noncompete and consulting terms, seller note terms, and exclusivity with the closing date. Ask the buyer one question about each before you sign.

First, structure: is this an asset sale or a stock sale, and has the buyer priced the difference? Second, mix: how much arrives in cash at closing, how much in a seller note, how much in an earnout? Third, allocation: how will the price be split across the seven classes the IRS uses on Form 8594? Fourth, scope: are the building, vehicles and equipment in or out?

Fifth, working capital: what number is the target, and which accounts count toward it? Sixth, what is paid for the noncompete, and is your consulting or employment pay separate from the price? Seventh, on the note: what interest rate, what security, and does the bank's loan rank ahead of you? Eighth, how many days of exclusivity, and what closing date does the letter assume?

Three terms are hard to change after signing: structure, the price mix and exclusivity. Allocation, the working capital definition and note security can still move, but a buyer who is already exclusive has less reason to give ground.

Two beliefs need correcting. The buyer's CPA shouldn't settle the allocation alone, because both sides file Form 8594 and you live with the result. And a seller note doesn't defer all your tax: Section 1245 recapture on depreciated machines is taxed in the year of sale, whatever the note says.

The table below shows the split. Three tasks land before or at signing: the after-tax estimate, the title check and the working capital target. The IRMAA and RMD projection has to be done before you set the closing date. Only the allocation and the installment election wait until the purchase agreement and the sale-year return. Check the 'when' column against your own calendar.

The eight questions

Which terms are hard to move

When the building isn't the company's to sell

A hypothetical person, Merle, 68, gets a draft letter of intent from five long-time employees offering $2.5 million for his machine shop, building included. He owns the building personally, not through the company. For illustration, it's worth $700,000 and his basis is $300,000 after the step-up on his late wife's half, so selling it creates a $400,000 gain. At an assumed 20 percent rate, that's an $80,000 tax cost in the sale year.

If he leaves it out, the price drops to $1.8 million and he leases the building to the buyers at $4,000 per month, which is $48,000 per year of taxable rent. If he still owns it at death, his two daughters' basis resets to market value and the $400,000 gain is never taxed under current law. The calculator on this site runs this kind of sell-or-hold comparison with your own numbers.

The draft has a paperwork flaw. It names the company as seller of a building the company doesn't own, and the deed still lists Merle and his late wife. Redrafting the letter is the easy part. A title company won't insure the sale until her death certificate and a survivorship affidavit are recorded with the county, or her half goes through probate if the deed shows tenants in common. And he'd need a separate lease on top. Any of these can push back the closing.

The step-up works like this: when his wife died, her half of the jointly owned building got a basis reset to market value. If Merle owns the building at his own death, the daughters get a full reset. That saves tax permanently rather than moving it to a later year, as long as current law stays in place.

The trade-off is real. Keeping the building makes Merle landlord to his own buyers. Rent is taxed at ordinary rates, and if the shop struggles, the rent and any note payments are at risk at the same time. If he needs the cash now, or the shop's future looks shaky, selling the building in the deal may be the safer call.

The numbers on the building

What the title mistake costs to undo

How much does being single at 68 change the math?

Being single cuts the Medicare income thresholds in half. The first surcharge starts above $109,000 for a single filer versus $218,000 for a joint one, and the top tier starts at $500,000 versus $750,000. A sale year above $500,000 of MAGI sets Part B at $689.90 a month instead of $202.90 two years later, which is $487.00 more per month, or $5,844 for the year.

Recapture and the cash paid at closing usually push Merle's sale year into the top tier even with a seller note. The note smooths the capital gain across later years, but it doesn't rescue the sale year itself.

Other owners face a different version. In your early 60s, you face the same two-year lookback for premiums that begin at 65. In your 50s, you're outside IRMAA but have a longer stretch to fund before Medicare starts.

For Merle, RMDs from about $900,000 in IRAs start at 73. That income comes in alongside the rent and the note interest, not in place of them. Returns are never certain and investments can lose money, so we'd test that combined income against a weak year, not an average one.

Dates that drive the letter, in calendar order

Start with a tax estimate on the draft, before you counter the price. Signing then starts exclusivity for the number of days the letter states. The purchase agreement sets the allocation, and the closing date decides the sale year. The working capital true-up follows closing. Form 8594 and any installment elect-out are due with the sale-year return, extensions included. IRMAA is set two years after the sale year, and RMDs start at 73 (75 for people born in 1960 or later).

Timing errors are easy to spot against that list. Signing before the estimate is too early. Deciding on the installment election after the return is filed is too late. Gifting shares to the daughters after a signed letter is the wrong order, because the gain may still be taxed to Merle (that topic gets its own page).

Then there's what can go wrong after signing: the employee buyers' revenue drops and note payments slip, Merle's health changes, or Congress changes the step-up. Leave room for it. Take a security interest in the shop's equipment, keep about two years of spending outside the note, and name in the note who receives payments after his death.

Early, late and out of order

What Apollon Wealth Management would open first in your accounts

Apollon Wealth Management would start with the deed and title of every asset the business uses. Next come your two most recent tax returns, to see how close you already sit to an IRMAA tier. After that it lines your IRA balances up against the RMD start age, so the letter's cash-versus-note mix is judged against income you'll have anyway.