What a Signed LOI Actually Starts

A letter of intent is rarely presented as a deadline. It arrives as a milestone — proof of progress, signed over dinner or across a conference table, filed away in a deal-room folder. The quarter the founder has been working toward for fifteen years is suddenly sixty to one hundred and twenty days out, and the prevailing feeling, understandably, is momentum.

The tax consequences of that signature tend not to present themselves until much later. By the time they do, most of the useful responses to them are no longer available. The problem is structural, not procedural: a signed LOI closes a set of doors that, from outside, look identical to doors still open. Some of those doors were already closing before the pen touched paper; others close the moment it did.

This piece is about which doors those are, and how much room is actually left in the rooms behind them.

The clock that started before the signature

Most of the planning moves that matter in a business sale are not transaction moves. They are structural — decisions about who owns what, in what entity, in what state, under what trust — that were consequential long before anyone negotiated a price. They tend to depend on a kind of independence: a gift into a trust, the funding of a charitable vehicle, the establishment of residency in a new state, reads most defensibly when the transaction that produces the gain is still somewhere between abstract and distant.

This is a doctrine concern, not a paperwork concern. Courts and the IRS have long been skeptical of planning that sits adjacent to a closing — planning the tax bar sometimes describes as occurring under the firm and fixed intent to sell. The further back in time a gift or a trust funding occurred, the less it looks like an act of tax management and the more it looks like an act of estate management that happened to precede a sale, rather than chase one.

The practical consequence is that the useful tax runway for a founder selling a business runs backward from the closing date, not forward from the LOI. Six to twelve months before the sale is where most of the moves with real leverage live. The LOI doesn't start the clock. It marks a point along a clock that has been running since the company was worth buying.

Why the signature changes what's legally visible

For moves that depend on valuation — gifts of stock, transfers to trusts, sales to grantor-trust arrangements, minority-interest discounts — the signature on an LOI does something quiet but important. It supplies a number. Before the LOI, the company's fair market value was an exercise in judgment, defensible through appraisal, often reflecting the kinds of discounts that arise from illiquidity, lack of control, and restricted transferability. After the LOI, there is a different number sitting in a binder: the one the buyer has agreed to pay.

The IRS, if it later reviews a gift or a transfer made in the same year as the sale, is not required to accept the appraisal over the LOI. It is free to point at the higher number and ask why the taxpayer's reported value assumed the lower one. There are legal arguments in both directions, and the facts of the transfer — when it occurred, how independent the valuation process was, what the buyer's diligence had uncovered at the time — matter considerably. But the default posture tilts, after the signature, in the direction of the higher number. Gifts that looked routine two months earlier begin to require more defense than anyone had budgeted for.

This is the first door that closes. Most founders are not told it has closed, because their advisors are focused on the transaction itself, and the valuation question is someone else's problem — usually an estate attorney's, and usually not one who is at the table during deal negotiations.

A question worth asking

Of everyone around the deal — the banker, the transaction attorney, the buyer's counsel, the CFO — whose job is it to say the closing should wait?

What each window still permits

What follows is a rough guide, not a prescription. Every transaction has its own constraints — regulatory approvals, earnout structures, buyer-side diligence timelines — that can either compress these windows or, more rarely, extend them. The frame is useful less as a checklist than as a way to see which moves are still credibly separable from the transaction, and which are not.

At 120 days

Four months before close is the widest useful window, and even that is narrower than most founders expect. At 120 days, an irrevocable trust can still be funded with shares, a charitable remainder vehicle can still be drafted and funded with pre-LOI consultation, and entity-level conversations — a reorganization, a conversion between LLC and corporate form, the establishment of a separate holding entity — can still begin without looking like reactions to an imminent sale. Residency moves initiated at this point have a few months of independent activity to point to, though not many.

The word initiated is doing work here. Funding a trust that was drafted last week is not, for purposes of the record, a four-month move. It is a four-day move that happens to sit inside a four-month window. Moves with real leverage require that the planning, the funding, and the operational follow-through all fit inside the runway — not just the paperwork.

At 90 days

Three months out, the shape of the deal is usually firming. Diligence is well underway. Buyer counsel is drafting definitive documents. The narrative independence of any planning initiated from this point begins to erode.

Gifting decisions made here can still be clean, provided the appraisal work was started earlier and the transfer documents don't read as mirror images of the LOI's price. Trust funding is still feasible. Residency establishment — the kind that attempts to sever taxable presence in a high-tax state before the sale closes — becomes considerably harder to defend, particularly in jurisdictions where the taxing authority has an established history of auditing mid-sale moves. California is the example most often cited, though it is not the only one.

At 60 days

Two months out, the planning menu contracts to the deal itself. The most consequential decisions in this window tend to be about how the purchase price is characterized and received: lump sum versus installment sale, the tax treatment of any earnout, the character of consideration that is stock versus cash, and the handling of the rollover equity that private-equity buyers often require of sellers they want to retain.

These are real levers. An installment sale can shift the timing of gain recognition, though it carries its own interest cost above certain thresholds and does not combine cleanly with other planning structures taken concurrently. An earnout structured as compensation rather than purchase-price consideration changes the character of the income, for better or worse, depending on the seller's other positions. Rollover equity, if taken, can defer tax on a portion of the proceeds — though the same rollover ties the seller's net-of-tax outcome to the buyer's subsequent performance in ways that are rarely modeled honestly at the time of signing.

These are moves to make with a tax advisor, not a transaction advisor. The two sets of incentives do not always point in the same direction.

At 30 days, and after

Inside the last month, the useful tax work is largely defensive. Estimated-tax safe-harbor calculations are done so the founder doesn't owe an underpayment penalty on top of a federal tax bill that may already run into eight figures. Withholding elections on any W-2 income in the closing year are set to minimize the January surprise. K-1 timing — for sellers of pass-through entities — is confirmed so the founder knows, with some precision, which tax year the gain will land in. The closing date itself can move; deals slip, sometimes by weeks, but a slip pushes the window, it doesn't expand the planning runway behind it.

After the closing, the frame shifts entirely. The year of the sale becomes a compliance exercise. The year after the sale — the year with little or no W-2 income — opens a different set of doors. Those doors are the subject of a separate piece.

The threads this piece doesn't pull

This piece has deliberately stayed at the level of the timeline. A number of the decisions that live inside these windows are complex enough to merit their own treatment.

Installment-sale versus lump-sum structure is one. The math depends on the seller's other income, the buyer's creditworthiness, and the presence or absence of qualified small business stock, which does not combine neatly with installment treatment. Reorganizations that preserve a portion of the founder's equity inside the buyer's entity — increasingly common in private-equity acquisitions of pass-through companies, where the buyer wants a step-up in asset basis — carry their own tax and legal geometry. Qualified small business stock timing, particularly for founders whose shares were issued after July 4, 2025 and who face the tiered three-, four-, and five-year exclusion schedule that replaced the older single-threshold rule, has become more complicated since the legislation of that year. State-residency questions — where the founder is a tax resident at the moment of sale, and what an aggressive state tax authority is willing to argue otherwise — are the subject of considerable ongoing litigation.

Each of these is a thread this publication will pull in its own time. The point of this piece is not to prescribe them. It is to locate them on the timeline, so that a founder reading it with an LOI in hand can see which ones have already passed out of reach.

Where to start

A reader who has reached this point of the piece with a signed LOI in hand is, in a certain sense, past the point of its greatest usefulness. That is itself the argument: most of the leverage in pre-sale tax planning lives in windows that have already narrowed or closed by the time a founder starts looking for an article like this one. The best time to have read it was a year ago. The second-best time is now, and quickly.

The practical move at this point is twofold. First, identify whether any of the decisions described in the 60-day and 30-day windows — installment structure, earnout character, rollover equity, closing-date placement, withholding and safe-harbor math — are still genuinely open. Second, engage someone whose role is specifically to answer that question, not to close the deal.

The Check on this site isn't the pre-sale audit this piece points toward. It's shorter, six questions, and scoped to tax drag in an investment portfolio rather than to a transaction timeline. For readers still inside the window, it's a way to see where the drag is already showing up in the years on either side of an exit. For readers past the LOI, it reframes what to look at in year one and year two after close, when the question is no longer how to structure the sale but how to invest what it produced.

Take the Check →