A short Q&A on what business owners should know about structure, diligence, and timing once the LOI is signed.
When a Letter of Intent (LOI) gets signed, the real work begins. Diligence teams start digging, tax and legal structuring questions surface, and both sides’ counsel start asking each other pointed, specific questions to make sure the deal that gets papered actually matches the deal that got agreed to in principle. Below are a few of the questions we hear most often from potential clients regarding our M&A experience and deal mechanics.
1. Have you papered a pre-close F-reorg on a seller S corporation?
Yes, this is a structure we work with routinely. In brief, an “F reorg” (named for the reorganization category under Internal Revenue Code Section 368(a)(1)(F)) lets a seller who owns an S corporation restructure into a new holding company shell immediately before closing, then convert the operating company into a disregarded subsidiary. Done correctly, the buyer can purchase what is legally a single-member entity, giving the buyer the tax benefits of an asset purchase (including a stepped-up basis in the target’s assets), while the deal still functions as an equity purchase for everything else: contracts, licenses, permits, and employment relationships generally stay in place without needing third-party consents to assign them. The IRS blessed this basic approach for S corporations in Revenue Ruling 2008-18, though getting it right requires careful sequencing, particularly around when the QSub election is made relative to the stock contribution and the closing itself.
One nuance worth flagging: because the F-reorg is fundamentally a restructuring of the seller’s entity before the sale, it’s often the seller’s own counsel who drafts and executes the actual reorg documents (formation documents for the new holding company, the contribution agreement, the S and QSub elections, and so on). When we represent the buyer, our role is typically to confirm the structure will actually deliver the tax treatment the deal terms assume, coordinate the reorg’s timing with the closing mechanics, and review the resulting documents before signing. When we represent the seller, we paper the reorg ourselves as part of getting the entity ready for sale.
2. What’s the practical difference between an asset purchase, a stock purchase, and an F-reorg structure?
An asset purchase lets the buyer pick which assets and liabilities it wants, and generally gives it a stepped-up tax basis, but it usually requires reassigning every material contract, lease, and license, which can be slow and can trigger consent requirements. A straight stock purchase is simpler mechanically (the buyer just steps into the seller’s shoes), but the buyer inherits the target’s tax basis and, often, more of its historical liabilities. An F-reorg is a hybrid: it’s designed to give the buyer the tax profile of an asset deal with the mechanical simplicity of a stock deal. Which structure makes sense depends on the target’s contracts, its liability profile, and how the parties want to allocate tax risk. It’s a question we work through with the client’s tax advisor early, ideally before the LOI is signed rather than after.
3. What kind of due diligence should we expect once the LOI is signed?
Typically, you can expect corporate records and cap table review, a contracts review focused on change-of-control and anti-assignment provisions, employment review, IP ownership and licensing review, litigation and compliance history. The scope scales with deal size and industry. For example, a services business with few material contracts is a much lighter lift than a regulated or IP-heavy business.
4. What happens to contracts with “change of control” or anti-assignment clauses?
This is exactly the kind of issue that shapes which deal structure makes sense. In an asset purchase, assigning a contract that requires counterparty consent means going and getting that consent, which takes time and gives the counterparty leverage. In a stock purchase (including a stock purchase following an F-reorg), the contracting entity doesn’t change hands in a way that typically triggers an assignment clause, though “change of control” language is drafted specifically to catch ownership changes and needs to be reviewed contract-by-contract regardless of structure.
5. What does the LOI’s exclusivity period actually mean, and how long does it usually run?
Exclusivity (sometimes called a “no-shop” provision) is typically the one part of an otherwise non-binding LOI that is binding. It commits the seller not to solicit or negotiate with other buyers for a set window (often 60 to 90 days) while the buyer spends money on diligence and legal fees. If the deal is more complex, or financing or regulatory approval will take longer, that window should be negotiated accordingly, since running out the exclusivity clock without a signed purchase agreement puts the seller back on the market.
What’s your next step?
Of course, this only scratches the surface. No two deals unfold the same way, and there are likely a handful of other questions specific to your situation that haven’t come up here yet. If you’re heading into a transaction and want to make sure the structure, the timeline, and the paperwork all line up, we’re ready to help. Contact our team at info@doidacrow.com or call 720-571-4062.
