Exit Planning Legal Considerations: The Documents and Who Prepares Them

The legal side of an exit is a short, ordered set of documents, each with one job, and an attorney is the person who drafts and negotiates them. The single most consequential recent change sits inside the oldest of those documents: on June 6, 2024 a unanimous Supreme Court held in Connelly v. United States, 602 U.S. 257, that “a corporation’s contractual obligation to redeem shares is not necessarily a liability that reduces a corporation’s value for purposes of the federal estate tax.” Any buy-sell agreement funded by company-owned life insurance and written before that date was drafted against a different understanding.

The short version: the documents do not vary much, but who pays the tax and who carries the risk is decided by how they are worded, so the drafting is the deal.

This page describes what each document does and names the authority behind each rule. It is not legal or tax advice, and nothing here is advice about your business. Every judgment in it belongs to your own attorney and your own CPA.

Exit planning legal considerations, document by document

Where the legal work starts: the entity and the ownership record

What you can sell depends on what the entity is and who holds it. The SBA’s own guidance for owners puts the point plainly: a sales agreement “allows for the purchase of assets or stock of a corporation,” and “an attorney should review it to make sure it’s accurate and comprehensive.” The same page names outright sales, gradual sales and lease arrangements as ways ownership is transferred, and advises settling in advance how the business will be run before closing and how much access the buyer has to information.

Those records are also the first thing tested. The IBBA defines due diligence as “a process where a buyer inspects a potential transaction,” one that “often includes a detailed review of accounting history and practices, operating practices, customer and supplier references, management references and market reviews.” Gaps in the ownership record surface there, at the point in a negotiation where they are most expensive to fix.

Buy-sell agreements, and what the Supreme Court changed in 2024

A buy-sell agreement decides what happens to an owner’s interest when that owner dies, leaves or falls out with the others. Many are funded with life insurance held by the company, so the company has cash to buy the departing owner’s shares.

Connelly concerned exactly that arrangement. Two brothers were the sole shareholders of a small building-supply corporation. Their agreement gave the survivor an option to buy the deceased brother’s shares, and if he declined, the company “would be required to redeem (i.e., purchase) the shares.” The company held $3.5 million of life insurance on each brother to pay for it. The estate valued the shares at $3 million, treating the redemption obligation as offsetting the insurance proceeds. The IRS added the proceeds back to the company’s value and assessed $889,914 more in estate tax.

Justice Thomas, writing for a unanimous Court, affirmed the Eighth Circuit. The reasoning, verbatim: “because a fair-market-value redemption has no effect on any shareholder’s economic interest, no hypothetical buyer purchasing Michael’s shares would have treated Crown’s obligation to redeem Michael’s shares at fair market value as a factor that reduced the value of those shares.” And: “Crown’s promise to redeem Michael’s shares at fair market value did not reduce the value of those shares.”

The Court also answered the objection that this makes succession planning harder for closely held corporations: “the result here is simply a consequence of how the Connelly brothers chose to structure their agreement.”

What that means for a redemption-funded agreement is a question about your agreement, your entity and your estate, and it belongs to your own attorney and tax adviser. What is not in doubt is the date. Material written about company-owned insurance and buy-sell agreements before June 2024 predates a unanimous holding on the point, so an agreement that has not been read by counsel since then has not been read against current law.

The letter of intent

The letter of intent records what the two sides think they have agreed before the expensive work starts: the price, the shape of the deal, and what happens next. It usually precedes full diligence, and it is where the asset-versus-stock question first appears in writing.

There is no published standard form. The IBBA’s glossary has no entry for it, and no authoritative body publishes customary terms, exclusivity periods or durations, so treat any article that describes “the standard LOI” as describing one lawyer’s habit. Which parts of a particular letter bind the parties is determined by that letter’s own wording, which is the reason to have your attorney read it before you sign it rather than after. Get your CPA to price the structure at the same moment, because the tax consequences set out in exit planning financial considerations are much easier to change here than in the purchase agreement.

The purchase agreement, and the asset-versus-stock choice

The agreement itself does the transfer. The SBA advises including all inventory and the names of the seller, the buyer and the business, and having an attorney review the document before signing.

The structural choice underneath it has a tax consequence that both sides feel. The IRS treats a typical business sale as a sale of each asset separately: “the sale of a business usually is not a sale of one asset. Instead, all the assets of the business are sold,” and “the residual method must be used for any transfer of a group of assets that constitutes a trade or business.” Both buyer and seller then file Form 8594, Asset Acquisition Statement Under Section 1060, with their returns for the year of the sale, allocating the price across seven classes ending in goodwill and going concern value.

Two rules make the allocation a negotiated term rather than an accounting clean-up. Section 1060 provides that a written allocation agreed by the parties binds both of them “unless the Secretary determines that such allocation (or fair market value) is not appropriate.” And the Form 8594 instructions cap the amount allocated to any asset other than goodwill at “its fair market value on the purchase date.” Where the target is a corporation and the buyer wants asset treatment without buying the assets, section 338(h)(10) allows a qualifying stock purchase to be treated as if the target “sold all of its assets in a single transaction.” Which of these fits is a question for the CPA and the attorney together, on your numbers.

Representations, warranties and the money held back

Representations and warranties are the seller’s statements about the business, written into the agreement so that the buyer has a contractual remedy if they turn out to be wrong. Their scope, their survival period and the limits on what can be claimed under them are all negotiated, and they are drafted by counsel on both sides rather than taken from a form.

Two mechanisms usually back them. An escrow or holdback keeps part of the price with a third party for a stated period so that claims can be paid from it. An earn-out is what the IBBA defines as “a contractual provision stating that the seller of a business is to obtain additional future consideration based on the business achieving certain future business goals.”

No one publishes how common either is. What is published is how much of the price arrives at closing: advisors surveyed by the IBBA and the M&A Source for the second quarter of 2026 reported cash at close of 88 percent of consideration for deals under $500,000, 92 percent from $500,000 to $1 million, 91 percent from $1 million to $2 million, 84 percent from $2 million to $5 million and 83 percent from $5 million to $50 million. The remainder is seller financing, earn-outs and retained equity combined, and the survey does not break those three apart. The practical reading is that a meaningful slice of the price in most bands depends on documents that operate after you have handed over the keys, which is why their wording matters more than their length.

Non-competes are a priced term, not boilerplate

A covenant not to compete entered into in connection with the acquisition of an interest in a trade or business is a section 197 intangible, which puts it in Class VI of the Form 8594 allocation. Section 197(a) then makes the buyer amortize it “ratably over the 15-year period beginning with the month in which such intangible was acquired.” So the non-compete is not a side letter. It carries a dollar figure, that figure comes out of the same purchase price as everything else, and the written allocation binds both parties’ returns.

Whether a particular covenant is enforceable, and on what terms, is a matter of state law that varies by state and changes. That question goes to your attorney in the state whose law will govern the agreement.

Employees, leases and the contracts that do not travel

Whether a lease, a customer contract, a license or a permit can move to the buyer is governed by that document’s own terms, which is why the buyer’s counsel reads them and why consents are chased for weeks before a closing. The SBA advises owners to comply with employment law, resolve financial obligations and consult “your lawyer and accountant” before “terminating your lease, selling equipment, and disconnecting utilities.”

The closing-out filings are set out by the IRS. A final return is required for the year the business closes, with the “final return” box checked on Form 1065 for a partnership or Form 1120 or 1120-S for a corporation, and Form 966 filed for a corporate dissolution or liquidation. Employment tax forms and W-2s have to be issued, payments of $600 or more to contractors reported, and the EIN closed by letter to the IRS giving the business name, EIN, address and reason for closing. Employment tax records are kept for at least four years, and property records until the period of limitations runs out. Form 8594 may be required as well where a group of assets constituting a trade or business changes hands.

Who may broker the sale, and what that says about the paperwork

Federal law now exempts most business brokers from SEC broker-dealer registration. 15 U.S.C. section 78o(b)(13) states that “an M&A broker shall be exempt from registration under this section,” covering securities transactions effected “solely in connection with the transfer of ownership of an eligible privately held company” where the buyer will control and actively manage the business afterward. The target must have EBITDA under $25,000,000 or gross revenues under $250,000,000, figures the statute indexes every five years against the Employment Cost Index for wages and salaries.

The exemption is lost in named circumstances, several of which describe things a seller might casually ask a broker to do: taking custody of funds or securities in the transaction, providing or arranging financing without the required disclosures, representing both sides without clear written consent, assembling a buyer group, dealing with a passive buyer, or binding a party to the transaction. This is a federal registration rule only; state business-broker and real-estate licensing is separate and varies by state.

The IBBA’s own credential for intermediaries, the Certified Business Intermediary, requires membership in good standing, the education requirement, conference attendance, evidence of acting as lead seller broker on three business transactions, and passing the CBI examination, with continuing education to maintain it.

Who to bring in, and when

An attorney drafts and negotiates every document above and is the only one of these advisers who can tell you what a clause does to you. A CPA prices each structure, prepares the allocation that both returns will carry, and cleans the financial history a buyer will test. A credentialed valuer produces the valuation, and if a buyer needs SBA financing the lender will accept only a qualified source holding an ASA, CBA, ABV, CVA or BCA accreditation, with the valuation “requested by and prepared for the Lender.” A broker or M&A adviser runs the sale process. Bring the attorney and the CPA in before the letter of intent, because that is the last cheap moment to change the structure. Our directory lists CPA firms by state, and for a business large enough to need a reporting pack and a forecast a buyer will interrogate, fractional CFO work is the closer description of the help. The order these documents arrive in is laid out in how to sell a small business and the exit planning process checklist.

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