Selling an Inherited Business: Basis, Deal Structure and Tax

An inherited company arrives with a price nobody has agreed on, a tax basis that must be documented under the estate rules, and a staff waiting to learn what you will do. Selling may be right. It is also where haste costs most, because the terms of a private-company sale are negotiated once and lived with for years.

This guide takes the decision in order: whether to hold, the date-of-death appraisal, why asset or stock structure matters more to an heir than to a founder, the buyers, and the terms that decide what you keep. By the end you should be able to judge an offer, interview an adviser, and brief your lawyer and accountant.

Hold or sell: authority and purpose first

First establish who may sell. The interest may sit in the probate estate, a trust, or your own name, and a buy-sell or operating agreement may give co-owners the first right to buy. When a Family Business Enters the Estate sets out that review, and the first steps after a business owner dies covers keeping operations steady meanwhile.

Then decide what the business is for. Holding suits a company with reliable income, managers who will stay, and an estate that can meet its obligations without it. Selling suits a company whose value depended on your spouse personally, a family divided over its future, or a fortune concentrated in one illiquid holding.

The valuation that documents your basis

IRS Publication 551 states the general rule: inherited property takes a basis equal to its fair market value at death. If the executor validly elects alternate valuation, the applicable value is generally measured six months after death, or on the earlier sale, exchange, or distribution date for property disposed of within that period. Special rules can change the answer, including qualified-use valuation and property you or your spouse transferred to the decedent within one year before death that returns to you. Do not treat a preliminary appraisal as the final basis.

When Form 8971 applies, the executor gives each affected beneficiary a Schedule A reporting the estate-tax value of property received. The IRS instructions make clear that Form 8971 is not required merely because an executor files Form 706 for portability, generation-skipping elections, protective purposes, or certain other excluded filings. If the consistent-basis rule applies, you generally may not use an initial basis above the final estate-tax value reported for the property. Commission an independent date-of-death appraisal from a credentialed business appraiser, disclose serious buyer interest that may bear on value, and reconcile the appraisal with the estate return and Schedule A. Valuing Assets at the Date of Death describes the evidence file.

Asset sale or stock sale: the heir’s arithmetic

In an asset sale the company sells what it owns; in a stock sale you sell your shares or membership interest, and the buyer takes the company whole, liabilities included.

Publication 544 treats a business sold for a lump sum as a sale of each asset separately: capital assets yield capital gain or loss, real or depreciable property used in the business and held over a year gets section 1231 treatment, and inventory yields ordinary income. Both sides allocate the price under the residual method, with goodwill last, and report it on Form 8594. Shares usually produce capital gain or loss, and inherited property counts as held more than one year.

Here an heir differs from a founder. Your new basis attaches to what you inherited: the shares or partnership interest, or, for a sole proprietorship, the business assets themselves. Publication 541 notes that a partnership’s basis in its own assets is generally unaffected by a partner’s death unless the partnership elects an optional adjustment. A stock sale may produce little gain for you; an asset sale can produce gain measured against the company’s older basis. For a corporation, Publication 544 adds, gain on a liquidating sale of its assets is generally recognized by the corporation, and the liquidation is then generally treated as a sale or exchange for you. Buyers often prefer assets because the price becomes their basis and goodwill is amortized over 15 years. Have your accountant model both structures before answering a term sheet.

Who buys a private company

Strategic buyers, usually competitors, suppliers, or customers, may pay for what the combination makes possible but will study your clients with a rival’s eye. Financial buyers, such as private equity funds, price the business on cash flow, often borrow to buy, and may ask you to defer part of the price. Family members and managers know the company best but often lack capital, shifting more of the price, and the risk, into seller financing.

The letter of intent and the terms beneath the price

The letter of intent sets price, structure, and timetable. Most of it is usually nonbinding, but its exclusivity clause typically binds you and suspends talks with other bidders. Settle the economics here, while alternatives remain. Five terms deserve care:

1. Earn-outs. Part of the price depends on results you no longer control. Define the metric, accounting, the buyer’s operating duties, and treatment on resale.
2. Seller notes. You lend the buyer part of the price. Require adequate interest, security, and guarantees, and learn whether the note ranks behind the buyer’s bank.
3. Escrows and holdbacks. Part of the price is reserved for post-closing claims; negotiate the amount, duration, and release.
4. Representations and warranties. Because you did not run the business, press for knowledge qualifiers, caps, and short survival periods, and ask whether you sign individually or only as executor or trustee.
5. Non-competes. A buyer may ask you personally not to compete; enforceability varies by state, and how the price is split between the covenant and goodwill can change your tax.

The headline price belongs to the buyer; the terms decide how much of it becomes yours.

Choosing an M&A adviser, and reading the fee

A capable intermediary prepares the materials, qualifies buyers, and runs a competitive process. Most are paid chiefly by a success fee, a percentage of the transaction, sometimes with a retainer credited against it. Read how transaction value is defined and the tail clause owing a fee if an introduced buyer closes later.

Federal law generally requires a broker who effects securities transactions, such as a sale of shares, to register with the SEC. Effective March 29, 2023, section 15(b)(13) of the Securities Exchange Act exempts a qualifying M&A broker transferring an eligible privately held company when the statutory conditions are met. The broker must reasonably believe the buyer will control the company or business and will directly or indirectly control its management. Eligibility turns on the fiscal year before engagement: EBITDA below $25,000,000 or gross revenues below $250,000,000; the statute authorizes the SEC to modify those figures by rule. The exemption has important exclusions: among other things, the broker cannot take custody of deal funds or securities, directly provide financing, bind a party, or represent both sides without clear written disclosure and written consent. Statutorily disqualified persons cannot use it, and state registration rules can differ. Check FINRA BrokerCheck and ask in writing whether the adviser is registered or, if not, the exact federal and state exemptions relied on.

Installment sale treatment

Under Publication 537, an installment sale is one where at least one payment arrives after the tax year of sale; gain is generally reported as payments arrive unless you elect out. The method is unavailable for losses, inventory, or publicly traded stock, and depreciation recapture is reported in full in the year of sale. An earn-out that ties the price to future profits generally makes it a contingent payment sale, with its own rules, and an irrevocable escrow funding your remaining payments generally defeats the method.

Interest on the deferred tax is generally owed when a sale price exceeds $150,000 and the nondealer installment obligations that arose during the year and remain outstanding at year-end total more than $5 million. Borrowing against the note can count as payment under the pledge rule, for sales over $150,000. If a related buyer, such as a child, resells within two years and before paying you in full, you may be treated as receiving part or all of the resale proceeds. Deferral is worth only what the buyer’s credit is worth.

When the estate defers tax under section 6166

For 2026 deaths the basic exclusion amount is $15,000,000, so many estates owe no federal estate tax. Property passing to a surviving spouse who is a U.S. citizen is also generally eligible for the section 2056 marital deduction if the transfer meets the statute; transfers to a surviving spouse who is not a U.S. citizen generally require a qualified domestic trust or another exception. A business passing to you may therefore produce no federal estate tax to defer at your spouse’s death, and the issue may matter more at your own. Where tax is due, section 6166 lets the executor pay the portion attributable to a qualifying closely held business over time if the business interest included in the gross estate exceeds 35 percent of the adjusted gross estate, meaning the gross estate less deductions under sections 2053 and 2054. A partnership interest can qualify if 20 percent or more of total capital is included in the estate or the partnership had 45 or fewer partners; corporate stock uses parallel tests based on the value of voting stock or number of shareholders. A proprietorship can qualify too, but holding an asset is not enough: the interest must be in a trade or business, a fact-sensitive distinction for passive investment or rental holdings.

The executor must elect by the return’s due date, including extensions. Tax may then be paid in up to ten equal annual installments, the first up to five years after the normal due date, with interest paid annually meanwhile. A sale can end it: with limited exceptions, once dispositions and withdrawals reach 50 percent of the interest’s value, the unpaid tax becomes due on notice and demand. A missed installment or interest payment has the same effect unless it is paid within six months, and even then it carries a penalty. Time any sale with the executor.

Questions to ask before you sign a letter of intent

1. Who has authority to sell, and do co-owners hold purchase rights?
2. Does the appraisal match the value reported on Form 8971?
3. What is my basis, and what is the company’s basis in its assets?
4. Net of tax, what do I keep under an asset sale versus a stock sale?
5. How much is cash at closing, and how much is deferred or held back?
6. What representations am I giving, in what capacity, and for how long?
7. How is the adviser paid, and which registration or exemption applies?
8. Do the installment method, the deferred-tax interest charge, or the pledge rule apply?
9. Has the estate elected section 6166, and would this sale accelerate the tax?

This article provides general U.S. educational information and is not legal, tax, securities, valuation, or investment advice. Confirm current rules with the IRS, the SEC, and qualified professionals who know your facts.