Every letter of intent has a price line, and buyers agonize over it. The line that can move more money sits one sentence away: whether you are buying the assets of the company or the company itself. That single choice shapes who pays which taxes, which liabilities follow the business, whether critical licenses and contracts survive the closing, and how your lender underwrites the deal. It belongs in the LOI, written deliberately, before you sign.
Two rule changes made 2026 the year to relearn the choice. The SBA's SOP 50 10 8, effective for applications on or after June 1, 2025, constrains which structures are available in SBA-financed deals. And the One Big Beautiful Bill Act, signed July 4, 2025, made 100% bonus depreciation permanent, which raised the stakes on getting structure right.
Most Main Street deals close as asset purchases, and the default exists for good reason. But a default is not a decision. The right question is not which structure produces the largest first-year deduction. It is which structure produces the best after-tax, risk-adjusted outcome across your entire ownership period, from closing through exit.
Why Buyers Usually Prefer an Asset Purchase
In an asset purchase, your new entity buys the business piece by piece: equipment, vehicles, inventory, customer lists, the trade name, the goodwill. The seller's legal entity stays behind, and in general, so do its liabilities. Buyers start here for two reasons: the tax basis step-up and the liability fence.
The step-up works like this. Your tax basis in each asset resets to what you paid, and each asset class recovers on its own schedule: goodwill and most acquired intangibles amortize over 15 years under IRC Section 197, inventory recovers through cost of goods sold as it sells, and land does not depreciate at all. The immediate firepower sits in qualifying tangible property. Under the OBBBA, 100% bonus depreciation is permanent for qualifying property acquired after January 19, 2025 and placed in service by the buyer, per IRS guidance, generally covering property with a recovery period of 20 years or less: machinery, equipment, most trucks and commercial vehicles, furniture, and certain improvements. Used equipment qualifies when bought at arm's length, so the seller having depreciated it to zero does not stop you; buying from a related party or taking carryover basis does. For tax years beginning in 2026, the Section 179 expensing limit is $2,560,000 with a phaseout beginning at $4,090,000, per Rev. Proc. 2025-32.
Take a $2 million HVAC acquisition allocated as $700,000 to vehicles and equipment, $100,000 to inventory, $100,000 to a non-compete, and $1.1 million to goodwill. Bonus depreciation on the qualifying equipment can produce up to approximately $224,000 of first-year federal tax reduction at a 32% marginal rate. Treat that as a ceiling, not a promise: the result depends on which assets qualify, on passenger-vehicle depreciation caps, and on your ability to use the deduction under the basis, at-risk, passive-loss, and excess-business-loss rules. Part of the benefit is timing rather than permanent savings, since depreciation taken now is depreciation you cannot take later. The goodwill and non-compete produce roughly $80,000 of annualized amortization deductions over 15 years.
Used well, the step-up is more than a tax line. If you can absorb the deduction, it preserves cash for hiring, equipment, working capital, and the first operating improvements without adding leverage. Run the same deal as a corporate stock purchase and you inherit the seller's basis instead; if the equipment was depreciated to zero, those deductions are gone.
The liability fence is the second reason. A buyer of assets takes on only the liabilities it agrees to assume, with narrow exceptions your attorney will screen for, including de facto merger, mere continuation, fraudulent transfer, and statutory carve-outs like unpaid sales and payroll taxes. The fence is real but not absolute: a strong default, not a substitute for diligence.
Many SBA lenders also prefer an asset purchase when entity continuity is not decisive. Asset deals generally make the collateral and acquired-liability package easier to document. The document that executes the structure is the asset purchase agreement, covered clause by clause in The Guide to Asset Purchase Agreements in SMB Acquisitions.
When Entity Continuity Is Worth the Trade-Off
In an equity purchase (stock for a corporation, membership interests for an LLC), you buy the entity, and its EIN, contracts, licenses, and operating history generally remain in place, reducing the need for individual assignments. Consent work does not disappear: contracts, permits, leases, and debt agreements can still require notice or approval after a change of control. The expensive version of this discovery happens mid-diligence: an LOI locks an asset structure, a non-assignment clause then surfaces in a key customer contract, and the restructure lands on the seller as a renegotiation.
Continuity is decisive in a recognizable set of deals: healthcare provider agreements that would take months to recredential, contractor licenses and bonding capacity that attach to the entity, government contracts with assignment restrictions, franchise agreements, and businesses with dozens of titled vehicles or vendor approvals.
Run one counterexample. You are buying a $3 million specialty contractor whose bonding capacity, municipal prequalification, safety record, licenses, and project backlog sit in the operating entity. An asset purchase could require contract assignments, license updates, replacement bonds, and customer consents across dozens of active projects. A buyer who accepts carryover basis to reduce those transfer risks is not necessarily making a tax mistake. The lost step-up may be the price of protecting the backlog and cash flow that make the deal work. Change-of-control consent may still be required from the surety, licensing authorities, and key customers.
Continuity has a cost side: you own the entity's history, known and unknown. Price it in with deeper diligence, stronger reps and warranties, and indemnification with an escrow or holdback behind it.
The seller's tax position pushes toward equity treatment too, and it differs by entity type:
Corporate stock (C or S corporation). Generally capital gain for the seller, without depreciation recapture at the shareholder level. C corporation sellers push hardest, because an asset sale taxes them twice: once inside the corporation, again on distribution.
LLC or partnership interests. Mostly capital gain, but Section 751 converts the portion attributable to depreciation recapture, receivables, and inventory into ordinary income. The gap between an interest sale and an asset sale is narrower than sellers assume.
Asset sale. Section 1245 recaptures prior equipment depreciation as ordinary income, plus the C corporation double tax where it applies.
One buyer-side nuance worth knowing: when a single buyer or acquisition entity acquires 100% of the interests of an LLC taxed as a partnership, the IRS generally treats the buyer's side of the transaction as an asset purchase, so the step-up survives even though the legal transaction is an equity purchase. The carryover-basis problem is mostly a corporate-stock problem.
Structure is therefore a price lever, and it cuts both ways. A seller who nets more from equity treatment can rationally accept a lower headline price, and experienced buyers discount the offer when the deal is forced into an equity structure, pricing the added risk and lost step-up. Get the seller's entity type and tax classification into your first diligence request. And if the seller holds Qualified Small Business Stock, the OBBBA expanded the Section 1202 exclusion; a QSBS seller has a strong reason to insist on a stock sale, and that pressure belongs in your price negotiation.
How SBA Rules Can Determine the Structure
If the deal is SBA-financed, check the financing constraint first, because it can decide the question for you. These rules govern 7(a) deals. A conventional or investor-backed acquisition is not bound by the SBA requirements, although its lender may impose separate structural conditions.
Under SOP 50 10 8, as amended:
A complete change of ownership (you buy 100%) can generally be structured as either an asset purchase or an equity purchase, subject to lender appetite.
A partial acquisition that brings in a new owner generally must be structured as a direct equity acquisition in the operating company. Loan proceeds may fund the purchase of interests from existing owners or, where applicable, the company's purchase of its own treasury stock or membership interests. Multi-step structures in which existing and new owners form a new entity to acquire the operating company are not eligible.
A complete buyout between existing partners runs under its own rules, with different equity injection treatment, even though an owner remains.
In an equity purchase, expect the operating company and the applicable new owners to sign as co-borrowers.
A seller who retains ownership takes on guarantee obligations. A selling owner who retains less than 20% must guarantee the full loan amount until the later of two years after final disbursement or the loan remaining current, without deferral, for 12 consecutive months. A retained owner at 20% or more signs the ordinary full, unlimited guarantee for the life of the loan. Many sellers who planned to roll 10% change their minds here; say it early.
Seller notes and the injection. For a complete change of ownership requiring the SBA's 10% equity injection, seller debt counts toward the injection only on full standby for the life of the loan, and only up to half of the required injection; the mechanics are in our seller financing guide.
For a searcher, the LOI implication is direct: if any rollover or partial structure is on the table, the structure clause, the guarantee disclosure, and the lender conversation happen before the LOI is signed, not after.
When an F-Reorganization May Preserve Continuity and the Tax Step-Up
Absent a qualifying tax election or reorganization, a corporate stock purchase leaves the buyer without a basis step-up. An F-reorganization is one common SMB structure for addressing that problem while preserving legal continuity. In outline: before closing, the seller reorganizes under IRC Section 368(a)(1)(F), typically by placing an S corporation under a new holding company and converting the target into an LLC that is disregarded for tax purposes. You then buy interests in that LLC. Done correctly, the entity's legal life continues (same EIN, and in most cases the same contracts and licenses) while the tax law treats your purchase as an asset purchase with a step-up in the acquired portion. In a 100% acquisition, that generally means a full step-up.
Treat it as an advanced structure to evaluate, not a default answer. Three cautions carry the weight. First, the sequence is unforgiving: steps executed in the wrong order or on the wrong dates can forfeit the tax treatment. Second, the seller's side does most of the pre-closing work, and the professional fees and added weeks are real. Third, and most important for SBA buyers, SOP 50 10 8 requires loan proceeds to fund a direct purchase and scrutinizes multi-step transactions, so the precise structure must be cleared with your SBA lender and experienced SBA and tax counsel before the LOI commits to it. Some lenders run F-reorg deals routinely; others will not. Ask before you paper it.
If you are buying 100% of a business with assignable contracts, skip the ceremony and run a plain asset purchase. And if the target is an LLC taxed as a partnership, you may not need the reorganization at all.
Why Purchase Price Allocation Belongs in the LOI
Every asset purchase, including one created by an F-reorg, contains a second negotiation. You and the seller must allocate the purchase price across asset classes under IRC Section 1060, and both sides must report the same allocation to the IRS on Form 8594.
The tension is structural. You want dollars in equipment and short-lived assets, where bonus depreciation makes them immediate deductions. The seller wants dollars in goodwill, taxed as capital gain, and resists equipment allocations above remaining basis because Section 1245 recaptures the spread as ordinary income. Non-competes are ordinary income to the seller and 15-year amortization for you even when the covenant runs three, so both sides usually keep that number small.
Negotiate the allocation methodology in the LOI, while you still have leverage. We hear from EBIT Community members that allocation fights surface late in diligence precisely because nobody wrote them down early. Our LOI Template and Guide includes structure and allocation language for this reason.
Model the Structure Through Ownership and Exit
First-year deductions are the loudest number in the room, but the structure decision runs the length of your ownership. Before committing, model the immediate deductions, the cash they preserve, and the potential recapture on an eventual asset sale. Then consider whether the legacy entity will complicate diligence, future acquisitions, ownership changes, or your own exit, because today's choice sets up that negotiation too.
The principle: the best structure is not the one with the largest year-one deduction. It is the one that produces the best after-tax, risk-adjusted outcome through ownership and exit. The objective is not to minimize taxes at closing. It is to begin ownership with a structure that gives the business room to invest, grow, and eventually transfer cleanly to its next owner.
The Four Questions to Answer Before You Sign
Factor | Asset purchase | Equity purchase |
|---|---|---|
Buyer taxes | Basis step-up: bonus depreciation plus 15-year goodwill amortization | Carryover basis for corporate stock; a single buyer acquiring 100% of an LLC taxed as a partnership is generally treated as buying assets |
Seller taxes | Recapture risk; double tax for C corporations | Corporate stock: generally capital gain, QSBS possible. LLC interests: capital gain with ordinary income on hot assets |
Liabilities | Buyer takes only what it assumes, with narrow exceptions | Buyer owns the entity's full history |
Licenses and contracts | Must transfer or be reissued; consents required | Generally continue, subject to change-of-control and consent clauses |
SBA structure rules | Generally available for a complete change of ownership | Available for complete purchases; partial acquisitions generally require a direct equity purchase |
Lender view | Often preferred: cleaner collateral and liability documentation | More diligence; co-borrower structure; retained sellers guarantee |
Then run the Four-Question Structure Test:
Does the financing dictate the structure? If SBA rules require a direct equity purchase or restrict a multi-step structure, that constraint comes first. Ask the lender in the first conversation.
Does the business require entity continuity? List every license, permit, contract, bonding line, provider agreement, and vendor approval. Mark which transfer, which need consent, and which cannot move.
What are the after-tax outcomes on both sides? Confirm the seller's entity type and tax classification, model the allocation, and price the structure trade instead of arguing it.
Which structure is best through ownership and exit? Weigh liabilities, immediate deductions, reinvestment capacity, future recapture, and the likely shape of your own sale.
The default: if financing does not constrain the structure, continuity is not critical, and the seller's tax position does not justify a meaningful price concession, begin with an asset purchase.
Your Monday-morning move: open your draft LOI and rewrite the structure clause you probably copied from a template. Name the structure and the allocation methodology. If a rollover or F-reorg is contemplated, describe the intended structure, make it subject to lender and tax-counsel approval, and confirm your lender will finance it before you sign. In practice, the LOI locks the structure, and renegotiating it later costs leverage, money, or both.
The price line gets all the attention. The structure line decides how much of the price you keep.
Disclaimer: This guide is for educational purposes only and does not constitute legal, financial, tax, or investment advice. Business acquisitions involve significant risks, and outcomes can vary widely based on individual circumstances. Always consult with qualified professionals including attorneys, CPAs, and financial advisors before making acquisition decisions. The EBIT Community does not guarantee the accuracy of information provided or the success of any acquisition strategy. Past performance and examples do not guarantee future results.
