🤝 The Guide to Asset Purchase Agreements in SMB Acquisitions

You can buy a profitable business and still lose everything—if your Asset Purchase Agreement (APA) isn't airtight.

Most first-time acquirers treat the APA like administrative paperwork, something their lawyer handles while they focus on "more important" things. But the APA isn't a formality. It's your primary tool for managing risk, defining what you're buying, and ensuring you can enforce your rights when things go wrong.

Most small business acquisitions under $10M are structured as asset purchases—but not always for good reason. Stock sales can offer real advantages depending on the business you're buying and how it's financed.

Continuity and Operational Simplicity. The buyer steps directly into the seller's shoes. Contracts remain valid, permits stay active, vendor relationships continue without disruption. For businesses where licenses or regulatory approvals are difficult to obtain, this continuity can make or break the deal.

Tax Attributes. Stock purchases preserve net operating losses (NOLs) and tax credit carryforwards. If the target has $200K in NOLs, those losses can offset your future profits—but only in a stock sale.

Simpler Deal Structure. When buying a clean company with no skeletons, stock purchases require less documentation, fewer consents, and faster closing. This works well for low-liability service businesses.

Relationship Retention. Brand accounts, vendor IDs, customer trust, and operational momentum remain intact. For businesses where the entity itself carries value—think franchise agreements or long-standing vendor terms—stock sales preserve what you're paying for.

Despite these advantages, 70-80% of small business deals still use asset purchases—and for good reason.

Liability protection gives you a clean slate. You don't inherit unknown tax liabilities, pending lawsuits, environmental violations, or contract breaches.

Buyer tax benefits are substantial. The step-up in basis lets you depreciate assets even if the seller had fully depreciated them. For a $2M acquisition, this can be worth $300K-$500K over the asset life.

Clearer risk boundaries mean you know exactly what you're buying and what you're not. Every excluded liability is documented.

Two significant changes in 2025 are shifting the calculation:

SBA SOP 50-10-8 (June 2025) now makes stock purchases for 51-99% ownership SBA-eligible, where previously only 100% ownership qualified.

QSBS Expansion (July 2025) increased qualified small business stock benefits—C-corp stock up to $15M or 10× basis can now generate tax-free gains.

There's no single "right" choice. Model both paths early in your LOI and align with your lender and tax advisor before drafting your APA. For a deeper look at structuring your initial terms, see our Letter of Intent (LOI) Template & Guide—download it to benchmark your LOI terms against industry norms.

Pro Tip: If the business needs specific licenses or permits that would take 6+ months to obtain in your name, strongly consider a stock sale structure.

Your APA needs to list every asset with precision. Not "substantially all assets"—that invites disputes. Instead: equipment by serial number, defined customer lists, patents by registration number, contracts by name.

Small business sellers often run informal operations. The truck might be titled personally. The building might be owned by a separate LLC. The company credit card might actually be personal. Identify these situations early, then decide: exclude them, purchase them separately, or negotiate ongoing arrangements.

If it's not written in the APA, it doesn't exist.

The liability side needs equal precision. Assume only specific liabilities necessary for continuity—certain accounts payable, customer deposits, ongoing obligations. Everything else stays with the seller.

Purchase price allocation has major tax implications. How you split the price among equipment, inventory, customer relationships, goodwill, and non-compete agreements affects your taxes for years. Engage your tax advisor early.

Representations are the seller's promises about what you're buying: assets are owned free and clear, financial statements are accurate, taxes are paid, no pending litigation, the business complies with laws.

These aren't formalities—they're your recourse if the business isn't what was presented. The scope becomes a negotiation: sellers want narrow promises with exceptions, you want comprehensive coverage.

Indemnification provisions outline how you'll be compensated when representations prove wrong. Here's a critical detail many buyers miss: most indemnification language only covers third-party claims, not your direct losses.

In Continental Motors v. Danbury Aerospace, a buyer couldn't recover $187K from escrow because the indemnity only addressed third-party claims. The fix: include language covering "direct losses, whether or not involving a third-party claim."

Indemnification includes negotiated limitations:

Survival periods define how long representations stay alive—commonly 12-24 months for general representations, statute of limitations for tax matters, indefinitely for fundamental items.

Caps limit the seller's maximum liability, typically 10-25% of purchase price for general claims. Fraud and fundamental breaches usually have no cap.

Baskets function like deductibles—you absorb losses up to a threshold (typically $10K-$50K for deals under $5M) before making claims.

An escrow holdback gives you practical power. Rather than chasing a seller who spent the proceeds, you hold 10-20% of the purchase price with an independent escrow agent for 12-18 months. Escrow isn't mistrust—it's enforcement.

Small business acquisitions typically involve simultaneous signing and closing, which makes escrow critical. Size your escrow to match your indemnification structure. If you negotiate a 24-month survival period, consider extending escrow or using a two-tier release.

Seller financing appears in 60-80% of small business acquisitions, typically 10-30% of purchase price. Most buyers barely scratch the surface on terms—that's where problems hide.

Here's a common impasse: the seller wants a premium for "potential," you want downside protection, and your lender wants to underwrite actual cash flows. The solution is a contingent promissory note—a seller note that gets partially or fully forgiven if certain metrics aren't met.

This acts like a capped earnout but looks like debt on Day 1. Example structure for a $500K contingent note in $100K annual tranches:

Why it works: the seller keeps skin in the game, you get overpay protection, and your lender sees debt aligned with performance. Contingent notes can solve valuation gaps, unrealistic seller expectations, and customer concentration risk.

The key is objective, verifiable metrics—no "seller adjusted EBITDA." Use audited financials, revenue via GAAP or historical method, retention of specific customers by name, or supplier continuity. Get these metrics wrong and you'll face years of disputes.

Interest rates typically run 4-8%, meeting IRS minimums. Security interests should be subordinated to senior lenders, but understand this gives the seller a claim on assets.

Acceleration clauses are dangerous—miss one payment and the full note becomes due immediately. Negotiate a 30-60 day cure period. Cross-default provisions mean if your SBA loan defaults, the seller note defaults too. Address this explicitly.

Plan your payment structure early. Interest-only versus fully amortizing makes a massive difference to cash flow. If you're planning early payoff, ensure no prepayment penalties.

Non-competes protect you from paying millions to an industry veteran only to have them start a competing business immediately. They typically run 2-5 years, though enforceability varies by state—California largely prohibits them.

For service businesses, non-solicitation provisions preventing the seller from soliciting your customers, employees, and vendors for 2-3 years may be more important. Cover both the selling entity and individual owners.

Asset purchases create more administrative work. Each asset needs formal transfer. More significantly, many contracts require third-party consent—and these can take 60-90 days or longer.

Your commercial lease almost certainly requires landlord consent. Make this a condition precedent to closing. If you can't obtain consent for a critical contract, you may need to restructure as a stock purchase or walk away.

Working capital adjustments generate more post-closing disputes than any other provision. The mechanism: establish a target working capital (typically 12-month average of current assets minus current liabilities, excluding cash and debt), the seller prepares an estimated closing statement, then 30-90 days post-closing your accountant calculates actual working capital and a final adjustment occurs.

The problem is measurement inconsistency. You must use the same accounting principles that established the target. If the seller used cash-basis, you can't suddenly apply GAAP accruals.

Negotiate the working capital mechanism in your LOI stage. Agree on included/excluded items and specify accounting principles. Consider a "collar"—if actual working capital falls within 5% of target, no adjustment occurs.

Complete financial due diligence and obtain a Quality of Earnings report before engaging lawyers extensively. It's more cost-effective to identify deal-killers through financial review before legal fees mount.

Your sequence: negotiate basic LOI terms, conduct financial and customer diligence, complete QofE, then give lawyers the green light.

Total transaction costs run 5-10% of purchase price for deals under $1M, declining to 3-6% over $5M. Legal fees: $15K-$75K. QofE: $5K-$25K. SBA lender fees: 2-4% of loan amount. These aren't optional costs—they're insurance against buying a problematic business.

Know your red lines before negotiations. Most buyers should never close without: a bill of sale, seller representations on financial statements, a non-compete for service businesses, and either escrow or a financially strong seller with reputation at stake.

Draft first whenever possible—your terms become the baseline. Use "market standard" language to reduce seller perception of unfairness. Frame difficult provisions as mutual protection, not mistrust. Both parties should feel slightly uncomfortable with final terms. That's a sign of a fair deal.

Your APA creates a detailed record of what you're buying, allocates risk through representations and indemnification, provides enforcement through escrow and restrictive covenants, and establishes the closing roadmap.

The typical LOI-to-closing timeline runs 90-150 days, with SBA financing adding 30-60 days. This isn't wasted bureaucracy—it's necessary time for proper diligence, consent procurement, and thoughtful negotiation.

Assemble your professional team early: an M&A attorney experienced with small business transactions, a transaction accountant who can perform QofE work, and a tax advisor who understands deal structure implications.

Your acquisition journey is fundamentally optimistic. You're building something, taking ownership of value creation, stepping into entrepreneurship through buying existing cash flow. Understanding what you're signing gives you confidence in negotiations, credibility with sellers and investors, and peace of mind that you've protected your investment.

For guidance on structuring your initial terms before the APA stage, see our Letter of Intent (LOI) Template & Guide and join our WhatsApp community.

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.