When buying a small business, one of the most important decisions you’ll make isn’t about price; it’s about structure.

Will you buy the entire company (equity purchase) or just its parts (asset purchase)? This fundamental choice influences taxation, risk exposure, operational continuity, and ultimately, the true cost of your deal. Many first-time buyers focus heavily on the purchase price, overlooking structural decisions that can have far greater consequences over the life of the business.

In this article, we’ll explore how each approach works, when to use them, and the hidden factors that could make or break your small business acquisition’s success.

‍

Equity Acquisitions: Taking the Wheel of an Existing Vehicle

In an equity transaction, the buyer purchases shares or ownership interests directly from the current owners. The business continues operating as-is; its contracts, licenses, and tax ID numbers remain intact, and the business history carries forward. Think of it as stepping into the driver’s seat of a moving vehicle. 

From a process standpoint, equity deals often close with fewer steps, since you’re not transferring every asset individually.

‍

Why Choose an Equity Structure?

Despite being less common in small business M&A, equity deals can offer practical advantages:

• Continuity: Customer contracts, licenses, and permits often remain valid without reapplication.
• Simplicity (in theory): Because they often preserve the continuity of contracts, vendor relationships, and licenses, you may avoid the administrative burden of asset-by-asset transfer.
• Attractive to Sellers: Sellers may prefer equity deals for tax reasons, and in some cases, it may be the only viable option if the business includes hard-to-transfer assets (e.g., professional licenses at the entity level).

This approach can work well for service-based businesses—like local accounting, engineering, or architecture firms—especially those with clean histories, good financials, and minimal physical assets. In many cases though, buyers favor an asset purchase with an earn-out since the real goal of the acquisition is to secure the company’s customers and employees.

‍

Key Risks for Buyers in Equity Transactions

• You inherit everything. That includes known and unknown liabilities like lawsuits, tax obligations, and even past employment issues.
• Limited tax advantages. Unlike asset deals, equity purchases don’t give you a “step-up” in the tax basis of assets, reducing your future depreciation and amortization opportunities.
• Locked-in structure. You’re stuck with the entity's legal form and state of registration unless you restructure post-closing.

For these reasons, equity deals demand more comprehensive diligence and strong protections built into the purchase agreement.

‍

Managing the Risk in Equity Deals

If you're pursuing an equity acquisition, manage your risk by:

• Conducting deep due diligence, especially around compliance, legal claims, and taxes over the past 5–7 years.
• Negotiating robust representations and warranties in the business purchase agreement.
• Considering escrows or holdbacks to protect against post-closing surprises.
• In larger transactions, evaluate reps & warranties insurance.

‍

Asset Acquisitions: Building Your Own Custom Vehicle

In an asset deal, you’re purchasing specific parts of the business (i.e. the assets you want) and leaving the rest behind. This gives you far more control over what you’re actually buying. 

You can exclude unwanted assets, burdensome contracts, and liabilities. You also, to some degree, gain the ability to allocate the purchase price across asset classes to optimize your tax outcomes.

‍

Why Asset Deals Appeal to Buyers

Asset deals allow buyers to start with a clean slate and certain benefits, including:

• Liability control: You can avoid inheriting the seller’s legal or tax issues.
• Tax efficiency: You get a stepped-up basis in acquired assets, allowing for greater depreciation and amortization.
• Control & customization: You choose the structure and jurisdiction of your new business entity.

‍

The Complications of Asset Deals

Asset deals tend to be preferred by buyers, especially when there are liability concerns, complex ownership arrangements, or significant tangible assets involved. The ability to start with a clean slate has benefits, but that flexibility also brings complexities such as:

• Administrative burden: Every asset must be identified and transferred individually.
• Third-party approvals: Some contracts (leases, vendor agreements) may require consent to assign.
• Licensing resets: Local or state permits, like health or zoning licenses, often need to be refiled.
• Employment transition: Employees don’t automatically transfer; offer letters and new benefits plans are typically required. These transitions must be carefully handled to maintain continuity and morale.
  

With asset deals, expect more upfront legwork (and longer closing timelines), especially in asset-heavy or regulated industries.

‍

Equity vs. Asset: A Quick Comparison

Not sure which structure fits your deal? Here's how equity and asset acquisitions compare and why asset deals are often the preferred approach for buyers.

‍

Although asset deals can be more complex, buyers often find the ability to cherry-pick assets and secure a stepped-up tax basis well worth the extra effort.

‍

Understanding the Tax Implications

In an equity purchase, buyers inherit the seller’s existing depreciation schedules, tax elections, and employment history. That means fewer immediate deductions and less flexibility. You should work with both legal and tax advisors.

An asset sale may yield a better tax outcome for the buyer, while an equity sale may be more tax efficient for a seller. That’s where skilled deal structuring comes in to maximize tax efficiency. Allocations must be carefully negotiated because they can significantly impact both parties' tax liabilities.

‍

When Sellers Push for Equity & How Buyers Can Respond

Deal structure can become a point of negotiation. It’s not uncommon for sellers to insist on an equity sale, particularly for tax reasons or to preserve contract continuity. A buyer may offer a higher purchase price or modify an earnout to persuade a seller to accept a less favorable structure. 

If you’re the buyer:

• You may be able to negotiate a lower price or improved terms to account for added risk.
• Consider hybrid structures (like a forward merger or installment sale) that blend benefits of both options.
• Use tax-sharing agreements or indemnification to bridge gaps.

‍

Final Thought: Structure as Strategy

Deal structure isn’t just a legal technicality. It’s a strategic lever that shapes everything from closing logistics to tax exposure to long-term integration. Before committing to a letter of intent or purchase agreement, get experienced legal and tax advice. In small business M&A, how you buy can be just as important as what you buy.

Thinking about buying or selling a small business? At Lamb Law, we help entrepreneurs and investors navigate every stage of the small business M&A process, from deal structure to closing and beyond. Request a consultation, and we can find a time to discuss your specific situation.