I come from a Big 4 (EY) and Private Equity (Morgan Stanley) background and have helped clients buy and sell small businesses for years. One of the most consistently misunderstood things I see first-time buyers get steamrolled on is deal structure, specifically whether you're buying the assets of the business or the stock/membership interest.

Brokers gloss over it. Sellers definitely don't volunteer the information. And most posts I've seen here either say "consult a CPA" (not helpful) or give a two-sentence answer that doesn't actually explain the math. So here's what you need to know:

Why you almost always want an asset deal as a buyer

When you buy assets, you get what's called a step-up in basis. That means the purchase price gets allocated across the assets you're acquiring (equipment, inventory, furniture, goodwill, non-compete agreements) and you depreciate those from the new (higher) value going forward.

Simple example: You buy a landscaping company for $500K. The seller's equipment on their books is fully depreciated (worth $0 to them). You allocate $150K of your purchase price to that equipment. Now you're depreciating $150K over 5–7 years. If we assume 5 years for simplicity, that's $30K of depreciation expense per year that you get to take against business income (so roughly $30K of income that’s sheltered from tax each year for 5 years). That's real tax shield, starting year one.  

In a stock deal, you get none of that. You inherit the seller's old depreciation schedule. The equipment is still worth $0 on the books, and you get $0 depreciation expense to offset business income. You paid $500K for the business and get almost no deductible basis from it.

To put some numbers on it, as the buyer in an asset deal, you’re getting $150K of new depreciable basis. If your marginal tax rate is ~37%, that's up to ~$55K of tax savings over the life of that depreciation just from this one allocation decision alone. In a stock deal, that same $150K of basis doesn’t exist for you, but the seller keeps more of the after‑tax proceeds because they avoid ordinary income rates on depreciation recapture.

Why the seller pushes for stock

Because their tax bill is dramatically lower.

In a stock deal, the seller pays long-term capital gains on the entire sale, usually 15–20% federal. Clean, simple, one tax event.

In an asset deal, the IRS breaks the sale into pieces. The allocation matters enormously here. If you load up the purchase price on equipment, the seller pays ordinary income rates on the depreciation recapture, potentially 37% on that chunk. Goodwill gets capital gains treatment, but other categories don't.

So when a seller says "I need it to be a stock deal," what they're really saying is: "I don't want to pay an extra $30–60K in taxes." That's their problem, not yours, but it becomes your problem if you concede it without negotiating a price adjustment.

The bridge: 338(h)(10) elections

If you're buying an S-corp (very common in SMB), there's a tax election called a 338(h)(10) that lets both parties treat the deal as an asset sale for tax purposes while keeping the legal structure of a stock sale. Both sides have to agree to it, and the seller typically needs a price bump to offset their higher tax hit, but it's a real tool worth knowing about.

Not available for every structure (doesn't work cleanly for C-corps or LLCs taxed as partnerships), but if you're looking at an S-corp and the seller won't budge on stock deal, this is worth bringing to the table.

The allocation fight nobody warns you about

Even when both sides agree to an asset deal, the allocation of purchase price is its own negotiation. The IRS requires both parties to file consistent allocations (Form 8594), and how you split the number across asset classes affects both of your tax outcomes.

As a buyer, you want to allocate as much as possible to:
- Equipment / FF&E (fast depreciation, bonus depreciation still available)
- Non-compete agreements (amortized over 15 years, but deductible)
- Working capital assets (step-up carries through)

You also want to minimize allocation to goodwill, not because goodwill is bad, but because equipment depreciates faster and creates more near-term cash tax savings.

The seller wants the opposite. This is a real negotiation and most buyers don't even know it's happening.

Takeaway

Before you get anywhere near LOI, know what entity type you're buying and get your CPA in the room. Not just for due diligence, but to model the after-tax purchase price under both structures. A deal that looks like $500K can cost you an extra $40–80K over 5 years depending on how you structure it.

Has anyone run into issues here, successfully negotiated a 338(h)(10) election, or had a seller dig in hard on stock deal? What did you end up doing?

Feel free to drop questions below, as I’m happy to clarify anything.

(Disclosure: I'm the founder of a deal collaboration platform, and I'm sharing my background and what we built (not here to spam).

Before starting this company, I was Head of M&A at a PE-backed portfolio company, where I led a tech tuck-in acquisition strategy. We did multiple deals a year, and the mandate was to move fast and keep transaction expenses to a minimum.

Three things kept grinding on me, deal after deal:

Legal bills that made no sense for template-driven work. For tuck-ins, a large portion of your agreements is reused. The same NDA, the same LOIs, the same MIPA/APAs. But outside counsel was still billing hours just to track down the right version of a doc, reconcile redlines, and manage email threads. After reviewing my legal invoice, I realized the inherent friction in the deal process was costing thousands of unnecessary transaction expenses.

Diligence trapped in email attachments. Our entire process lived in inboxes. No master track, or clear ownership. Visibility into what was open vs. closed was often vague and not updated. If someone was out or a thread got buried, you found out at the worst possible time.

The security exposure nobody talked about. On any given deal, you're sending sensitive documents to 10 to 15 people across your deal team, advisors, and counsel. Every attachment forwarded outside that thread is a document you've lost control of. In M&A, you talk about confidentiality constantly and then run the whole process over Outlook.

I left in January 2024 and spent two years building a deal execution platform designed around how M&A actually works. Deal document collaboration, diligence tracking, and a secure data room are all connected. This isn't a glorified Dropbox or white-labeled CRM. We built the platform specifically for the moment when you're mid-process on a live deal and need everything to keep the momentum going.

We launched with 15 cornerstone customers across PE, corporate development, and investment banking. The results were surprising. Deal teams shaved up to 3 weeks off diligence timelines. Legal expenses decreased by as much as $20k on a single deal. If you want to learn more, DM me.

I'm not here to pitch, but am genuinely curious what pain points others are still running into on the execution side. The sourcing and origination tooling in PE has gotten pretty mature. The execution layer still feels like it's 10 years behind.