The Small Business Owner's Guide to M&A Deal Structures
The difference between a good deal and a great deal often comes down to structure — not price.
I've seen business owners negotiate hard on purchase price, then lose hundreds of thousands in unnecessary taxes because nobody thought about how the deal was structured.
Asset sale vs. stock sale:
This is the fundamental question, and buyer and seller usually want opposite things.
Sellers prefer stock sales because the entire gain is taxed at capital gains rates (currently 20% + 3.8% NIIT). Clean, simple, favorable.
Buyers prefer asset sales because they get a "stepped-up basis" in the assets — meaning they can depreciate/amortize the full purchase price. This creates massive tax deductions over the next 5-15 years.
The gap between these positions is real money. On a $2M deal, the structural difference can be $200K-$400K in total tax impact between buyer and seller combined.
Earnouts and contingent payments:
When buyer and seller disagree on value, earnouts bridge the gap. But the tax treatment matters:
- Earnout payments are generally ordinary income to the seller (not capital gains)
- The timing of recognition can be managed with installment sale treatment
- Properly structured, earnouts can defer significant tax liability
Seller financing:
When the seller carries a note, installment sale treatment lets them spread the gain over the payment period. This can keep the seller in a lower tax bracket and defer the 3.8% net investment income tax.
The 338(h)(10) election:
This is the compromise that often makes both sides happy. It's technically a stock sale (seller gets capital gains treatment) but treated as an asset sale for tax purposes (buyer gets stepped-up basis). It requires an S-corp or C-corp target, but when it works, it's elegant.
Bottom line: If you're buying or selling a business and your CPA isn't deeply involved in structuring the deal, you're leaving money on the table. The purchase agreement should be a tax document as much as a legal one.