Two offers at the same headline price can leave very different amounts in your account. Structure decides how much of the number you were quoted you actually keep, when you receive it, and how much risk you carry after closing.
This guide covers the structural decisions that matter most in a lower-middle-market sale: asset versus stock, how the tax treatment differs, and the contingent forms of consideration — earn-outs, seller notes and equity rollover — that appear in most deals at this size.
Asset sale versus stock sale
Nearly every lower-middle-market transaction is one or the other, and buyer and seller want opposite things.
| Asset sale | Stock sale | |
|---|---|---|
| What transfers | Named assets and liabilities | The legal entity, whole |
| Buyer preference | Strongly preferred | Resisted |
| Seller tax outcome | Generally worse | Generally better |
| Buyer gets stepped-up basis | Yes | No (absent an election) |
| Unknown liabilities | Mostly stay with the seller | Transfer to the buyer |
| Contracts and licenses | Often need consent to assign | Usually travel with the entity |
| Typical in this market | The clear majority | Less common |
Why buyers want an asset sale. They select which liabilities to assume, and they get a stepped-up basis in the acquired assets — meaning they can depreciate them again from the purchase price. That future tax shield has real present value, and it is why buyers pay for the structure.
Why sellers prefer a stock sale. One asset sold, generally taxed once, usually at capital gains rates. Cleaner, and typically better after tax.
Where it actually lands. Most deals in this range are asset sales, because the buyer's preference is strong and their tax benefit is quantifiable. The seller's leverage is not usually in refusing the structure — it is in being paid for accepting it. If a buyer captures a step-up worth a meaningful sum, that value is negotiable, and a seller who understands the trade is in a position to price it rather than concede it.
The C-corporation problem. If your business is a C-corporation, an asset sale can be taxed twice: once at the corporate level on the gain, and again when proceeds are distributed to you. The combined outcome can be materially worse than a stock sale. This is not a detail to discover during negotiation. If you operate as a C-corp and expect to sell, raise it with a tax adviser years ahead — some mitigations require lead time measured in years, not months.
Tax treatment, in outline
In an asset sale, the price is allocated across asset classes, and each class is taxed differently. Allocation is negotiated and documented, and both parties file consistently.
- Tangible assets with depreciation previously claimed can trigger recapture, taxed at ordinary income rates rather than capital gains.
- Goodwill and going-concern value generally receive capital gains treatment, which is why sellers push for allocation here.
- Consulting or non-compete payments are ordinary income to you and immediately deductible to the buyer, which is why buyers push for allocation there.
The buyer's preferences run opposite to yours in most categories. Allocation is a negotiation with real money in it, and it is frequently settled late by people who have stopped paying attention.
This is genuinely tax advice territory and this guide is not it. The point here is narrower: allocation is negotiable, the amounts are not trivial, and you need a qualified tax adviser engaged before the letter of intent is signed rather than after.
Earn-outs
An earn-out makes part of the price contingent on the business hitting agreed targets after closing.
They exist to bridge a genuine disagreement about the future. You believe the growth is real; the buyer will pay for it once it appears. Used well, an earn-out closes a gap that would otherwise kill a deal.
The risk is structural: you no longer control the business being measured.
Terms that decide whether it pays:
- What is measured. Revenue is harder to manipulate than EBITDA. EBITDA can be affected by allocated overhead, management fees and accounting choices the new owner controls.
- Who calculates it, and what rights you have to inspect, dispute and audit.
- Over what period. Longer means more exposure to decisions you do not make.
- What the buyer may not do. Protective covenants matter — not moving your customers to another entity, not loading the business with corporate allocations, not changing pricing or sales structure in ways that suppress the measure.
- What happens on a change of control. If the buyer sells during the earn-out period, the earn-out should accelerate or the terms should survive.
The test: value the deal as if the earn-out pays nothing. If that number is acceptable, the earn-out is upside. If you need it to make the deal work, you are financing the buyer's purchase of your business and carrying operational risk you cannot control.
Seller financing
A seller note is deferred consideration: the buyer pays part of the price over time, with interest, under a promissory note.
Common in this market, and often unavoidable — particularly with individual buyers and in SBA-financed transactions, where lenders frequently require a seller note as evidence of the seller's confidence and to complete the capital stack.
What determines whether it is acceptable: where the note sits relative to the bank debt (almost always subordinated), what security exists behind it, whether there is a personal guarantee, what interest rate applies, and what standstill provisions the senior lender imposes on your ability to enforce if payments stop.
A subordinated, unsecured note behind a full bank facility is closer to equity risk than to a receivable, and should be priced and considered accordingly.
Equity rollover
Private equity buyers frequently ask sellers to retain a minority stake — commonly 10–30% — in the acquired business or in the acquiring platform.
The argument is alignment, and it is a real one: buyers pay more when management stays exposed to the outcome. The genuine attraction for sellers is the second bite. If the platform is built and sold again in five years at a higher multiple, a retained stake can be worth more than the portion sold first.
What to examine before agreeing:
- What you are rolling into. Equity in the operating company you know, or in a holding company you do not?
- Where it sits in the capital structure. Common equity behind preferred stock with an accruing return can be worth far less than the headline percentage implies, particularly in a downside case.
- Minority protections. Tag-along rights, information rights, and what happens if you disagree with the platform's direction.
- Liquidity. Usually none until the sponsor exits. Assume you cannot sell it when you want to.
Rollover equity is a genuine wealth-building instrument in a successful platform and a source of significant disappointment in an unsuccessful one. It should be evaluated as an investment decision on its own merits, not as a rounding item within the sale.
Working capital: the adjustment most sellers miss
Enterprise value is not proceeds. Nearly every transaction includes a working capital adjustment.
The parties agree a target — the peg — usually derived from a trailing twelve-month average of normalized working capital. If the business delivers less than the peg at closing, the price is reduced dollar for dollar. More than the peg, and the price increases.
This is one of the most common places value leaks after the headline price is agreed. The peg is negotiated late, its definition is technical, and seasonality can move it substantially depending on which months the average covers. A seasonal business closing in its low month against a full-year average peg can face a meaningful reduction that nobody flagged during negotiation.
Get the definition and the calculation period into the letter of intent. It is far harder to renegotiate once the buyer is in exclusivity.
What to decide before signing an LOI
Structure is easier to shape before exclusivity than after. Ahead of signing:
- Know your entity type and its tax consequences under each structure.
- Have a tax adviser engaged — not consulted after the fact.
- Know your minimum acceptable cash-at-close, independent of any contingent consideration.
- Understand the working capital definition and the period the peg is drawn from.
- Decide in advance whether you want post-sale involvement, because it changes which buyers suit you and how the deal should be built.
Related
Short answers on structure are on our FAQ. The full transaction sequence is covered in The Sale Process, Start to Finish. How the price gets set in the first place is in How Lower-Middle-Market Businesses Are Valued.
This guide is for informational purposes only and does not constitute investment, financial, legal or tax advice. Tax treatment depends on facts specific to your business and jurisdiction; engage qualified tax and legal counsel before agreeing to any structure.