One of the first and most consequential decisions in any business acquisition is how to structure the deal: asset purchase or stock purchase. The choice affects tax treatment, liability exposure, contract assignability, third-party consent requirements, and a range of other considerations that have real economic consequences for both sides of the transaction.

Because buyers and sellers often have competing structural preferences, deal structure is regularly negotiated — and the terms agreed to in the letter of intent tend to govern, because reopening structure after the LOI is signed is very difficult. Understanding the tradeoffs before that moment is essential. For where this decision falls in the broader sell-side M&A process, see our step-by-step overview.

Asset Purchase: How It Works

In an asset purchase, the buyer acquires specific assets of the target company — physical property, intellectual property, customer contracts, equipment, inventory — and assumes only the liabilities it expressly agrees to take on. The seller retains the legal entity and all liabilities not transferred. The buyer acquires the business; the corporate container stays with the seller, who must wind it down separately after closing.

Stock Purchase: How It Works

In a stock purchase (or, for LLCs, a membership interest purchase), the buyer acquires all of the ownership interests in the target entity. The legal entity — with all of its assets, contracts, liabilities, obligations, and relationships — transfers intact. Only the ownership changes. The business continues operating in the same legal structure, and third-party relationships generally continue without the need for consent.

Why Buyers Typically Prefer Asset Deals

Liability limitation. In an asset purchase, unknown or contingent liabilities — pending lawsuits, undisclosed tax deficiencies, environmental obligations — stay with the seller’s entity. The buyer starts with a cleaner slate.

Tax basis step-up. The buyer gets a stepped-up tax basis in acquired assets equal to the purchase price. This translates into larger depreciation and amortization deductions going forward — real economic value over time that a stock purchase does not provide.

Selective acquisition. Asset deals allow buyers to leave behind unwanted liabilities, undesirable contracts, and assets they don’t need. Stock deals transfer everything.

Why Sellers Typically Prefer Stock Deals

Tax treatment. For individual sellers, a stock sale often results in capital gains treatment on the entire purchase price. In an asset sale, portions of the proceeds may be taxed as ordinary income — for assets like inventory, accounts receivable, equipment (recaptured depreciation), and covenants not to compete — producing a materially worse after-tax outcome for the seller.

Simplicity. A stock sale transfers the entire business without requiring consent to assignment of customer contracts, re-issuance of licenses, or notifications to counterparties. In an asset deal, obtaining these consents adds timeline, cost, and transaction risk. A single landlord or customer who refuses to consent can create real closing complications.

Clean exit. In a stock deal, the seller fully exits the entity at closing. In an asset deal, the seller retains the legal entity and must dissolve it separately — managing any residual liabilities and distributing remaining assets through a wind-down process.

Bridging the Gap: Section 338(h)(10)

In S corporation transactions, the parties may elect under Section 338(h)(10) of the Internal Revenue Code to treat a stock sale as an asset sale for tax purposes. This allows the buyer to obtain the benefit of an asset deal tax basis step-up while the transaction is structured as a stock deal — keeping contract assignments and third-party consents to a minimum. A 336(e) election can achieve a similar result for certain C corporation and subsidiary transactions.

These elections require careful tax analysis and mutual agreement between buyer and seller — and they are often the mechanism by which the structural preference gap gets resolved. For other creative approaches to bridging buyer-seller disagreements, see our post on innovative M&A deal structures, and on the tax treatment of earnouts.

Why Counsel’s Role Matters

The choice between asset and stock structures ripples through the entire purchase agreement: how representations and warranties are framed, how indemnification works, which disclosure schedules are required, and what closing conditions apply. Experienced M&A counsel advises on deal structure before the LOI is signed. Once the structure is agreed to in the LOI, the negotiating leverage to change it is substantially reduced.

➤ Structuring an acquisition? Contact Petersen | Landis for experienced M&A counsel.

If you own a small business and are starting to think about an exit — whether that means selling in two years or ten — understanding how buyers will value your company is one of the most practical things you can do right now. The number a buyer arrives at may feel arbitrary or surprising. It doesn’t have to. The frameworks are knowable, and understanding them gives you real advantages in a sale process.

This post focuses specifically on the valuation approaches that apply to smaller businesses — typically those with under $10 million in enterprise value — and explains the practical rules of thumb that drive most transactions at this deal size. For the full methodology overview that applies across deal sizes, see our pillar guide on business valuation methods.

The Core Metric: Seller’s Discretionary Earnings (SDE)

For owner-operated businesses where the owner is also the primary operator, buyer valuation typically starts with seller’s discretionary earnings (SDE) rather than EBITDA. SDE is calculated by taking net income and adding back: the owner’s salary and benefits (since a buyer will account for the owner’s role differently), interest, taxes, depreciation, amortization, and any one-time or personal expenses run through the business.

The resulting SDE figure represents the total financial benefit available to a single full-time owner-operator. It is the most relevant earnings metric for buyers of small businesses because it reflects economic reality better than EBITDA when owner compensation is a material part of the cost structure.

Typical SDE Multiples by Industry

• Service businesses (general): 2x–3.5x SDE
• Professional services firms: 2.5x–4x SDE
• Property management companies: 3x–5x SDE
• Construction and trades: 2x–3.5x SDE
• Retail businesses: 1.5x–2.5x SDE

These are ranges, not formulas. Where your business lands within the range — or whether it trades above it — depends on the factors below.

What Drives Multiples Up

Recurring or contracted revenue. Buyers pay premiums for predictability. A service business with multi-year contracts or historically low customer churn trades at a higher multiple than one that re-earns its revenue year to year. Even month-to-month agreements with stable renewal history are valued more favorably than fully transactional revenue.

Low owner dependence. The buyer needs to believe the business will continue performing without you. A business where all key customer relationships, institutional knowledge, and operational decisions run through the owner is discounted accordingly. Investing in management depth and documented processes before going to market improves value in a measurable way.

Customer diversification. Concentration in any single customer — particularly above 15–20% of revenue — is a risk factor buyers price explicitly. Addressing concentration before going to market, if possible, is worth the effort.

Clean financials. Unexplained variances, informal revenue recognition, and personal expenses commingled with business records reduce buyer confidence and, as a direct consequence, price. Buyers who cannot readily verify your earnings build a discount into their offer. Our framework for preparing to sell your business and maximize value covers the cleanup steps that make the biggest difference here.

The Legal Piece

Purchase price is a headline number. What you actually net from a sale depends on deal structure, earnout terms, working capital adjustments, seller note provisions, escrow holdbacks, and the representations you make in the purchase agreement. A seller who focuses only on the LOI price — without understanding how those other terms affect their net proceeds — often leaves significant value on the table.

Experienced transaction counsel helps you understand the full economic picture of a deal, not just the number on the letter of intent. For a deeper overview of the three major valuation frameworks used across all deal sizes, see our Business Valuation Methods post, and for the broader transaction journey, our guide to the sell-side M&A process.

➤ Thinking about a sale? Contact Petersen | Landis to understand your business’s value and how to maximize it.

Sellers who are diligence-ready before they go to market close transactions faster, with fewer surprises, and often at better prices. The reverse is equally true: sellers who enter a process with disorganized documentation lose leverage when buyers discover problems mid-stream and use them to renegotiate. For the buyer-side view of what buyers actually examine in M&A due diligence, see our companion overview.

This checklist covers the major categories of documents and information buyers typically request in a middle-market M&A transaction. Use it to identify gaps, resolve known issues, and build your virtual data room before your process begins — not after a buyer issues their first request list.

1. Corporate and Organizational Records

• Certificate of incorporation or articles of organization, and all amendments
• Current bylaws or operating agreement
• Fully diluted capitalization table (including all options, warrants, and convertible instruments)
• Board and member meeting minutes for the past three to five years
• Stockholder or member resolutions authorizing prior significant transactions
• Good standing certificates and registered agent information for all operating jurisdictions
• Organizational chart showing all subsidiaries and their ownership structure

2. Financial Records

• Audited or reviewed financial statements for the past three to five years
• Current year-to-date interim financials (within 60 days)
• Trailing 12-month revenue and EBITDA bridge with documented addback support
• Accounts receivable and accounts payable aging schedules
• Federal and state tax returns for the past three to five years
• Capital expenditure history and near-term projections
• All existing debt, credit facility, and financing agreements

3. Material Contracts

• All customer contracts representing more than 5% of revenue
• Supplier, vendor, and distributor agreements
• Real property leases and subleases
• Equipment leases and financing arrangements
• License agreements (inbound and outbound)
• Non-compete and non-solicitation agreements with third parties
• Management agreements and consulting arrangements

For each contract, confirm: (a) whether it is fully executed and current; (b) whether it contains a change-of-control or assignment restriction; and (c) the expiration date. Change-of-control issues and assignment restrictions are among the most common transaction complications discovered during diligence. For LLCs, make sure the operating agreement’s transfer and consent provisions are also reviewed in this same pass.

4. Intellectual Property

• Patents (issued and pending), trademarks, copyrights, and trade secret documentation
• Domain names and social media accounts
• IP assignment agreements from all founders, employees, and contractors who developed company IP
• Inbound software licenses and open source usage documentation
• Outbound technology licensing agreements

5. Employment and HR

• Employee roster by department, location, and classification (full-time, part-time, contractor)
• Employment agreements and offer letters for all key employees
• Equity incentive plan documents, option agreements, and vesting schedules
• Bonus, commission, and deferred compensation arrangements
• Employee handbook and key HR policies
• Benefits plan summaries (health, retirement, and other plans)
• Any pending or threatened employment claims or agency complaints
• Independent contractor agreements and classification documentation

6. Litigation and Regulatory

• All pending and threatened claims, lawsuits, and arbitrations
• Correspondence with any regulatory agency (including informal inquiries)
• Industry-specific licenses and permits, with any restrictions or conditions noted
• Environmental compliance records, if applicable
• Data privacy and security compliance documentation

7. Insurance

• Current insurance policies (general liability, D&O, E&O, cyber, property, workers’ compensation)
• Claims history for the past three years

A Note on Timing

The time to assemble this documentation is not when a buyer issues a diligence request list. By then, the clock is running and gaps become negotiating leverage for the buyer. Sellers who maintain organized records and address known issues proactively are in a fundamentally stronger position when a deal process begins.

Working with experienced M&A counsel before going to market — not just after signing an LOI — is one of the most consequential decisions a seller can make. The legal costs of preparing properly are modest relative to the price adjustments, extended timelines, and eroded leverage that come from entering a process unprepared. For the full sequence of stages, see our guide to the sell-side M&A process, and for early-stage groundwork, our framework for preparing to sell your business.

➤ Contact Petersen | Landis to start your diligence preparation before going to market.

Selling a business is one of the most consequential financial events of an owner’s life — and one of the least understood. Most owners have built their company over years or decades, but the mechanics of a structured sale process are unfamiliar territory. Investment bankers describe it from the perspective of their role. Buyers describe it from the perspective of their objectives. Very few resources walk you through it from the seller’s chair.

This guide does exactly that. Whether you are actively exploring a sale or simply want to understand what you’re getting into, here is how a sell-side M&A transaction actually works — and where your attorney’s role matters most at each stage.

Stage 1: Pre-Sale Preparation

Before your business goes to market, groundwork determines whether you attract serious buyers and achieve your target price. This phase involves organizing corporate records and financial statements, resolving known legal or structural issues, confirming your management team’s continuity plan, and aligning with your advisors — attorney, accountant, and investment banker — on deal structure and a realistic valuation range. Understanding the core business valuation methods buyers use is essential at this stage.

Sellers who skip this stage tend to discover problems during buyer due diligence. That is the worst possible time to learn about a cap table defect, an unsigned customer contract, or a liability you thought was resolved. Fixing issues before going to market protects your price; fixing them mid-diligence costs you leverage. For a deeper look at the groundwork that pays off, see our guide on preparing to sell your business in four steps.

Stage 2: Signing a Confidentiality Agreement

Before any substantive information about your business is shared with a prospective buyer, both parties execute a non-disclosure agreement (NDA). At this stage, your attorney should review the NDA to confirm that its definitions of confidential information are appropriately broad, that any standstill or non-solicitation provisions are acceptable, and that the agreement reflects your specific situation.

NDAs are frequently treated as form documents. They are not. A poorly drafted NDA can leave your customer lists, pricing data, and key employee information exposed if a deal falls apart.

Stage 3: Indications of Interest

After reviewing your confidential information memorandum (CIM), interested buyers submit non-binding indications of interest (IOIs). An IOI typically includes a proposed price range, a preliminary sense of deal structure — asset versus stock purchase — and any major conditions. IOIs are not binding, but they signal a buyer’s seriousness and frame the negotiation to come. Your advisors evaluate them not just on price, but on deal structure, buyer financing, and realistic probability of closing.

Stage 4: Letter of Intent

The LOI is the most pivotal pre-close document in a sell-side transaction. It is largely non-binding, but it establishes the economic deal points — purchase price, payment structure, earnout mechanics, escrow arrangements — that will govern your negotiating posture in the purchase agreement. Once signed, the LOI typically includes an exclusivity period during which you cannot solicit other buyers.

Many sellers sign LOIs without adequate legal review, only to spend weeks fighting uphill to recover ground in the purchase agreement. The LOI deserves the same attention as the definitive agreement. For a closer look at the terms that matter most, see our breakdown of the most important deal points in a letter of intent. This is where experienced M&A counsel earns the engagement.

Stage 5: Due Diligence

Following LOI execution, buyers conduct comprehensive due diligence. They will review your financial statements (typically three to five years), material contracts, intellectual property, employment records, pending or threatened litigation, regulatory compliance, and real property interests. The process is intensive and typically runs four to ten weeks depending on deal complexity.

Well-prepared sellers move diligence faster and encounter fewer surprises. Working with your attorney before diligence begins to organize a virtual data room, resolve known issues, and prepare responses to predictable buyer questions is time well spent. Our detailed walkthrough of what buyers examine during M&A due diligence covers each category in depth.

Stage 6: Purchase Agreement

The definitive purchase agreement — whether a stock purchase agreement (SPA) or asset purchase agreement (APA) — is the governing deal document. It covers representations and warranties (the factual statements each party makes about the transaction), indemnification provisions (who bears risk for breaches), purchase price adjustments (typically working capital mechanics), and closing conditions. The structural choice between asset purchase versus stock purchase shapes virtually every section of this agreement, which is why it should be locked down in the LOI.

Representation and warranty insurance (RWI) has become increasingly common in mid-market transactions, shifting some post-closing indemnification risk to an insurer rather than leaving it between buyer and seller. Your attorney should advise on whether RWI makes sense for your deal and how it affects the indemnification negotiation.

Stage 7: Closing

Closing involves executing the definitive agreements, wiring the purchase price, transferring ownership, and satisfying all conditions precedent — regulatory approvals, third-party consents, lender payoffs. Your attorney coordinates the closing checklist, manages the flow of funds, and confirms that all deliverables are in order before the transaction is deemed closed.

Post-close, there are often outstanding obligations: earnout periods to manage, working capital true-ups to negotiate, and transition services to provide. The transaction does not end at the wire.

The Role of Counsel Throughout

Experienced M&A counsel is a strategic partner from pre-market preparation through post-close — not just a document reviewer. That means advising on deal structure, evaluating LOI terms with an eye toward the purchase agreement, managing diligence preparation, negotiating representations and indemnification caps, and coordinating closing mechanics. If you are considering a sale of your business, the time to engage counsel is before the LOI, not after.

➤ Contact Petersen | Landis for a confidential consultation with our M&A team.