The structure you choose in the LOI determines who pays taxes, who inherits liabilities, and how the deal closes. Get this decision wrong, and you've committed to the wrong economics.
Buyer acquires specific assets (equipment, inventory, IP, contracts, goodwill) directly from the company. The seller retains the legal entity and any liabilities not explicitly assumed by buyer.
Buyer acquires the ownership interests (stock, LLC units, partnership interests) of the entity. Buyer becomes owner of the company itself, including all assets AND all liabilities-known and unknown.
Asset vs Stock: The Critical Differences
| Factor | Asset Purchase | Stock Purchase |
|---|---|---|
| What's Acquired | Specific assets you select | Entire entity (all assets & liabilities) |
| Liabilities | Only assumed liabilities transfer | ALL liabilities transfer (known & unknown) |
| Tax Basis | Stepped-up basis to purchase price | Carryover basis from seller |
| Seller Tax Treatment | Mixed ordinary income + capital gains | Capital gains (typically) |
| Buyer Tax Preference | Preferred (depreciation shield) | Less favorable |
| Seller Tax Preference | Less favorable | Preferred (capital gains) |
| Contract Assignment | Requires consent/novation | Usually automatic (entity unchanged) |
| Employee Transfer | New hires (re-employment) | Automatic (same employer) |
| Licenses & Permits | Often must be re-obtained | Usually transfer with entity |
| Complexity | Higher (asset schedules, assignments) | Lower (simpler documentation) |
| Most Common In | Small-mid M&A, distressed deals | Larger M&A, PE transactions |
The tax difference between structures can be 10-15% of the purchase price. On a $5M deal, that's $500K-$750K. This is why structure should be addressed in the LOI before spending on due diligence-if you can't agree on structure, you may not have a deal.
Asset Purchase LOI Provisions
Must Include:
Sample Language:
"Purchased Assets shall include all assets used in the Business, including but not limited to: equipment, inventory, accounts receivable, contracts, customer lists, intellectual property, and goodwill, but excluding Excluded Assets."
Typically Excluded:
Sample Language:
"Excluded Assets: cash, bank accounts, tax refunds for periods ending prior to Closing, corporate minute books, any assets not used in the ordinary course of the Business."
Buyer Typically Assumes:
Buyer Excludes:
Sample Language:
"Buyer shall assume only the following liabilities: (i) obligations under Assigned Contracts arising after Closing, and (ii) trade accounts payable set forth on Schedule X. Seller shall retain all other liabilities of the Business, including any pre-closing liabilities, litigation, and tax obligations."
Why It Matters:
The allocation determines how much of the purchase price is depreciable/amortizable (good for buyer) vs treated as capital gains (good for seller).
Sample Language:
"Purchase price shall be allocated among Purchased Assets in accordance with Section 1060 of the Internal Revenue Code. Buyer and Seller shall negotiate allocation in good faith and shall file consistent IRS Forms 8594."
Stock Purchase LOI Provisions
Must Specify:
Sample Language:
"Buyer shall acquire 100% of the issued and outstanding membership interests of [Company Name], LLC from the Members listed on Schedule A. No options, warrants, or other securities convertible into equity are outstanding."
Common Structures:
Sample Language:
"Purchase Price: $X on a cash-free, debt-free basis, subject to adjustment for Working Capital above or below the Target of $Y. Seller shall deliver the Company with normalized Working Capital of $Y +/- $50,000."
Stock Purchase Concerns:
Since buyer inherits ALL liabilities, indemnification becomes critical:
Sample Language:
"10% of Purchase Price shall be held in escrow for 18 months to secure Seller indemnification obligations. Seller shall indemnify Buyer for breaches of representations, pre-closing liabilities, and tax obligations for periods ending prior to Closing."
What It Does:
Treats stock sale as asset sale for tax purposes. Buyer gets stepped-up basis; seller's tax increases. Often used with gross-up.
Sample Language:
"Buyer and Seller shall jointly elect to treat the transaction as an asset purchase under Section 338(h)(10). Buyer shall gross-up Seller for the incremental tax cost of such election, estimated at $X."
When to Use Each Structure
LOI Structure Clauses
TRANSACTION STRUCTURE
The Transaction shall be structured as an asset purchase. Buyer shall acquire substantially all of the assets used in connection with the Business (the "Purchased Assets"), subject to the terms and conditions of a definitive Asset Purchase Agreement (the "APA").
PURCHASED ASSETS
Purchased Assets shall include, without limitation: (i) all tangible personal property, including equipment, furniture, fixtures, and inventory; (ii) all intellectual property, including trademarks, trade names, patents, and copyrights; (iii) all contracts and agreements set forth on Schedule A (the "Assigned Contracts"); (iv) all accounts receivable; (v) all customer lists, records, and goodwill; and (vi) all permits and licenses to the extent transferable.
EXCLUDED ASSETS
The following assets shall be excluded from the Transaction: (i) cash and cash equivalents; (ii) tax refunds for periods ending prior to Closing; (iii) corporate records of Seller; (iv) contracts not listed on Schedule A; and (v) any other assets set forth on Schedule B.
ASSUMED LIABILITIES
Buyer shall assume only the following liabilities: (i) obligations under Assigned Contracts arising after the Closing Date; and (ii) trade accounts payable set forth on Schedule C (to be mutually agreed). Seller shall retain and be responsible for all other liabilities of the Business, whether known or unknown, including any pre-closing liabilities, litigation, and tax obligations.
PURCHASE PRICE ALLOCATION
Buyer and Seller shall allocate the Purchase Price among the Purchased Assets in accordance with Section 1060 of the Internal Revenue Code. The parties shall negotiate such allocation in good faith prior to Closing and shall file consistent IRS Forms 8594.
TRANSACTION STRUCTURE
The Transaction shall be structured as a stock purchase. Buyer shall acquire 100% of the issued and outstanding shares of common stock / membership interests of [Company Name] (the "Company") from the shareholders / members listed on Schedule A (the "Sellers"), subject to the terms and conditions of a definitive Stock Purchase Agreement (the "SPA").
PURCHASE PRICE
The aggregate purchase price shall be $[X] (the "Purchase Price"), payable as follows: [Cash at Closing / Seller Note / Earnout]. The Purchase Price is based on a cash-free, debt-free basis and assumes normalized Working Capital of $[Y] as of Closing. The Purchase Price shall be adjusted dollar-for-dollar for Working Capital above or below the Target, calculated in accordance with GAAP.
ESCROW
[X]% of the Purchase Price ($[___]) shall be deposited into an escrow account at Closing to secure Sellers' indemnification obligations under the SPA. The escrow shall be held for [18] months following Closing, subject to claims made during such period.
INDEMNIFICATION
Sellers shall indemnify Buyer for: (i) breaches of representations and warranties; (ii) breaches of covenants; (iii) pre-closing liabilities not reflected in the Working Capital calculation; and (iv) tax liabilities for periods ending on or before Closing. General representations shall survive for [18] months; fundamental representations (capitalization, authority, taxes) shall survive for [36] months or the applicable statute of limitations.
TAX ELECTION (If Applicable)
[The parties shall / shall not] make an election under Section 338(h)(10) of the Internal Revenue Code to treat the Transaction as an asset purchase for tax purposes. [If applicable: Buyer shall pay Seller a gross-up amount equal to the incremental tax cost to Sellers resulting from such election.]
The structure you choose in the LOI sets the tax economics for the entire deal. Let us help you negotiate the right structure before you spend money on due diligence.
Acquisition Stars • acquisitionstars.com • alex@acquisitionstars.com
The deal structure in your LOI has major tax and liability implications. Our M&A attorneys review your letter of intent to ensure the structure protects you.
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