M&A Deal Points | Why asset deals are more prevalent in the lower middle market?

We’ve discussed this before, but it’s a topic that comes up frequently, so it’s worth revisiting: asset deals are the default structure for lower middle market (LMM) transactions, with a few exceptions. Why are they so common? Let’s break it down:

1. Liability Protection
One of the main reasons asset deals are favored is that they allow buyers to selectively assume liabilities. This significantly reduces the risk of inheriting unknown or unwanted liabilities from the seller—especially important when dealing with smaller companies that may have less formalized structures. From a legal standpoint, this is a major advantage.

2. Flexibility
Asset deals also offer buyers more flexibility, as they can pick and choose the specific assets they want to acquire. This ensures that buyers are only paying for what they need and can avoid any unwanted or unnecessary parts of the business.

3. Tax Benefits
On the financial side, asset deals often come with tax advantages. Buyers can benefit from increased depreciation and amortization deductions due to a stepped-up asset basis. This can be especially attractive in lower middle market deals, providing significant tax relief post-transaction.

4. Simplified Due Diligence
Since the focus is primarily on the assets being acquired, asset deals typically involve a more straightforward due diligence process. This can save time and reduce complexity compared to equity deals, where the buyer inherits the entire entity, including all its liabilities and potential risks.

That being said, equity transactions do occur in certain scenarios, particularly when it’s essential to retain customer contracts, licenses, or permits. These specific situations may make an equity deal more appropriate, but for the majority of LMM transactions, asset deals remain the go-to structure.