When selling a business, one of the earliest and most consequential decisions is whether to structure the deal as an asset sale or a stock sale. These terms may sound technical, but they drive everything from tax outcomes and liability exposure to the speed and complexity of closing.
Buyers and sellers rarely have the same preferences. Buyers typically push for an asset sale. Sellers usually want a stock sale. The negotiation over this difference can influence the transaction's economics more than almost any other factor.
This article explains how each structure works, why the parties disagree, and how tax elections, especially Section 338(h)(10), can bridge the gap when both sides need flexibility. (Need a quick reference for the future? Bookmark this page on your browser and check out the cheat sheet at the bottom of the page.)
A stock sale transfers ownership of the entire legal entity. The buyer acquires all shares, all assets, and all liabilities, unless specific items are expressly carved out.
For the seller, a stock sale is often tax-efficient and straightforward:
However, buyers inherit the company “as is,” meaning known and unknown liabilities will carry over; there will be no immediate tax deduction from stepping up the basis of assets; and a heavy reliance on warranties, indemnities, and due diligence protections will be needed.
Because of these drawbacks, buyers tend to avoid stock deals unless there are compelling reasons, such as regulatory requirements, intellectual property concerns, or contract assignments that would be too difficult to transfer in an asset deal.
In an asset sale, the buyer purchases selected assets: inventory, equipment, customer lists, goodwill, intellectual property, and other items, and does not purchase the legal entity itself. The seller keeps the entity and any liabilities not expressly transferred.
Buyers strongly prefer asset sales because they allow selection of only the assets they want, avoid historical liabilities, and provide a step-up in basis, which increases future depreciation and amortization deductions.
These deductions can significantly reduce taxable income in the years after the acquisition. Because this tax benefit is valuable, buyers often push hard for an asset structure.
For sellers, however, asset sales can create tax friction. Gains may be taxed partly as ordinary income rather than capital gain. Certain assets, such as appreciated equipment, can generate recapture tax. C corporations face the risk of double taxation: taxed at the corporate level and again when dividends are distributed to shareholders.
As a result, sellers usually resist asset deals unless the buyer compensates them through a higher purchase price.
The tension is straightforward: Buyers favor asset sales because they can avoid legacy liabilities, gain large post-closing tax deductions, and tailor the purchase to the assets they want. Sellers favor stock sales because they generally receive capital-gain treatment, avoid recapture taxes, and minimize complexity and administrative burden. Also, sellers can walk away from stock sales without leaving an empty entity riddled with liabilities.
Both sides have valid reasons. That’s why the structure becomes a central negotiation topic in any M&A deal.
In an asset sale, the IRS requires that the buyer and seller allocate the purchase price among the assets being transferred. This allocation determines each party’s tax treatment.
Categories include:
For buyers, allocating more value to depreciable assets accelerates deductions. For sellers, assigning too much to certain categories can raise their tax bill.
Example:
If a large portion of the purchase price is assigned to equipment, the seller may face ordinary income due to depreciation recapture. If more value is assigned to goodwill, gain is often taxed more favorably.
Because these allocations can materially alter the tax outcomes, both sides must negotiate them carefully, ideally with input from tax advisors early in the process.
There are situations where the parties want the economics of an asset deal but need the mechanics of a stock deal. That’s where Section 338(h)(10) comes in.
This election allows a stock sale to be treated as if the buyer purchased the assets for tax purposes. The legal entity transfers as stock, but the tax consequences mimic an asset transaction.
Use of Section 338(h)(10) is particularly useful when the seller is an S corporation, the buyer wants a step-up in basis, or the seller is willing to make the election because the buyer compensates them for any incremental tax cost.
A Section 338(h)(10) election can unlock the buyer’s tax advantages without forcing the seller into the full tax burden of an asset sale. It’s not always the perfect solution, but use of Section 338(h)(10) closes the valuation gaps in many deals.
The deal structure changes the seller’s final after-tax payout. Consider a scenario involving a purchase price of $10 million with a seller’s adjusted basis of $3 million.
The gap between the two structures can easily reach hundreds of thousands, or even millions, of dollars, depending on the asset mix, entity form, and state tax exposure. This is why sellers often push for price adjustments when buyers insist on an asset deal.
If you’re considering a sale, take the following steps if you’re carefully considering asset sale and stock sale implications:
Choosing between an asset sale and a stock sale is one of the most important decisions in any transaction. The differences affect tax liability, risk exposure, administrative burden, and ultimately the dollars a seller takes home.
By understanding how each structure works and by modeling the tax outcomes before negotiations begin, business owners enter the process prepared, confident, and able to advocate for the structure that best aligns with their goals.
With the proper preparation and the right advisory team, sellers can navigate this decision with clarity and secure a result that reflects the actual value of the business they’ve built.