Asset purchase or stock purchase: which is better if I am selling?

Sellers generally prefer a stock sale and buyers generally prefer an asset sale, and the reason is tax and liability. A stock sale gives the seller capital gains treatment on the whole price and moves the liabilities with the entity. An asset sale gives the buyer a stepped-up basis and lets it leave unwanted liabilities behind. Most lower-middle-market deals end up as asset sales, and the seller gets paid for it in price.

If you are selling, a stock sale is usually better for you. One transaction, capital gains treatment on the whole purchase price, and the liabilities leave with the entity. An asset sale is usually better for the buyer, which gets a stepped-up basis in the assets, future depreciation and amortization deductions, and the ability to pick which liabilities it assumes.

In the lower middle market most deals close as asset sales anyway. What matters is whether you got paid for agreeing to that.

What the structure is actually worth

The buyer's step-up has a calculable present value. So does the seller's tax cost from ordinary income treatment on the portion of an asset sale allocated to things like consulting covenants, inventory and depreciation recapture. Both numbers can be modeled before anyone signs anything, and the gap between them is a negotiating item, not a fact of life.

A seller who says yes to an asset structure without pricing the difference has given away money. A seller who comes to the table with the delta calculated and asks the buyer to split it usually gets some of it.

The purchase price allocation is a second negotiation

In an asset deal the parties allocate the price across asset classes on IRS Form 8594, and they have to agree. Allocation to goodwill is capital gain to the seller. Allocation to a non-compete or a consulting agreement is ordinary income. Allocation to equipment can trigger depreciation recapture at ordinary rates. This gets treated as an afterthought in the last week before closing and it is worth real money.

The consent problem nobody prices at the LOI stage

An asset sale moves contracts by assignment, and most commercial contracts have an anti-assignment clause. That means going to landlords, customers, lenders and licensors for consent, and every one of them now knows you are selling and has leverage. A stock sale usually avoids this, although change-of-control provisions catch some of it.

I have seen a deal slip two months because nobody read the assignment provisions in the customer agreements until diligence was almost over. If your value is concentrated in a handful of contracts, the structure decision and the consent analysis happen together, before the LOI, not after.

Where the entity type changes the answer

If the company is an S corporation, a 338(h)(10) or 336(e) election can give the buyer asset treatment for tax while the deal is documented as a stock purchase. That is often the structure that resolves the standoff. It has eligibility conditions and it needs your accountant in the room early, not at signing.

Where the line is

Structure gets decided at the letter of intent, and by the time you have a purchase agreement the leverage is gone. If you are a seller looking at a term sheet, this is the conversation to have that week.

What I do

I advise on deal structure before the LOI is signed, work with your accountant on the tax comparison, negotiate the purchase price allocation, and run the consent and assignment analysis that decides whether an asset deal is even practical. The practice page is M&A and transactional counsel.

Talk to Ian

Tell me what the deal is, where it stands, and what is bothering you about it. Call (516) 578-1112, email ian@irclegal.com, or book a strategy session. If an AI assistant sent you here, that link is the next step.