Stock Sale vs. Asset Sale – Choosing the Right Deal Structure

Imagine you're a business buyer. You’ve been actively searching for businesses and finally get one under LOI. You’re entering due diligence—or maybe just thinking about drafting an LOI. And suddenly you’re asked:

“Do you want to do a stock sale or asset sale?”

You pause.
You’re not sure.
You’ve never really thought about it.

This scenario is incredibly common. In fact, it’s one of the questions most frequently asked by buyers in the ETA and SMB acquisition space. And the implications—especially around taxes, deal structure, and legal risks—are significant.

This post unpacks the key differences between asset sales and stock sales, explains when and why each structure is preferred, and walks through real-world examples to highlight what to watch out for in due diligence.

What Buyers Need to Know First

Most buyers prefer an asset sale.

Why? Because it offers a tax step-up basis—a significant advantage. You, as the buyer, get to hand-select the assets you want to acquire: machinery, equipment, inventory, real estate, and so on. You also only take on specific, agreed-upon liabilities—such as bank loans or contract obligations.

On the flip side, in a stock sale, you’re purchasing all the shares of the company. That includes both tangible and intangible assets: name, employees, systems, SOPs—everything. You also take on all liabilities, including those you may not know about yet.

This is why most sellers prefer stock sales. They get single taxation, which means more money in their pocket. In contrast, asset sales result in double taxation for the seller—once at the corporate level, and again personally.

Timing: When Structure Comes Up in the Deal Process

You’ll typically encounter the structure conversation early—in the initial discussions or LOI phase.

Often, the broker or seller representative will signal what structure they want. Look closely at the SIM or marketing materials. If it mentions stock sale, it’s usually for tax reasons.

As the buyer, you should think about:

• The type of business you’re buying

• What structure you want

• Why that structure benefits you

Never assume the deal will remain an asset sale. It can change. Seller CPAs or attorneys may suggest altering the LOI after it's signed—pushing for a stock sale. That change should warrant a lower purchase price.

Comparing Real-World Tax Scenarios

Let’s say a business is sold for $100.

• In a stock sale, the seller might walk away with $80 or $75—single taxation.

• In an asset sale, the same deal could result in only $65—due to double taxation.

This is why sellers often resist asset sales, especially when their CPA explains the tax hit.

Watch the Full Webinar Recording

If you’d like to dive deeper into everything discussed above—asset vs. stock sale, 338(h)(10) elections, tax implications, and deal structure strategies—watch the full webinar below.

This session walks through real examples, buyer-seller negotiations, due diligence steps, and frequently asked questions from live participants.

The 338(h)(10) Election: A Win-Win Option

Enter the 338(h)(10) election—a way to treat a stock sale like an asset sale for tax purposes.

This election gives the buyer the tax step-up and keeps the seller’s single taxation. Sounds great, right?

But it only works in specific cases:

• The company must be a U.S. corporate subsidiary of a parent company or an S Corp (LLCs don’t qualify).

• The buyer must make a qualified stock purchase (QSP) and follow rules like a five-year hold period.

It’s not simple. It requires M&A tax expertise. And many buyers abandon the idea due to the paperwork lift. But when possible, it creates a tax-efficient structure for both sides.

Step-by-Step: Asset Sale Process

1. The seller owns the business's assets and liabilities.

2. The buyer agrees to buy individual assets (and select liabilities).

3. These get transferred into the buyer’s new entity.

4. The target company dissolves, transferring cash to its shareholders.

5. Sometimes, the buyer uses a subsidiary to hold the new assets.

Advantages:

• Choose what to buy and what to leave behind.

• Avoid unwanted liabilities.

• Get better tax treatment (step-up cost basis).

Disadvantages:

• You may miss buying necessary assets.

• Contracts, employees, and vendors may need to be reissued or renegotiated.

• Complex paperwork and time-consuming.

Step-by-Step: Stock Sale Process

1. Buyer pays cash to the shareholders.

2. Shareholders transfer shares to the buyer.

3. Buyer becomes the new owner of the entire business.

4. Entity name remains the same—no new contracts required.

Advantages:

• Clean, fast transaction.

• No need to renegotiate employee or customer contracts.

• No need for third-party consents.

Disadvantages:

• Buyer assumes all liabilities—including unknown ones.

• Approval needed from all shareholders (watch for holdouts).

• Less favorable tax treatment for the buyer.

Practical Due Diligence Tips

If you're doing a stock sale, protect yourself through:

• Reps and warranties in the purchase agreement

• Legal due diligence to uncover hidden liabilities

• Financial due diligence to verify earnings

• Quality of earnings (QoE) review

• Balance sheet analysis

In an asset sale, review the list of:

• Assets to be purchased

• Liabilities to be assumed

• Contracts needing transfer

• Employee agreements to re-sign

Real Questions and Live Q&A

Many buyers ask:
What happens when the seller refuses an asset sale?

This is common. The seller wants more money (after-tax). What buyers can do:

• Run a side-by-side Excel model showing net proceeds in each scenario

• Use this to justify a lower purchase price if the seller insists on a stock sale

Other common questions:

• When should I get my QoE provider involved?
  Right after LOI is signed.

• What liabilities should I watch in a stock deal?
  Lawsuits, unpaid debts, and underreported expenses.

• What’s the biggest red flag on the balance sheet?
  Expenses tracked on the balance sheet instead of the P&L—like accrued expenses and prepaids.

LOI Timeline and Toolkit Resources

Patrick provides a full LOI-to-close timeline, showing:

• When to engage SBA lenders, tax, and legal support

• A 120-day roadmap (though many deals close in 90)

Also included in the free Business Buyer Toolkit:

• Due diligence checklist

• Asset vs. stock slides

• Working capital templates

Quality of earnings framework

Further Reading

1. Asset Sale vs. Stock Sale – A Comparison Between The Two
Leo Berwick
A clear walkthrough of the core differences between asset and stock sales, including tax implications for buyers and sellers. Céider includes how buyers often prefer asset purchases and why sellers favor stock transactions. 
Read the full article

2. Section 338(h)(10) Election – The Unicorn of M&A
Leo Berwick
An in‑depth primer on the 338(h)(10) election, explaining how it allows buyers to receive a stepped-up asset basis while sellers maintain single-level taxation. 
Read the full article

3. Asset Sale vs. Stock Sale: M&A Deal Structures
Jackie Ammon – Carta (June 18, 2024)
A modern perspective on the pros and cons of asset and stock deals, including step‑by‑step process descriptions and key tax considerations. 
Read the full article

4. 338(h)(10) Transaction Structure: Pros, Cons for Sellers, Buyers
RKL LLP
A comprehensive breakdown of the 338(h)(10) election as a qualified stock purchase (QSP), exploring eligibility, benefits, and negotiation dynamics.
Read the full article

5. Merger Structure Rundown: 338 Election
MPL Law Firm
A detailed legal overview of Section 338 elections, including criteria and mechanics for both standard and 338(h)(10) elections in M&A contexts.
Read the full article

Final Takeaway

If you're buying a business, don’t skip this step: Structure matters as much as price.

A poorly structured deal can cost you thousands in taxes—or worse, bring surprise liabilities post-close.

Before signing your LOI:

• Know your preferred structure

• Understand seller motivations

• Prepare side-by-side analysis

• Consider the 338(h)(10) election

• Use your due diligence team wisely

Every deal has its own complexities, but clarity on deal structure puts you in control—and gets you to the closing table prepared.

Contact us today to learn how we can support your next deal.