Key Takeaways
- ✓ Asset purchases let buyers cherry-pick assets and avoid liabilities, with a stepped-up tax basis - but require individual transfer of every contract, permit, and employee
- ✓ Stock purchases transfer the entire entity (simple, fast) but saddle buyers with all liabilities - known and unknown
- ✓ Mergers combine entities by operation of law - most common for larger deals via reverse triangular merger structures
- ✓ The tax impact alone can swing the net proceeds by 15-25% - getting the structure wrong is one of the most expensive mistakes in M&A
- ✓ Section 338(h)(10) elections can give you the best of both worlds - but only if both parties agree and the entity qualifies
Every M&A deal starts with a question most people don't spend enough time on: how are we actually doing this?
Not the price. Not the timeline. The structure. Are you buying assets or stock? Is this a merger? What about a reverse triangular merger? Should you make a 338(h)(10) election?
Most buyers and sellers treat deal structure as a technical detail - something the lawyers and accountants figure out. That's a mistake. The structure of your deal determines:
- Tax treatment - who pays capital gains vs. ordinary income, and whether you face double taxation
- Liability exposure - whether the buyer inherits every lawsuit, environmental claim, and tax obligation the seller ever had
- Contract continuity - whether key customer contracts, leases, and licenses survive the transaction
- Employee retention - whether employees transfer automatically or have to be rehired (and whether they walk away)
- Closing timeline - whether you close in 45 days or 120
In my experience across years of M&A practice, I've seen structure choices save deals and I've seen them destroy them. I once worked on a deal where the buyer saved $1.2M in taxes by switching from an asset purchase to a stock purchase with a 338(h)(10) election - a change that took one conversation with the seller's tax advisor. I've also seen deals collapse because a seller's key customer contract had an anti-assignment clause that nobody caught until two weeks before closing, and the asset purchase structure meant that contract couldn't transfer.
This guide breaks down the three primary M&A deal structures, the specific tax and legal implications of each, and how to decide which one is right for your deal.
The Three M&A Deal Structures at a Glance
Before we go deep on each structure, here's the high-level comparison:
| Factor | Asset Purchase | Stock Purchase | Merger |
|---|---|---|---|
| What transfers | Selected assets and assumed liabilities only | Entire entity - all assets and all liabilities | Everything by operation of law |
| Buyer's tax basis | Stepped up to fair market value | Carryover (seller's old basis) | Depends on structure (tax-free vs. taxable) |
| Seller's tax treatment | Mixed (ordinary + capital gains); double tax risk for C-corps | Capital gains (single level) | Can be tax-free if structured as reorganization |
| Liability exposure | Limited to assumed liabilities | All liabilities (known and unknown) | All liabilities (surviving entity) |
| Contract transfer | Requires individual assignment + consent | Automatic (but watch change-of-control clauses) | Automatic by operation of law |
| Employee transfer | Must be rehired by buyer | Automatic - same employer | Automatic (surviving entity) |
| Typical timeline | 60-120 days | 45-90 days | 60-120+ days |
| Best for | Small-to-mid deals, distressed assets, cherry-picking | Clean companies, few shareholders, contract-dependent businesses | Larger deals, public companies, tax-free reorganizations |
Structure 1: Asset Purchase
An asset purchase is the most common structure for small and mid-market M&A deals. The buyer identifies specific assets they want - equipment, inventory, intellectual property, customer lists, contracts - and specific liabilities they're willing to assume. Everything else stays with the seller's entity.
Think of it as buying the contents of a house without buying the house itself. You pick the furniture, appliances, and artwork you want. The seller keeps the mortgage, the property taxes, and the leaky roof.
Why Buyers Love Asset Purchases
Tax Advantages
- Stepped-up basis - The buyer's tax basis in the acquired assets equals the purchase price (fair market value), not the seller's depreciated book value
- Higher depreciation deductions - That stepped-up basis means more depreciation and amortization deductions in the years following the acquisition
- Section 1060 allocation - The purchase price is allocated across asset classes (I through VII), and smart allocation can front-load tax benefits
- Goodwill amortization - Any purchase price above the fair market value of tangible assets becomes amortizable goodwill (15 years)
Liability Protection
- Cherry-pick liabilities - Only assume the liabilities explicitly listed in the purchase agreement
- Leave behind the unknown - Pending litigation, environmental claims, tax disputes, and undisclosed obligations stay with the seller
- Clean entity - The buyer operates through a new (or existing) entity without the seller's historical baggage
- Reduced diligence scope - You only need to diligence what you're buying (though you should still review what you're not)
The Problems with Asset Purchases
Asset purchases aren't free money. They come with significant operational friction:
Contract Assignment Headaches
Every contract must be individually assigned from the seller to the buyer. Many contracts contain anti-assignment clauses requiring the other party's consent. Key risks:
- Landlords can refuse to assign leases (or demand higher rent)
- Customers can use the assignment as leverage to renegotiate terms
- Government permits and licenses often can't be assigned at all
- IP licenses may have restrictions on assignment
Employee Transfer Risks
Employees don't transfer automatically. They must be terminated by the seller and rehired by the buyer. This creates:
- WARN Act exposure if 100+ employees (60 days notice required)
- Benefits gaps - employees lose seniority, PTO, retirement vesting
- Key employee flight - the transition window lets talent walk away
- Non-compete complications - seller's non-competes may not transfer
Real example:
A buyer structured a $4M acquisition as an asset purchase to avoid the seller's pending litigation. During due diligence, we discovered that the target's three largest customer contracts - representing 60% of revenue - contained anti-assignment clauses requiring written consent. One customer used the assignment request as an opportunity to reduce their annual spend by 25%. Another refused to consent entirely. The buyer ultimately renegotiated the price down by $800K and restructured two of the contracts pre-closing. Without catching this early, the buyer would have acquired a business missing a third of its revenue base.
The Seller's Double Tax Problem
For C-corporation sellers, asset sales create a double taxation event. Here's why:
| Step | What Happens | Tax Impact |
|---|---|---|
| 1. Corporate-level sale | The C-corp sells its assets to the buyer | Corporation pays corporate income tax on any gain (up to 21% federal) |
| 2. Liquidation distribution | Corporation distributes net proceeds to shareholders | Shareholders pay capital gains tax on the distribution (up to 23.8% with NIIT) |
| 3. Net result | Combined effective tax rate on the same dollars | Effective rate can approach 40%+ vs. ~24% for a stock sale |
This is why C-corp sellers push so hard for stock deals. For S-corporations, partnerships, and LLCs, the double-tax problem doesn't exist because these are pass-through entities - the gain flows directly to the owners' personal returns.
Successor Liability: The Exception That Swallows the Rule
Buyers choose asset purchases to avoid inheriting liabilities. But courts have developed exceptions that can pierce that protection:
- De facto merger doctrine - If the transaction looks, walks, and quacks like a merger (same employees, same location, seller dissolves), courts may treat it as one and impose successor liability
- Mere continuation - If the buyer is essentially a continuation of the seller (same ownership, same management, same operations), the corporate separateness doesn't hold
- Fraud exception - If the asset sale was structured specifically to defraud the seller's creditors
- Product liability - Many states impose successor liability for product liability claims regardless of deal structure
- Environmental liability - CERCLA (federal Superfund law) can impose environmental cleanup liability on current property owners regardless of how they acquired the property
The lesson: an asset purchase doesn't guarantee liability protection. How you structure the post-closing operations matters as much as how you structure the deal itself.
Structure 2: Stock Purchase
In a stock purchase, the buyer acquires the seller's ownership interests (stock in a corporation, membership interests in an LLC). The company itself doesn't change - it keeps its assets, liabilities, contracts, employees, tax ID number, everything. What changes is who owns the company.
Using the house analogy: you're buying the house itself, not the contents. The mortgage, the property taxes, the leaky roof - they all come with it.
Why Stock Purchases Work
Simplicity
- No individual transfers - The entity continues to own everything it already owns. No bills of sale, no assignment agreements, no title transfers
- Contracts stay in place - The entity that signed the contracts still exists, so no consent or assignment needed (usually)
- Employees remain employed - No termination/rehire process, no WARN Act issues, no benefits gaps
- Permits and licenses - Government permits typically stay with the entity
Seller Tax Advantages
- Single level of tax - Proceeds go directly to shareholders, avoiding double taxation
- Capital gains treatment - Sale of stock is a capital transaction (lower rates than ordinary income)
- Cleaner exit - No need to dissolve the entity, liquidate, or distribute assets
- Potential QSBS exclusion - If the stock qualifies under Section 1202, sellers may exclude up to $10M or 10x basis from gain
The Risks Buyers Must Manage
Stock purchases are simple, but simplicity comes at a price:
| Risk | What Can Go Wrong | How to Protect Yourself |
|---|---|---|
| Unknown liabilities | You inherit every obligation the company ever had - lawsuits, tax deficiencies, regulatory violations, environmental contamination | Thorough due diligence + comprehensive reps & warranties + indemnification with escrow |
| Change-of-control clauses | Key contracts may allow termination when ownership changes - even though the entity survives | Identify all change-of-control provisions in diligence; get consents or waivers pre-closing |
| No stepped-up basis | Buyer inherits seller's depreciated basis - lower deductions, higher future gain on resale | Consider 338(h)(10) election if entity qualifies; factor tax cost into purchase price |
| Minority shareholders | If not all shareholders agree to sell, you have a holdout problem (especially without drag-along rights) | Confirm shareholder count and drag-along provisions early; consider merger structure instead |
| Tax history | Unfiled returns, unpaid taxes, and aggressive positions all become your problem | Tax diligence + tax indemnification + escrow for known exposures |
Change-of-control traps are more common than you think:
In a recent transaction, the target had a master service agreement with its largest customer (45% of revenue). The contract contained a change-of-control clause allowing termination on 30 days' notice. The seller had never triggered it because ownership hadn't changed in 15 years. During due diligence, we flagged the clause, approached the customer before closing, and negotiated a 3-year extension commitment. Without that pre-closing conversation, the buyer would have been one certified letter away from losing nearly half their revenue.
Not Sure Which Structure Fits Your Deal?
The right structure depends on entity type, tax situation, contract portfolio, and deal size. Get it wrong, and you'll pay for it in taxes or inherited liabilities. Get it right, and you start day one in a stronger position.
The Best of Both Worlds: Section 338(h)(10) Elections
What if you could buy stock (simple transaction) but get the tax benefits of an asset purchase (stepped-up basis)? That's exactly what a Section 338(h)(10) election does.
When both buyer and seller agree to make this election, the IRS treats the stock purchase as if the target corporation sold all its assets and then liquidated. The buyer gets a stepped-up basis in the assets. The transaction mechanics remain a stock purchase - no individual asset transfers, no contract assignments, no employee terminations.
When 338(h)(10) Works
| Requirement | Details |
|---|---|
| Entity type | Target must be an S-corporation or a subsidiary of a consolidated group (not available for standalone C-corps) |
| Buyer requirement | Must be a corporation (or entity treated as corporation for tax purposes) |
| Purchase threshold | Must acquire at least 80% of the target's stock within a 12-month period |
| Joint election | Both buyer and seller must agree to the election - seller faces deemed asset sale treatment |
| Filing deadline | Election must be filed by the 15th day of the 9th month after the acquisition date (Form 8023) |
The Negotiation Dynamic
Here's where it gets interesting. The 338(h)(10) election benefits the buyer (stepped-up basis) but can hurt the seller (the deemed asset sale may allocate proceeds to ordinary income categories rather than capital gains). So sellers typically ask for a gross-up payment - the buyer pays the seller extra to compensate for the additional tax burden.
Whether this makes economic sense depends on the math: if the buyer's present value of future tax savings from stepped-up basis exceeds the gross-up payment, the election creates value for both parties. If not, stick with a straight stock purchase.
Pro tip:
Run the 338(h)(10) analysis early - before LOI if possible. I've seen deals where both sides assumed the election was obvious, only to discover during due diligence that the entity didn't qualify (because it was an LLC taxed as a partnership, not an S-corp). By that point, the purchase price had been negotiated based on stock-deal tax assumptions, and the entire economic model had to be reworked.
Structure 3: Mergers
A merger is fundamentally different from an asset or stock purchase. Instead of one party buying from another, two entities combine by operation of law - meaning the state statute governs how assets and liabilities transfer, not the parties' agreement. The surviving entity automatically holds everything the merged entity had.
Types of Mergers
| Merger Type | How It Works | When It's Used |
|---|---|---|
| Forward merger | Target merges into buyer; target disappears, buyer survives | Simple deals where buyer wants to absorb target entirely |
| Reverse merger | Buyer merges into target; buyer disappears, target survives | When target has valuable licenses, permits, or contracts that shouldn't transfer |
| Forward triangular merger | Target merges into a buyer-created subsidiary; target disappears, subsidiary survives | Buyer wants to keep target's business separate in a subsidiary |
| Reverse triangular merger | Buyer's subsidiary merges into target; subsidiary disappears, target survives as buyer's subsidiary | Most common - preserves target entity, contracts, and permits while giving buyer full control |
Why Reverse Triangular Mergers Dominate
The reverse triangular merger is the default structure for most mid-market and larger M&A transactions because it solves the biggest problems of both asset and stock purchases:
- Target entity survives - All contracts, permits, licenses, and employee relationships stay intact (like a stock purchase)
- No consent issues - Since the target entity continues to exist, most anti-assignment clauses aren't triggered (though change-of-control clauses may still apply)
- Squeeze-out minority shareholders - Unlike a stock purchase, a merger can force dissenting shareholders to accept the deal (subject to appraisal rights)
- Tax flexibility - Can be structured as tax-free (Type A reorganization) if paid with buyer stock, or taxable if paid in cash
- Clean structure - Buyer's parent company isn't directly exposed to target's liabilities - they're housed in the subsidiary
The downside: mergers are more complex legally. They require board approvals, shareholder votes (in most cases), state filings, and compliance with statutory merger procedures. For smaller deals, this overhead isn't worth it - an asset or stock purchase is simpler.
How to Choose the Right Structure for Your Deal
There's no universal "best" structure. The right choice depends on a matrix of factors specific to your deal. Here's the decision framework I walk clients through:
Start with Entity Type
| Seller's Entity | Default Structure | Why |
|---|---|---|
| C-Corporation | Stock purchase or merger | Asset sale triggers double taxation; stock sale or merger avoids it |
| S-Corporation | Stock purchase with 338(h)(10) election | Pass-through avoids double tax; election gives buyer stepped-up basis |
| LLC (partnership-taxed) | Asset purchase (or membership interest purchase) | Pass-through entity - no double tax; membership interest sale is similar to stock sale but with different mechanics |
| Sole proprietorship | Asset purchase (only option) | No separate entity exists - you can only buy the assets |
Then Layer in Deal-Specific Factors
| If the deal has... | Lean toward... | Because... |
|---|---|---|
| Known or suspected liabilities | Asset purchase | Leave the liabilities behind |
| Non-assignable contracts or permits | Stock purchase or merger | Entity survives, contracts stay in place |
| Many shareholders (including minority) | Merger | Squeeze-out dissenters via statutory merger |
| Healthcare, defense, or regulated industry | Stock purchase or merger | Regulatory permits and licenses usually can't be assigned |
| Buyer wants tax benefits from purchase price | Asset purchase or 338(h)(10) | Stepped-up basis = more depreciation deductions |
| Distressed seller or bankruptcy | Asset purchase (363 sale) | Bankruptcy court can convey assets free and clear of liens |
| Buyer wants to pay in stock (tax-free to seller) | Merger (Type A reorganization) | Qualified reorganization defers seller's tax |
The Five Most Expensive Structure Mistakes I See
1. Defaulting to asset purchase "because it's safer"
Yes, asset purchases limit liability. But if the target is a C-corp, the seller's after-tax proceeds drop dramatically - which means they'll demand a higher purchase price to compensate. A $5M asset deal might cost the same as a $4.2M stock deal when you factor in the seller's tax gross-up. Run the math before picking the structure.
2. Ignoring anti-assignment clauses until closing
If you're doing an asset deal and the target has material contracts, you need to identify anti-assignment and change-of-control provisions during LOI diligence - not during the purchase agreement phase. Discovering that your largest customer can walk away two weeks before closing is a nightmare that's entirely preventable.
3. Assuming 338(h)(10) is available without checking
I've seen buyers negotiate purchase prices based on the tax savings from a 338(h)(10) election, only to discover in diligence that the target is an LLC taxed as a partnership - which doesn't qualify. Or that the target's S-corp election was terminated years ago. Verify entity status and election eligibility before you build it into your financial model.
4. Not modeling the Section 1060 allocation
In asset purchases, the purchase price must be allocated across seven asset classes under Section 1060. How you allocate directly affects both parties' taxes - allocating more to depreciable assets (Class V) benefits the buyer with faster deductions, while allocating to goodwill (Class VII) means 15-year amortization. Buyers and sellers have opposing interests here, and failing to negotiate the allocation in the purchase agreement leads to post-closing disputes.
5. Picking the structure without involving tax counsel
Deal structure is a joint legal-and-tax decision. I've seen M&A attorneys draft purchase agreements for a structure that their client's CPA later realized was tax-inefficient - requiring a restructure that added $50K in legal fees and two months to the timeline. Get your M&A attorney and tax advisor in the same room before you sign the LOI.
Quick Reference: Which Structure When?
Asset Purchase
Best when you want control
- ✓ Small-to-mid deals (<$10M)
- ✓ Known liability risks
- ✓ S-corp or LLC sellers
- ✓ Distressed acquisitions
- ✓ Buyer wants specific assets only
- ✗ Avoid if target has non-assignable contracts
Stock Purchase
Best when you want simplicity
- ✓ Clean target with few liabilities
- ✓ C-corp sellers (avoid double tax)
- ✓ Contract-dependent businesses
- ✓ Regulated industries (permits)
- ✓ Few shareholders
- ✗ Avoid if significant unknown liabilities
Merger
Best when you want flexibility
- ✓ Larger transactions ($10M+)
- ✓ Many or minority shareholders
- ✓ Tax-free reorganizations
- ✓ Public company targets
- ✓ Complex ownership structures
- ✗ Avoid for simple, small deals
Structure Your Deal Right the First Time
The wrong deal structure costs you in taxes, inherited liabilities, or lost contracts. I've structured transactions across every entity type and deal size - and the structure conversation is always the first one I have with clients.
Experienced M&A representation. Managing partner on every deal. Nationwide practice.
Frequently Asked Questions About M&A Deal Structures
What is the difference between an asset purchase and a stock purchase?
In an asset purchase, the buyer selects specific assets (equipment, IP, contracts, inventory) and specific liabilities to assume. The seller's legal entity stays behind. In a stock purchase, the buyer acquires the seller's ownership shares, which means the entire entity transfers - every asset, every liability, every contract, every lawsuit. Asset purchases give buyers more control over what they're buying; stock purchases are simpler but riskier because you inherit everything.
Which deal structure is better for the buyer?
Buyers generally prefer asset purchases because they get a stepped-up tax basis (higher depreciation deductions), they can leave unwanted liabilities behind, and they choose exactly which assets to acquire. However, stock purchases are better when the target has non-assignable contracts, government permits, or licenses that would be lost in an asset sale. The right structure depends on your specific deal - there's no universal answer.
Which deal structure is better for the seller?
Sellers generally prefer stock purchases because the proceeds are taxed at capital gains rates (lower than ordinary income), there's no double taxation issue for C-corporation sellers, and the transaction is simpler since the entity transfers as a whole. Asset sales can trigger double taxation for C-corp sellers - the corporation pays tax on the asset sale, then shareholders pay again when they receive the proceeds.
What is a Section 338(h)(10) election?
A Section 338(h)(10) election lets you structure a stock purchase but treat it as an asset purchase for tax purposes. The buyer gets the stepped-up basis and depreciation benefits of an asset deal, while the transaction mechanics are simpler because you're still buying stock. Both buyer and seller must agree to the election, and it only works for S-corporations and certain subsidiary acquisitions. It's one of the most powerful - and most misunderstood - tools in M&A tax planning.
What is successor liability in an asset purchase?
Even though asset purchases generally let buyers avoid the seller's liabilities, courts have carved out exceptions through the 'successor liability' and 'de facto merger' doctrines. If a court determines that the asset purchase was essentially a disguised merger - same employees, same location, same business, seller dissolved - the buyer can be held liable for the seller's pre-closing obligations. This is why proper deal structuring with experienced M&A counsel matters.
Do all contracts transfer in a stock purchase?
In a stock purchase, contracts generally remain in place because the legal entity that signed them continues to exist. However, many contracts contain change-of-control provisions that allow the other party to terminate or renegotiate when ownership changes. These provisions are common in key customer agreements, supplier contracts, leases, and loan documents. Identifying and addressing change-of-control clauses during due diligence is critical.
How does deal structure affect employees?
In a stock purchase, employees remain employed by the same entity - nothing changes on paper. In an asset purchase, employees technically lose their jobs with the seller and must be rehired by the buyer. This triggers WARN Act considerations for larger companies, creates gaps in benefits and seniority, and gives key employees a window to walk away. Most asset deals include employee transition plans to manage this risk.
What is a reverse triangular merger?
A reverse triangular merger is a structure where the buyer creates a subsidiary, that subsidiary merges into the target company, and the target survives as a wholly-owned subsidiary of the buyer. It combines the simplicity of a merger (everything transfers by operation of law) with the practical benefit of keeping the target as a separate legal entity. It's the most common structure for larger M&A transactions because it preserves contracts, permits, and licenses while giving the buyer full ownership.
How long does it take to close each type of deal structure?
Asset purchases typically take 60-120 days because every asset must be individually identified, valued, and transferred, and third-party consents must be obtained. Stock purchases usually close in 45-90 days because the entity transfers as a whole. Mergers can take 60-120+ days depending on shareholder approval requirements and regulatory filings. The actual timeline depends on the complexity of the deal, not just the structure.
Can I change the deal structure after signing an LOI?
Technically yes, but it's expensive and disruptive. Switching from stock to asset (or vice versa) after LOI means renegotiating price (because tax treatment changes), redrafting the purchase agreement from scratch, re-running parts of due diligence, and potentially re-obtaining lender approval. Getting the structure right before you sign the LOI saves significant time and money.