Asset Purchases vs. Stock Purchases

Choosing the Right Deal Structure Can Be Worth More Than the Purchase Price

Asset deal or stock deal? It’s one of the first structural questions in any acquisition — and one of the most consequential. The choice between purchasing a company’s assets versus purchasing its equity affects everything from tax liability to successor exposure to how employees, contracts, and intellectual property transfer. John Montague has advised on both structures across more than fifteen years of M&A practice, with a particular focus on technology company transactions. His combined legal and accounting background — J.D. from the University of Florida Levin College of Law, accounting degree from Stetson University — gives him a distinctive ability to analyze deal structures through both a legal and financial lens simultaneously.

From John Montague: I tell clients that the asset-vs.-stock question isn’t really a legal question or a tax question — it’s both at once. You can’t optimize the legal structure without understanding the tax consequences, and vice versa. That’s why I work closely with each client’s tax advisor from day one of deal structuring.

How We Help

John Montague advises buyers and sellers on deal structure selection and optimization, including analyzing the tax implications of asset versus stock acquisitions for both parties; structuring hybrid transactions such as Section 338(h)(10) elections that allow a stock sale to be treated as an asset sale for tax purposes; drafting asset purchase agreements with carefully delineated included and excluded assets and assumed and excluded liabilities; drafting stock purchase agreements with appropriate representations, warranties, and indemnification provisions; advising on the treatment of employees, contracts, permits, and licenses under each structure; and navigating the particular complexities of structuring acquisitions of technology companies, where IP transfer mechanics and third-party consent requirements vary significantly between asset and stock deals.

Understanding the Core Differences

In an asset purchase, the buyer selects which assets to acquire and which liabilities to assume. This provides surgical precision — a buyer can cherry-pick the valuable assets (intellectual property, customer contracts, equipment) while leaving behind unwanted liabilities (pending litigation, unfavorable leases, legacy obligations). The trade-off is complexity: each asset must be individually transferred, contracts may require third-party consent to assign, and the process involves more documentation.

In a stock purchase, the buyer acquires the seller’s equity interests and takes the company as-is — all assets, all liabilities, all contracts. The entity continues to exist, which simplifies the transfer of contracts, permits, and employee relationships. But the buyer also inherits everything, including unknown or contingent liabilities. This is why stock deals require more intensive due diligence and more robust indemnification provisions.

For technology companies, the choice carries additional considerations. Software licenses, API agreements, and cloud service contracts often contain anti-assignment clauses that are triggered by asset sales but not by stock sales. Conversely, an asset purchase may be preferable when the buyer wants the technology but not the target company’s regulatory history or legacy obligations. Having worked on technology M&A transactions since the early days of his career at Locke Lord LLP, John Montague understands these technology-specific structural nuances and helps clients navigate them strategically.

Frequently Asked Questions

Which is better for the buyer — an asset purchase or stock purchase?

Buyers generally prefer asset purchases because they can select specific assets, avoid inheriting unknown liabilities, and typically receive a stepped-up tax basis in the acquired assets. However, stock purchases may be preferable when the target holds non-assignable contracts, licenses, or permits that the buyer needs, or when the transaction needs to close quickly with minimal third-party consents.

Which is better for the seller?

Sellers of C corporations generally prefer stock sales because the proceeds are taxed once at the shareholder level as capital gains. An asset sale by a C corporation can result in double taxation — the corporation pays tax on the asset sale, and then shareholders pay tax again on the distribution of proceeds. For S corporations, LLCs, and partnerships, the analysis is different and depends on the specific tax attributes of the entity and its owners.

What is a Section 338(h)(10) election?

A 338(h)(10) election is a tax provision that allows a stock purchase to be treated as an asset purchase for federal income tax purposes. This can give the buyer the tax benefits of an asset purchase (stepped-up basis) while giving both parties the legal simplicity of a stock transfer. It’s available for acquisitions of S corporations and certain corporate subsidiaries, and requires agreement from both buyer and seller.

How does deal structure affect employees?

In a stock purchase, employees generally remain employed by the same legal entity, so their employment continues without interruption. In an asset purchase, the buyer typically makes new offers of employment to the employees it wants to retain. This distinction affects benefits continuity, accrued PTO, employment agreements, and non-compete arrangements.

Related Practice Areas: Mergers & Acquisitions | M&A Due Diligence | LOI & Term Sheet Drafting

Need help structuring your acquisition? Call 904-234-5653 or schedule a consultation.