One of the most important, and often early, questions in any M&A negotiation is: Should this be structured as an asset deal or a stock deal? This question arises across the deal spectrum, from “Main Street” businesses to middle-market transactions. While public company acquisitions tend to follow a more standardized stock deal structure, these represent a small portion of overall deal activity. For the vast majority of transactions, particularly in the lower and middle market, the structure deserves careful consideration.

Surprisingly, in many cases we encounter, transaction structure is not addressed in detail within the Letter of Intent (LOI), or it’s simply deferred. In practice, this isn't necessarily a red flag. Buyers and sellers are often focused on aligning on headline terms—purchase price, timing, and key conditions—before addressing the technical nuances of how the deal will be structured.

Asset vs. Stock Deal: The Basics

• In a stock deal, the buyer acquires the shares or equity of the selling entity, thereby assuming ownership of the legal entity itself.

• In an asset deal, the buyer selects specific assets and liabilities to acquire from the seller, which are then transferred into the buyer’s legal entity (or a newly formed entity).

Advantages of an Asset Deal

• Selective Risk Management: Buyers can avoid unwanted liabilities such as pension obligations, product warranties, or litigation exposure.

• Tax Efficiency: Buyers generally benefit from a “step-up in basis,” allowing assets and goodwill to be depreciated or amortized based on their fair market value.

Challenges of an Asset Deal

• Contractual Transfers: Assigning contracts, licenses, and permits can be complex or even impossible without third-party consent.

• Seller Tax Implications: Asset deals can result in higher tax burdens for sellers, who may push for a stock deal or higher consideration to make up the difference.

Advantages of a Stock Deal

• Simplicity for Sellers: Entire ownership is transferred in a single step, often resulting in more favorable tax treatment for the seller.

• Continuity: Operational continuity is easier to maintain, especially when it comes to contracts, leases, and licenses that remain with the entity.

Challenges of a Stock Deal

• Assumed Liabilities: Buyers assume all liabilities (known and unknown) along with the equity.

• No Step-Up in Basis: Buyers may not be able to reset the asset values for depreciation purposes, impacting long-term tax benefits.

Other Considerations

Transaction structure can also impact:

• Employee benefits and transition

• Intellectual property and technology assets

• Insurance policies

• Post-closing integrations

In some cases, tax elections, such as a Section 338(h)(10) election or F-reorganization, can help bridge the gap between buyer and seller preferences and provide a structure that meets both parties' objectives.

Need Guidance?

Choosing the right structure requires an in-depth understanding of your goals, risks, and tax considerations. The Weis Burney team has extensive experience helping clients navigate the complexities of M&A transactions.

Contact us today to discuss your next deal.

The foregoing is intended to be marketing material. Information is contained in this article is for general education and knowledge. It is not designed to be and should not be substituted for legal advice. This information is not intended to create an attorney-client relationship.