What is the difference between an asset sale and a stock sale, and how does it change what I take home?

In a stock sale, you sell your shares and the buyer ends up owning the company. In an asset sale, the company sells its assets and contracts to the buyer, and the shell stays behind with the cash. The difference decides how many times your proceeds get taxed, so it belongs in the price conversation, not in the legal cleanup after it.

Why buyers ask for an asset deal

When a buyer purchases assets, it generally sets its tax basis in them at the price it paid. That is the step-up. Most of the premium over book value lands in goodwill, which the buyer can amortize over 15 years under Section 197 of the tax code. Those deductions cut the buyer's future tax bills, so buyers value the structure and often ask for it by default. Some strategics say they only do asset deals. That is a position, not a law.

What it costs a C corporation seller

If your company is a C corporation, as most venture-backed companies are, an asset sale can be taxed twice. The company pays corporate tax on the gain when it sells the assets. Then shareholders pay tax again when the cash is distributed to them. In a stock sale, shareholders pay one layer of tax on their own gain. Pass-through sellers such as S corporations and LLCs taxed as partnerships generally face one layer either way, which is why this fight is mostly a C corporation fight.

An example, hypothetical and federal only

Say a C corporation sells for $20 million. The company's tax basis in its assets is $2 million, and shareholders' basis in their stock is $500,000.

As a stock sale: the shareholders' gain is $19.5 million. At the top federal rate of 23.8 percent, the tax is about $4.64 million and they keep about $15.36 million.

As an asset sale: the company's gain is $18 million. At the 21 percent corporate rate it owes about $3.78 million, then distributes the remaining $16.22 million. Shareholders pay 23.8 percent on $15.72 million of gain, about $3.74 million, and keep about $12.48 million.

The gap is about $2.88 million. For the buyer, if the whole $18 million step-up lands in goodwill, 15-year amortization is $1.2 million a year of deductions, worth about $252,000 a year at a 21 percent rate. That is roughly $3.78 million undiscounted and about $2.16 million at an 8 percent discount rate. So the buyer's gain is real but smaller than your loss. Expect to bargain for a share of the gap, not all of it.

What changes the math

Net operating losses. Many startups carry losses that can offset some of the company-level gain. For losses generated after 2017, the offset is generally capped at 80 percent of taxable income.

Price allocation. In an asset sale the price is spread across asset classes, and some portions can be taxed at ordinary rates.

State taxes, your cap table, and whether your shares qualify for the small business stock exclusion. An asset sale can undo that exclusion, which is covered in the QSBS answer on this site.

None of these are in the example. All of them move the answer.

Bridge structures

Elections such as Section 338(h)(10) and an F reorganization can give a buyer asset-style tax treatment inside a stock deal. They are generally built for S corporations and subsidiaries of corporate groups, not for a typical venture-backed C corporation with many holders. Ask your tax advisor early whether any bridge fits your cap table. Do not assume one does.

The move

Put the structure in the LOI, before exclusivity starts. If the buyer wants assets, ask for the number: what will they pay to make you whole? Have your advisors model both structures with your real basis, losses and state taxes before you respond.

Questions for your advisor

Is my company a C corporation, an S corporation or an LLC? What is the company's tax basis in its assets, and what losses does it carry? What do I net in each structure? What is the step-up worth to this buyer?

This is general information, not tax advice.

Related reading: What is a strategic buyer and how do I find one for my startup; How do I negotiate a software company acquisition; What Is a Quality of Earnings Report and Why Does Every Buyer Require One; What is a letter of intent (LOI) in M&A; does QSBS apply when I sell my company.