Most business owners only get one chance to sell a company. Whether you’re a seasoned entrepreneur or finally ready to hang up your hat after building a thriving business, you’ll need to choose how the sale is structured—and that’s usually where your lawyer and the IRS square off like two boxers in a ring. On one side, your legal team wants to shield you from future liabilities.
On the other, the IRS is eagerly eyeing how much more tax it can collect, depending on the sale structure you pick. It’s a tug-of-war that can leave you feeling like you’re stuck in the middle. Here’s what you need to know if you’re operating in the M&A space and deciding on a stock sale or an asset sale.
What’s the Difference?
Stock Sale
With a stock sale, the buyer purchases the shares of the target company. The business entity remains intact—liabilities, assets, and existing contracts stay right where they are. From the seller’s perspective, this is often cleaner because you can typically walk away without too many post-sale obligations. But the downside for buyers is they generally inherit all the seller’s past baggage—like potential lawsuits or hidden liabilities that could pop up down the road.
Asset Sale
Here, the buyer purchases selected assets (and possibly some liabilities) of the business. You get to pick and choose: maybe the brand name, the equipment, and the goodwill, but not that lawsuit from disgruntled employees. It’s great for buyers who want a fresh start.
However, sellers might end up taking a double tax hit—once on the gains at the corporate level if the business is set up as a C corporation, and again at the individual level when profits are distributed. This is where the IRS is rubbing its hands together with glee.
Why Your Lawyer Prefers One Over the Other
Lawyers tend to lose sleep over liability issues (it’s basically in their job description). In many cases, they prefer asset sales because buyers can pick up only the “good stuff” and leave potential legal messes behind. If you’re the seller, your attorney might still lean toward a stock sale to ensure you’re rid of every last legal tie to your former business. Either way, their focus is on reducing future headaches—both yours and theirs.
Why the IRS Has Its Own Agenda
Taxes, taxes, taxes. The IRS wants the deal structured in a way that maximizes how much it can collect. In an asset sale, a portion of the purchase price might be allocated to tangible and intangible assets, potentially leading to higher recapture taxes. Stock sales, meanwhile, often result in capital gains, which may or may not be as lucrative for the IRS, depending on the seller’s basis in those shares.
Negotiations Can Get Heated
Once you realize the huge impact taxes and liabilities can have on your final payout—or the bill you might face later—you’ll see why everyone’s hackles go up. Buyers want a better tax write-off and minimal risk; sellers want to keep more money in their pockets and safely walk away.
Throw in your respective lawyers, each safeguarding their client’s interests, and the IRS looking for its piece of the pie, and you have a recipe for heated negotiations that can feel personal, even though it’s just business.
Finding the Right Balance
The truth is, there’s no “one-size-fits-all” solution. Depending on your business structure (e.g., S corp, C corp, LLC) and your long-term plans, you might benefit from a stock sale—or maybe an asset sale. The key is getting sound advice.
That often means picking a lawyer who understands the specifics of mergers and acquisitions, a tax professional who can model different scenarios, and a deal-maker who knows how to keep everyone calm during the negotiations.
Don’t Forget About the Human Factor
M&A deals aren’t just about dollars and cents. Emotions can run high, especially if you’ve poured years of sweat equity into your business. That’s why it’s important to have transparent conversations early on with potential buyers: discuss structure, tax considerations, liability concerns, and any other issues that could derail the transaction. A fair approach will save you headaches—plus a huge chunk of legal fees.
Closing Thoughts
Lawyers focus on liability, and the IRS focuses on taxes—two powerful forces that can lock horns over how a sale should be structured. Knowing the basics of stock vs. asset sales can help you navigate these waters more confidently. By enlisting a strong M&A team that covers both legal and tax angles, you’ll be in a better position to walk away with a deal that works for everyone—except, perhaps, the folks who wanted a bigger slice of the pie.
At the end of the day, making the right moves in your transaction can mean the difference between celebrating your exit or wishing you’d done it differently.
