Asset Sale vs. Stock Sale
Investment Banking glossary · M&A & LBO Modeling Dynamics
Definition
Two M&A legal structures with very different tax outcomes. Stock Sale: buyer acquires the target's stock; inherits all assets, liabilities, and contingent risks; no step-up in tax basis (book write-ups create a DTL but no tax-deductible D&A); single layer of tax to the seller. Asset Sale: buyer acquires specified assets and assumes specified liabilities; tax basis is stepped up to FMV, producing tax-deductible D&A and real cash tax savings; for C-Corp sellers, triggers double taxation (corporate tax on the gain, then shareholder tax on distribution), which makes asset sales unattractive for most sellers. A Section 338(h)(10) election bridges the gap — legal stock sale with asset-sale tax treatment.
Asset Sale vs. Stock Sale in plain English
When one company buys another, it can either buy the whole company as a single package (a stock sale) or cherry-pick the specific pieces it wants (an asset sale) — and the tax bill is wildly different. In a stock sale the buyer inherits everything, the good and the ugly (hidden lawsuits, old debts), and gets no special tax perks. In an asset sale the buyer 'resets' the value of what it bought to today's price, which unlocks bigger future tax write-offs and real cash savings — great for the buyer. The problem is that for a regular corporation the seller often gets taxed twice on an asset sale (once at the company level, once when owners take the money out), so sellers usually hate it. A special IRS move called a Section 338(h)(10) election is the clever compromise: on paper it's a stock sale (seller-friendly), but it's taxed like an asset sale (buyer-friendly), giving both sides what they want.
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