Asset sale or stock sale: the structure decision that quietly changes the price

Two owners sell businesses with the same revenue, the same EBITDA, and the same buyer pool. They get headline offers within a hundred thousand dollars of each other. Twelve months later one has roughly thirty percent more money in the bank than the other. The wedge is not negotiation skill. It is the structure of the deal.

Almost every middle-market sale comes down to two structural choices: is the buyer purchasing the assets of the business, or the equity in the business; and is the transaction taxable today, or partly deferred for the seller. Those choices interact with the seller's entity type, the buyer's intent, the company's depreciable assets, and the tax rules in effect at closing. Get them right and the price stays high and the after-tax proceeds stay higher. Get them wrong and the same headline number can come with a tax bill no one warned the owner about.

The good news for owners is that the choices are not that complicated to understand. The bad news is that almost no one explains them before the letter of intent gets signed, which is the point at which structure stops being negotiable.

The buyer wants assets. The seller wants stock. Why.

The first rule of structuring a sale is that buyers and sellers want opposite things, and there are good economic reasons for the disagreement.

A buyer wants to acquire assets. Buying assets gives the buyer a fresh tax basis equal to the price paid. That basis can then be written off through depreciation and amortization deductions, lowering the buyer's taxable income for years. Goodwill, customer relationships, and other intangibles get amortized over fifteen years. Tangible equipment can often be fully written off in the year of purchase under current bonus depreciation rules. The cash value of those future deductions is real money to the buyer. An asset deal also lets the buyer pick which liabilities to assume and which to leave behind, which matters when the seller may have unknown tax, employment, or product-liability exposures.

A seller wants to sell stock, or membership interests, or partnership interests. Selling equity produces a single layer of capital gains tax for the owner, often at long-term capital gains rates. There is no asset retitling, no separate vehicle title transfers, no contract reassignments, no licensing or permit re-issuance. The corporate entity stays intact, and the buyer steps into the owner's shoes.

Across hundreds of middle-market deals the pattern is so consistent that the Philadelphia Bar Association's tax section summarizes it in two lines:

Every deal you will ever look at is some version of finding the middle ground inside that tension. The middle ground is where structure earns its keep.

The four corners of the structure decision

There are exactly four combinations to know. Most middle-market deals end up in one of them.

Two notes on the matrix. Under Section 368 reorganization rules, an equity-for-equity portion of a deal generally needs to be roughly 40 percent or more of total consideration to qualify for tax-deferred treatment on that portion. And every deal mixes cash and stock to some degree. The pure corners exist mostly in textbooks. The art is moving the deal toward the corner that matches the seller's situation.

338(h)(10): the bridge for S-corps

If the company being sold is an S-corporation, there is a tax election that lets the buyer and seller have a stock deal legally but an asset deal for tax purposes. It is called a Section 338(h)(10) election, after the part of the tax code that defines it.

The mechanics: buyer and seller jointly elect, on a tax form filed after closing, to treat the stock purchase as if the corporation had sold all its assets and then liquidated. Legally the deal is a stock transaction. The buyer signs a stock purchase agreement, takes the corporate entity, keeps the licenses and contracts in place. But for tax purposes, the IRS pretends an asset sale happened underneath. The buyer gets a stepped-up basis in the underlying assets. The seller gets capital-gains treatment because their S-corp passes through the gain at the shareholder level.

The election does require some negotiation. The deemed asset sale can trigger a higher effective tax rate for the seller than a straight stock sale would, because some of the gain may be reclassified as ordinary income via depreciation recapture (more on that below). Sellers usually agree to the election in exchange for a gross-up: an increase in the purchase price that compensates them for the extra tax. The buyer is willing to pay the gross-up because the present value of their new depreciation deductions exceeds the cost.

A close cousin, Section 336(e), accomplishes a similar result when the buyer is not a corporation and the 338 rules do not strictly apply. And Section 338(g) is a buyer-only election generally reserved for situations where the seller has no US tax presence.

The F-reorganization: the pre-sale move that fixes a lot

S-corporations have a recurring problem at sale: the rules for S-corp eligibility are strict and easily violated by accident. Having more than 100 shareholders, accidentally creating a second class of stock with different distribution rights, an ineligible shareholder buying shares, community-property complications in a divorce, any of those can quietly disqualify the S-election years before anyone notices. If diligence finds it, the buyer can argue the S-corp never really existed and re-price the whole deal.

An F-reorganization, named after the part of Section 368 that allows it, is a pre-sale restructuring that solves this. The owner contributes their existing S-corp stock to a new holding company (also an S-corp), then converts the original operating entity from a corporation to a single-member LLC. The holding company is now the parent. The operating business sits inside a disregarded entity for tax purposes. When the sale happens, the buyer purchases the membership interests of the LLC, which is treated as a deemed asset sale for tax. The seller still pays gains at the shareholder level, but the buyer gets the basis step-up they want, and the historical S-corp exposure is sanitized.

F-reorgs take roughly four weeks of work and have to happen before the buyer is at the negotiation table. They are routine for tax counsel, expensive to undo after an LOI is signed, and one of the most common reasons owners are told "you should have started this six months ago."

Partnerships and LLCs: the 754 election

If the company being sold is a partnership or a multi-member LLC taxed as a partnership, the structure conversation looks different. There is no equivalent to the 338(h)(10) election because partnerships do not have stock. Instead, there is the Section 754 election.

When a partnership has a Section 754 election in place, or makes one in the year of the transaction, the partnership's inside basis in its assets gets adjusted to reflect what the buyer actually paid for the partnership interest. The adjustment applies only to the buyer's share of the assets, not the whole partnership. The effect is similar to a partial step-up: the buyer gets higher depreciation and amortization deductions going forward, allocated specifically to them.

The benefit is large in industries where the partnership owns appreciated real estate or significant depreciable equipment. The election is permanent for the partnership, so it has implications beyond the single transaction. Most established partnerships have it in place. Owners who plan to sell partnership interests should confirm the election is in place well before going to market.

The recapture trap: why "20 percent cap gains" is sometimes a lie

The single biggest surprise on the seller's side of structure conversations is depreciation recapture. The rule is simple to state and brutal in effect.

When a business sells tangible equipment, machinery, vehicles, or other property that has been depreciated over the years, the tax code does not let the seller pay long-term capital gains rates on the full gain. Section 1245 of the tax code says: to the extent the gain represents depreciation already deducted in prior years, that portion is recaptured and taxed as ordinary income, not capital gain.

For a manufacturing business with significant depreciated equipment, the recapture can be substantial. For a services business with little tangible equipment, it is often immaterial. The point is that "I will be at long-term cap gains rates" is a sentence many sellers say with confidence that does not survive contact with a tax model. The number that lands in the seller's bank account after a sale is almost never a clean 20 percent off the top.

Goodwill and other Section 197 intangibles, which is most of where the purchase price gets allocated in a service business, generally do get capital-gains treatment. So the recapture trap is a tangible-asset problem more than a services problem. But every owner should ask their tax advisor for the recapture estimate before they get attached to a net-proceeds number.

Five questions to take to your tax advisor

No article replaces the work of a deal-tax attorney on a specific transaction. But the conversations get better when owners walk in already knowing the questions.

1. Given my entity type, what is the realistic structure my buyer pool will accept? Strategic buyers and private equity have different defaults. The answer changes by industry too.
2. Does an F-reorganization make sense for me, and if so, when should it happen? If the answer is yes and you are inside twelve months of a possible sale, start now. If you are inside six months, the window may already be closing.
3. If a 338(h)(10) election comes up in negotiations, what would the gross-up have to be to make me whole? Buyers will ask. Owners who can answer in real time keep more leverage.
4. What is my depreciation recapture exposure? Have it modeled before the LOI. If it is material, your net proceeds expectations need to be adjusted upward in the price negotiation, not downward at the closing table.
5. Have we considered Section 1202 / Qualified Small Business Stock? The 2025 tax law made this exclusion significantly more generous. For many C-corp owners, it is worth the analysis even if it has been ruled out in the past.

Structure is one of the few parts of a sale where the owner has real leverage before the LOI is signed and almost none after. The owners who get the highest after-tax proceeds are the ones who spent forty hours with a tax advisor twelve months before going to market. The owners who get the lowest are the ones who first heard the word "338(h)(10)" two weeks before closing.

Sources: Pete Miller, Clark Nuber PS, Tax Structuring of Merger and Acquisition Transactions (May 2025). Philadelphia Bar Association Tax Section, Tax Provisions in M&A Transactions panel (September 2022). Deloitte M&A Tax Talk, Tax basis step-up considerations (April 2026) and Essentials for a successful sale transaction (August 2024). Internal Revenue Code Sections 338, 336(e), 368, 754, 1245, 1060, and 1202. Examples and commentary are the work of the Next Chapter Wealth editorial team and are general in nature. Specific transactions require analysis by qualified tax counsel.