Private-company M&A in the United States uses one of three legal structures: an asset purchase, in which the buyer acquires specific assets and assumes only specified liabilities; a stock purchase, in which the buyer acquires the target's equity and the whole company comes along intact; or a statutory merger, in which two entities combine by operation of state law. Asset purchases dominate at the smaller end of the market because the buyer gets a tax basis step-up and can leave unwanted liabilities behind, while stock purchases and reverse triangular mergers take over when contracts, licenses, or a long shareholder list make transferring assets one by one impractical.
What follows is educational, not legal or tax advice. Structure choice can change a seller's after-tax proceeds materially, so involve qualified M&A counsel and a tax advisor before signing a letter of intent.
The three basic deal structures
Asset purchase
In an asset purchase, the buyer (often a new entity formed for the deal) buys identified assets from the selling company: equipment, inventory, intellectual property, customer relationships, goodwill. The buyer assumes only the liabilities listed in the purchase agreement. The selling entity survives the closing, pays off the obligations it retained, and usually dissolves after distributing the proceeds.
Because the company itself never changes hands, everything must be conveyed piece by piece. Vehicle titles are re-registered, leases and customer contracts are assigned (frequently requiring the counterparty's consent), permits are reissued, and employees are terminated by the seller and rehired by the buyer. The purchase price is allocated among classes of assets under Section 1060 of the Internal Revenue Code, and both buyer and seller report that allocation to the IRS on Form 8594. The allocation sets the buyer's new, stepped-up tax basis, which generally lets the buyer depreciate the assets again and amortize purchased goodwill over 15 years for tax purposes.
Stock purchase
In a stock purchase (a membership interest purchase, for an LLC), the buyer acquires the ownership interests directly from the shareholders. The company itself is untouched: same legal entity, same employer identification number, same contracts, same permits, same workforce. Nothing needs retitling, although contracts containing change-of-control clauses (provisions triggered when ownership of a party changes) may still require consent.
The trade-off is that the buyer inherits the entity whole, including liabilities nobody has discovered yet: old tax exposure, warranty claims, employment disputes. Buyers respond with deeper diligence, indemnification from the sellers (a contractual promise to reimburse covered losses), escrows, and often representations and warranties insurance. For tax purposes the buyer takes a carryover basis in the company's assets, meaning no step-up, unless the parties make a special election covered below.
Merger forms: direct, forward triangular, reverse triangular
A statutory merger combines two entities under a state merger statute. One entity survives; the other ceases to exist, and its assets and liabilities vest in the survivor automatically. Once the required shareholder approval is obtained, every share converts into the right to receive the merger consideration, so a merger does not need every shareholder's signature, unlike a stock purchase. Dissenting holders are generally limited to appraisal rights, a court proceeding to determine the fair value of their shares.
- Direct forward merger. The target merges straight into the buyer and disappears. Simple, but the target's liabilities land directly on the buyer's own balance sheet, so acquirers rarely use it.
- Forward triangular merger. The buyer forms a shell subsidiary, called a merger sub, and the target merges into it and disappears, leaving the acquired liabilities contained in the surviving sub. Because the target ceases to exist, many of its contracts are treated as having been transferred, raising consent issues similar to an asset deal. A taxable forward merger is generally treated as an asset sale for federal income tax purposes.
- Reverse triangular merger. The merger sub merges into the target, and the target survives as a wholly owned subsidiary of the buyer. Target shares are cancelled and converted into the right to receive the deal consideration. Contracts, permits, and licenses stay inside the same legal entity, which is why this is the workhorse structure for acquiring companies with many shareholders or hard-to-move agreements. A taxable reverse triangular merger is generally treated as a stock sale for tax purposes.
Comparison at a glance
| Structure | What transfers | Unknown liabilities | Buyer's tax basis | Typical use |
|---|---|---|---|---|
| Asset purchase | Only listed assets and liabilities; contracts assigned individually | Generally stay with the seller | Stepped up to purchase price | Smaller deals; buyers focused on liability protection and tax deductions |
| Stock purchase | The entire entity, intact | Come with the company | Carryover, unless a tax election applies | Hard-to-assign contracts or licenses; small shareholder group |
| Reverse triangular merger | The entire entity, which survives as a subsidiary | Contained in the acquired subsidiary | Generally carryover, as in a stock sale | Many shareholders; contract continuity matters |
| Forward triangular merger | Assets and liabilities vest in the buyer's merger sub; target disappears | Contained in the merger sub | Asset-sale treatment when taxable | Less common; asset-style tax treatment with merger mechanics |
Three examples of how the choice plays out
A plumbing contractor with $900,000 of EBITDA (earnings before interest, taxes, depreciation, and amortization) sells to an individual buyer for $3.5 million. The buyer purchases assets: trucks, tools, the customer list, the trade name. The seller's LLC settles its remaining bills and dissolves. The buyer gets a full basis step-up and starts depreciating, and none of the seller's history follows the business.
A wholesale distributor organized as an S corporation, with $6 million of EBITDA, sells to a private equity firm for $36 million. It holds hundreds of supplier agreements that would each need consent in an asset deal. The parties sign a stock purchase agreement with a joint Section 338(h)(10) election: legally a stock sale, so the contracts are undisturbed, but taxed as an asset sale, so the buyer gets the step-up. The sellers negotiate a price increase to cover the extra tax the election creates for them.
A software company with 45 shareholders, including former employees who exercised options, sells to a strategic acquirer for $50 million. Collecting 45 signatures on a stock purchase agreement would give every small holder holdout leverage. Instead, the buyer forms a merger sub and completes a reverse triangular merger. Once holders of the required majority approve, every share converts to cash automatically.
Tax treatment drives most structuring fights
Three points explain the tug-of-war. First, buyers want a stepped-up basis because it produces depreciation and amortization deductions that shelter future income; asset purchases, and deals taxed like them, deliver the step-up, while stock purchases deliver carryover basis. Second, when the target is a C corporation (a company taxed at the entity level), an asset sale is taxed twice: once inside the corporation on the gain, and again when the after-tax proceeds are distributed to shareholders. That double layer is why owners of C corporations resist asset deals. Third, for S corporations and other pass-through entities, gain is generally taxed once at the owner level, which makes asset-style treatment far more workable, though items such as depreciation recapture can shift part of the gain to ordinary income rates.
The Section 338(h)(10) election bridges the two worlds. It is available when the target is an S corporation or a corporate subsidiary, the buyer is a corporation, and the buyer acquires at least 80 percent of the stock in a qualified stock purchase; buyer and sellers must elect jointly. The transaction stays a stock sale as a legal matter, but federal tax law treats it as if the company had sold its assets, giving the buyer the step-up and 15-year goodwill amortization. Sellers commonly negotiate a gross-up in the price for any additional tax. Elections like this carry strict eligibility rules and deadlines, so bring in tax counsel early.
Consideration: how the seller actually gets paid
Structure defines what is sold. Consideration defines what the seller receives, and most private deals combine several forms.
- Cash at closing. The cleanest outcome for a seller. A portion is often held in escrow (a third-party account that secures the seller's indemnification obligations) for a negotiated period after closing.
- Buyer stock or rollover equity. The seller takes part of the price in equity of the buyer or its holding company. Rollover equity is standard in private equity deals because it keeps the seller invested in the outcome; depending on the structure, some of it can be received on a tax-deferred basis.
- Seller notes. A promissory note from the buyer for part of the price, paid over time with interest and usually subordinated to bank debt, meaning the bank gets paid first. Seller notes are common in smaller transactions where third-party financing does not cover the full price.
- Earnouts. Contingent payments tied to post-closing performance, usually revenue, gross profit, or EBITDA over a defined period. In SRS Acquiom's data on private-target deals outside life sciences, 24 percent of 2025 deals included an earnout, up from 19 percent in 2014, and across deals that include one, roughly one in five earnout dollars is actually paid. Earnouts bridge valuation gaps but are notoriously dispute-prone; metric definitions, accounting conventions, and operating covenants all need to be nailed down in the agreement.
One-step vs. two-step processes for private targets
These labels come from public-company practice. In a one-step merger, the target signs a merger agreement, mails shareholders a proxy statement, holds a vote, and then closes. In a two-step deal, the buyer first makes a tender offer (an offer made directly to shareholders to buy their shares) and then completes a back-end merger to acquire the shares that were not tendered. Under Section 251(h) of the Delaware General Corporation Law, that back-end merger can be completed without a shareholder vote if the tender offer brings in enough shares, but the statute applies only to targets listed on a national securities exchange or held of record by more than 2,000 stockholders. In practice, the two-step route is a public-company tool.
Private targets close in one step. When the shareholder group is small, everyone simply signs the stock or asset purchase agreement. When a merger is used, the required majority typically approves by written consent, a signed document that substitutes for a shareholder meeting, delivered at or immediately after signing. For a private deal, the sequencing question that actually matters is whether to sign and close simultaneously, which is common in smaller transactions with no third-party conditions, or to sign first and close weeks later while lender financing, key contract consents, and any required regulatory filings are completed.
Sources
- IRS: About Form 8594, Asset Acquisition Statement Under Section 1060
- SRS Acquiom: Earnout and Milestone Trends in Private-Target M&A Deals
- Wyrick Robbins: Mechanics and Advantages of Reverse Triangular Mergers
- RKL LLP: 338(h)(10) Transaction Structure: Pros and Cons for Sellers, Buyers
- Duane Morris: DGCL Sec. 251(h) Makes Two-Step Mergers Easier to Complete
Frequently asked questions
- What is the difference between an asset sale and a stock sale?
- In an asset sale the buyer purchases specific assets and assumes only the liabilities listed in the agreement; the selling entity stays behind with everything else. In a stock sale the buyer purchases the company's equity, so the entity, its contracts, and all liabilities, known and unknown, transfer intact. Buyers generally prefer asset deals for the tax step-up; sellers generally prefer stock deals for a cleaner exit.
- Why do buyers prefer an asset purchase?
- Two reasons. An asset purchase gives the buyer a stepped-up tax basis, creating fresh depreciation and 15-year goodwill amortization deductions that shelter future income. It also lets the buyer leave behind liabilities it did not agree to assume, including unknown ones. The cost is friction: assigning contracts, obtaining third-party consents, retitling assets, and rehiring employees one by one.
- What is a reverse triangular merger?
- The buyer forms a shell subsidiary, and that subsidiary merges into the target, leaving the target alive as a wholly owned subsidiary of the buyer. Target shares convert into the right to receive the deal consideration once the required majority approves, so no individual shareholder can block the deal by refusing to sign. Because the target entity survives, its contracts, permits, and licenses generally stay in place.
- How does an earnout work when selling a business?
- An earnout is a contingent portion of the purchase price paid only if the business hits agreed post-closing targets, usually revenue, gross profit, or EBITDA over roughly one to three years. SRS Acquiom data shows earnouts in about a quarter of recent private-target deals outside life sciences, with far less than the full contingent amount typically paid, so sellers should treat earnouts as upside rather than certainty.
- What is a 338(h)(10) election?
- It is a joint federal tax election that treats a legal stock sale as an asset sale for tax purposes. It is available when the target is an S corporation or a corporate subsidiary, the buyer is a corporation, and at least 80 percent of the stock is acquired. The buyer gets a stepped-up basis and tax-deductible goodwill amortization; sellers often negotiate a price gross-up for any added tax.
Considering a sale in the next few years? See what a prepared process looks like.
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