Structuring Equity Buyouts vs Asset Purchases

Introduction: Why Structure Is Strategy

In dealmaking, the price is often seen as the headline, but the structure is where the value—or the risk—truly lives. Having been in the seat for equity buyouts, asset purchases, and every hybrid in between, I can tell you that the structure chosen will have a profound impact not only on tax efficiency, but on liabilities assumed, contractual continuity, and even cultural integration. Whether buying or selling, CFOs must bring more than financial insight to the table; they must bring structural foresight.

Equity Buyouts: Clean Transitions with Hidden Luggage

Equity buyouts are, on the surface, simpler. The buyer acquires the shares of the legal entity, stepping into its shoes. Licenses remain intact, customer contracts typically require no novation, and operations continue with fewer disruptions. In a recent acquisition of a manufacturing company in the Midwest, our decision to pursue a stock deal allowed us to avoid months of state-level re-registration and retain vendor relationships without renegotiation.

But with that continuity comes risk. The buyer inherits the target’s liabilities—disclosed and undisclosed. That includes tax exposures, litigation risk, employee obligations, and regulatory issues. Even after a robust diligence process, the risk of unknown liabilities lingers. For this reason, representations, warranties, and indemnification terms in equity deals must be negotiated with care. In several deals, we used representation and warranty insurance to mitigate this exposure, but it comes with cost and does not cover everything.

Another critical consideration is basis step-up. In an equity deal, the buyer typically inherits the target’s historic basis in its assets. There is no reset, which limits depreciation and amortization going forward. For buyers seeking tax shields, this is often a dealbreaker unless an IRC Section 338(h)(10) election is available—and mutually beneficial.

Asset Purchases: Control Over What You Assume

Asset purchases offer surgical precision. The buyer selects which assets to acquire and which liabilities to leave behind. This structure is favored when the seller has contingent liabilities, when the business is a division rather than a standalone entity, or when the buyer wants a basis step-up. In one deal involving the carve-out of a business unit from a large conglomerate, an asset deal allowed us to acquire only the IP, customer contracts, and key employees, while avoiding legacy pension obligations.

The tax benefit of a basis step-up can be substantial. By resetting the asset basis to fair market value, the buyer enhances future depreciation and amortization deductions. For technology companies acquiring intangibles like patents or customer lists, this can create material cash tax savings in the early years post-acquisition.

However, asset deals are procedurally more complex. Contracts must be individually assigned, leases transferred, licenses reissued, and employees re-onboarded. Some jurisdictions impose transfer taxes, and regulatory approvals may differ. In one international deal, the asset transfer triggered VAT and stamp duties in multiple countries, requiring careful modeling to preserve deal value.

Legal and Operational Considerations

From a legal standpoint, asset deals offer cleaner risk isolation but heavier administrative burden. Each asset must be documented, transferred, and accounted for. In contrast, equity deals may be easier to close but carry long-tail liability exposure. In cross-border contexts, this distinction becomes even more critical. Legal systems vary in how they treat asset versus equity transfers, especially regarding employee rights and successor liability.

Operationally, continuity is often smoother in equity deals. Systems, banking relationships, and customer operations are less disrupted. In asset deals, integration must be carefully managed. I once led a post-close transition in an asset deal where the ERP cutover was mishandled. As a result, invoicing was delayed, revenue recognition slipped, and cash flow suffered for two quarters.

Negotiation Leverage and Seller Considerations

From the seller’s perspective, equity sales are cleaner. They exit the entire entity, with fewer trailing obligations. Asset deals may leave the seller with stranded liabilities or legal shells to unwind. As such, sellers often demand a premium for asset sales, or reject them outright if legal or tax exposure cannot be compartmentalized.

In deals where the buyer has leverage—such as distressed sales or divestitures—asset deals may be imposed. But in competitive environments, equity deals are often necessary to win the target. As CFO, knowing the seller’s constraints and priorities allows you to structure offers that are both attractive and efficient.

Hybrid Structures and Section 338 Elections

Not all deals fit neatly into one box. Hybrid structures—like equity deals with 338 elections—aim to capture the continuity of stock deals with the tax benefits of asset acquisitions. Section 338(h)(10), available for certain subsidiary sales, allows the buyer to treat a stock purchase as an asset acquisition for tax purposes.

However, 338 elections come with strings attached. The seller must be a corporation, both parties must agree, and certain filing deadlines must be met. Moreover, state-level conformity is not guaranteed. In one deal, we obtained federal tax benefits under 338 but still had to deal with legacy state tax liabilities due to lack of conformity.

Conclusion: There Is No Structurally Neutral Deal

Every M&A structure has embedded trade-offs. Equity buys deliver operational continuity but tax inefficiency and potential legacy risk. Asset purchases deliver precision and tax uplift but at the cost of complexity and relationship disruption. The right structure depends on the target’s profile, the buyer’s strategy, and the leverage dynamics in play.

As a CFO, your role is to ensure that structure follows strategy—that the legal form of the deal supports the economic goals of the business. That means not only modeling the numbers, but translating those models into legal terms, tax outcomes, and operational impacts. In the end, deal structure is not a footnote. It is the framework on which all value creation stands.

Insight

In the dynamic terrain of mergers and acquisitions, the structural framework of a deal can often define its success more than the headline valuation. Equity buyouts and asset purchases are not merely technical options on a checklist. They are reflections of how risk, reward, control, and continuity are allocated between buyer and seller. Over the past three decades in Silicon Valley and global finance, I have learned that appreciating the subtleties in this choice often spells the difference between seamless integration and disruptive surprises.

Equity buyouts appeal to many buyers due to their elegant simplicity. With one transaction, you step into the shoes of the entity, gaining access to customers, licenses, and systems with minimal interruption. In high-growth industries like SaaS or consumer tech, where customer relationships and momentum are vital, this continuity can preserve enterprise value in a way that an asset deal might fracture. I have seen deals where even a minor disruption in contract assignments during an asset acquisition triggered customer anxiety and attrition. Yet, that very continuity in equity deals hides exposure. You inherit the entirety of the balance sheet, including dormant litigation, unresolved tax audits, or even compliance lapses no one thought to surface during diligence. That is where the danger lies.

One of the toughest decisions in an equity deal involves negotiating reps and warranties. While rep and warranty insurance has become more common and accessible, its limitations are real. Not all exposures are covered. In one transaction involving a healthcare tech company, a HIPAA violation surfaced post-close, not because of willful negligence, but due to inconsistent data encryption protocols across acquired systems. The cost of remediation was high, and insurance only covered a fraction. That experience reinforced the importance of operational diligence, especially in regulated sectors.

Asset purchases, by contrast, offer a scalpel rather than a net. You can pick and choose. For buyers inheriting an environment where past liabilities are uncertain or where the seller is a conglomerate carving out a division, this precision is invaluable. In one case, we acquired just the intellectual property, a subset of contracts, and key personnel from a struggling mobile technology firm. We left behind legacy leases, litigation, and expensive severance obligations. It was a win. But it came at the cost of enormous administrative effort. Every asset had to be evaluated, documented, and reassigned. Every employee had to be re-onboarded.

In cross-border deals, asset structures can trigger layers of friction. Many jurisdictions have automatic employee transfer protections, and the concept of an asset-only deal does not always align with local labor law. In Germany, for instance, works councils must be involved. In India, asset deals might attract indirect taxes that were never modeled in initial assumptions. These factors must be part of the structural calculus.

From a tax planning lens, the potential to step up basis in asset deals is significant. Especially in deals heavy with intangible assets, such as technology or pharmaceutical acquisitions, the ability to amortize newly valued assets can generate substantial future tax shields. In a deal I structured involving a cybersecurity firm, we were able to secure nearly $30 million in future amortization by opting for an asset purchase. It took complex negotiations and seller concessions, but the payoff in post-close cash flow was indisputable.

However, not all deals permit such benefits. Section 338(h)(10) elections offer an elegant middle ground. In certain cases, they allow a stock deal to be treated as an asset acquisition for tax purposes. This provides the buyer the benefit of a basis step-up while maintaining the operational advantages of a stock deal. But these elections come with strings attached—both parties must be corporations, the target must be a subsidiary, and timing requirements are strict. And while federal conformity is strong, state conformity is not universal. In one deal, the mismatch between federal and California treatment cost us six figures in additional compliance and tax obligations.

One overlooked element in structural decisions is contract assignability. In asset deals, each major contract must be reviewed. Change-of-control provisions, anti-assignment clauses, and consent requirements can delay or even derail closings. Conversely, in equity deals, contracts generally roll over. Yet, that same benefit can become a weakness. If the seller’s contracts include legacy pricing, outdated indemnities, or unfavorable terms, you inherit them all. The decision is never clean.

CFOs must also anticipate the seller’s perspective. For sellers, equity deals are simpler and cleaner. They exit fully. Asset deals might leave them with legal shells, trailing liabilities, and tax complications. Unless the seller is distressed or lacks leverage, they will favor stock deals. This shapes the negotiation dynamic. In hot markets or strategic sales, buyers who insist on asset deals often find themselves outbid or excluded.

Integration must also be factored in. Asset deals, with their complexity, often require longer lead times and more robust transition planning. Banking relationships, ERP access, and employee systems all need to be rebuilt or migrated. In one acquisition of a logistics business, we underestimated the time required to recreate vendor accounts in our procurement platform. Payments were delayed. Supplier relationships strained. These small oversights become costly.

Finally, I encourage all CFOs to build structural scenarios early in the diligence process. Model both stock and asset frameworks. Evaluate post-close amortization. Quantify administrative overhead. Consider regulatory and contractual burdens. Engage legal and tax advisors early, not just to validate assumptions, but to surface risks. Deals often race toward a signing date. Structure decisions made late under pressure often become long-term regrets.

The structure of a deal is not a tax footnote or a legal formality. It is a foundational decision with implications for compliance, cash flow, risk, and integration. It shapes how value is realized—and how risk is absorbed. In my experience, the best outcomes arise when structure is not dictated by precedent but designed through intent. A deliberate choice, aligned to strategy and informed by experience, is what ultimately separates good deals from regrettable ones.

Disclaimer: This article is for informational purposes only and does not constitute legal, tax, or financial advice. Always consult qualified advisors before making decisions on M&A structure or execution.