Asset deals versus stock deals
By SuperdayReps · Michigan Ross Undergrad | Wharton MBA · ex-Citi | ex-Greenhill · Former Head Mentor at a Leading IB Prep Service
6 min read · updated July 8, 2026
There are only two legal ways to buy a company, and the choice between them decides who inherits the risks and who gets a tax break. One buyer pays the same price for the same business and walks away with a very different deal depending on which structure they pick. So even though this sounds like lawyer trivia, it is a favorite interview topic, and the logic is simple once you see it.
The two structures are a stock deal and an asset deal. In a stock deal you buy the target's shares. In an asset deal you buy the target's assets directly and leave the shares behind. That one difference drives everything else.
Stock deal: you buy the whole entity
When you buy the stock, you buy the legal entity itself, exactly as it stands. Every asset comes with it, and so does every liability. Not just the debt you can see on the balance sheet, but the ones you cannot: a lawsuit that has not been filed yet, an unpaid tax bill from three years ago, an environmental cleanup nobody disclosed. These hidden or uncertain obligations are called contingent liabilities, and in a stock deal they are now your problem.
There is also a tax consequence. In a stock deal the tax basis of the target's assets usually carries over unchanged. Tax basis is the value the tax authorities let you depreciate an asset down from. If the target had been depreciating a factory for years, you inherit that same low, worn-down basis. You get no fresh tax deductions from the deal. This matters more than it sounds, and the next section shows why.
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Frequently asked
- What is the difference between an asset deal and a stock deal?
- In a stock deal you buy the target's shares, so you inherit the whole entity and every liability, including hidden contingent ones. In an asset deal you buy chosen assets, assume only the liabilities you agree to, and reset the assets' tax basis up to fair value. That one choice drives the risk and the taxes.
- What is a step-up and why do buyers want it?
- A step-up resets the tax basis of acquired assets up to the price you paid, and you get it in an asset deal. Higher basis means more depreciation and amortization in future years, and that expense is tax-deductible, so it lowers the cash taxes the buyer actually pays. It is real cash in the buyer's pocket.
- What is a 338(h)(10) election?
- It lets a buyer legally purchase the target's stock but treat the deal as an asset purchase for tax, so the buyer still collects the step-up while keeping the entity intact. It only works with an eligible seller, typically an S-corp or a corporate subsidiary, where an asset-style result avoids double taxation.
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