This is the first blog in Finkel Law Group’s multi-part series on Mergers and Acquisitions (M&A) in California. In any merger or acquisition, one of the earliest and most important decisions is whether to structure the deal as an asset acquisition, a stock purchase, or a merger. This foundational choice shapes the entire transaction’s risk profile, tax outcomes, and process. In this introductory post, we focus on the differences between asset and stock purchases — two of the most common structures — and preview how future installments will build on these fundamentals to explore the broader M&A landscape.
Overview: Two Paths to Buying a Business
In an asset acquisition, the buyer purchases selected assets, and sometimes specific liabilities, of the seller’s business rather than buying the entire business entity itself. In a stock purchase, the buyer acquires all or a majority of the outstanding shares of the selling company, thereby taking control of the entire business entity, including all assets, contracts, and liabilities, in one fell swoop. Each approach has distinct legal and commercial implications. An asset sale allows cherry-picking of valuable assets and exclusion of unwanted liabilities, whereas a stock sale transfers the company intact, which can simplify continuity but also means the buyer inherits all the company’s obligations, both known and unknown. The decision between these different transactions hinges on factors like liability risk, tax consequences, required approvals, and the strategic goals of the parties.
Because this series focuses on California business transactions, it’s important to note that California law adds its own nuances. For example, under California’s Corporations Code, a corporation selling all or substantially all of its assets outside the regular course of business must obtain approval from both its board of directors and its shareholders. By contrast, a stock purchase where the buyer negotiates directly with shareholders of the target company to buy their shares may not require a formal corporate vote by the selling company, depending on how the deal is structured. This means asset deals can involve more procedural hurdles on the sell-side, while stock deals shift the focus to getting each shareholder on board and complying with any shareholder agreements.
Key Differences Between Asset and Stock Acquisitions
Liability and Risk Allocation
What happens to the selling company’s liabilities is a core difference between asset and stock deals. In an asset acquisition, the buyer generally picks up only the liabilities it agrees to assume – such as certain contracts or debts specified in the asset purchase agreement – and leaves other liabilities behind with the seller. This selective transfer can shield the buyer from unexpected obligations like pending lawsuits or old debts of the seller. Do note, however, that some obligations can follow the assets by law, e.g. certain tax liens or environmental liabilities, an issue we will explore later in the series. In a stock purchase, however, the buyer steps into the shoes of the selling company. The entire business entity continues under new ownership, so all existing liabilities stay with the company and effectively become the buyer’s problem after closing. This includes known liabilities and any surprises lurking on the company’s books. As a result, buyers often favor asset deals to minimize risk, while stock deals require especially thorough due diligence to identify and price in any liability exposure upfront.
Contracts, Permits, and Continuity
Asset sales and stock sales also differ in how they affect contracts and operational continuity of the selling company. In an asset acquisition, key contracts like customer agreements, supplier contracts, leases, or licenses usually need to be assigned or novated to the buyer. Many contracts have consent clauses that require the other party’s approval before the contract can be transferred. Important permits or licenses might need to be re-applied for by the new owner if they can’t be assigned. This means an asset sale can involve obtaining numerous third-party consents, and a risk that some contractual relationships or permits won’t carry over.
By contrast, in a stock purchase, the selling company remains the same; it just has different owners. Its contracts and licenses typically stay in place without needing approvals for assignment, since the company is still the party to those agreements. Operationally, a stock acquisition can be more seamless; customers, vendors, and employees might not even notice a change in ownership because the business continues as usual under the same entity. If maintaining continuity and avoiding disruptions is a priority – for example, where the business has many contracts that would be hard to individually assign, or critical licenses that are non-transferable – a stock purchase has a clear advantage.
Corporate Approvals and Complexity
From a corporate governance standpoint, asset deals and stock deals involve different approval processes. As mentioned, selling substantially all of the assets of a corporation triggers formal approval requirements under California law; typically a board resolution and a vote of the shareholders of the selling company. A stock acquisition can sometimes be accomplished with fewer formalities: If a buyer simply negotiates with each shareholder to buy their shares for an agreed price, there may be no need for a selling company shareholder meeting or resolution; each owner just signs a stock purchase agreement.
However, stock transactions can become complex if the target has many shareholders or dissenting owners. In practice, many stock acquisitions of an entire company are structured as mergers to squeeze out minority shareholders, which then do invoke statutory approval thresholds. In short, asset sales involve the company as an active participant, and thus require internal corporate action, whereas stock sales are often a series of individual transactions with shareholders. The latter can be simpler if ownership is concentrated, but potentially cumbersome if dozens if not hundreds of shareholders must agree to sell. Ensuring all necessary consents and approvals are obtained is a critical planning point for either deal type. In a later blog in our series we will delve into strategies for securing difficult consents from shareholders and directors.
Tax Implications
The tax consequences of an asset sale versus a stock acquisition can be dramatically different, especially for C-corporations. In an asset sale, the selling company will pay tax on any gains realized from the sale of its assets, and then when it distributes the proceeds of the sale to the shareholders – for example, in a post-closing liquidation or dividend – the shareholders pay tax again on that distribution. This double taxation can make asset sales less attractive to sellers in a corporate context.
In a stock sale, by contrast, the seller is usually the individual shareholder, who pays capital gains tax often at a lower rate on the profit from selling their stock. The company itself is not directly taxed in a stock transfer. This is one reason why sellers often prefer a stock deal when a corporation is involved because it can significantly reduce the overall tax burden on exiting the investment.
Buyers, on the other hand, may get a tax benefit from an asset purchase: The buyer can allocate the purchase price to the acquired assets and enjoy a stepped-up tax basis in those assets, allowing for greater depreciation or amortization deductions going forward. That benefit isn’t available in a straight stock purchase because the assets stay on the books at their old tax basis, with no step-up, unless a special IRS election is made in certain cases.
California’s tax rules illustrate another difference: A stock purchase is not treated as a sale of tangible property and thus does not incur sales tax, whereas a sale of business assets could be subject to sales tax on any tangible assets transferred. Buyers who are purchasing a business’s inventory, equipment or other physical assets in California need to account for potential sales tax, whereas buying the company’s stock avoids that particular tax. These tax considerations and strategies to optimize tax outcomes for both sides buyers and sellers will be addressed in depth in later blogs in our series.
Flexibility vs. Simplicity
An asset acquisition offers great flexibility because the deal can be structured to include only those assets and liabilities the parties agree to include in the transaction. This makes sense for a buyer who, for instance, wants to acquire a division, specific product lines, or key assets of the seller’s business without taking on extraneous baggage. It can also be useful when the seller intends to keep or carve out certain assets like real estate or intellectual property not included in the sale.
A stock purchase, in contrast, is an all-or-nothing proposition. The buyer gets the whole company “warts and all.” That approach is simpler in terms of the transaction’s scope. Rather than multiple bills of sale, assignment agreements, and so on, a stock deal can sometimes be accomplished with one stock purchase agreement and a share transfer. The trade-off is less flexibility to leave unwanted property behind. If the selling company comes with some unwanted property like a problematic contract, a lawsuit, a unquantifiable contingent liability, the buyer in a stock deal must address it via representations, indemnities, or other protective measures, since legally those problems will remain with the company that the buyer now owns. In essence, asset deals let you tailor what is acquired, whereas stock deals offer a cleaner entity-level transfer that is often quicker and more straightforward at closing.
Impact on Employees
Employees deserve special attention as well. In an asset sale, employees of the selling company do not simply start working for the buyer. The buyer must decide which employees to offer jobs to, and those employees would technically be terminated by the seller and then hired by the buyer as new employees. This can affect continuity of benefits, accrued vacation, and may trigger legal obligations like California’s WARN Act, which requires 60 days’ notice of mass layoffs or closures for larger employers.
In a stock purchase, by contrast, the employees remain employed by the same company. Only ownership has changed. From the employees’ perspective, their paychecks still come from the same employer and their tenure and benefits carry on uninterrupted. If maintaining the workforce with minimal disruption is a goal, a stock transaction can be advantageous on that front. We will address employee transfer issues and how to handle them in a future blog of this series.
When to Choose an Asset vs. a Stock Transaction
Given these differences, how do you decide which type of transaction is right for your deal? The optimal choice depends on the specifics of the business and the priorities of the buyer and seller.
When an Asset Purchase Makes Sense
Buyers typically favor asset acquisitions when they want to minimize risk exposure and have the freedom to acquire only the desirable parts of a business. If a selling company has significant unknown liabilities or legacy problems, purchasing assets out of the company can eliminate those issues by leaving the potential problems behind with the seller. Asset deals are also ideal when the buyer doesn’t need or want the entire company, like when acquiring a product line, a portfolio of clients or assets, or certain intellectual property from the seller.
From the seller’s side, an asset sale might be necessary if only part of the business is being sold (e.g. a division) or if the buyer is unwilling to do a stock deal. Additionally, certain laws and regulations may make asset deals attractive. For instance, if the business is in a highly regulated industry where the buyer cannot directly acquire the entity due to licensing restrictions, buying the assets may be the only viable path.
Overall, an asset acquisition offers greater flexibility to structure the transaction to the parties’ liking. However, sellers who are C-corporations must weigh the downside of double taxation on an asset sale and both sides should be prepared for a longer checklist of consents to fully transfer the business.
When a Stock Purchase is Preferable
Sellers often strongly prefer a stock sale when possible, especially if the seller is a corporation or if the owners want a clean exit. Selling stock means the owners can receive a single capital gains tax hit, and possibly qualify for favorable tax treatment, and the selling company’s obligations largely transfer to the new owner automatically.
For buyers, a stock purchase can be attractive when continuity is critical. For example, if the business has many ongoing contracts, permits, or licenses that might be disrupted or require onerous approvals in an asset transfer. By buying all or a majority of the selling company’s stock, the buyer can step into the business with far less procedural hassle. And customers see the same company name, landlords don’t need to approve a new tenant, permits stay valid with the company, and employees remain on the same payroll.
In competitive deal situations, a seller may demand a stock deal due to the tax benefits. A buyer willing to accept a stock purchase might have an edge in winning the deal. A stock transaction might also be the only route if, for instance, the seller has certain contracts that cannot be assigned without great cost. Some contracts might even have prohibitions on assignment that treat an asset sale as a breach, whereas a change of control via stock sale could be permissible.
The key caveat for buyers is that with a stock purchase, comprehensive due diligence and robust representations, warranties and indemnities are a must. The buyer needs to thoroughly investigate the selling company’s financial statements, potential legal liabilities, taxes liabilities, employment practices, et cetera before closing, because any skeletons in the closet become the buyer’s problem after the transaction closes. A future blog in our series will provide guidance on due diligence best practices to help buyers manage this risk.
Looking Ahead: Critical Considerations in this Series
Deciding between an asset acquisition and a stock purchase is only the first step in understanding how M&A transactions work. Finkel Law Group’s multi-part series on M&A transactions will provide a comprehensive roadmap for California business owners and executives. In upcoming installments, we’ll dive deeper into the strategic reasoning behind each transaction’s structure, walk through the transaction process from term sheet to closing, and examine due diligence, consents, tax strategy, and risk management from both buyer and seller perspectives. Later in the series, we’ll expand our focus to cover mergers — their statutory requirements, negotiation dynamics, and tax and regulatory implications — rounding out a complete picture of the merger process from planning through post-closing integration.
Both asset acquisitions, stock purchases and mergers can be powerful tools for growth or transition. The key is understanding which transaction best aligns with your company’s goals and how to execute it properly. Whether you are a California business owner planning to sell your company or a prospective buyer evaluating a new opportunity, Finkel Law Group’s Mergers and Acquisitions attorneys has decades of experience guiding clients through complex transactions. Stay tuned as we unpack each stage of the M&A process, equipping you with the insight to make informed decisions and achieve a successful outcome for your deal.
How Our M&A Lawyers Can Help
Whether you are a California business owner planning to sell your company or a prospective buyer looking to invest, having experienced advisors to guide you through these decisions is crucial. Finkel Law Group’s Mergers and Acquisitions attorneys have decades of experience with asset, stock and merger transactions. We’re here to help you navigate this strategic decision and each step of the deal that follows. Stay tuned as we unpack each of these important topics in depth in the coming weeks and months, equipping you with the knowledge to make informed decisions and achieve a successful outcome for your deal.
About Finkel Law Group
Finkel Law Group, with offices in San Francisco, Oakland and Washington D.C., has more than 25 years of experience counseling buyers and sellers in navigating the complexities of M&A transactions. When you need intelligent, insightful, conscientious and cost-effective legal counsel to assist you with the sale or acquisition of a company please contact us at (415) 252-9600, (510) 344-6601, (771) 202-8801 or info@finkellawgroup.com to speak with one of our attorneys.