What is a stock sale?
Takeaway: A stock sale is the simplest and most tax-efficient M&A structure for sellers, where the buyer purchases all of the company's stock directly from the stockholders, preserving QSBS benefits and avoiding double taxation.
In contrast to a complex and tax-disadvantaged asset sale, the stock sale is the cleanest, simplest, and most founder-friendly way to structure the acquisition of your company. As the name implies, in a stock sale, the acquiring company purchases the stock of your company, not its individual assets.
This structure is overwhelmingly preferred by the founders, employees, and investors of a C-Corporation because it results in a single layer of taxation at favorable long-term capital gains rates and preserves the valuable Qualified Small Business Stock (QSBS) exclusion.
How a Stock Sale Works
The mechanics of a stock sale are straightforward:
The Transaction: The buyer makes an offer to purchase 100% of the outstanding shares of your company directly from the stockholders.
The Sellers: The sellers in the transaction are not the company itself, but all of the individual stockholders on your cap table (founders, employees, and investors).
The Outcome: After the sale, your company becomes a wholly-owned subsidiary of the acquiring company. The corporate entity itself continues to exist, but with a new owner.
The Major Advantages for Sellers
A Single Layer of Tax: This is the most important benefit. The proceeds from the sale are paid directly to the stockholders. Each stockholder then pays a single layer of personal capital gains tax on their individual profit. The company itself does not pay a corporate-level tax on the transaction, completely avoiding the "double taxation" problem of an asset sale.
Preservation of QSBS: A stock sale is the only M&A structure that allows your stockholders to take advantage of the powerful QSBS tax exclusion. For eligible stockholders who have met the five-year holding period, this could mean that up to 100% of their capital gains are free from federal tax. This can translate into millions of dollars in additional, take-home value for your team and early investors.
Clean Break: In a stock sale, the buyer acquires the entire company as-is, including all of its past, present, and future liabilities, both known and unknown. This provides a much cleaner break for the selling stockholders.
Why Buyers May Resist a Stock Sale
While a stock sale is best for you, a buyer may push for an asset sale instead. Their primary concern is that by acquiring the entire corporate entity, they are also inheriting all of its hidden liabilities. They also lose the significant tax benefit of a "step-up" in the basis of the company's assets.
The negotiation over whether the deal will be structured as a stock sale or an asset sale is one of the most important and consequential parts of any M&A negotiation. As a founder, you should go into that negotiation with a clear understanding of the immense tax benefits of a stock sale and be prepared to advocate strongly for that structure.
Disclaimer: This post is for general informational purposes only and does not constitute legal, tax, or financial advice. Reading or relying on this content does not create an attorney–client relationship. Every startup’s situation is unique, and you should consult qualified legal or tax professionals before making decisions that may affect your business.