What is an asset sale?
Takeaway: An asset sale is an M&A structure where a buyer purchases a company's specific assets instead of its stock; this is highly favorable for the buyer but often creates a "double taxation" disaster for the startup's sellers.
When a company is sold, the transaction must be given a specific legal and tax structure. One of the primary ways to structure an acquisition is an asset sale. In this type of deal, the acquiring company does not buy the stock of your startup. Instead, it "cherry-picks" and purchases the specific assets that it wants, leaving the corporate shell of your company behind.
While the business result may seem similar, the legal and, most importantly, the tax consequences of an asset sale are dramatically different from a stock sale. For the sellers of a C-Corporation, an asset sale is almost always a financially painful and disadvantageous structure.
How an Asset Sale Works
In an asset sale, the purchase agreement will specify exactly which assets the buyer is acquiring. This can include:
Intellectual property (patents, trademarks, source code).
Physical equipment.
Customer contracts.
Inventory.
The buyer will also specify which, if any, of the company's liabilities they are assuming. They will typically leave behind any unknown or undesirable liabilities with the seller's "empty shell" corporation.
Why Buyers Love Asset Sales
Acquirers often strongly prefer an asset sale for two key reasons:
Liability Shield: It allows them to acquire the "good stuff" without inheriting any of the seller's hidden or unknown past liabilities (such as old tax issues or pending lawsuits). They get a clean start.
The Tax "Step-Up": This is the major financial benefit for the buyer. In an asset sale, the buyer gets to "step-up" the tax basis of the assets they are acquiring to the full purchase price. This allows them to get significant future tax deductions by depreciating or amortizing those assets over time.
The "Double Taxation" Trap for Sellers
This tax benefit for the buyer comes at a direct and severe cost to you, the seller. For a C-Corporation, an asset sale triggers a devastating double taxation:
Corporate-Level Tax: First, your corporation must pay corporate income tax on the gain it recognizes from selling its assets to the buyer.
Individual-Level Tax: Then, when the corporation takes the remaining after-tax proceeds and distributes them to you and your stockholders, you must each pay a second layer of personal tax on that liquidating distribution.
This double tax can consume a huge portion of the sale proceeds, dramatically reducing the net, take-home amount for you and your team. Furthermore, because the transaction is a sale of assets and not stock, your stockholders will not be able to use the powerful QSBS exclusion to eliminate their capital gains tax.
As a founder, you should almost always strongly resist a request to structure your company's sale as an asset sale. You should advocate for a stock sale or a merger, which are far more tax-efficient for you and your stockholders. If a buyer insists on an asset sale, push for them to "gross up" the purchase price to fully compensate you for the adverse tax consequences.
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.