5 million payday... or a
2 million one.
This isn't a minor detail for accountants to handle at closing. The tax structure is a core negotiation point that pits your financial interests directly against your buyer's. Understanding this conflict before you sign a Letter of Intent (LOI) is one of your most important jobs as a founder.
The Core Conflict: Stock Sale vs. Asset Sale
Every M&A deal is structured as either a stock sale or an asset sale. The economics are night and day. You and your buyer want opposite things.
Your Goal as a Seller: A Stock Sale
In a stock sale, the buyer acquires the actual shares of your corporation. The company entity—with all its assets, liabilities, and history—transfers to the buyer. For you, this is almost always the superior choice for three reasons:
- One Layer of Tax at Lower Rates: You sell your stock, which you've likely held for over a year. The profit is taxed at long-term capital gains rates (currently 15-20% federal, plus state tax). This is much lower than ordinary income rates (up to 37% federal).
- The QSBS Home Run: A stock sale is the only way to qualify for the Qualified Small Business Stock (QSBS) exemption, which can potentially eliminate your entire federal tax bill. More on this below.
- A Cleaner Break: The buyer inherits the entire corporate entity, including all past liabilities, known or unknown. While you'll still a make certain promises (reps & warranties), it's a much cleaner exit.
The Buyer's Goal: An Asset Sale
In an asset sale, the buyer purchases a specific list of assets—code, customer lists, brand names, patents. They do not purchase your company shares. Your original corporate shell is left behind, along with any liabilities the buyer doesn't explicitly agree to take.
Buyers strongly prefer this for two reasons:
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