Beyond Valuation: How Deal Structure Shapes Shareholder Value
by Dan O’Connor, Excendio Advisors
Introduction
When a private company is sold, most attention goes to the headline valuation — but savvy boards and founders know that valuation is only part of the story. The way a deal is structured, as an asset sale or a stock sale, can dramatically change who captures value, who bears risk, and how much actually flows to shareholders after taxes. This structural choice is often worth millions more than any last-minute price adjustment, yet it’s too often treated as a legal afterthought.
Why It Matters Now
In today’s M&A environment, deal structures are under closer scrutiny than ever — not by antitrust regulators, but by buyers, lenders, and clients. A few drivers:
- Higher interest rates and tighter credit: Buyers want every tax shield available to justify purchase prices. Asset sales deliver bigger deductions, while stock sales may limit leverage capacity.
- Tax policy in flux: With federal proposals targeting capital gains rates and state-level tax variations, sellers are under pressure to capture favorable treatment while they can.
- Private equity dynamics: PE buyers, with exit horizons of 3–7 years, are laser-focused on maximizing after-tax IRRs. Structuring is now a core lever, not a side consideration.
- Compliance scrutiny: Even mid-market deals face heightened diligence around cybersecurity, data privacy, client approvals, and industry-specific licenses. Buyers often push for asset deals to selectively assume liabilities and capture tax benefits, while sellers prefer stock deals to avoid contract-by-contract reapprovals.
Bottom line: Structure is now a defining factor in shareholder value creation.
Quick Comparison — Asset Sale vs. Stock Sale
| Item | Asset Sale | Stock Sale |
| Tax Treatment | Mix of capital gains & ordinary income; often higher tax burden for seller | Generally long-term capital gains for seller (favorable rates) |
| Buyer Preference | High — clean liabilities, stepped-up asset basis | Lower — inherits liabilities, no step-up in basis |
| Liability Allocation | Seller retains many liabilities | Buyer assumes company as-is, including contingent risks |
| Complexity | Requires reassigning contracts, licenses, IP; can slow closing | Simpler transfer of ownership through shares |
| Closing Risk | Higher — consents and approvals create deal friction | Lower — continuity of contracts and operations preserved |
Note: Under IRC § 338, certain stock sales can be treated as asset sales for tax purposes, combining the legal simplicity of a stock deal with the tax benefits of an asset deal — if both parties agree.
Key Considerations
- Tax Treatment
- Asset Sale: Buyers secure tax shields through basis step-ups, enhancing after-tax returns. Sellers in C-corps may suffer double taxation (corporate-level tax plus shareholder-level tax on distributions), drastically reducing net proceeds. Sellers in S-corps or LLCs avoid entity-level tax but may still face higher ordinary income recapture on certain assets.
- Stock Sale: Sellers usually see cleaner, single-layer capital gains taxation. Buyers lose the step-up benefit and may demand a lower price to compensate.
- Liability Transfer
- Asset Sale: Buyers cherry-pick liabilities, insulating themselves from hidden claims (environmental, employment, litigation).
- Stock Sale: All liabilities transfer, known or unknown. Due diligence must be airtight, and indemnification structures become critical.
- Contracts, Licenses & Approvals
- Asset Sale: Every client contract, software license, and vendor agreement may require consent. This can delay closings and put revenue at risk.
- Stock Sale: Existing contracts generally carry over intact — a major advantage for continuity.
- Complexity, Cost & Speed
- Asset Sale: Dozens of asset transfers, appraisals, and assignments create legal and administrative overhead.
- Stock Sale: Streamlined — change the shareholder ledger, and ownership transfers.
- Negotiation Dynamics
- Asset sale benefits accrue disproportionately to buyers. Stock sale benefits accrue disproportionately to sellers.
- IRC § 338 election: In qualified stock purchases, the buyer and seller can jointly elect to treat the deal as an asset purchase for tax purposes. Buyers secure the step-up, while sellers face heavier tax — usually requiring a price premium or other concessions to balance.
Why It Matters
The choice of structure is a shareholder value lever, not just a legal formality.
- After-Tax Economics Drive Outcomes
- A deal’s “headline valuation” is meaningless if the wrong structure erodes shareholder proceeds. In a $50M IT Services exit, the difference between asset vs. stock can swing net proceeds by $8–12M — more than any typical purchase price adjustment.
- Closing Certainty Is on the Line
- Asset sales often require dozens (or even hundreds) of client consents and contract revisions. In services businesses where recurring revenue is king, one lost top 10 client can break the model. Stock sales minimize this friction by keeping contracts intact.
- Risk Allocation Shapes Value
- Buyers and sellers are not only negotiating price; they’re negotiating who holds the bag for past liabilities. Structure determines whether risks like cybersecurity breaches, misclassified employees, or pending litigation stay with the seller or transfer to the buyer.
- Financing and Bankability Depend on Structure
- Lenders underwriting mid-market IT deals want predictability. If asset structures jeopardize revenue continuity, financing may tighten or require covenants tied to retention. Conversely, stock deals may load risk back onto the buyer’s balance sheet.
- Strategic Leverage in Negotiation
- Structure is often the most powerful bargaining chip. Sellers can use the threat of tax drag to demand purchase price gross-ups or better earnouts. Buyers can use the promise of tax shields to justify a higher valuation.
Bottom line: The “asset vs. stock” decision is about who captures value, who bears risk, and whether the exit delivers on shareholder expectations.
Case Example: $50 Million IT Services Sale
Consider an IT Services company being sold for $50 million.
- Asset Sale
- Buyer acquires selected contracts, IP, and customer lists while assuming limited liabilities.
- Step-up in basis generates $10–12 million in extra tax-deductible amortization over 5–7 years.
- Seller, as a C-Corp, faces double taxation — corporate tax plus shareholder tax on distributions.
- Major friction: every client master services agreement (MSA) and software license may require client consent. Even one lost Fortune 500 contract could erase millions in value.
- Net after-tax proceeds: roughly $30–32 million.
- Stock Sale
- Buyer acquires equity directly, inheriting all assets, liabilities, and contracts without needing client reapprovals.
- Seller pays a single layer of capital gains tax, netting $40–42 million.
- Buyer loses step-up benefits and assumes risks like client disputes, employee misclassification, or cybersecurity liabilities.
Negotiation Outcome: The deal closes as a hybrid asset sale. The buyer captures tax shield benefits, but the purchase price is grossed up by $8 million to offset seller tax drag. To address client consent risks, the parties create a transition services agreement and secure representations & warranties insurance to cap exposure.
Takeaway: In a $50 million IT services deal, structure alone can swing shareholder proceeds by $10+ million — a swing larger than most valuation disputes.
Broader Implications
- For Sellers: Structure determines how much of the deal’s value they actually keep. Contract assignability, employee retention, and tax treatment can make or break outcomes.
- For Buyers: Structure defines whether they inherit hidden liabilities or capture future tax shields — both directly impacting post-close returns.
- For Advisors: Structure drives financing, insurability, and deal certainty. It’s not an afterthought — it’s a core element of value delivery.
- For the Market: With valuations under pressure, structure often dictates whether deals clear at all. Hybrids are becoming the new norm.
OBBBA Commentary
The One Big Beautiful Bill Act (OBBBA) reshapes the calculus for M&A:
- Expanded § 1202 QSBS
- Many founders incorporated as C-corps for growth capital — now they can qualify for tiered exclusions (50% after 3 years, 75% after 4, 100% after 5).
- At a $50M exit, founders may realize tens of millions tax-free if holding QSBS-eligible stock.
- Structural Tension Increases
- Sellers now have stronger incentives for stock sales.
- Buyers, however, are more motivated than ever toward asset deals due to OBBBA’s expanded depreciation benefits.
- Hybrid & Election Options
- Expect more creative structuring: stock rollovers, partial asset transfers, purchase price gross-ups, reps & warranties insurance — and IRC § 338 elections, where stock deals are re-cast as asset purchases for tax purposes.
Implication: OBBBA made structure a shareholder value weapon. Sellers with QSBS leverage have more power than ever, while buyers must innovate to compete.
Call to Action
Valuation is only half the story. The real determinant of shareholder outcomes is deal structure. Whether you’re a founder, investor, or buyer, treating the asset vs. stock sale decision as boilerplate risks leaving millions on the table. At Excendio Advisors, we focus on shareholder value beyond valuation — aligning transaction strategy, tax efficiency, and exit certainty to deliver superior outcomes.