What is the difference between a stock deal vs. an asset deal?

A stock deal is when an acquirer purchases all shares (ie equity ownership) of a firm to purchase the entire company. The acquiror assumes both the assets and liabilities of the company. This is by far the most common kind of deal.

In a stock deal, proceeds to the seller are taxed at the capital gains rate, which is lower than the ordinary income tax rate. Meanwhile, the buyer is not able to step up the value of the assets on their tax books to increase depreciation & amortization and reduce taxes. As a result, stock deals are more favorable for the seller in terms of taxes.

An asset deal is when the acquirer purchases the target’s assets. All asset deals are friendly. An asset deal does not assume the target’s liabilities which can be useful if the target has contingent liabilities such as lawsuits or has an unfavorable brand reputation.

In an asset deal, proceeds to the seller from hard assets such as PP&E can be subject to higher ordinary income tax rates rather than capital gains tax rates. However, intangible assets are subject to the lower capital gains tax rates. Meanwhile, the buyer is able to step up the value of the assets to fair market value on their tax books, which allows the buyer to realize a higher depreciation and amortization expense resulting in lower taxes.