The Million Dollar Business Exit Guide: Part 3
How to Structure a Business Sale: Asset vs. Stock Sale Guide
When it comes to selling your business, the structure of the deal can be just as important as the sale price. Owners of businesses in the $2M to $20M revenue range often spend years building their company—yet many leave substantial value on the table by choosing the wrong sale structure.
Let’s walk through one of the most crucial—but often misunderstood—stages of selling your business: deciding between an asset sale and a stock sale (called a share sale in Canada). Each comes with distinct tax implications, risk exposure, and operational impact.
Whether you’re preparing to sell within the next 12 months or simply laying the groundwork for a future exit, understanding this key decision could add hundreds of thousands—or even millions—to your net proceeds.
Important note: we are not accountants and this is NOT tax or financial advice. Please speak with your CPA or Financial Planner before making any major tax decisions.
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What Is Deal Structure—and Why It Matters
Deal structure determines how ownership of your business transfers to the buyer. It affects several crucial aspects:
How much tax you'll owe
What liabilities the buyer assumes
How simple or complex the transaction will be
What post-sale responsibilities you'll retain
In the M&A world, structure often matters more than price. A poorly structured $6 million deal might net you less than a $5.5 million deal with optimized tax planning and reduced liability.
The Two Primary Structures: Asset Sale vs. Stock Sale
What Is an Asset Sale?
In an asset sale, the buyer purchases specific assets of your company—such as equipment, inventory, goodwill, branding, and customer contracts. The buyer typically does this by establishing a new corporation (NewCo) to acquire these assets.
Many sellers mistakenly believe that the brand/company name won't transfer to the buyer. In reality, buyers almost always want to purchase your brand, customer list, and other intangible assets—collectively known as goodwill.
Buyer Acquires:
Physical assets (machinery, inventory)
Intangible assets (trademarks, contracts, goodwill)
Select liabilities (only if agreed upon)
Seller Keeps:
The legal entity
Any excluded liabilities or assets
What Is a Stock (or Share) Sale?
In a stock sale, the buyer purchases your entire company as-is—including all assets and liabilities. They effectively step into your position as the owner of the corporation.
Buyer Acquires:
100% of the company's shares
All liabilities (known and unknown)
Seller Walks Away From:
Legal entity and operational responsibility
Contracts, liabilities, and tax risks (unless otherwise negotiated)
Asset Sale vs. Stock Sale: Pros and Cons
Here’s how the two structures stack up:
How Deal Structure Impacts Your Tax Bill
In the U.S. 🇺🇸
Asset Sale: You may face double taxation—once at the corporate level (if C-corp), and again personally.
Stock Sale: Gains are usually taxed at long-term capital gains rates (15–20%), often making this route more attractive for sellers.
Additionally, Qualified Small Business Stock (QSBS) can provide significant tax benefits. If your company qualifies as QSBS under Section 1202, sellers may be eligible for up to 100% exclusion on capital gains (up to $10M or 10x basis) when specific holding period and other requirements are met. This can make a stock sale even more advantageous from a tax perspective.
In Canada 🇨🇦
Stock Sale: Eligible owners can use the Lifetime Capital Gains Exemption (LCGE)—a potential $1M+ tax-free gain.
Asset Sale: Offers no LCGE benefit, resulting in significantly higher tax exposure.
Talk to your accountant early to model both scenarios—structure choices can have a seven-figure impact.
Who Bears the Risk?
In Asset Sales:
While buyers often want to acquire most business assets, they typically require sellers to sign representations and warranties guaranteeing against historical liabilities like pending lawsuits, unpaid taxes, or warranty claims. This means sellers may remain responsible for pre-sale issues even after closing.
In Stock Sales:
Buyers step into full ownership, including legacy risks. This often triggers extensive due diligence and seller warranties to protect the buyer post-closing.
Definition - Reps & Warranties
Representations and warranties are legally binding statements and assurances made by the seller about the business being sold. These statements cover areas like financial records, legal compliance, employee matters, and potential liabilities. If these statements prove false after closing, the buyer typically has legal recourse against the seller for any resulting damages.
Which Structure Do Buyers Prefer?
Most buyers prefer asset sales. Why?
They gain more control over what they’re buying
They limit exposure to unknown liabilities
They enjoy better tax advantages (depreciation step-up)
This is especially true for buyers of distressed businesses or those with complex legal histories.
Which Structure Do Sellers Prefer?
Sellers typically prefer stock sales, especially if they:
Qualify for LCGE (Canada)
Want a cleaner, faster exit
Have strong, clean financial and legal documentation
If your company is well-organized and profitable with minimal risk baggage, you may be in a strong position to negotiate a stock sale.
What Structure is Most Common?
In the USA, Asset Sales tend to dominate, though sellers often negotiate for a higher purchase price to offset their increased tax burden in these deals. In Canada, most deals are done as Share/Stock Sales.
Ultimately, the final structure depends on negotiations between buyer and seller about their risk tolerance.
What Type of Business Is Best for Each Structure?
✅ Asset Sale:
Distressed or high-liability businesses
Sole proprietorships
Companies with outdated or complex legal records
Companies with long operating histories (20+ years)
✅ Stock Sale:
Clean, profitable corporations
Businesses with transferable contracts
LCGE-eligible Canadian companies
Enterprises with strong employee retention and SOPs
Common Misconceptions About Deal Structure
❌ “Structure is the buyer’s choice.”
Structure is negotiable—and a good M&A advisor will fight to balance risk, tax impact, and valuation to serve the best interests of both parties.
❌ “I’ll worry about structure later.”
Do not leave this to the last minute. Structure influences due diligence, legal cleanup, and even how you market the business.
❌ “All buyers want asset sales.”
True, many do. But buyers are also willing to accept a stock sale if the business is clean, well-structured, and risk-mitigated.
How to Prepare Your Business for Either Structure
🧠 Think Like a Buyer
A buyer will only agree to a stock sale if they feel confident in what they’re taking on. So, reduce their risk by:
Cleaning up corporate records
Fixing equipment and technology issues
Formalizing contracts and employee agreements
📄 Build Legal and Financial Hygiene
Get your Minute Book reviewed by a corporate lawyer. Ensure your financials are third-party verified (Quality of Earnings). Formalize your org chart and SOPs.
🧾 Lock In Contracts
The more assignable contracts (with clients, vendors, landlords) you have, the easier a stock sale becomes. This also boosts valuation in either structure.
How an M&A Advisor Maximizes Value Through Deal Structure
At Breakwater M&A, we don’t just broker deals—we guide entrepreneurs to life-changing outcomes.
We help you:
Negotiate the right structure for your situation
Model the tax implications before going to market
Align incentives with the right type of buyer
Reduce friction during diligence and closing
The result? A higher-value exit, lower post-sale liability, and a smoother transition.
Interested in learning more about which structure is right for you? Book a confidential call with our team HERE.
Final Thoughts: Structure Beats Price
You only sell your business once. Don’t leave structure to chance.
Choosing between an asset sale and stock sale isn’t just a legal technicality—it can determine how much you keep, how long you're liable, and whether the deal closes at all.
Work with an experienced M&A advisor early in your exit planning to model both scenarios, market your business accordingly, and negotiate a structure that serves your long-term goals—not just the buyer’s.
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