Deal Structures Cheat Sheet
Stock Deal vs. Asset Deal
| Feature | Stock Deal | Asset Deal |
|---|---|---|
| What’s Acquired | Entire legal entity (shares) | Specific assets and liabilities |
| Liabilities | Buyer assumes ALL liabilities (known and unknown) | Buyer chooses which liabilities to assume |
| Tax Basis Step-Up | No — buyer inherits seller’s tax basis | Yes — buyer gets fair market value basis |
| Seller Tax Treatment | Capital gains on stock sale | Ordinary income on some assets, capital gains on others |
| Third-Party Consents | Generally not required (entity survives) | Often required (contracts must be reassigned) |
| Complexity | Simpler to execute | More complex, requires asset-by-asset transfer |
| Seller Preference | Preferred (cleaner, capital gains treatment) | Less preferred (potential ordinary income) |
| Buyer Preference | Less preferred (inherits all liabilities) | Preferred (cherry-pick assets, step-up basis) |
Forms of Consideration
| Type | Description | Buyer Advantage | Seller Advantage |
|---|---|---|---|
| All Cash | Buyer pays entirely in cash | No dilution, clean deal | Immediate liquidity, certain value |
| All Stock | Buyer issues shares to target shareholders | Preserves cash, shares risk with seller | Tax-deferred (if structured properly) |
| Cash + Stock Mix | Combination of cash and buyer equity | Balances cash outflow with alignment | Partial liquidity + upside participation |
| Earnout | Contingent payments based on performance | Reduces overpayment risk | Higher total if targets are met |
| Seller Note | Deferred payment via promissory note | Reduces upfront cash need | Interest income on deferred portion |
| Assumption of Debt | Buyer takes over target’s debt obligations | Reduces cash purchase price | Eliminates debt obligations |
Merger Structures
| Structure | How It Works | When Used |
|---|---|---|
| Forward Merger | Target merges into buyer, target ceases to exist | Simple acquisitions, buyer absorbs target |
| Reverse Merger | Buyer merges into target, target survives | Preserving target’s contracts, licenses, public listing |
| Forward Triangular | Target merges into buyer’s subsidiary | Isolate liabilities from parent, most common in M&A |
| Reverse Triangular | Buyer’s subsidiary merges into target (target survives) | Preserve target’s contracts while buyer controls |
| Tender Offer | Buyer offers directly to target’s shareholders | Hostile deals or when speed matters, bypasses board |
Sources & Uses Table
Every deal model includes a Sources & Uses table that shows where the money comes from and where it goes. This is the financial blueprint of the transaction and feeds directly into the accretion/dilution analysis.
| Sources (Where Money Comes From) | Uses (Where Money Goes) |
|---|---|
| Cash on hand | Equity purchase price |
| Revolver draw | Refinance existing debt |
| Term loan | Transaction fees (advisory, legal) |
| High-yield bonds | Financing fees |
| Equity contribution (buyer stock) | Cash to balance sheet |
| Rollover equity (seller reinvestment) | Rollover equity (offsets source) |
Key Takeaways
- Buyers prefer asset deals (cherry-pick assets, step-up basis); sellers prefer stock deals (capital gains, clean exit).
- All-cash deals provide certainty; all-stock deals enable tax deferral and shared risk.
- Forward triangular mergers are the most common M&A structure — they isolate liabilities from the parent.
- Earnouts bridge valuation gaps but create post-closing disputes if metrics aren’t clearly defined.
- The Sources & Uses table is the foundation of every deal model. See the full M&A process for context.
FAQ
What is the difference between a stock deal and an asset deal?
In a stock deal, the buyer purchases the target’s shares and assumes all liabilities. In an asset deal, the buyer selects specific assets and liabilities to acquire. Stock deals are simpler; asset deals give buyers more control over what they take on.
Why do buyers prefer asset deals?
Asset deals let buyers get a tax basis step-up (higher depreciation deductions going forward), choose which liabilities to assume, and avoid unknown or contingent liabilities that come with buying the entire entity.
What is an earnout in M&A?
An earnout is contingent consideration where additional payments are made post-closing if the acquired business meets certain performance targets (usually revenue or EBITDA milestones). It’s commonly used when buyer and seller disagree on valuation.
What is a reverse triangular merger?
The buyer creates a shell subsidiary that merges into the target. The target survives as a subsidiary of the buyer. This preserves the target’s contracts, licenses, and relationships while giving the buyer control. It’s the most common structure for public company acquisitions.
How does the tax treatment differ between cash and stock deals?
In a cash deal, selling shareholders recognize gain immediately (capital gains or ordinary income depending on structure). In a qualifying stock-for-stock deal, shareholders can defer tax recognition under Section 368 reorganization rules until they sell the acquirer’s stock.