What's the difference between an asset deal, a stock deal and a 338(h)(10) election?

Say a stock deal buys the shares and every liability, while an asset deal buys chosen assets and steps up their tax basis. Explain why buyers want the step-up, why sellers often prefer stock, and how a 338(h)(10) combines the two.

The numbers, step by step

Illustrative figures, not from a real deal: $500 million paid for assets with a $200 million tax basis, all of the step-up amortized over 15 years, at a 25% tax rate.

Step-up in tax basis$500 million − $200 million

$300 million

Extra deduction each year$300 million ÷ 15

$20 million

Tax saved each year$20 million × 25%

$5 million

Value of 15 years of savings at 10%$5 million × 15-year annuity factor

$38 million

What the interviewer listens for

• Do you separate the legal difference from the tax difference?
• Do you explain the step-up and 15-year tax amortization of goodwill?
• Do you know the double tax a C corporation seller faces in an asset deal?
• Do you define the 338(h)(10) and who qualifies?
• Do you tie the structure to price?

Common mistakes

• Saying goodwill from a stock deal is tax-deductible.With no step-up, it has no tax basis.
• Offering a 338(h)(10) as an option for any target.It needs a corporate buyer taking at least 80% and an S corporation or subsidiary target.
• Forgetting that a stock buyer inherits every liability, including unknown ones.
• Treating it as a tax question only, when asset deals need contracts, permits and titles transferred.

Likely follow-ups

• Why can't a public company sale use a 338(h)(10)?Its owners are many funds and individuals, not one corporate parent or S corporation holders, so it doesn't qualify.
• Which liabilities can still follow an asset buyer?Some follow the assets by law or contract, like certain environmental and employee obligations, and courts can impose successor liability, so diligence still matters.
• Who pays for the step-up in a 338(h)(10)?Often the buyer, through a gross-up that covers the seller's extra tax. It's worth paying as long as the gross-up costs less than the tax savings are worth.

More finance technicals

• How does a buy-side M&A process work?
• How do you tell whether an acquisition is accretive or dilutive?
• Walk me through a merger model.
• What are synergies, and which kind would you trust more?
• Would a buyer rather pay for an acquisition with cash, debt or stock?

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