Resources / Glossary / Stock purchase

Stock purchase.

Aka. Stock deal · share purchase · equity purchase
All terms

What is a stock purchase?

A stock purchase is a transaction in which the buyer acquires the equity of a target company directly from its shareholders. The legal entity continues unchanged — same contracts, same licenses, same employer of record — but its ownership transfers to the buyer. The buyer steps into the company exactly as it stands.

The defining feature is that everything comes with it. In a stock deal the buyer inherits all of the target's assets and all of its liabilities, including ones that were never disclosed or discovered. There is no line-by-line selection of what crosses the table the way there is in an asset purchase; the buyer is buying the whole entity.

Because the entity itself does not change, contracts, permits, and customer relationships generally stay in place without needing individual reassignment. This continuity is the structure's biggest practical advantage and the reason it dominates many private-company acquisitions.

Why a stock purchase is chosen

The structure is favored when the value of the business lives in things that are painful to transfer one at a time.

  1. Contract continuity. Customer agreements, leases, and supplier contracts remain with the entity, so they do not have to be individually assigned or re-consented.
  2. Licenses and permits. Regulatory approvals and licenses held by the entity stay attached to it, avoiding a slow re-application process under the buyer's name.
  3. Seller preference. Sellers generally favor stock deals because the tax outcome is usually better and they exit the entity cleanly, with no residual liabilities to manage.
  4. Simplicity at signing. Transferring shares is mechanically simpler than transferring a long schedule of individual assets.

The cost of that simplicity is risk. The buyer inherits unknown liabilities, which is why stock deals lean heavily on thorough diligence, robust representations and warranties, indemnification, and often escrow or representations-and-warranties insurance.

Stock purchase vs. asset purchase

The two structures sit on opposite sides of the same trade-off. A stock purchase offers continuity and a cleaner seller exit but exposes the buyer to inherited liabilities and usually no stepped-up tax basis. An asset purchase lets the buyer ring-fence liabilities and step up basis but requires reassigning contracts and licenses piece by piece.

In practice, the structure is negotiated alongside price. Where a buyer accepts a stock deal it cannot get tax-stepped, the parties sometimes elect tax treatments that approximate an asset purchase, capturing some of the basis benefit while keeping the legal simplicity of a share transfer.

Frequently asked.

5 questions
01 What's the difference between a stock purchase and an asset purchase?

In a stock purchase the buyer acquires the entity itself and inherits all of its assets and liabilities. In an asset purchase the buyer takes only named assets and assumes only chosen liabilities, leaving the entity with the seller.

Stock deals favor continuity and the seller's tax position; asset deals favor the buyer's liability protection and tax basis.

02 Does the buyer inherit the target's liabilities in a stock purchase?

Yes. Because the entity continues unchanged, the buyer takes on all of its liabilities, including undisclosed or contingent ones such as old litigation, tax exposures, or employee claims.

This is why stock deals depend so heavily on diligence, strong representations and warranties, indemnification provisions, and sometimes insurance to allocate the risk of surprises.

03 Why do sellers usually prefer a stock purchase?

Sellers often get a single layer of tax at favorable rates on a stock sale, whereas an asset sale by a corporation can be taxed at the entity level and again on distribution. Sellers also exit the legal entity entirely, leaving residual obligations behind.

Because the structure shifts both tax outcome and liability exposure, asset-versus-stock is typically a negotiated point that gets reflected in the purchase price.

04 Do contracts need to be reassigned in a stock purchase?

Generally no. Since the contracting entity is the same before and after, its contracts stay in place without individual assignment.

The exception is a change-of-control provision, which some contracts contain — these can require counterparty consent even when the entity itself does not change hands.

05 What is a 338(h)(10) election in plain terms?

It is a tax election available in certain U.S. stock deals that lets the parties treat the transaction as an asset purchase for tax purposes while it remains a share transfer legally. The buyer captures a stepped-up basis without having to reassign contracts and licenses.

It only works under specific conditions and usually requires the seller's cooperation, since it can change the seller's tax outcome — so it is negotiated, not assumed.

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