Seller insists on stock sale due to taxes. How do buyers actually protect themselves?

January 31, 2026

by a searcher from Northwestern University - Kellogg School of Management in San Francisco, CA, USA

I recently submitted an LOI to acquire a massage parlor chain under an asset sale structure. The seller is generally aligned on price and economics, but is unwilling to do an asset sale. His position is that an asset deal would cost him roughly 35% of the business value in taxes, so he is only open to a stock sale. I fully understand the additional risks and liability exposure that come with a stock purchase, especially in this industry. Before walking away or forcing the issue, I am trying to understand whether there are practical ways buyers have successfully structured stock deals to meaningfully protect against historical and contingent liabilities. For those who have been in this situation. Did you find workable solutions (escrows, reps and warranties, indemnities, purchase price adjustments, insurance, etc.), or is this usually a hard stop? Would appreciate any firsthand experience or lessons learned.

Reply by an intermediary
from University of Wisconsin in Lawrence, KS, USA

You take out reps and warranties insurance (RWI) and split the cost with the seller. This is the simplest way and very common. AIG is the gold standard for such insurance, but there are many other carriers. Otherwise, you can require a hefty liabilities escrow to cover any claim for say the next 3 years or so.

Reply by a professional
from University of Akron in Charlotte, NC, USA

I’m generally pro–stock sale, and I think they should be considered far more often than they are. There’s a widely accepted default mindset that asset sales are inherently safer, but that view is largely shaped by theoretical risk analysis rather than how ownership and risk are actually experienced once you’re operating the business. A lot of that guidance comes from advisors doing exactly what they should—analyzing downside on paper—but it often misses what is real and tangible to the owner day-to-day. If I were advising a client here, I’d tell them to move forward with the stock sale if the business fits their buy box and diligence checks out—and to use that flexibility as leverage. A seller who is insisting on a stock deal for tax reasons will often be willing to improve economics or terms in ways that can more than compensate for any lost tax benefits, whether through price, seller financing, earn-outs, or stronger indemnity protection. In practice, the risk differential between a stock sale and an asset sale is often overstated, especially for a business like this. Most companies don’t have large undisclosed historical liabilities lurking in the background, and this isn’t an industry with inherent systemic or latent risk. There is always operational risk tied to prior ownership, but that exists in asset deals as well. What often gets overlooked is where protection actually comes from. Asset sales separate liability structurally; stock sales separate it contractually. In both cases, the real protection lives in the purchase agreement—reps and warranties, indemnities, escrows or holdbacks, survival periods, and specific carve-outs—not in the deal form itself. And regardless of structure, you can still be pulled into a lawsuit. Anyone can sue anyone for anything. The difference is who ultimately bears the cost, and that’s governed by the contract. A well-papered stock deal can function very similarly to an asset deal from a liability standpoint. Where stock sales really stand out is in the parts you actually feel as an owner. You get true continuity—leases, licenses, bank accounts, merchant processing, vendor contracts, credit history, and operational momentum all remain intact. In service businesses especially, asset deals can introduce real friction through landlord consents, re-licensing, re-underwriting, and transition disruption. That friction is tangible risk, not theoretical. On taxes, losing the step-up is real, but it’s often overemphasized relative to cash flow and overall deal economics. Many smaller deals don’t fully realize the theoretical tax benefit anyway. And being willing to do a stock deal when many buyers won’t is often leverage—tax-sensitive sellers frequently compensate with better pricing, stronger seller financing, longer earn-outs, or improved indemnity terms. Net-net, I’m not neutral on this. When diligence is done properly and the agreement is well-structured, I often see stock sales as an advantage. The liability discussion tends to live on paper, while the operational and continuity benefits are real, immediate, and felt every day by the owner.

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