M&A Deal Structures: Asset vs Share Sale, Cash vs Stock, Earn-outs

01Why Structure Matters as Much as Price

When a founder hears an offer, the mind jumps straight to the number. That is natural, but it can be a trap. Two deals at the same headline price can leave you with very different amounts in your bank account, because the structure of an M&A deal decides three things the price alone does not: how much risk you carry after closing, how much tax you pay, and how much of the money you actually take home.

Think of every deal structure as splitting three things between you and the buyer. Risk: if a customer sues or a tax notice arrives after closing, who pays? Tax: is the gain taxed once or twice, and at what rate? Timing and certainty: is the money in your hand at closing, or dangling on a future target that may or may not be hit? A slightly lower price paid fully in cash, taxed once, with a small holdback, can beat a bigger number that is half stock and half earn-out.

Two levers control most of this. The first is what is being sold, the shares of the company (a share sale) or the business inside the company (an asset or business sale). The second is how you get paid, cash, the buyer’s shares, a deferred earn-out, or money parked in escrow. The rest of this guide takes each lever in turn. It pairs naturally with the definitive-agreement stage covered in the term sheet and SPA guide, and with the numbers in tax on exit in India.

02The Share Sale

In a share sale, the buyer purchases the shares of the company directly from the shareholders, the founders, ESOP holders who have exercised, and investors. The legal entity does not change. The same company, with the same PAN, the same contracts, the same licences, the same employees and the same bank accounts, simply has new owners on the cap table. Ownership changes hands; the business itself never moves.

This is usually the cleaner structure, and it is the one sellers tend to prefer. Because nothing inside the company has to be reassigned, you avoid the paperwork of transferring each contract, licence and asset one by one. Customer agreements, vendor contracts, leases and registrations mostly stay in place, though some may contain change-of-control clauses that need consent.

Tax and payout in a share sale

Tax is the big attraction. When you sell shares, the gain is capital gains in the hands of the sellers, and it is taxed once. For unlisted shares held for more than 24 months, long-term capital gains are taxed at 12.5% without indexation for transfers on or after 23 July 2024 (Finance Act 2024); if held for 24 months or less, the gain is short-term and taxed at your applicable slab rate. The cash reaches shareholders directly, with no intermediate layer. These figures are guidance as of June 2026, so verify current rates with a CA or on incometax.gov.in.

The catch: the buyer inherits everything

The trade-off sits with the buyer. Because the company continues intact, the buyer inherits all its liabilities, known and unknown: past tax positions, pending litigation, employee dues, warranty claims, that one contract with an ugly clause. This is exactly why buyers run hard due diligence on a share deal and why they lean on representations and warranties, indemnities and an escrow to protect themselves. For a well-run company with clean books, a share sale is straightforward. For a company with skeletons, the buyer will price the risk in, or push for the other structure.

03The Asset or Business Sale

In an asset sale, the buyer does not buy the company. The company itself sells its business, the assets, the customers, the technology, the team, the brand, to the buyer, and receives the money into the company. The shareholders keep owning the (now largely empty) company. When an entire business or undertaking is sold together as a going concern for one lump-sum price, without putting a value on each individual asset, Indian tax law treats it as a slump sale governed by Section 50B of the Income Tax Act.

Why buyers like it

The buyer’s big win is avoiding hidden liabilities. In a well-drafted asset deal, the buyer takes the assets it wants and leaves the old liabilities, disputes and unknown exposures behind in the seller’s company. It is a way of buying the good parts without adopting the whole history. Buyers may also get a cleaner cost base for the assets they acquire. This is why a cautious buyer, especially where diligence has surfaced concerns, often pushes for an asset or business sale.

The two-layer tax problem for founders

Here is the reason sellers usually resist it. In a slump sale, the gain (broadly, the sale consideration minus the net worth of the undertaking) is taxed in the hands of the selling company under Section 50B. But the founders do not have the cash yet, the company does. To actually get that money into founders’ pockets, it has to leave the company (as dividend, buyback or eventually on winding up), and that movement can attract a second layer of tax. So the same economic exit can be taxed twice: once at the company, once when it flows to shareholders. That is often materially worse for founders than a single capital-gains hit on a share sale. Confirm the exact treatment for your case with a CA.

More consents, more friction

An asset sale is also more work to execute. Because the business is being lifted out of one entity into another, individual contracts, leases, licences and registrations may need to be reassigned or freshly obtained, and counterparties, landlords and regulators may have to consent. Employees may need to be transferred on fresh terms. None of this is fatal, but it adds time, cost and execution risk compared with a share sale where the wrapper stays put.

04Share vs Asset: Side by Side

Here is the same decision laid out on one page. Treat it as guidance, not a rule; the right answer depends on the company’s history, the buyer’s appetite for risk, and where the tax lands.

The structure is a negotiation, and it rarely sits in isolation from the price. If a buyer insists on an asset deal that costs you more tax, that is a legitimate reason to push the price up to compensate. A good adviser quantifies exactly how much extra, so you are trading in numbers rather than in feelings. For how buyers arrive at the number in the first place, see how startups are valued at exit.

05Cash vs Stock vs Earn-out vs Escrow

Once you know what is being sold, the next question is how you get paid. Real deals almost always mix these four forms, and the mix tells you how the risk is being shared.

Cash

Cash paid at closing is the cleanest, most certain form of consideration. The money is yours, the value does not move after closing, and you are not exposed to what happens to the buyer next. Every seller wants as much of the deal in up-front cash as possible, for the simple reason that certainty is worth a lot.

Stock

Stock means you receive the buyer’s shares instead of, or alongside, cash. Now your outcome is tied to the buyer’s future value. If the buyer is a strong company on the way up, this can be a good thing. But the shares may be illiquid, locked in, or hard to value, and you carry the buyer’s risk without controlling it. In cross-border deals, taking foreign stock also brings FEMA and tax wrinkles; if there is a non-resident on either side, the pricing and reporting rules in cross-border M&A and FEMA come into play.

Earn-out

An earn-out is deferred, contingent money: part of the price paid later, only if the business hits agreed targets after closing. It is how buyer and seller bridge a gap on what the business is worth today. We go deep on it in the next section, because it is where most post-deal disputes are born.

Escrow / holdback

An escrow (or holdback) is a slice of the price, commonly 10 to 20 percent as a rough guide, parked with a neutral third party or held back by the buyer for a set period after closing. It secures your representations, warranties and indemnities: if a problem you promised was not there turns up, the buyer recovers from the escrow instead of chasing you personally. Whatever is left when the claim window closes is released to you. This is standard practice, not an insult; negotiate its size, duration and the cap on claims rather than fighting its existence.

06Earn-outs in Depth

The earn-out deserves its own section because it is the most misunderstood, and most litigated, part of an M&A deal. Used well, it gets a deal done that would otherwise have collapsed. Used carelessly, it turns into two years of argument and a payout that never arrives.

What an earn-out is for: bridging the valuation gap

Earn-outs exist because buyer and seller often disagree on what the business is worth. The founder is sure next year will be huge; the buyer is not paying today for a future that may not happen. An earn-out splits the difference honestly: the buyer pays a base price now, and pays more later only if the optimistic case actually comes true, measured against targets like revenue, EBITDA, gross margin, active users or a product milestone over the next one to three years. It lets both sides say yes without either pretending to agree on the future.

Why earn-outs go wrong

The trouble is that after closing, the seller no longer controls the business. The buyer does. So a founder chasing an earn-out target can watch the new owner make decisions that quietly make the target unreachable: cutting the marketing budget, reassigning the team, changing pricing, folding the product into a bigger portfolio, or simply defining the metric differently than the founder assumed. Disputes usually come down to three things: whose numbers count (accounting choices can move EBITDA a lot), who ran the business during the earn-out, and what the target actually meant when it was written vaguely.

How to structure earn-out targets clearly

If you accept an earn-out, spend your negotiating energy on making it precise and defensible:

• Pick a metric that is hard to manipulate. Revenue is cleaner than EBITDA because EBITDA depends on cost allocations the buyer controls after closing.
• Define the measurement exactly. Spell out the accounting policies, what is included and excluded, and who calculates it, with your right to audit.
• Protect your ability to hit the target. Agree on the budget, headcount, autonomy and support the business will get during the earn-out period, in writing.
• Use tiers, not a cliff. A sliding scale (you earn proportionally as you approach the target) is fairer than all-or-nothing, which invites gaming near the line.
• Agree the dispute process up front. Name an independent expert or mechanism to resolve calculation fights, so a disagreement does not become a lawsuit.

And a plain founder truth: value the up-front, certain part of the deal on its own merits, and treat the earn-out as upside you may or may not see. If the base price is not one you would be happy with even if the earn-out pays zero, be very careful. How the total proceeds are then split among founders, investors and ESOP holders is a separate and important question, covered in what happens after the deal closes and in the payout order explained in the waterfall and liquidation preference.

07Frequently Asked Questions