Cash consideration is money a buyer pays a seller in exchange for a business, its assets, or its stock. It is the simplest form of payment in a merger or acquisition because the value is fixed at the moment of transfer, with no exposure to share-price swings or a buyer’s future ability to pay. The headline purchase price, though, almost never equals what hits the seller’s account. Working capital adjustments, escrow holdbacks, earn-outs, and taxes all reshape the final number, sometimes substantially.
In a stock acquisition, the cash goes directly to the selling shareholders. In an asset purchase, it goes to the target company, which then distributes the proceeds to its owners. That structural choice drives most of the tax differences discussed below.
What Actually Gets Paid at Closing
The purchase price in the agreement is a starting figure. Several mechanisms sit between that number and the cash the seller takes home.
Working Capital Adjustments
A fixed price would let a seller drain operating cash out of the business before closing. To prevent that, most deals set a working capital peg: an agreed level of current assets minus current liabilities the business should carry on the closing date. If actual working capital comes in below the peg, the purchase price drops dollar for dollar. If it comes in above, the seller gets more. A post-closing true-up, usually finished within 60 to 90 days, finalizes the number once both sides work through the actual balance sheet.
Escrow and Holdbacks
Between 5% and 15% of the deal value is typically placed in escrow with a third-party agent rather than released to the seller at closing. That money secures the buyer against breaches of the seller’s representations and warranties. If the seller overstated revenue, failed to disclose a pending lawsuit, or misrepresented an environmental condition, the buyer can make a claim against the escrow. Escrow periods generally run 12 to 24 months, and any unclaimed balance then releases to the seller.1Bloomberg Law. M&A Overview – Escrow Accounts in M&A
Holdbacks work similarly but are retained directly by the buyer. They are often used for specific anticipated liabilities, such as a known environmental cleanup or an unresolved tax audit.
Earn-Outs and Deferred Payments
When buyer and seller cannot agree on value, an earn-out can bridge the gap. A portion of the price becomes contingent on the business hitting specified financial targets, such as revenue or EBITDA, during a defined period after closing. Hit the targets and the seller collects. Miss them and the buyer keeps the difference.
Earn-outs are among the most litigated provisions in deal-making. The seller no longer controls the business, yet their payout depends on how it performs. Disputes commonly turn on accounting methods, investment decisions that suppress short-term earnings, and operational changes the buyer makes after closing. The metrics, measurement periods, and accounting standards need to be pinned down with precision in the purchase agreement.
Deferred payments are different. These are installments paid on a fixed schedule regardless of performance. The distinction matters: earn-out payments and fixed deferred installments follow different tax reporting rules.
Post-Closing Disputes
Purchase agreements almost always include a dispute mechanism for disagreements over working capital, earn-out calculations, and other post-closing items. The usual approach gives each side a window to review and object. If they cannot agree, the dispute goes to an independent accounting firm that acts as a neutral referee, with authority limited to the specific items in dispute rather than a full re-audit. Its determination binds both sides.
How the Seller Is Taxed
Receiving cash is almost always a fully taxable event. Unlike a stock-for-stock reorganization, where tax can sometimes be deferred, a cash sale forces the seller to recognize gain or loss in the year of closing. The size of the bill depends on what is being sold and how long the seller held it.
Stock Sales
When shareholders sell stock for cash, the gain is total cash received minus the shareholder’s adjusted basis. Stock held more than a year qualifies for long-term capital gains rates, which top out at 20%. Stock held a year or less is taxed at ordinary rates, which can reach 37%.2Internal Revenue Service. Topic no. 409 – Capital Gains and Losses For the seller, a stock sale is clean: one asset sold, one tax character.
Asset Sales
An asset sale requires allocating the total cash across every individual asset transferred: equipment, inventory, real estate, customer lists, goodwill, and so on. Both parties must agree on the allocation and report it consistently to the IRS on Form 8594.3Internal Revenue Service. Instructions for Form 8594 Federal law requires the allocation to follow a residual method that distributes the price across seven classes of assets, from cash and securities at the top down to goodwill and going concern value at the bottom.4Office of the Law Revision Counsel. 26 USC 1060 – Special Allocation Rules for Certain Asset Acquisitions
Each class carries its own treatment. Inventory is taxed as ordinary income. Depreciated equipment triggers depreciation recapture under Section 1245, meaning the portion of gain attributable to prior depreciation deductions is taxed at ordinary rates rather than capital gains rates.5Office of the Law Revision Counsel. 26 US Code 1245 – Gain From Dispositions of Certain Depreciable Property Depreciated real property triggers a similar recapture under Section 1250, with unrecaptured gain taxed at a maximum 25% rate.2Internal Revenue Service. Topic no. 409 – Capital Gains and Losses Only the portion allocated to goodwill and long-held capital assets reaches the favorable long-term capital gains rate.
This is where allocation gets contentious. The seller wants more weight on goodwill and capital assets to secure lower rates. The buyer wants more weight on short-lived depreciable assets for faster write-offs. The negotiated price often reflects those competing preferences.
Net Investment Income Tax
Sellers with modified adjusted gross income above $200,000 (single) or $250,000 (married filing jointly) face an additional 3.8% net investment income tax on the capital gain. The surtax applies to the lesser of the seller’s net investment income or the amount by which their income exceeds the threshold.6Internal Revenue Service. Net Investment Income Tax For a multi-million-dollar sale, this effectively raises the top long-term rate from 20% to 23.8%. It is easy to miss in early deal modeling.
Installment Reporting for Deferred Payments
When part of the cash is received after the year of sale, whether through earn-outs, seller financing, or scheduled installments, the seller can generally report the gain as payments arrive rather than all at once. This is the installment method under Section 453 of the Internal Revenue Code, and it applies automatically to qualifying sales unless the seller elects out.7Office of the Law Revision Counsel. 26 US Code 453 – Installment Method The method does not cover sales of inventory or dealer dispositions.
Under installment reporting, each payment breaks into three components: return of basis (tax-free), capital gain, and interest income. The gain portion stays at a constant percentage of each payment across the payout period. For sellers with substantial earn-outs stretching over years, this can meaningfully smooth the tax hit.
One wrinkle: if a deferred payment arrangement lacks adequate stated interest, the IRS imputes interest at the applicable federal rate and recharacterizes part of each payment as ordinary interest income rather than capital gain.8Office of the Law Revision Counsel. 26 US Code 1274 – Determination of Issue Price in the Case of Certain Debt Instruments Issued for Property Deal counsel typically ensures that deferred payment provisions carry interest at or above the applicable federal rate to prevent that reclassification.
Timing of Escrow and Earn-Out Income
Cash in escrow is generally not taxed until it is actually released, provided the seller cannot direct or access the funds during the escrow period. That defers tax on the escrowed slice, which matters when 10% or more of the price sits locked up for a year or two. Earn-out payments are taxed in the year received, spreading the liability across the earn-out period.
Qualified Small Business Stock
Sellers of qualifying C corporation stock may exclude a substantial portion of gain under Section 1202. To qualify, the corporation must be a domestic C corporation with gross assets that never exceeded $75 million, and the stock must have been acquired at original issue in exchange for money, property, or services.9Office of the Law Revision Counsel. 26 US Code 1202 – Partial Exclusion for Gain From Certain Small Business Stock
The exclusion scales with holding period. For stock acquired after the applicable date under current law, holders who have owned the stock at least five years can exclude 100% of the gain, up to the greater of $15 million or ten times the stock’s adjusted basis. Shorter holds yield partial exclusions: 75% at four years and 50% at three.9Office of the Law Revision Counsel. 26 US Code 1202 – Partial Exclusion for Gain From Certain Small Business Stock For founders and early investors, Section 1202 can wipe out the federal tax on a cash sale entirely. The corporation must also meet an active business requirement throughout the holding period, and certain industries, including financial services, hospitality, farming, and mining, are excluded.
How the Buyer Is Taxed
The buyer’s position is roughly the mirror image of the seller’s, which is why the two sides usually push in opposite directions on deal structure.
Stock Purchase: Carryover Basis
A stock buyer acquires shares at a basis equal to the cash paid. The tax basis of the company’s underlying assets, however, stays exactly where it was. If the target bought equipment five years ago and has been depreciating it since, the buyer inherits whatever depreciation schedule remains. No fresh start. That carryover basis is the main reason buyers resist pure stock deals: a premium price, used-up deductions.
Asset Purchase: Step-Up in Basis
In an asset purchase, the buyer allocates the total cash paid (plus any liabilities assumed) across all acquired assets using the same residual method and Form 8594 classes the seller uses.10Internal Revenue Service. About Form 8594, Asset Acquisition Statement Under Section 1060 This creates a new, stepped-up basis in every asset, often well above the target’s old book value. The buyer can then depreciate tangible assets from the new basis and amortize intangibles, including goodwill and customer lists, over 15 years under Section 197.11Office of the Law Revision Counsel. 26 US Code 197 – Amortization of Goodwill and Certain Other Intangibles
Those amortization deductions are a serious tax shield. A buyer paying $10 million in cash and allocating $4 million to goodwill can deduct roughly $267,000 per year for 15 years against future income. Multiply by the buyer’s marginal rate and the present value of those deductions becomes a real factor in deal pricing. Buyers routinely pay more for a structure that delivers a full step-up.
Section 338(h)(10): Stock Legally, Assets for Tax
In some cases both sides can have it both ways. A Section 338(h)(10) election allows a qualified stock purchase to be treated as an asset purchase for federal tax purposes while remaining a stock purchase for every other legal purpose, so contracts, licenses, and permits transfer with the stock while the buyer still gets a stepped-up basis in the assets. Both parties must agree to the election, and it works only for acquisitions of S corporations or members of a consolidated group. Where available, it is often the most tax-efficient structure.
Section 1031 Does Not Rescue Cash Proceeds
Sellers sometimes ask whether they can defer tax by rolling cash proceeds into a like-kind exchange under Section 1031. Since the Tax Cuts and Jobs Act took effect in 2018, Section 1031 applies only to real property. Exchanges of machinery, equipment, vehicles, intellectual property, and other business personal property no longer qualify.12Internal Revenue Service. Like-Kind Exchanges – Real Estate Tax Tips If the sale includes commercial real estate, that portion can potentially qualify, but the seller must use a qualified intermediary to hold the proceeds. Taking direct control of the cash blows the exchange.
Cash Compared With Stock and Seller Notes
Cash gives the seller a known, final value at closing. The cost of that certainty is immediate tax. Stock consideration ties the seller’s payout to the buyer’s share price; if the buyer’s stock drops 30% in the six months after closing, the seller has effectively taken a 30% price cut. Lock-up restrictions on selling the received shares can compound that exposure.
Stock does carry one real advantage. In a qualifying corporate reorganization under Section 368, the seller can defer capital gains tax until the received stock is eventually sold.13Office of the Law Revision Counsel. 26 US Code 368 – Definitions Relating to Corporate Reorganizations For a seller who plans to hold the buyer’s stock long term, deferral can be worth more than cash in hand. The transaction has to meet strict requirements, however, generally including that the acquisition be made solely or primarily for voting stock, and many deals do not qualify.
Seller financing through a promissory note introduces credit risk. The seller is effectively lending to the buyer, backed by a promise to pay principal and interest over time. If the buyer or the acquired company stumbles, the seller may not collect in full. Cash carries no counterparty risk once it clears.
Many large deals use a mix: a fixed cash component for certainty plus a stock component to align the seller with the combined company’s future.
HSR Filing for Large Cash Deals
Cash transactions above a certain size trigger federal antitrust review. Under the Hart-Scott-Rodino Act, both parties must file a premerger notification with the Federal Trade Commission and the Department of Justice and observe a waiting period, typically 30 days, before closing. For 2026, the minimum transaction value that triggers filing is $133.9 million.14Federal Trade Commission. New HSR Thresholds and Filing Fees for 2026
Filing fees scale with deal size and are paid by the acquirer:
- Under $189.6 million: $35,000
- $189.6 million to $586.9 million: $110,000
- $586.9 million to $1.174 billion: $275,000
- $1.174 billion to $2.347 billion: $440,000
- $2.347 billion to $5.869 billion: $875,000
- $5.869 billion and above: $2,460,000
These thresholds are adjusted annually for changes in gross national product.14Federal Trade Commission. New HSR Thresholds and Filing Fees for 2026 Failing to file when required can draw penalties exceeding $50,000 per day, so deal teams in the mid-market and above should confirm early whether HSR applies.