The buyer wants to do an asset sale to get a tax step-up, but our proprietary AI tools and software integrations are bound by restrictive licensing agreements that are difficult to assign. How do we negotiate a hybrid deal structure or a transitional licensing agreement to protect our valuation while avoiding a lengthy consent process?

Question

Tyler Smith · Accepted Answer

Buyers prefer asset sales because of the tax advantages, but this structure can create massive operational bottlenecks if your core value is tied to third-party software licenses or proprietary integrations. If these contracts require prior consent to assign, a standard asset sale can delay your close indefinitely.

To bypass this obstacle while maintaining your premium valuation, propose a hybrid structure such as a divisional drop-down or a F-reorganization. This allows you to package your operating assets, including your proprietary AI tools and systems, into a new legal subsidiary.

The buyer can then purchase the stock of that subsidiary, which often avoids triggering the assignment clauses of your critical licenses, while still allowing the buyer to make a joint Section 338(h)(10) election for tax benefits.

Alternatively, if a stock structure is off the table, negotiate a robust Transitional Services Agreement, or TSA. Under a TSA, your existing entity continues to host and run the licensed systems during a post-close transition period while the buyer migrates their operations.

This ensures there is no disruption to your daily operations, preserving the business performance tracked on your weekly Scorecard and protecting your valuation from post-close adjustments.