The buyer is demanding an asset sale to secure a tax step-up, but our tax advisor warns that depreciation recapture will severely reduce our net proceeds. How do we negotiate a structural adjustment to protect our net walkaway cash?

Question

Tyler Smith · Accepted Answer

Buyers almost always prefer an asset sale because it allows them to step up the tax basis of the acquired assets and write off depreciation immediately. This tax benefit has real economic value to the buyer, but it often comes at your expense. In an asset sale, you face high ordinary income tax rates on depreciation recapture and may even face double taxation depending on your corporate structure.

To protect your net proceeds, you must calculate the exact tax discrepancy between a stock sale and an asset sale. Present this calculation to the buyer and negotiate a tax gross-up. A tax gross-up requires the buyer to increase the purchase price to offset your additional tax liability, ensuring your net walkaway cash is identical to what you would have received in a stock transaction.

If the buyer resists a direct price increase, negotiate a compromise structure. One option is a joint election under Section 338-h-10 of the Internal Revenue Code. This allows the transaction to be treated as an asset purchase for the buyer's tax purposes, while you sell stock.

Use the financial transparency of your operating system to present clear, auditable tax schedules during diligence. Showing the buyer the precise mathematical impact of their requested structure makes it a rational, logical negotiation rather than an emotional dispute over price.