The buyer is insisting on an asset sale to secure a step-up in tax basis, but our leadership team wants a stock sale to limit our post-closing liability and simplify the transfer of our software licenses. How do we negotiate a compromise that protects our cash proceeds while satisfying the buyer's tax objectives?

Question

Tyler Smith · Accepted Answer

This is a classic negotiation friction point where tax goals clash with operational reality. In an asset sale, the buyer gets to write off the purchase price faster through depreciation step-ups, but you are left with potential double taxation and the headache of transferring every single vendor agreement, IP asset, and customer contract. To find a middle ground, you can propose a stock sale with a Section 338(h)(10) election. This legal structure treats the transaction as a stock sale for corporate law purposes, meaning all of your software licenses, customer accounts, and operational systems transfer cleanly without interruption, while allowing the buyer to treat it as an asset sale for tax purposes.

Because a Section 338(h)(10) election will trigger a higher tax liability for you due to ordinary income depreciation recapture, you must negotiate a tax gross-up clause. The buyer must agree to pay an additional cash premium at close to offset your extra tax burden, ensuring your net walk-away cash is identical to what you would receive in a straight stock sale. This preserves your operational structure, protects you from historical liability, and gives the buyer the tax benefits they demand.