The buyer insists on an asset purchase to maximize their tax depreciation, but we have critical enterprise vendor agreements and state licenses that cannot be easily assigned. How do we force a stock transaction or mitigate the transfer risk?

Question

Tyler Smith · Accepted Answer

Buyers prefer asset purchases because Section 197 allows them to step up the tax basis of your assets and amortize acquired intangibles over fifteen years. For a seller, however, an asset sale creates two severe headaches: heavy ordinary income tax rates on depreciation recapture, and the immense operational friction of assigning every vendor agreement, commercial lease, and operating permit.

If non-assignable enterprise contracts or regulatory permits make an asset sale commercially dangerous, push back with structural alternatives. Offer an equity purchase structured as a stock sale, or propose an equity sale treated as an asset sale for tax purposes under Section 338(h)(10) or Section 336(e), provided you operate as an S-corporation. This gives the buyer their cherished tax basis step-up while keeping the corporate entity intact, entirely bypassing the need to obtain third-party contract consents.

If you agree to a stock transaction with a tax election, ensure the buyer pays a full tax gross-up. Calculate the exact dollar difference between your capital gains tax in a pure stock sale and the combined federal and state tax burden under the deemed asset sale, including depreciation recapture and state tax differentials. The purchase agreement must obligate the buyer to pay this difference as additional purchase price at closing.

If the buyer refuses a stock structure entirely, make non-assignable contracts their closing condition problem, not yours. Require the buyer to bear the cost and legal burden of securing third-party consents, and specify that failure to obtain consent on non-material vendor contracts cannot serve as grounds for terminating the agreement or re-trading the purchase price.