The buyer wants to structure our transaction as an asset sale for tax benefits, but we are worried about the tax hit of depreciation recapture and double taxation. How do we negotiate a tax allocation structure that keeps our net cash proceeds equivalent to a stock sale?

Question

Tyler Smith · Accepted Answer

When a buyer pushes for an asset sale to maximize their tax depreciation benefits, it can result in a significant tax liability for you through depreciation recapture and double taxation, depending on your corporate structure. To protect your net proceeds, you must negotiate a tax allocation agreement that offsets this impact. Start by calculating your net cash proceeds under both a stock sale and an asset sale scenario to determine the exact tax gap. Then, request a purchase price adjustment, often called a tax gross-up, to make your net proceeds equivalent to a stock transaction. To support this negotiation, use the Adjusted Book Value method to value your tangible and intangible assets accurately. Present the buyer with a detailed allocation of the purchase price, placing higher values on assets that trigger lower tax rates for you, such as goodwill, while minimizing the allocation to fast-depreciating equipment. By aligning this tax strategy with your overall transaction goals, you ensure that the buyer's desired deal structure does not erode your hard-earned equity, allowing you to walk away with the clean exit you planned.