The buyer is demanding an asset purchase structure for tax depreciation benefits, but our CPA says the resulting ordinary income tax hit will cost us hundreds of thousands of dollars compared to a stock sale. How do we negotiate a gross-up or structure an alternative like an F-reorganization?

Question

Tyler Smith · Accepted Answer

Buyers want asset purchases because they get a step-up in tax basis, allowing them to depreciate and amortize acquired assets to lower their post-closing tax burden. They also avoid inheriting unknown historical liabilities. Sellers want stock sales because all proceeds are generally taxed at preferential long-term capital gains rates, avoiding double taxation and ordinary income treatment on inventory or depreciation recapture.

If you simply accept an asset sale structure without calculating your tax drag, you are giving the buyer a multi-million-dollar tax subsidy out of your own proceeds. You have two strategic paths to solve this impasse.

The first path is an explicit tax gross-up. Calculate the exact dollar difference between your net proceeds under a stock sale and your net proceeds under an asset sale. Require the buyer to increase the headline enterprise value to cover that delta. Since the buyer receives a tangible future cash benefit from the basis step-up, they should pay for the privilege.

The second path is an alternative structure, such as a pre-closing F-reorganization for an S-Corporation, or an election under Internal Revenue Code Section 338(h)(10). In an F-reorg, your company creates a holding structure that allows the buyer to acquire a partnership interest or single-member LLC, achieving their desired tax basis step-up while you preserve stock-sale capital gains treatment.

Never negotiate headline purchase price without modeling after-tax proceeds. Define your required tax structure clearly in the letter of intent before entering exclusivity.