The buyer's LOI specifies an asset purchase so they get a tax basis step-up, but our tax liability will be significantly higher than in a stock sale. How do we quantify this tax discrepancy and negotiate a higher purchase price to make us whole?

Question

Tyler Smith · Accepted Answer

Buyers prefer asset sales because Section 197 allows them to step up the tax basis of your assets to fair market value, creating substantial tax deductions by amortizing goodwill and intangible assets over fifteen years. For the seller, an asset sale often triggers catastrophic tax leakage through ordinary income rates on depreciation recapture, inventory appreciation, and potential double taxation in C-corporations.

To counter this, calculate the net after-tax proceeds of a stock sale versus an asset sale before countersigning the Letter of Intent. Quantify the dollar difference between paying long-term capital gains on a stock transaction versus paying mixed ordinary income and capital gains on an asset purchase. The difference between those two bottom lines is your tax spread.

Present this analysis directly to the buyer as a commercial negotiation. If they insist on an asset purchase to capture the tax shield, demand an upward adjustment to the purchase price that makes your net proceeds identical to a stock transaction. Alternatively, propose a stock sale with a joint Section 338(h)(10) or Section 336(e) election if you are an S-corporation. This election treats the transaction as an asset sale for federal tax purposes while maintaining the legal form of a stock transfer, allowing you to explicitly negotiate a gross-up payment covering the seller's additional tax burden.