The prospective buyer is insisting on an asset purchase agreement, but our financial advisors tell us a stock sale is much better for our tax position. How do we negotiate the deal structure so we do not lose our hard-earned equity value to taxes?

Question

Tyler Smith · Accepted Answer

This is a classic conflict in business acquisitions. Buyers prefer asset sales because they can step up the tax basis of the acquired assets and write off depreciation, while avoiding historic liabilities. Sellers prefer stock sales because the entire gain is taxed at favorable long-term capital gains rates. If you accept an asset sale without adjusting the purchase price, you are effectively discounting your own deal. To protect your walkaway cash, you must calculate the tax discrepancy. Work with your CPA to run a side-by-side analysis of your net proceeds under both structures. Once you have the exact dollar amount of the tax delta, use it as a negotiating lever. Ask the buyer for a gross-up provision to increase the purchase price of the asset sale to match the net after-tax proceeds of a stock sale. If they refuse, suggest a hybrid structure or negotiate for other favorable terms, such as a lower working capital target or reduced indemnity escrows. Never agree to an asset structure without knowing the tax impact, and ensure your leadership team is aligned on how this affects the overall valuation.