The buyer is insisting on an asset purchase structure so they can step up their tax basis, but our CPA says we need a stock sale to avoid double taxation and capital gains hits. How do we negotiate this structural standoff without killing the deal?

Question

Tyler Smith · Accepted Answer

This is one of the most common friction points in lower middle-market M&A. Buyers prefer an asset sale or a transaction treated as an asset sale for tax purposes because it allows them to step up the tax basis of acquired tangible and intangible assets, creating substantial depreciation and amortization tax shields post-close. Furthermore, asset purchases allow buyers to leave legacy legal liabilities behind. Conversely, an asset purchase can trigger devastating corporate-level tax, built-in gains tax, or ordinary income recapture for the seller.

The solution is to focus on after-tax net proceeds rather than legal labels. Do not simply reject the asset purchase. Instead, instruct your transaction CPA to model the exact tax liability of an asset sale versus a stock sale at the proposed enterprise value. Calculate the specific dollar delta required to make you whole on an after-tax basis.

Once you know the dollar gap, negotiate an asset-to-stock tax gross-up. Present the math transparently: the buyer captures millions in future tax deductions through the basis step-up, while you face immediate tax erosion. Propose splitting or fully grossing up the purchase price to offset your excess tax burden. Alternatively, propose structuring the transaction as a stock sale with a Section 338(h)(10) or Section 336(e) joint election, where the legal form remains a stock transfer but the buyer achieves their asset step-up, provided the buyer funds the resulting tax differential.