The buyer is insisting on an asset sale so they can get a tax step-up in the basis of our equipment and software, but our corporate structure means this will trigger a massive tax bill for us. How do we calculate and negotiate the necessary valuation premium to make a stock sale or Section 338(h)(10) election viable?

Question

Tyler Smith · Accepted Answer

Buyers heavily favor asset sales because they can write up the value of your assets and depreciate them over time, which shields their post-close income from taxes. For you, an asset sale can be a disaster, triggering high ordinary income tax rates on depreciation recapture and potentially double taxation if you are a C corporation. If you want to keep your net proceeds whole, you must force the buyer to pay for this tax benefit.

- First, work with your CPA to run a detailed tax simulation comparing a straight stock sale to an asset sale. Calculate the exact dollar difference in your net after-tax proceeds. This difference is your tax friction.

- Second, if the buyer insists on the tax advantages of an asset sale, propose a stock sale with a joint Section 338(h)(10) or Section 336(e) election. This allows the transaction to be treated as an asset sale for tax purposes while remaining a stock sale for legal purposes.

- Third, explicitly state in your negotiations that you will only agree to this election if the buyer agrees to a tax gross-up. This means the buyer must increase the purchase price by the exact amount needed to ensure your net after-tax cash at close is identical to what you would have received in a straight stock sale. Since the buyer is getting millions in future tax write-offs, they should be willing to share that value to get the deal done. Use your weekly Level 10 Meeting™ to align your internal leadership and CPA team on these negotiation limits before responding.