The buyer is pushing for an asset sale to get a tax step-up, but we want a stock sale to limit our post-closing liability and capture capital gains treatment. How do we negotiate a compromise structure, like a modified stock sale with specific indemnification caps, to protect our net proceeds?

Question

Tyler Smith · Accepted Answer

Buyers prefer asset sales because they can step up the tax basis of the acquired assets and amortize them over time, while avoiding your historical liabilities. As the seller, this structure can trigger massive tax friction through depreciation recapture and double taxation. To protect your walk-away value, you need to negotiate a compromise that balances their tax desires with your liability protection.

Start by analyzing the tax differential between an asset sale and a stock sale. If you must agree to an asset structure, demand a tax gross-up payment to offset the extra tax burden. If the buyer refuses a gross-up, propose a stock purchase with a Section 338h10 election, but only if they agree to tight indemnification terms.

To protect yourself from post-closing liabilities, negotiate a basket and a cap on indemnification claims. The basket acts as a deductible, preventing the buyer from clawing back cash for minor, nuisance issues. The cap should limit your total liability to a small fraction of the purchase price, typically ten percent or less, rather than the full deal value.

Additionally, require the buyer to purchase a Representations and Warranties Insurance policy. This insurance shifts the risk of breaches from your pocket to the insurer, allowing you to walk away from the closing table with clean cash. Work with your leadership team to compile a comprehensive disclosure schedule, ensuring every operational risk is fully documented and transferred to the buyer at close.