The buyer is insisting on an asset purchase agreement to avoid our historical liabilities, but we have critical software licenses and customer contracts that are explicitly non-assignable. How do we negotiate the deal structure to keep it a stock sale or protect our business if we must undergo a costly asset transfer?

Question

Tyler Smith · Accepted Answer

Buyers prefer asset sales because they can write up your tangible assets for depreciation benefits and leave behind any historical liabilities. However, if your business relies on critical, non-assignable customer contracts or software integrations, forcing an asset sale can severely disrupt your operations and delay your close. If you must go down the path of an asset sale, you need to conduct a thorough audit of your critical agreements early in the process. Identify which contracts require explicit customer consent to transfer and which ones have change-of-control clauses. Use your documented processes to show the buyer that your operational workflows are deeply integrated with these contracts. If transferring these assets represents a high operational risk, use this data to push for a stock sale. You can mitigate their liability concerns by offering robust representations and warranties backed by a reasonable escrow or reps and warranties insurance. If the buyer still insists on an asset sale, demand a purchase price allocation that minimizes your ordinary income tax exposure. You must also negotiate a tax gross-up to compensate for the depreciation recapture and double taxation that asset sales often trigger. Never allow the buyer to capture all the tax benefits while you absorb all the structural costs and operational friction of transferring your business piece by piece.