The buyer is demanding an asset purchase agreement, but because we are structured as a C-Corporation, this triggers double taxation. How do we negotiate a compromise or a purchase price gross-up?

Question

Tyler Smith · Accepted Answer

When a buyer demands an asset sale for the tax benefits of a step-up in basis, a C-Corporation owner faces a severe double taxation trap. The corporation is taxed on the sale of the assets, and the shareholders are taxed again when the remaining cash is distributed. This can easily wipe out thirty to forty percent of your net proceeds. To resolve this, you must negotiate a stock sale or structured compromise. One common solution is a Section 338(h)(10) election, which treats a stock sale as an asset sale for tax purposes. If you agree to this election, you are giving the buyer their step-up in basis, but you must negotiate a purchase price gross-up to compensate your shareholders for the additional tax burden. Use quantitative tax models to calculate the exact dollar difference in net proceeds between a pure stock sale and an asset sale. Present this data transparently to the buyer, showing them that if they want the tax benefits of the step-up, they must pay for them through a higher enterprise value. Bring this issue to your leadership team's weekly Level 10 Meeting to ensure everyone is aligned on your minimum walk-away number. By using clear financial models, you can protect your net proceeds while keeping the transaction moving forward.