The strategic buyer is demanding an asset sale so they can get a tax step up in basis, but because we are structured as a C corporation, this will trigger double taxation and wipe out thirty percent of our net proceeds. How do we negotiate a structural compromise or a tax gross up to protect our walk away number?

Question

Tyler Smith · Accepted Answer

An asset sale for a C corporation is a financial disaster for the seller, triggering taxes at both the corporate level upon sale and the individual level upon distribution. Buyers prefer asset sales because they can depreciate the acquired assets rapidly, but you cannot allow their tax optimization to destroy your net proceeds. You must address this valuation gap head on. Start by calculating the exact dollar difference in net cash proceeds between a stock sale and an asset sale. Present this calculation to the buyer as an objective, numbers first reality. If they insist on an asset purchase, demand a tax gross up, which means they must increase the purchase price to ensure your net, after tax proceeds are identical to what you would receive in a stock sale. If the buyer refuses a full gross up, suggest a creative compromise. Propose a stock sale coupled with a Section 338 h 10 election, which treats a stock sale as an asset sale for tax purposes. While this still triggers corporate level tax, it can sometimes be structured to minimize the impact if you have net operating losses or other tax credits. Alternatively, negotiate to allocate a larger portion of the purchase price to non corporate assets, such as personal goodwill or a long term consulting agreement. Personal goodwill is taxed directly to the shareholders at capital gains rates, bypassing the corporate level tax entirely. Use your disciplined decision making process to evaluate these options, and never agree to an asset structure until your tax accountant has run a full flow of funds model.