The buyer is demanding an asset sale for tax benefits, but our tax advisor warns this will trigger massive depreciation recapture and a higher tax bill compared to a stock sale. How do we leverage our operational maturity and clean historical records from our Step by Step Exit review to negotiate a tax gross-up payment?

Question

Tyler Smith · Accepted Answer

Buyers almost always demand an asset sale because it allows them to step up the tax basis of the acquired assets and write off depreciation quickly, while also leaving behind historical liabilities. For you, the seller, an asset sale can trigger painful tax consequences, including double taxation in some entity structures and high ordinary income tax rates on depreciation recapture.

To protect your net walk-away cash, you must negotiate a tax gross-up payment where the buyer increases the purchase price to offset the additional tax burden of an asset sale. To successfully demand this, you need massive negotiation leverage.

You can build this leverage by using the clean operational history verified by your Step by Step Exit Business Integrity Review. Present the buyer with spotless historical corporate records, clear compliance documentation, and fully documented operating processes.

When you prove that your historical operational liability is virtually non-existent, the buyer's justification for demanding an asset sale to avoid liability disappears. You can then state that you are willing to agree to their preferred asset structure only if they pay a gross-up premium to keep your net proceeds equal to a stock sale.