The buyer insists on structuring our acquisition as an asset purchase to capture depreciation step-up benefits, which generates significant tax depreciation recapture for us compared to a stock sale. How do we negotiate a purchase price gross-up to offset our tax penalty?

Question

Tyler Smith · Accepted Answer

Buyers prefer asset purchases because they get a step-up in basis under Section 1060, allowing them to depreciate your assets and write off acquired goodwill against their future taxable income. For you as a seller, an asset sale can be catastrophic. If your business holds significant depreciated equipment or intellectual property, or if you operate as a C-corporation, an asset sale triggers corporate-level tax plus individual-level capital gains, alongside ordinary income tax rates on depreciation recapture.

To resolve this structural conflict, have your transaction CPA model your net after-tax proceeds under both a stock sale and an asset sale. Calculate the exact dollar gap created by the asset structure. This gap represents the tax cost of giving the buyer their desired basis step-up.

Take that financial model to the negotiating table. The buyer is receiving a quantifiable future cash-flow benefit through tax shields created by depreciation and amortization deductions. Calculate the net present value of those tax deductions to the buyer. You should negotiate a gross-up in headline purchase price that covers one hundred percent of your incremental tax liability, or at least splits the buyer's net present value tax benefit fifty-fifty. If the buyer refuses to bridge the gap with cash, evaluate a stock sale with a Section 338(h)(10) election if you are an S-corporation, but only if the cash at close fully compensates for your net tax penalty.