Our potential buyer is insisting on an asset sale so they can get a tax step-up, but our accountants say this will cost us millions in taxes compared to a stock sale. How do we navigate this conflict during the early stages of negotiating our deal structure?

Question

Tyler Smith · Accepted Answer

This is a classic battle in M&A. Buyers almost always want an asset sale because it allows them to step up the tax basis of your assets and write them off through depreciation, plus it insulates them from your historical liabilities. Sellers want a stock sale because it results in lower capital gains tax rates and is far simpler administratively. If you are an S-Corporation or a partnership, an asset sale can trigger significant ordinary income tax on depreciation recapture and inventory, which reduces your net proceeds. To resolve this, you must quantify the tax delta. Work with your tax advisors to calculate the exact difference in your net after-tax cash between a stock sale and an asset sale. Once you have this number, you can negotiate a tax gross-up. This means the buyer pays a higher purchase price to ensure you walk away with the same after-tax cash as you would in a stock sale. If they want the tax benefits of an asset step-up, they must pay for them. Getting this agreed upon in the initial LOI stage prevents major deal friction later.