We are negotiating with a private equity buyer who insists on an asset sale to secure a tax step-up, but our tax advisor warns this will trigger huge depreciation recapture. How do we structure a compromise, such as a Section 338(h)(10) election, and what operational data must we present to justify our demand for a purchase price gross-up?

Question

Tyler Smith · Accepted Answer

When a private equity buyer insists on an asset sale to gain a tax step-up, it creates a massive tax friction for you due to depreciation recapture and different tax rates. To protect your net proceeds, you must be prepared to negotiate a purchase price gross-up or explore a corporate structure compromise like a Section 338(h)(10) election.

To justify this demand, you must present your business as a highly organized, low-risk acquisition. Use a Step by Step Exit Business Integrity Review to audit and document your corporate compliance, intellectual property ownership, and contract assignability.

Show the buyer that your corporate records are pristine and that a stock sale or a joint election carries zero hidden liabilities for them. If your contracts do not require consent for a change of control, a stock sale is actually much cleaner and faster for the buyer than an asset transfer.

By presenting a clean, risk-free corporate structure alongside a clear calculation of the tax friction, you put yourself in a position to demand that the buyer covers the tax difference. You either get them to agree to a stock structure or secure a gross-up that ensures your net cash walk-away remains exactly what was promised.