The buyer is insisting on an asset sale to get a tax step-up, but our tax advisors say this structure will cost us an extra fifteen percent in taxes compared to a stock sale. How do we negotiate a transaction structure or a price gross-up that keeps our net proceeds intact without blowing up the deal?

Question

Tyler Smith · Accepted Answer

A primary point of negotiation in deal structuring is the legal format of the transaction. Buyers heavily favor asset sales because they can step up the tax basis of the assets for future depreciation and avoid inheriting legacy liabilities. For you, the seller, an asset sale can trigger high tax rates on depreciation recapture, resulting in a significantly lower net payout compared to a stock sale.

To resolve this conflict, you must first calculate the exact financial impact. Work with your CPA to model the net cash proceeds of both structures. If you agree to the buyer's asset sale structure, negotiate a purchase price gross-up to compensate you for the additional tax burden.

Alternatively, propose a hybrid structure such as a stock sale with a joint election under Section 338(h)(10). This structure is legally a stock sale but is treated as an asset sale for tax purposes, offering a potential middle ground. Use your weekly Level 10 Meeting™ to IDS® this issue with your advisory team, ensuring you secure the necessary structural terms to protect your net proceeds.