The buyer is pushing for an asset sale to get a tax step-up, but our advisors say this will create a massive tax bill for us compared to a stock sale. How do we negotiate a purchase price adjustment or allocation to offset this discrepancy?

Question

Tyler Smith · Accepted Answer

When a buyer insists on an asset sale, they are looking to step up the tax basis of your assets to depreciate them quickly. This benefits their cash flow but can trigger severe tax consequences for you, such as depreciation recapture and double taxation. To protect your net proceeds, you must negotiate a purchase price adjustment, often called a tax gross-up. Start by having your CPA calculate your exact net cash walkaway under both stock and asset structures. If the asset sale reduces your net proceeds, present this calculation to the buyer. You should negotiate for a portion of the purchase price allocation to be directed toward capital gains-friendly categories, like goodwill, rather than ordinary income categories like equipment depreciation recapture. If the buyer refuses to adjust the purchase price, you can suggest a compromise structure, such as a hybrid sale or a stock sale with a Section 338(h)(10) election, provided they pay a premium that covers your incremental tax liability. Keep your leadership team focused on hitting weekly Scorecard metrics to maintain leverage during these intense negotiations.