A potential buyer is demanding an asset purchase structure so they can benefit from a tax basis step-up, but our CPA says this will cause a massive tax drag for our corporate structure. How do we negotiate a middle ground or structure a price adjustment to offset this tax hit?

Question

Tyler Smith · Accepted Answer

This is a classic conflict in M&A deal structuring. Buyers almost always prefer an asset sale because it allows them to step up the tax basis of the acquired assets and depreciate them quickly, reducing their future tax bill. It also protects them from taking on your historical liabilities. For you as the seller, especially if you operate as a C-corp or have significant depreciation recapture, an asset sale can trigger double taxation and massive tax rates, whereas a stock sale would be taxed at favorable long-term capital gains rates.

To bridge this gap, you have two primary negotiation levers. First, you can calculate the exact dollar difference in your net cash proceeds between a stock sale and an asset sale. Present this calculation to the buyer and demand a gross-up in the purchase price to make you whole. If they want the tax benefits of an asset structure, they should pay for them.

Second, you can suggest a compromise such as a Section 338(h)(10) election if you are an S-corp. This treats the transaction as an asset sale for tax purposes, giving the buyer their step-up, while legally keeping it a stock sale to protect you from liabilities. Always ensure your deal team runs these calculations early so you do not get blindsided at the letter of intent stage.