The buyer is adamant about an asset purchase agreement to step up their tax basis and avoid successor liability, which will trigger massive recapture taxes for us. How do we negotiate a tax-neutral deal structure or force them to pay a premium to offset our tax hit?

Question

Tyler Smith · Accepted Answer

Buyers prefer asset purchases because they can step up the tax basis of your tangible and intangible assets, allowing them to claim massive depreciation deductions post-close. For you, however, an asset sale can trigger significant ordinary income tax recapture on equipment, alongside state taxes that would not apply to a stock sale.

To resolve this conflict, you must negotiate based on net after-tax proceeds, not gross enterprise value. If the buyer insists on an asset sale, require them to perform a gross-up calculation. This means they must increase the purchase price to ensure your net cash at close matches what you would have received in a stock sale.

Additionally, use your internal operational standards to reduce their anxiety about successor liability. Present them with a comprehensive Business Integrity Review that demonstrates pristine historical compliance, clear employment records, and clean contracts. If your core processes are fully documented and run on a robust operating system like EOS®, you can offer them a comprehensive representations and warranties insurance policy instead of agreeing to an asset sale. This protects them from historical liabilities while allowing you to keep the transaction structured as a stock sale to maximize your net proceeds.