The buyer is demanding an asset sale to protect themselves from potential employment liabilities, but the tax impact of depreciation recapture will ruin our net proceeds. How do we negotiate an indemnification structure to make a stock sale viable for them?

Question

Tyler Smith · Accepted Answer

Buyers prefer asset sales because they get a stepped up tax basis and avoid historical liabilities. For you, an asset sale can trigger massive depreciation recapture taxes under the Internal Revenue Code, destroying your net proceeds. To bridge this gap, you must convince the buyer to agree to a stock sale by addressing their liability concerns directly. You can achieve this by offering a robust indemnification structure. Offer to set up a dedicated escrow account containing a percentage of the purchase price to cover any pre closing employment or regulatory claims that might arise within a specific period, such as twelve to twenty-four months. You should also agree to an indemnification cap, which limits your total liability to the size of the escrow or a set percentage of the deal value. To make this work, show the buyer that your historical compliance and operations are tightly managed. Walk them through your Accountability Chart to demonstrate how your human resources and legal functions are structured. By combining clear operational oversight with a funded escrow, you remove the buyer's risk and secure the tax benefits of a stock sale.