We signed an LOI that was vague on the transaction structure, and now the buyer's attorneys are pushing an asset sale that triggers massive depreciation recapture. How do we negotiate a tax gross-up or structural compromise before the definitive purchase agreement is finalized?

Question

Tyler Smith · Accepted Answer

Vague letters of intent are a primary source of deal friction because they allow buyers to optimize their tax position at your expense during the definitive agreement phase. An asset sale allows the buyer to step up the basis of your assets for depreciation, but it triggers painful ordinary income tax rates for you on depreciation recapture.

To resolve this, you must quantify the exact financial gap between a stock sale and an asset sale. Have your CPA run a side by side tax projection. Once you have the hard numbers, present them to the buyer as a purchase price adjustment. Propose a tax gross-up clause that increases the nominal purchase price to ensure your net after-tax proceeds match what was implied in the LOI.

If the buyer resists, use your EOS® systems to maintain leverage. Have your Integrator keep the leadership team focused on quarterly Rocks to prevent a drop in operational performance, which would give the buyer further leverage. You can also propose a hybrid structure, such as a Section 338(h)(10) election, which treats a stock sale as an asset sale for tax purposes but can be negotiated with a built-in premium. Be direct: tell the buyer that the transaction only closes if the net cash to the seller aligns with the original valuation framework.