The buyer is insisting on an asset sale structure to get a tax step-up in basis, but this will trigger a massive immediate tax bill for us on our fully depreciated equipment. How do we negotiate a gross-up provision in the purchase price to offset this specific tax liability without killing the deal?

Question

Tyler Smith · Accepted Answer

When a buyer insists on an asset sale, they get to write off the acquired assets under Section 179 or bonus depreciation, but you face massive tax rates on depreciation recapture. To protect your net proceeds, you must negotiate a purchase price gross-up or a mutual agreement on the allocation of the purchase price.

Start by calculating your exact tax liability under both a stock sale and an asset sale scenario. Present this quantitative gap to the buyer openly. Explain that while you understand their desire for a tax step-up, the resulting tax burden on your end makes the current headline valuation unacceptable.

Propose a compromise during your deal negotiations. Request a purchase price adjustment, often called a tax gross-up, to split the tax benefit they receive. Alternatively, negotiate the allocation of the purchase price under Section 1060. Push to allocate more of the purchase price to goodwill, which is taxed at lower long-term capital gains rates, and less to fully depreciated equipment or inventory, which triggers ordinary income tax rates.

Use the metrics and financial goals outlined in your V/TO® to justify your net proceeds target. By framing this as a collaborative math problem rather than an emotional dispute, you can often reach an agreement that protects your post-close cash while still allowing the buyer to complete their desired asset structure.