The buyer is adamant about structuring our transaction as an asset sale to get a tax step-up, but this will trigger a massive tax bill for us compared to a stock sale. How do we use the concept of personal goodwill to bridge this tax gap and preserve our net proceeds?

Question

Tyler Smith · Accepted Answer

When a buyer insists on an asset sale, they are looking to step up the tax basis of your assets so they can write them off through depreciation. For you, the seller, this often results in ordinary income tax rates on a large portion of the proceeds, plus potential double taxation if you operate as a C-corporation.

To bridge this gap without losing the deal, you can negotiate a personal goodwill allocation. Personal goodwill represents the value of your personal reputation, relationships, and expertise, as opposed to the enterprise goodwill owned by the corporation. Because personal goodwill is an asset owned directly by you as an individual, its sale is taxed at favorable capital gains rates, bypassing the corporate-level tax.

To make this structure hold up under IRS scrutiny, you must establish that your personal goodwill actually exists and is distinct from the business. You must prove that you have not previously signed a non-compete agreement that transferred your personal goodwill to the corporation. Additionally, you must negotiate a separate personal goodwill purchase agreement directly with the buyer.

This strategy requires careful coordination with your legal and accounting teams. It is a powerful way to yield the same net cash-at-close as a stock sale, while still allowing the buyer to get their asset step-up. It turns a deal-killing tax disagreement into a collaborative, structured win-win solution for both parties.