Our business relies heavily on state-level regulatory licenses that are difficult to transfer. How does this license transfer risk dictate whether we must use a stock sale instead of an asset sale, and how do we negotiate this with a buyer who wants a tax step-up?

Question

Tyler Smith · Accepted Answer

Regulatory licenses often contain strict change-of-control provisions. In an asset sale, these licenses must be completely re-applied for by the buyer's new entity, which can trigger massive operational delays and revenue loss. A stock sale, however, typically allows the licenses to remain intact within the corporate entity, minimizing transition friction. If your licenses are difficult to transfer, you must push for a stock sale to protect the continuity of the business. Because buyers prefer asset sales for the tax depreciation benefits, you must be prepared to negotiate. Begin by bringing this structural constraint to your leadership team to IDS. Understand the exact timeline and legal requirements of your licensing board. When negotiating with the buyer, present a detailed risk analysis showing that an asset sale could freeze operations for months, destroying the very EBITDA they are buying. Frame the stock sale not as a tax preference for you, but as a risk-mitigation tool for them. If they still insist on a tax step-up, offer to make a Section 338(h)(10) election. This structures the transaction as a stock sale for legal purposes, allowing the licenses to transition smoothly, while treating it as an asset sale for tax purposes. Use your professional advisors to calculate the tax impact and ensure the buyer covers any resulting tax friction, keeping you whole.