The buyer is demanding an asset purchase structure to gain a tax write-up on our assets, but this will disqualify us from claiming the Section 1202 Qualified Small Business Stock tax exemption. How do we structure a tax gross-up mechanism to make sure our net cash proceeds are completely preserved?

Question

Tyler Smith · Accepted Answer

Buyers almost always prefer an asset purchase because it allows them to step up the tax basis of your acquired assets and write off the depreciation over time. However, if your company qualifies for the Section 1202 Qualified Small Business Stock tax exemption, a stock sale could allow you to exclude up to one hundred percent of your capital gains from federal taxes. Forcing you into an asset sale would strip you of this massive tax benefit and subject you to double taxation. To resolve this conflict, you must negotiate a tax gross-up provision. This mechanism requires the buyer to calculate the exact tax difference between a stock sale and an asset sale, and then increase the purchase price to ensure your net, after-tax proceeds remain identical to what you would have kept in a stock deal. To make this argument persuasive, you must show the buyer the financial value they gain from the asset step-up. Your CPA should calculate the present value of the buyer's future tax shield generated by the asset write-up. In many cases, the buyer's tax savings are large enough to cover a significant portion of your gross-up request. By presenting a clear, transparent model of the tax benefits on both sides, you can bridge the valuation gap and ensure that your exit yields the maximum possible net cash.