The buyer is pushing hard for an asset sale to get a tax step-up on our equipment and software, but our tax advisor says this will cost us millions in taxes compared to a stock sale. How do we handle this structural disagreement?

Question

Tyler Smith · Accepted Answer

The tension between a stock sale and an asset sale is a classic hurdle in M&A negotiations. Buyers prefer asset sales because they can step up the tax basis of your tangible and intangible assets, allowing them to claim significant depreciation and amortization deductions. They also avoid inheriting your historical legal and tax liabilities. As the seller, you prefer a stock sale because your entire gain is generally taxed at favorable long-term capital gains rates. In an asset sale, you may face double taxation or ordinary income tax rates on depreciation recapture. To solve this, you need to calculate the exact net cash difference between the two structures. Once you have the numbers, you can negotiate a tax gross-up. If the buyer insists on an asset sale for the tax benefits, they should compensate you by increasing the purchase price to ensure your net, after-tax proceeds are the same as they would be in a stock sale. Alternatively, you can explore a joint election under Section 338(h)(10) or Section 336(e), which treats a stock sale as an asset sale for tax purposes. This allows the buyer to get their tax step-up while you negotiate a premium to cover your additional tax liability. Never agree to an asset structure without running a detailed tax projection.