The buyer is insisting on an asset sale to avoid successor liability, while we want a stock sale to minimize tax. How do we structure a hybrid transaction or use representations and warranties insurance to bridge this gap?

Question

Tyler Smith · Accepted Answer

In almost every transaction, a fundamental conflict arises over deal structure. Buyers strongly prefer asset sales because they get a step-up in tax basis and avoid taking on historical liabilities. Sellers prefer stock sales because they qualify for lower capital gains tax rates and offer a clean break from the business's past.

To resolve this tension without giving up your valuation, you can propose a hybrid structure or leverage modern transaction insurance. One effective compromise is negotiating a Section 338(h)(10) election, which treats a stock sale as an asset sale for tax purposes. Because this triggers a higher tax bill for you, you must demand a purchase price gross-up from the buyer to cover the difference.

To address the buyer's fear of hidden liabilities without resorting to an asset sale, introduce representations and warranties insurance. This insurance shifts the risk of post-closing indemnity claims from your personal balance sheet to an underwriting market.

By combining a tax gross-up with representation and warranty insurance, you give the buyer the tax benefits and security they want while preserving your stock-sale tax treatment and minimizing your post-close risk. Discuss this setup during your quarterly planning sessions so your team is ready when negotiations begin.