The buyer is proposing an asset sale but is short on cash, offering a combination of cash, a seller note, and equity in their parent entity. How do we structurally organize this mixed consideration to minimize tax drag while ensuring our equity portion has real governance and liquidation preferences?

Question

Tyler Smith · Accepted Answer

Accepting a complex, mixed consideration package requires a careful balance of tax planning and legal protection. In an asset sale, receiving different forms of consideration can trigger immediate tax liabilities if not structured correctly. To minimize your tax drag, structure the seller note under Section 453 to defer taxes on that portion of the purchase price until you actually receive the cash payments. For the equity portion, negotiate a tax-free rollover under Section 721, if the parent entity is structured as a partnership, or Section 351, if it is a corporation, to defer taxes on the rolled equity. To protect the value of your new equity, do not accept common stock. Demand preferred equity with a liquidation preference. This ensures that if the company is sold or liquidated, you get paid your principal back before any common shareholders receive a dime. Additionally, secure protective covenants and governance rights, such as a seat on the board of directors or veto rights over major decisions like taking on excessive debt or selling the company. This structural setup ensures you defer your tax liabilities while retaining meaningful control and protection over your remaining investment.