A strategic buyer is insisting on an asset purchase to avoid our historical sales tax exposure in several states, but we want a stock sale to secure capital gains treatment. How do we use a Voluntary Disclosure Agreement or structured indemnity to keep the stock sale on the table?

Question

Tyler Smith · Accepted Answer

Buyers dread successor liability, especially regarding unquantified state sales tax exposure. If they buy your stock, they inherit that history. If they buy your assets, they generally leave it behind. To save your capital gains treatment under a stock sale, you must quantify and ring-fence this risk so the buyer can price it accurately rather than running away.

First, initiate a voluntary disclosure agreement or VDA in the key states where you have exposure before the buyer's Quality of Earnings audit uncovers it. By stepping forward voluntarily, you can often limit the look-back period, waive penalties, and establish a firm, capped dollar amount for the outstanding liability.

Second, use a structured indemnity. Agree to indemnify the buyer for any pre-closing sales tax liabilities up to a specific cap, and back this promise up by placing a portion of the purchase price into a dedicated tax escrow account. The escrowed funds are released to you after the statute of limitations expires.

This structure eliminates the buyer's fear of the unknown. They get the protection of a capped liability backed by cash in escrow, and you get to keep the stock sale structure and the favorable tax treatment that comes with it.