Upper Mid-Market Acquisition ($5M-$10M): Section 338 Elections and Earn-Out Complexity

Deals in the $5-10M range often involve stock purchases where a Section 338(h)(10) election could give you stepped-up basis. Earn-out contingencies, multiple entity layers, and complex financing require coordinated CPA and legal analysis before the LOI is finalized.

Section 338 election analysis is critical. If you are buying stock (rather than assets), a Section 338(h)(10) election lets both parties agree to treat the stock purchase as an asset acquisition for tax purposes. You get a stepped-up basis on all assets; the seller reports as if assets were sold. Whether this benefits the deal overall depends on modeling both sides, which requires a CPA running the numbers before the letter of intent is finalized.

Earn-out provisions create deferred tax issues. Deals at this size frequently include earn-outs tied to future performance. Under Section 453, gain from contingent payments may qualify for installment treatment, but the IRS requires a maximum selling price or payment period. Imputed interest rules under Section 483 add further complexity.

Multiple entity layers may be needed. Holding company structures, blocker entities for certain investors, and operating entity elections all affect how income flows and who pays the tax.

The tradeoff: The cost of a full advisory team (CPA, attorney, valuation specialist) is significant, but it is small relative to the seven-figure tax differences that depend on how the deal is structured.