Maximizing value through deal structure

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There are two basic alternative sale structures to consider when considering an exit strategy — the sale of assets and the sale of stock. Careful consideration of the deal structure is required, as it will have major ramifications upon tax considerations, handling of cash at close and legacy liabilities of the seller after the sale. Goals of the buyer and seller are often at odds. That is why it is important to engage a knowledgeable investment banker early in the process, as well as an experienced corporate attorney and tax accountant. 

Sale of assets

The advantages of the asset sale primarily benefit the buyer. First, the buyer can choose which assets will be transferred and which liabilities will be assumed. The buyer is not liable for the seller’s liabilities unless they are specifically assumed. This is especially helpful insofar as unknown and potential liabilities (i.e. environmental issues) are concerned. A second major benefit to the buyer is that the tax basis in the acquired asset is increased (or “stepped-up”), which should result in higher future tax deductions for the buyer. 

There are a few advantages to the asset sale from the seller’s perspective. First the seller can choose to retain cash accounts and accounts receivable. Similarly, the seller can maintain ownership of assets not transferred since corporate existence is maintained and an asset sale is often a more liquid transaction than a stock deal; consideration is usually paid in cash.  

The disadvantages of the asset sale are numerous and vary in potential impact. First, the transaction is complex because every asset must be transferred separately. Also, consents to transfer contracts may be required and often are difficult to obtain. This can be problematic for both the seller from a logistical/feasibility standpoint and may be problematic to the buyer from a customer continuity perspective. The asset sale will also be subject to state and local transfer taxes.

Most importantly, from a seller’s perspective there is the potential “double taxation” (corporate and stockholder level). Herein lies the real creative friction when crafting a deal. 

Sale of stock

In a stock sale, the buyer acquires the stock of the seller directly from the selling company’s shareholders. The selling company either becomes a subsidiary and will continue to operate after the transaction, or the selling company may be merged into the buyer. One of the primary advantages to the stock sale is the simplicity of the transaction. Particularly when there are a limited number of stockholders, it is a matter of just transferring stock certificates. Since corporate structure remains intact, no transfer of title to assets is required.

The major advantage of a stock sale from the seller’s perspective is the tax treatment.   There is only one level of tax, typically at the capital gains rate, which is considerably lower than the ordinary income rates. The other major advantage to the seller is that the sale of stock transfers all of the liabilities to the buyer.

Some characteristics of the stock sale can be seen as a plus or minus depending upon the unique fact set of a potential deal and the perceived needs of the buyer and/or seller. First, consideration paid by the buyer may include stock in the buying company, either in part or in whole. Also, management and minority stockholders in the selling company cannot typically stop stockholders from transferring ownership, which can result in the “holdout” of minority owners.  

The drawbacks to a stock sale typically work against the buyer. The buyer gains all of the seller’s liabilities. Also, the buyer does not gain the higher basis in corporate assets — tax treatment remains the same and the buyer inherits the sellers tax attributes. As stated earlier, the goals of buyers and sellers are at odds. Shareholders want to sell stock to avoid double taxation. Buyers want to buy assets to limit liability and to write up assets for depreciation purposes. This is part of the art of the deal.

Portions of this article were adapted from a presentation at Zweig White’s Environmental Business Summit. 

For more information, contact Thomas Brinsko at (281) 538-9996 or tbrinsko@bicalliance.com

by Thomas Brinsko

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