The tax and legal structure of a transaction can significantly affect its value to either the buyer or seller. The structuring decision depends on tax considerations, liability concerns, and the assignability of licenses and contracts. A common maxim is “a buyer prefers a sale of assets, and a seller prefers a sale of stock.”
Many participants in the M&A industry lack knowledge of transactional legal and tax structures. As a result, they fail to appreciate the economic impact of a deal’s design on buyer and seller. This chapter reviews the fundamentals and provides you with the tools to talk sensibly with the legal and tax experts. Please note that this chapter is an overview. There are hundreds of exceptions and loopholes to the guidelines herein, enough to keep thousands of lawyers, accountants and lobbyists busy year round.
The structuring decision depends on:
- Tax considerations
- Liability concerns
- The assignability of the seller’s licenses and contracts
A general rule is the following:
- The buyer prefers a sale of seller assets. Why?
- The buyer can increase the tax basis of the seller’s assets, thus increasing future tax depreciation.
- Through an asset sale, the buyer minimizes its responsibility for hidden seller liabilities.
- The seller prefers a sale of its common stock. Why?
- The seller pays one level of income tax, as opposed to two or more in an asset deal.
- A common stock sale transfers ...