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    2 Replies Latest reply on May 13, 2011 7:51 AM by Bridge

    Asset purchase vs. Stock Purchase

    Colmpl Newbie

      I am in the process of purchasing a company, however "ONE SMALL" problem that I am running into is a tax issue, which can be pretty significant for the buyer.


      The valuation of the company that we all agree on (seller/buyer) is $4.8m (4x a TTM of $1.2m in EBITDA). This transaction calls for the seller to assume all debt, approx. $1.1m and TAXES.

      The sellers want the transaction structured as a stock sale, with them essentially paying cap gains and state income for a total of 26% on the gain. As they have no basis in the stock, the transaction would yield the sellers prior to repayment of company liabilities, net proceeds of approx. $3.5m ($5m less expenses of $300k, less capital gains/state income taxes of $1.2m).


      The buyer wants to structure the transaction as an asset sale. The rationale for this is I don't want to deal with any liabilities that may come out of the woodwork in years to come as well as structuring the transaction in the most efficient manner for the buyer - eg. write up assets (Machinery & Equipment) , thus taking advantage of the aggressive/accelerated tax write-off, etc.


      The problem that I am running into is that the company converted to a S-Corp approx. 5yrs ago (Oct 2006) and per the tax code, any company that sells assets inside a 10yr window of converting to an S-Corp will be subjected to Build In Gains ("BIG") Tax - In the case of the sellers, this would be approx $1m in BIG taxes. In addition the company will have to pay taxes including some depreciation differences between book vs. tax. Finally, the shareholders will also be subject to taxes on final distributions after the liquidation of the company. All in all, the tax bill under such a structure will leave the shareholders with net proceeds of approx. $2.2m (vs. $3.5m under a stock sale and before repayment of company liabilities).


      One last item in connection with the BIG tax is that there is some relieve under the tax code, which avoids the BIG tax come the 5 year anniversary of the c to s conversion. In the case of the seller, that anniversary date falls on October 1st, 2011. The problem is that I don't want to wait until October 1st as some other suitors may close in on the deal sooner than Oct 1st.


      Does anyone have any creative ideas on how to structure the transaction as an "asset purchase" and still give the sellers the same net proceeds result as they would get under an stock sale?. I remember many years ago looking at a transaction which saw the sellers prior to the sale, drop the assets into an LLC, allowing the buyers to purchase assets out of the LLC and in some way had the sellers avoid all of these Draconian taxes.


      Thank you in advance for your input

        • Asset purchase vs. Stock Purchase
          phanio Pioneer

          Two things:

          1) You have to look out for yourself first.  Why would you even care about the sellers wishes if it costs you money in the long-run.  From what you outline here, someone is not going to get everything they want - don't let that someone be you.

          2) Can you split the company up and do one part stock sell, and one part asset sell.  Might be able to find a middle point where neither one of you are hurt to much.


          Also, would the seller be interested in owner financing.  This might change the entire transaction to benefit both of you via reduced or deferred tax liabilities.

          Lastly, change the organization back to a c-corp or to an LLC - then transact the purchase.


          Hope this helps.

          • Asset purchase vs. Stock Purchase
            Bridge Navigator

            First off, you really do not agree on a "valuation".  Value is based on the overall deal structure and as you are finding out, the deal structure can have a significant cash flow effect for both the buyer and the seller.


            Aside from pricing issues, there are significant legal and business risk issues in the difference between a stock and an assets deal.


            Depending on the type of company you are looking at, one strategy would be to purchase the assets and have the buyer classify the gain as "personal goodwill" hence getting capital gains tax treatment on the income.  This is an IRS case-law documented tax strategy in which you will need an accountant who knows what they are doing.


            It addition, it sounds like you both need the help of a competent merger & acquisition advisor.


            Best of luck,


            Greg Dupuis

            Brdige Ventures, LLC