This session from Transaction Advisor’s Deals Forum: Private Equity & Middle Market Transaction Structuring conference discussed advancements in M&A tax structuring, including how buyers and sellers can create additional value via tax matters.
Other topics included the increased use of flow-through tax structures, tax basis step-ups, transaction tax deductions, tax attributes, and tax elections.
The presenters explained the potential tax implications--and benefits--that should be analyzed on both the buy- and sell-sides of a transaction as early in the process as possible.
Beginning with the initial transaction discussions, prior to the signing of a letter of intent, buyers should be developing a thorough understanding of the tax classification of the target.
The better this understanding, the more the buyer can take advantage of the deal structure from a tax benefit perspective.
The parties should ensure a number of significant tax implications are addressed in the letter of intent, including the expectations of a tax basis step-up for the buyer, deferred revenue, and trapped cash, among others.
Buyers should also use the letter of intent to flesh out any differences in the buyer and seller’s accounting methods and any necessary reconciliation.
On the sell-side, sellers are more frequently performing sell-side tax due diligence as part of a transaction. This is in part being driven by sellers’ desire to identify mechanisms for increasing sale proceeds through the monetization of tax matters.
A common method of monetizing tax matters for sellers is through the use of net operating loss carryforwards. Buyers often challenge the actual value of such carryforwards but certain tax provisions allowing for claiming carryforwards for extended periods of time can be used by sellers at the bargaining table to demonstrate value.
The presenters advise that sellers be keenly aware of unique tax provisions with potentially punitive effects and whether they are applicable to their transaction.
For instance, certain change of control payments to executives—often referred to as ‘golden parachutes’—are not tax deductible and further subject the executives to excise tax.
Sellers in a transaction are often at an advantage given their cooperation is necessary for buyers to take advantage of various tax incentives, including tax basis step-ups.
Buyers will often seek a transaction structure involving an F reorganization resulting in a tax-basis step up through the deemed sale and purchase of assets.
Conversely, sellers prefer an H10 structure to mitigate any risk involving an S corp status, assuming there is any.