Structuring Transactions

The determination of what form of the Merger and Acquisition transaction is structured is often the most challenging aspect of any successful deal.  Whether asset sales, stock transfers, mergers, or even tender offers, your VR Intermediary can aid you in the most advantageous structure for you needs.  VR along with specific need experts take into consideration a variety of relevant factors that may include the legal, tax, and accounting needs of our clients.  Managing these needs along with realistic expectations is the basis for the imaginative planning needed to react to the possible conflicting goals of buyers, sellers, investors, and lenders.

General Forms for a Transaction

There are three general forms used in the acquisition of a privately held business:

§    Asset Sale: the purchase of the assets of the business

§    Stock Sale: the purchase of the stock of the company owning the assets

§    Merger: where the acquiring company and target company effectively become one entity

It is possible to combine the different forms to create a hybrid transaction structure, such as some of the assets of the business are purchased separately from the stock of the company that owns the rest of the assets, and a merger immediately occurs between the buyer and the acquired company thereafter.  Another example could involve the purchase of the stock of one company and the assets on another, where both enterprises are actually owned by the same seller. The possibilities are nearly endless. 

VR has its core business directed towards asset and stock purchases of privately held businesses. 

Core Structure Questions

§         What price and according to what terms will the buyer acquire?

§         What are the tax ramifications to the buyer and seller?

§         What are the long term goals and objectives of the buyer?

§         What is the role of the seller in the business after closing?

§         Which assets are included in the sale and at what value?

§         Which liabilities will be assumed by the buyer?

§         How will tangible and intangible assets be transferred to the buyer?

§         Will the buyer acquire the assets or stock of the acquired company?

§         What form or forms of payment will be made to the seller?

§         Will the price be fixed, contingent, or payable over time?

§         What are the tax consequences of the proposed structure for the purchase?

Asset Transactions

In an asset transaction the acquired company transfers all the assets used in the business that is the subject of the sale.  These can include equipment, inventory, and real estate, along with “intangible” assets such as contract rights, leases, patents, and trademarks.  These could be all or only some of the assets owned by the divesting enterprise.

Stock Transactions

The seller transfers its shares in the acquired corporation to the acquirer in return for an agreed payment.  Although the acquirer may purchase less than all the stock in a public company, this seldom occurs in the purchase of a privately held enterprise.

Asset Versus Stock Purchases

The most fundamental issue in structuring the acquisition of a company is whether the transaction will be in the form or an asset of an stock purchase.  Both forms have their advantages and disadvantages, and are dependent upon the circumstances particular to each and every transaction. In addition, each transaction type offers distinct advantages and disadvantages to the buyer and seller.

Asset Purchase

Seller Advantages

ü       Ownership of nontransferable assets are usually retained.

ü       Specific assets can be carved out of the transaction.

ü       Corporate name and goodwill can generally be maintained.

ü       Seller retains corporate entity after the sale.

ü       Corporations tax attributes are retained.

Buyer Advantages

ü       The buyer can be selective as to which assets of the company are acquired.

ü       Seller liabilities generally remain with the seller’s corporate entity, unless specifically assumed under the contract.

ü       Undisclosed or contingent liabilities generally remain with the seller’s corporate entity.

ü       Opportunity to elect new accounting methods.

ü       Asset value is stepped up to market value and equal to the purchase price, allowing higher depreciation and amortization.

Seller Disadvantages

ü       Possible double taxation if the corporation also liquidates.

ü       Generates various kinds of gains or loss to the seller based on the classification of each asset as capital or ordinary.

ü       Transaction more complex and costly in terms of transferring specific assets or liabilities.

ü       A variety of third-party consents will typically be required to transfer key tangible and intangible assets to the buyer.

ü       Asset acquisition requires compliance with applicable state bulk sales statutes, as well as state and local sales and transfer taxes.

Buyer Disadvantages

ü       No carry over of the seller corporations tax attributes such as credit carryforwards and net operating losses.

ü       A bargain purchase could cause a step down in the basis of the assets.

ü       Nontransferable rights or assets cannot be transferred to the buyer.

ü       Lenders consent may be required to assume liabilities.

ü       Loss of corporations liability, unemployment, or workman’s compensation insurance rates.

Stock Purchase

Seller Advantages

ü       Taxes are only on the sale of stock, generally a tax benefit to the seller.

ü       All obligations (i.e., disclosed, not disclosed, unknown, and contingent) and nontransferable rights can be transferred to the buyer.

ü       Gain or loss is usually capital in nature.

ü       If stock held by individuals is IRC Section 1244 stock and is sold at a loss, the loss is generally treated as ordinary.

ü       May permit seller to report gains from the sale of stock on an installment basis.

ü       Does not leave the seller with the problem of disposing assets that are not bought by the purchaser.

Buyer Advantages

ü       Tax attributes carry over to buyer (e.g., net operating loss and credit carryforwards).

ü       Avoids many of the restrictions imposed on sales of assets in loan agreements and potential sales tax.

ü       Preserves the right of the buyer to use the seller’s name, licenses, and permits.

ü       No changes in the corporation’s liability, unemployment, or workers’ compensation insurance ratings.

ü       Nontransferable rights or assets (e.g., license, franchise, patent) can usually be retained by the buyer.

ü       Continuity of the corporate identity, contracts, and structure.

Seller Disadvantages

ü       Offer and sale of the company’s securities may need to be registered under certain circumstances.

ü       Seller cannot pick and choose assets to be retained.

ü       May not use the corporation’s net operating loss and credit carryforwards to offset gain on sale.

ü       Loss on sale of stock may not be recognized by corporate shareholder who included the company in his consolidated income tax return.

Buyer Disadvantages

ü       There is less flexibility to cherry-pick key assets of the seller.

ü       The buyer may be liable for unknown, undisclosed, or contingent liabilities (unless adequately protected in the purchase agreement).

ü       No step-up in basis (i.e., seller’s depreciation basis is preserved and the buyer continues with historical tax basis).

ü       Normally does not terminate existing labor union collective bargaining agreements or employment agreements and generally results in the continuation of employee benefit plans.

ü       Dissenting shareholders have a right of appraisal for the value of their shares, with the right to be paid the appraised value, or else remain minority shareholders.