Valuation Podcast: Stock Sale v. Asset Sale (Business Valuation Expert Nashville and St. Louis) http://www.ValuationPodcast.com (314) 541-8163
Hi Welcome to ValuationPodcast.com – A podcast and video series about all things related to business and valuation. My name is Melissa Gragg, a company valuation expert in St. Louis Missouri.
During this episode we will discuss Tax Considerations in Private M&A Transactions.
We have the privilege to discuss these issues with a tax accountant and fellow business valuation expert in Franklin and Nashville Tennessee – Brad Smith.
Tax Considerations in Private M&A Transactions.
Questions often asked by the seller:
1. What are the tax consequences of selling the enterprise?
2. What is a “purchase price allocation” and how does it impact the transaction?
3. I understand that “goodwill” is a component of my company. What are the tax implications of goodwill in the sale?
4. The buyer wants to include an “earnout” in the terms of sale. What are the tax ramifications?
5. The buyer wants to include a “seller note” in the terms of the sale. What are the tax ramifications?
6. They buyer wants to include a noncompete and assign it a value. What does this mean from a tax perspective?
7.I am a shareholder/member in a private company. My fellow shareholders/members are willing to buy/redeem my interest so I can retire. What are the tax consequences to me?
CVA, MAFF, CDFA
Expert testimony for financial and valuation issues
Bridge Valuation Partners, LLC
Cell: (314) 541-8163
Brad Smith, CPA, ABV, CVA, IAR
Smiley, Smith, Wynd, LLC
1650 Murfreesboro Road-Hwy 96 E.
Franklin, TN 37067
And, and what we’ve seen even in deals, just so, because a lot of people, you know, if they’ve been running their business for 30 plus years, they really may not have sold or bought a business before. And so some of it comes at the very beginning that you’re trying to determine the purchase price, and there could be an allocation, like, so they’ll then give you an allocation. And that’s, that’s the time to really start negotiating those pieces as opposed to after the sale. I think that’s what you said earlier.
Absolutely. It’s, it’s a, it’s a LOI or pre LOI event, not a post-closing event. The, the internal revenue service requires a both buyer and seller complete a form 85 94, where they record and agree on what those final allocations are. And, and so it’s, it’s real important that everyone get on the same page. And part of our due diligence, if we’re representing a seller is to really go through those assets and understand what levers we can pull and what sensitive areas might exist. So you can have a, a client that may have a lot of equipment depreciable property, and with these accelerated depreciation options that we have and have had for a quite a while their basis in these assets could be very low, but the value of those assets could still be significant. And so the seller needs to understand that there is a recapture component of that that creates ordinary income to them based upon that allocation. So that, that can become a very sensitive matter that we want to work through. For sure.
And this we’ve kind of skipped ahead, but one thing that I think might also be of interest to people is if you could just briefly describe kind of the difference between a stock sale and an asset sale, because buyers like one and sellers usually like another. And so maybe if just, just on a high level because it’s usually is a pref, you know, there’s tax consequences that are favorable to each party on each different, you know, a stock sale is what sellers prefer, but buyers prefer an asset sale. You know, talk to us a little bit about why buyers prefer that asset sale.
Well sure. So, I mean, basically it comes back to that purchase price allocation and the buyer getting a new basis in all of those acquired assets, everything from the depreciable property to the amortizable intangibles like Goodwill, they get they get a new starting point for future deductions. So it’s, it’s, it’s, it’s definitely a tug of war between buyer and seller to find that middle ground that works for both parties. So an asset sale incidentally also covers the acquisition of a disregarded entity, which is something I see more and more but an asset sale is, is a little more direct if the selling entity has non-operating assets or assets that they want to excluded a variety of reasons.