THE IMPORTANCE OF THE THREE-PARTY MERGER & ACQUISITION TRANSACTION

Almost all M&A transactions consist of a three-party event: the seller, the buyer and the tax collector. A myriad of tax issues must be considered and understood as part of the valuing, pricing, negotiating and structuring of a deal. Proper planning will minimize the tax collector’s share of the deal and maximize the remaining value to buyer and seller.

Significant tax elements that reoccur in Middle Market deals include:

• Stock versus asset purchase deal
• Purchase price allocation; basis step-up in the acquired assets
• Forms of entity: C and S corporations, LLC or partnerships, Sections 338(h)(10) & 754 elections and built-in gains tax
• Capital gains versus ordinary income
• Types of consideration: cash, buyer’s stock, notes
• Capital gains versus ordinary income
• Tax attributes of carryovers; net operating losses, tax credits and high tax basis in assets
• Sales and other transfer taxes

Professionals can perform a careful evaluation of the pros and cons of alternative tax issues; incorporate those strategies into the initial negotiations and documents; and minimize disputes later in the process.