If buyers want asset purchases and sellers want stock purchases how do the two ever come to an agreement?
Leading Tax Attorney Alexander Lee of Paul Hastings, answered this question in our webinar “Tax Considerations for M&A.“
There are several factors that are important when the buyer and seller discuss deal structure.
Specify Deal Structure in the Letter of Intent
First, if you want either a stock purchase or an asset purchase, make sure early on that you write it out in the Letter of Intent (LOI). If you have shrewd tax planners who are helping out with the LOI process, often they will put that the buyer wants to purchase the assets of the seller. And if the seller is asleep at the switch as an example, later on when we start going down the road and drafting the agreement the seller may say, “I want to buy stock,” but then we point to the LOI which says this is an asset purchase.
Use Your Leverage
For those who haven’t already dictated deal structure in the LOI, leverage is usually the biggest factor in deciding. A lot of times if you have a seller that really wants to sell or buyer that really wants to buy, you use your leverage to get them to agree one way or the other.
Take a Look at the Numbers
The other important factor, of course is price. A seller may get their accountant to do a back-of-the-envelope calculation that shows how much the seller will lose from a tax perspective if they do an asset purchase instead of a stock purchase and how much the buyer can expect to gain. This may help move the purchase price a little.
The Seller’s Advantage
Ultimately the sellers are the ones that control the process more than anything. Unless the seller is really desperate, most of the time when you get stock vs. asset situation and one side doesn’t have the upper hand, the seller will win the negotiation. They want to sell, but if they don’t get the deal the way they want and it costs too much in taxes even with a good price, they may decide not to sell.
I always tell sellers to be careful in the bid process. When you’re looking at bids, don’t just look at the highest bid, make sure you carefully look at the document and see if the bid is a bid for assets or for stock. It might be a lower bid for stock, but ultimately it may be a better deal when you compare it with what you’re going to pay in taxes if you do an asset deal.