An ounce of prevention is worth a pound of cure when it comes to merger and acquisition (M&A) deals. Incorporating a comprehensive strategy to mitigate tax risks and optimize tax advantages is an essential component of any M&A deal strategy, demanding a nuanced understanding of multifaceted legal expertise. Omitting tax considerations in structuring a deal leaves money at the bargaining table and confounds the valuation process. Regardless of whether the business transaction involves the purchase or sale of assets or stock, obtaining expert advice is essential to comprehend how the Internal Revenue Service will treat the deal.
Navigating Asset Transactions
Asset transactions have unique contours when compared against a stock deal. From the buy-side, buyers may depreciate assets based on purchase price. However, the downside is business successor liability. Under state law, buying assets may keep the buyer on the hook for unpaid state taxes. From the sell-side, asset sales likely create capital gain treatment. This is beneficial because of the capital gain rate break. However, sellers of assets may have potential “depreciation recapture.” To reiterate, it is crucial to emphasize that seasoned advisers, armed with extensive expertise, possess a range of potential planning opportunities designed to proactively mitigate and address the various tax risks inherent in such transactions.
Deciphering Complexity of Stock Sales
Stock sales, compared to asset deals, are generally more complex. Depending on the business entity form, the Code blesses some transaction structures as tax-free. On the one hand, buyers may choose stock deals for “tax-free reorganization treatment.” A tax-free reorganization is a creature of the Code and requires tax counsel. Sellers generally receive capital gain treatment on the sale of corporate stock. All in all, stock deals are complex, but advisers have levers in the Code to manage parties’ interest in a transaction.
Engaging an Expert for Strategic Deal Structuring
Before inking a letter of intent, engaging a skilled adviser to structure your deal ensures the most value is captured at the bargaining table. Advisers with both tax and transaction acumen have tools in their toolkit to bring a transaction to life while mitigating downstream tax liabilities. These experienced professionals not only navigate the complexities of deal structuring but also assess potential risks and opportunities, providing comprehensive guidance to optimize the overall outcome of the transaction.
For more information or to seek counsel from McCarthy Lebit’s Mergers & Acquisitions attorneys, please reach out to request a consultation or call us at 216-696-1422.
