Dear reader,

As we move through the height of summer, the busiest time of the year in M&A looms ahead with both buyers and sellers looking to close their deals before year-end. Here at PSMJ’s M&A practice, our advisors at PSMJ are navigating these waters for their sellers and buyers. In today’s issue, we pull the curtains back on a major way that structuring a deal as an asset purchase or sale of stock can hide true value coming straight from our experience in negotiating deals on both sides of the aisle.

So, what’s the catch? Is there something nefarious going on? Let’s look at a real case faced by one of PSMJ’s sellers- names, and numbers related to deals have been redacted to preserve confidentiality.

This seller took a spontaneous phone call that seemed very interesting: a Private Equity buyer wanted to acquire his firm! They exchange information and correspond for some time, the seller slowly reveals information to the buyer, ultimately culminating in an offer by the buyer. The value of the offer seems nice, a lot more than the owner’s next generation of leadership would be able to pay for a sale of the firm to internal buyers. But is it a fair offer? Is there someone out there who could pay more? Any expert in M&A will tell you that the market sets value, and with just one offer on the table, it’s hard to tell if an offer is competitive.

At this point, the seller reached out to PSMJ for help. After all, the Private Equity buyer has experience across dozens of these deals, and the firm owner never got his start in M&A- he was busy building a successful company for the last several decades.

Here we pause to comment, if you are an owner who is approached by a buyer, know that you are not alone. Across the entire AEC industry, owners are receiving daily solicitations, and offers to acquire firms are being made every day. If this has happened to you, then the chances are PSMJ will know other buyers who might be interested too. The M&A advisors at PSMJ navigate the market regularly, and have deep, entrenched relationships with both private equity and strategic buyers. They are in the business of helping a seller find the ideal partner that will fulfill their goals and create a long-standing, synergistic partnership for years to come.

Within just a few short months, PSMJ had introduced that firm owner to a curated list of buyers who presented a variety of offers. Now at last, the time had come to pick the two most competitive offers that had stood well above the others, each presented as an LOI with all other key terms negotiated to a good place for both seller and buyer.

Buyer A’s offer: $20,000,000 total offer value for the firm as a stock purchase.

Buyer B’s offer: $22,000,000 total offer value for the firm as an asset purchase.

Seems pretty straightforward right? With all else equal, the higher number looks better. BUT WATCH OUT!

The asset purchase on that higher price tag would leave our seller and firm owner with a significant tax bill thanks to the difference between capital gains tax and ordinary income tax. Take home for the Stock deal is $16,000,000, while the Asset deal would result in $13,200,000- a difference of just under $3,000,000. In terms of the seller’s take-home total amount, the stock purchase is much better.

$3,000,000! But how? The math is simple: Capital Gains tax is usually 20%, and ordinary income tax is around 40%. The stock deal is treated as Capital Gains, while the asset deal is treated as ordinary income tax.

So, is this something nefarious by the buyer? Are they hiding their profits in an arcane deal structure? No. The buyer isn’t getting the difference in amounts between the two deals. The government is. The way the buyer benefits between one deal structure and another has to do with a topic that we will cover in our next entry.

This article is the first in our M&A Insider series- Tricks of The Trade. For our next entry, we will look at the other side of the aisle- why would a buyer choose this pricier transaction structure of asset purchase when the stock purchase saves on the seller’s tax bill. Tune in next time to the M&A Insider, where PSMJ’s M&A Advisory team shares their experience straight from the negotiation table.

Have you had a buyer reach out to you? The M&A Advisors at PSMJ are here to help.
Schedule a complimentary consultation at psmj.com or call us at 617-965-0055.

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