Dear insider,
Where we last left off, we had just walked through the implications of a real-life scenario- one of our seller clients faced a decision between two great offers: one an asset deal and the other a stock deal. We demonstrated the tax implications for the seller in this scenario, how the asset purchase would result in a much larger tax bill immediately after the transaction. So why would a buyer use an asset purchase?

At PSMJ’s M&A practice, we have advised buyers in a variety of scenarios to build an offer with the tax heavy asset-structure just as much as we have advised them to pursue a stock purchase. What drives the benefit of one or the other is a little more nuanced than just the number of zeroes at the end of the check.
Let’s look at another case from the frontlines of M&A, this time with one of our buyers as they considered how to structure an offer for a potential acquisition target.

PSMJ’s M&A team contracted with a buyer to explore acquiring an office in a new geography within a similar line of business. Our team of advisors and analysts helped this buyer identify the ideal target for acquisition and initiated the conversation between them. The incumbent owners of the firm and our buy-side client had all the makings of a good deal, alignment on strategic vision, culture, the numbers seemed right, and both wanted to put something together.

However, the seller had a few challenges at their end that they sought to resolve with this transaction- they held a hefty small business loan that had helped them open a new office space and expand their services. Further, they owned the office building that they worked in. Lastly, the seller had liability exposure on a project that was under active litigation.

As is typical in an acquisition, the buyer was not interested in purchasing the office space, and with the customary structure of a cash-free/debt-free deal, the small business loan was a simple matter of balancing the cash available on the balance sheet or the proceeds from the transaction with the debt faced by the seller. The issue of liability was where we harken back to our understanding of how to structure a transaction. While a stock purchase is a much simpler transaction, the asset deal would allow the buyer to pick which desirable assets they would like to purchase, as well as avoid exposure to the liability issues faced by the seller’s firm.

In an asset deal, the buyer is purchasing the individual assets from the seller, with proceeds from the sale allocated among the sold assets. In most cases of these transactions, the buyer does not assume any of the seller’s liabilities- ideal for reducing the risk exposure to the ongoing proceedings as well as any other potential exposures hiding in their projects. 

When allocating the purchase price to the selected assets, the buyer gets to enjoy a favorable tax benefit through a step up in the tax basis of the assets they are acquiring. By paying the fair market value on an asset that has already been depreciated and amortized, the buyer gets the opportunity to depreciate and amortize the selected assets at the new “basis” in which they paid for thus allowing them to reduce their taxable income.

This means they pay less in a tax bill further down the road when it comes time to sell those assets.

Apart from the clear benefit of reducing risk exposure, the buyer had another goal as well that would benefit from using the asset purchase instead of the stock. The buyer and the seller planned to sell their future combined firm to a larger buyer when the time came for them to step down- roughly 10 years down the road. With this goal in mind down the road, the buyer was including a considerable amount of stock in the purchase for the seller. As the seller was looking to join the buyer’s team, the relative implications of the tax bill between the two transactions were dwarfed by the potential value of a risk-mitigated purchase for their future joint firm. 

With a clean slate for the selling firm, a deal that hit both parties’ financial goals, and a deal structured right, PSMJ had helped the buyer build an offer that was the right fit for both buyer and seller. 

M&A is an art just as much as it is a science, with a delicate balance of trade-offs present in any option available to the parties involved. How our advisors navigate those trade-offs depends on the goals of our client and their potential transaction partners. For any buyer or seller in the A/E/C industry, the goal is to find a transaction that creates a joint team that will run well together. This starts at 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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