buying, selling and transitioning a business: increase your roi with thoughtful tax planning...
TRANSCRIPT
Buying, Selling and Transitioning a Business:Increase your ROI with Thoughtful Tax Planning
September 18, 2012
Kevin Kaiser, Lindquist & VennumMark Salsbury, Lindquist & Vennum
Today's Presenters
Kevin KaiserTax Partner
Mark SalsburyTax Partner
Agenda
• M&A Tax Considerations Overview• Corporate Structuring Alternatives and
Considerations• Partnership (LLC) Structuring Alternatives and
Considerations• Deal Elements and Reporting• Q&A
M&A Tax Considerations Overview
M&A Tax Considerations Overview • Tax Due Diligence Process
• Tax Structuring Considerations and Deal Elements
• Drafting/Implementation
• Tax Reporting
M&A Tax Considerations Overview
Tax Due Diligence Process
• Investigation and analysis– Buy Side– Sell Side
• Pre-Transaction Tailoring– Intercompany accounts
M&A Tax Considerations Overview Tax Structuring Consideration and Deal Elements
• Non-tax considerations– Asset or equity
• Taxable or tax deferred• Buy Side– Maximize tax benefit from purchase price– Preservation of tax benefits (e.g. NOLs)– Minimize tax on income from operations– Minimize tax on exit
M&A Tax Considerations Overview Tax Structuring Consideration and Deal Elements
(Con't)• Sell Side– Minimize or defer tax on sale– Utilize tax benefits– If target is a corporation (S or C corp), Sellers typically
want to sell stock• One level of tax on sale of shares• Gain generally eligible to be taxed at long-term
capital gains rates (top rate currently 15%)
M&A Tax Considerations Overview Tax Structuring Consideration and Deal Elements
(Con't)
– If target is an LLC, Sellers are generally more concerned with minimizing ordinary income (taxed at 35%) , i.e., less concerned about selling equity vs. selling assets from a tax perspective
• Seek to benefit from "win-win" solutions
M&A Tax Considerations OverviewDrafting/Implementation
• Proper documentation is critical• Purchase agreement– Description of transaction– Purchase price adjustments (e.g., working capital)– Tax and employee benefit representations and
warranties– Pre-closing covenants– Post-closing covenants
M&A Tax Considerations OverviewDrafting/Implementation (cont')
– Post-closing covenants• Tax return preparation• Amendments to tax returns• Allocation of taxes between pre- and post-closing
periods• Tax audit responsibility
– Indemnification (indemnity for taxes, treatment of indemnity payouts, etc.)
– Purchase price allocation
CPE Polling Code #1
11
Corporate Structuring and Considerations
Corporate Structuring and Considerations
Basic Overview
• Tax treatment of transaction depends on whether Buyer uses cash or stock
• Mostly cash = Taxable• Mostly Stock = Potentially Tax-Deferred
Corporate Structuring and Considerations
Buyer
Merger Sub
Target
Reverse Triangular Merger
Merger Sub merges into Target;
Target survives
Shareholders
MergerConsideration
Buyer
Target
Regular Stock Purchase
ShareholdersPurchase Price
Both transactions result in Buyer owning the equityinterests of Target.
Corporate Structuring and ConsiderationsTaxable Stock Sale
• Seller consequences• Buyer consequences• Entity consequences
Corporate Structuring and Considerations
P
S
T
Forward Triangular Merger
T merges into S;S survives
ShareholdersPurchase Price
Newco
P T
Assets
Purchase Price
T AssetsS
Shareholders
Purchase Price
Regular Asset Purchase
Caution: S will succeed to T’s corporate-level tax liabilityfrom the deemed sale of assets. Must address contractually. Not a common structure for a taxable transaction.
Both transactions result in Buyer’s subsidiary owning theassets of Target.
Corporate Structuring and ConsiderationsTaxable Asset Sale
• Seller consequences• Buyer consequences• Entity consequences
CPE Polling Code #2
20
Corporate Structuring and Considerations
Deemed Asset Sale (§338(h)(10) Election)• Basic requirements:– Buyer must be a corporation– Buyer must acquire 80% or more of stock "by
purchase"– Target must be an S corp or subsidiary member of
a group filing consolidated returns
Corporate Structuring and Considerations
Deemed Asset Sale (§338(h)(10) Election)
• Seller consequences• Buyer consequences• Entity consequences
Corporate Structuring and ConsiderationsDrop Down to LLC
Newco LLC
S Corp
Buyer1. S corp contributes
assets and liabilities to Newco LLC
2. Purchase and sale of membership interests in Newco LLC (often less than 100%)
Corporate Structuring and ConsiderationsDrop Down to LLC
• Facilitates inside basis step where owners also desire tax-deferred rollover treatment
• Allows a buyer that is an LLC or partnership to maintain flow through tax treatment for target
• Must consider anti-churning issues
Corporate Structuring and Considerations
Corporate Reorganizations• Basic principles• Statutory requirements• Non-Statutory requirements– Continuity of shareholder interest– Continuity of business enterprise– Business purpose– Exchange of "net value"
Corporate Structuring and Considerations
Corporate Reorganizations
Target
Target merges with and into Buyer with Buyer surviving
Note: For liability protection, consider merging Target with an into Buyer's wholly owned LLC subsidiary
Buyer
"A" Reorganization
Shareholders Buyer stock/other consideration (other consideration not to exceed 60%)
Corporate Structuring and Considerations
Corporate Reorganizations
Target
Note: A "B" reorganization can also be effected by merger
Buyer
"B" Reorganization
Shareholders
Buyer voting stock (and no other consideration)
Target stock which constitutes "control"
for purposes of Section 386(c)
CPE Polling Code #3
09
Partnership (LLC) Structuring and Considerations
Partnership (LLC) Structuring and Considerations
Purchase of Partnership or Membership Interests• Purchase of <100% of equity interests• Sellers – Gain generally eligible for LTCG treatment– Exception – "hot asset" rules• Unrealized receivables• Inventory• Depreciation recapture
Partnership (LLC) Structuring and Considerations
Purchase of Partnership or Membership Interests• Buyer– Basis in membership interest = amount paid for
membership interest plus share of partnership liabilities
– §754 election to obtain basis step up in Buyer's share of assets
• LLC – Technical termination under §708 if 50% or more of
capital or profits are sold within 12 month period
Partnership (LLC) Structuring and Considerations
§754 Election• A §754 election is made when Buyer acquires less
than 100% of the equity in an LLC to obtain Asset SUB
• Election impacts only Buyer’s share of inside basis• Nonselling members’ share of inside basis is
unchanged (i.e., they are not affected by the election)
Partnership (LLC) Structuring and Considerations
Purchase of Partnership or Membership Interests
• Purchase of 100% of equity interests by single buyer• Rev. Rul. 99-6– Sellers – Sale of partnership interests– Buyer – Purchase of assets
Partnership (LLC) Structuring and Considerations
Partnership Asset Sale
• Cash purchase• Cash and equity consideration
Partnership (LLC) Structuring and Considerations
Partnership Division or Merger Rules• Two partnerships merge into one partnership,
resulting partnership treated as continuation of the partnership the members of which own 50% or more of the resulting partnership
• Default rule – Assets over merger– Terminated partnership deemed to transfer assets
to resulting partnership in exchange for equity interests, and then liquidate
Deal Elements and Reporting
Deal Elements and Reporting
• Escrows• Earn-outs and contingent consideration• Transaction costs• Noncompete agreements• Personal goodwill• Contingent liabilities• Purchase price allocations• Tax Documentation
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