buying, selling and transitioning a business: increase your roi with thoughtful tax planning...

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

[email protected]

Mark SalsburyTax Partner

[email protected]

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


(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%)


(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


Basic Overview

• Tax treatment of transaction depends on whether Buyer uses cash or stock

• Mostly cash = Taxable• Mostly Stock = Potentially Tax-Deferred


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


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


CPE Polling Code #2

20


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


Deemed Asset Sale (§338(h)(10) Election)


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 Reorganizations• Basic principles• Statutory requirements• Non-Statutory requirements– Continuity of shareholder interest– Continuity of business enterprise– Business purpose– Exchange of "net value"


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 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


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


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


§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)


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 Asset Sale

• Cash purchase• Cash and equity consideration


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

Thank You For Joining Us Today!

• CLE Event Code 169865• For CPE credit, email the six-digit polling code

sequence (XX-XX-XX) to [email protected]• Join us on Oct. 16 for "Tiptoeing Through the

Employment Law Minefield"– Visit www.lindquist.com/2012webinarseries for more info and to register.

http://www.lindquist.com/2012webinarseries

buying, selling and transitioning a business: increase your roi with thoughtful tax planning...

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