Judy was very concerned about discretion. She wanted to meet at 5 AM over a holiday weekend, to ensure she wouldn’t be seen by her employees. We compromised and met at 7 AM. Judy was trying to sell her business. When it comes to selling a business, there are typically two ways to structure the sale: as an asset deal or an equity deal.
“If the buyer wants this to be an asset deal, Matt, you should just pack up your things and leave.”
The buyer, my client, wanted an asset deal. Was this transaction doomed? Could I find a middle ground? And then it came to me: the “eureka” moment. I knew what to do.
When it comes to asset deals versus equity deals, there are pros and cons to each approach. The implications depend, among many other things, upon whether you’re the buyer or the seller.
In this case, my client, who I’ll call Aaron, was the buyer. For a variety of reasons, Aaron would benefit most from an asset deal. But Judy was more than willing to walk away from a deal structured that way. Did a win-win situation exist?
As it turns out, the win-win situation did indeed exist, in the form of what’s known as a 338 Election. In a 338 Election, a transaction is legally structured as an equity deal, but for tax purposes is treated like an asset deal. Judy would achieve her desired outcome of an equity deal, while Aaron would walk away with the tax benefits of an asset deal.
So how did we pull this off? I asked Judy’s CPA to calculate the additional tax burden associated with this innovative transaction structure — it amounted to $32K, a fraction of the total purchase price. As a means of “reimbursement,” Aaron tacked on an extra $32K to the purchase price, and the deal was closed.
Ultimately, we negotiated a win-win deal, and Aaron was pleased with the outcome. In the long term, he will see a deduction of amortization of about $250K per year for 15 years, among other immediate deductions.
When it comes to M&A Transaction Advisory Services, creative and tailored solutions are everything. Having done extensive due diligence on this transaction, I knew how to best position my client for a successful outcome, and our negotiations proved effective.
If you’d like to learn more about the ins and outs of business transactions, you might consider attending M&A Success, an upcoming event co-sponsored by Geffen Mesher.