We consistently counsel parties to an M&A deal that results
in a stepped-up tax basis in the assets of the target often has
more value to a buyer than a transaction with no basis step up. The
increased value lies in the increased depreciation and amortization
deductions that the buyer can use to reduce its taxable income.
Thus, taxable asset purchases, stock purchases with 338(h)(10)
elections, and taxable purchases of partnership interests and
disregarded entities all have the potential for reduced tax
liabilities for the buyer.
Similarly, the purchase of the stock of a corporation with net
operating loss carryforwards or other deferred tax assets creates
value for a buyer. The buyer can, subject to certain limits, use
those deferred tax assets to reduce the future taxable income of
the target.
A seller and buyer often acknowledge the additional value
attributable to the tax savings resulting from the stepped-up basis
or deferred tax asset. However, placing a price on that value can
be difficult due to uncertainties in the buyer's realization of
the tax benefit. More recently, we are seeing the parties
negotiating additional consideration attributable to tax attributes
in the form of an agreement commonly called a "Tax Receivable
Agreement." This type of agreement first came to light in
2007-2008 when the former owners of The Blackstone Group negotiated
such an agreement as part of the IPO of that firm.
The concept of the Tax Receivable Agreement is simple–the
buyer pays more consideration to the seller as the buyer realizes
tax savings from the specific tax attributes. For example, if the
Tax Receivable Agreement relates to stepped-up basis, the buyer
would make payments as it depreciated or amortized the
assets.
In the right circumstances, a Tax Receivable Agreement can be an
important element of consideration in a transaction. For the
seller, it is a mechanism that unlocks the value of tax attributes
that it brings to the deal, either resulting from the structure of
the deal or from the historic operations of the target. For the
buyer, it represents deferred consideration financed by a lower tax
bill.
If you are looking at a potential M&A transaction either as a
buyer or a seller, you should consider using a Tax Receivable
Agreement as part of the consideration package. The Kilpatrick
Townsend Tax Team can help you analyze the utility of such an
agreement and guide you through its negotiation and
implementation.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.
