Asset vs stock deal: tool to determine impact to buyer and seller
October 15, 2022
by an investor from University of Nebraska - Lincoln in Austin, TX, USA
I’m surprised at the lack of tools available to determine impact to buyer and seller for each transaction type: stock vs asset. Lots of fancy articles but not many that provide an actionable tool.
The purpose would be to quantify the quantifiable impacts, not address those that are more qualitative (liability, risk, etc) without engaging accounting or legal. Purely P&L and tax impact in both directions based on financials provided. Reasonableness is key here.
Anyone have this tool? Otherwise I’m going to make it.
from The University of Chicago in Chicago, IL, USA
(For example:
1. We all know buyer ROI depends on Terminal Value. Would the exit be a Stock sale or an Asset sale? The choice will impact exit value and hence buyer ROI, and hence the price buyer will be willing to pay seller. Why is ignored today? BVX allows you to clarify exit transaction structure.
2 If buyer entity is a C Corp and exit is an Asset sale, who considers buyer's C Corp. taxes? BVX does.
3. Use of WACC as a discount rate assume that buyer's debt principal does not have to be repaid. How realistic is that? Using WACC as a discount rate can MATERIALLY overvalue a business. I have written articles on this. Corporate Finance assumes efficient capital markets with no friction cost meaning you can refinance debt every day. The valuation appraisal industry writes reports so they can win in the court if the case goes to the court. They are least concerned about buyer/seller transaction. I have yet to see a valuation report that discusses Asset vs. Stock, S vs. C not if the bank could/would finance.
4. Does the amount of equity a buyer has impact what the buyer can afford to pay? It does. BVX addresses that.
5. Common assumption is that growth increases value. Not true.
Happy to discuss more.
Note: I respect Robert Shefferly answer b/c he makes good points., But, Bob, seller's taxation has nothing do with valuation. Points you make do impact seller's net proceeds, but not the value, which is what buyer/seller are concerned about. As you and I have discussed, your knowledge in this area is the tops.)
from Walsh College of Accountancy and Business Administration in Detroit, MI, USA
1) Character of Gain - Ordinary vs Capital and what tax rates to use
2) Section 1374 Built in Gains Tax (if applicable)
3) State and Local Taxes
4) Transaction Costs (with emphasis on how success-based fees and employment deal bonuses are treated if a pure asset deal)
The most difficult area is state and local taxes because you need to take into account the following (as or if applicable) - entity level taxes, passthrough entity tax elections, whether credit for taxes paid to other states applies, whether the gain is allocable or apportionable, current year apportionment which may or may not be reflective of the prior year, and apportionment calculations which may or may not include the sales price or gain from certain asset classes in the numerator and/or denominator.
I review a lot of these calculations that are prepared by the tax advisors of Sellers and substantially all small firm tax advisors do not have the knowledge and skill set to prepare it and get it right.