Contributing LOI for Tax-Free Fee Rolled into Deal

searcher profile

March 26, 2024

by a searcher from Massachusetts Institute of Technology - MIT Sloan School of Management in Florida, USA

Has anyone successfully earned a deal fee on a tax-free basis, and rolled that fee into a deal in exchange for equity in the target?

There is discussion that this can be accomplished by contributing the LOI as property in exchange for a fee, that fee is then paid directly to the company, which then issues equity. The taxable event would be capital gains upon an exit.

Thanks in advance!

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Reply by an investor
from The University of Chicago in Chicago, IL, USA
It is not uncommon. Fundamentally a new LLC is established with i.) the sponsor contributing the LOI into the entity and ii) the capital providers contributing cash for the acquisition. The LLC becomes the buyer. The parties of the LOI should be the seller and the sponsor (not the capital providers), and all time extensions of the LOI, if any, should be documented and up-to-date through closing.
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