Deal structure on partner buyout

July 28, 2020

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

Company has two founders at 50/50 ownership. Partner B wants to exit, Partner A wants to stay onboard and maintain current role.

Considering a 70% total equity buyout - all equity of Partner B and and 20% of Partner A.

In this scenario, does an stock sale make more sense than an asset sale (since I am not 100% buying the business)? Also, should there be a seller financing and earnout on Partner As equity? Since he is staying on-board he still has "skin in the game"

Reply by a professional
from Walsh College of Accountancy and Business Administration in Detroit, MI, USA

Need more facts. Is target a C-Corp, S-corp, or a LLC taxed as a partnership? You generally want to structure the transaction (to the extent possible) so that you can get a step-up in the tax basis of the assets in order to create a tax shield. This does not always mean you have to buy assets to accomplish this. Glad to spend some time with you on a call if you want to explore. Email me at redacted and we can set up a date and time that works for both of us.

Reply by a professional
from New York University in New York, NY, USA

I agree with Rob. There are a number of factors that would drive the decision, but most buyers would want to structure it as an asset deal for tax purposes. As far as seller financing/earnouts, there are obviously advantages for you as the Buyer to structuring it that way. There are a number of ways you could consider structuring the deal, that would be driven by the size of the transaction, the tax status of Buyer and Seller, business goals, etc. Happy to discuss.

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