Evaluating Stock Sale vs Asset Sale: Determining an Appropriate Discount

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by a searcher from Dartmouth College - Tuck School of Business at Dartmouth
in Chicago, IL, USA

1yr ago

Evaluating Stock Sale vs Asset Sale: Determining an Appropriate Discount

I'm currently evaluating an opportunity where the seller requires a stock sale. Setting aside the increased risk of assuming liabilities and focusing solely on the lack of stepped-up basis in the assets, I'm seeking input on determining an appropriate discount on the purchase price compared to an asset sale.

My preliminary thought is to discount the deal by an amount equal to the present value of the difference in cash flows that would be received in an asset sale versus a stock sale. This approach aims to quantify the financial impact of the lost step-up in basis. Are there additional factors I should consider when determining this discount? Are there other standard practices for discounting multiples in stock sales?

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reply by a searcher 1yr ago
from Cornell University in Kansas City, MO, USA

I've seen 10% used as a standard price reduction for a structure resulting in no step-up in asset basis for the buyer.

That being said, I think it makes more sense to calc the NPV of the step-up D&A tax shield. Just make sure you model this correctly with the right interest deduction cap, year 1 accelerated depreciation, etc. and find the difference in taxes paid with and without your step-up depreciation. This is going to be sensitive to your discount rate... so make sure your WACC makes sense in a space where SBA debt is ~9%, KoE is ~30%, and your target capitalization likely varies significantly from your closing capitalization where you have ~90% debt funding.

reply by an intermediary 1yr ago
from Northwestern University in Portland, OR, USA

I think discounting the price AND structuring it as an asset sale is a no go for most sellers unless they're desperate, have zero experience in M&A, AND have no experienced advisors (assuming double tax treatment for an asset sale).