Experience with a stock purchase

October 16, 2023

by a professional from Emory University in Atlanta, GA, USA

Just submitted my first LOI on chiro/PT practice! I originally opted for an asset purchase since the business also had a high AR and large working capital. But right before signing the LOI, the sellers broker said they only wanted to do a stock as a 338H.

has anyone had any experience with this type of deal structure in this specific healthcare vertical or in general?

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Reply by a searcher
from University of Tennessee in Nashville, TN, USA

My advice is to get a competent, healthcare-specific deal attorney on your team. I saw this structure when I was in healthcare Corp. Dev. but we only utilized it to maintain licensing/contractual structures in various jurisdictions (federal, state, etc.) when they would be otherwise non-transferable. We also utilized a F Reorganization instead of the 338(h)(10) when the Target was a S-Corp to offer greater deal flexibility.

I am not an expert at Chiro/PT practice licensing or contracts issues that would necessitate a stock sale vs. an asset sale. My assumption why the Advisor/Seller is insisting on the 338(h)(10) election is for tax purposes: the Seller gets capital gains tax rates on the stock sale. Caveat emptor: a legal stock sale means that, if not properly structured through contract language and entity structure, the known and unknown liabilities of the Target become the Buyer's responsibility. The Advisor/Seller may ask for an increased purchase price due to advantageous tax treatment to the Buyer under this structure. Also know that the election is jointly made by both parties and not individually, which can be a later negotiation challenge.

The Seller's and your entity structures in this transaction will determine how you will be able to transact. The 338(h)(10) election has to be between only Corporate entities (C-Corp/S-Corp to C-Corp/S-Corp). Some Buyers don't like the legal formalities that come with corporate entity structure. With a F Reorg, the Target must be a S-Corp but the end structure holding entity usually is a disregarded LLC.

These are the general rules of engagement but legal minds may have other more creative (and costly) alternatives for your consumption.

Reply by a professional
from Boston College in Baltimore, MD, USA

Phillip, to add to these comments, a 338(h)(10) election is a joint election made by a corporate buyer and the sellers of an S Corporation. It results in an equity deal for corporate purposes and an asset deal for tax purposes (though not all states recognize the 338(h###-###-#### Unless your buyer is a corporation, a 338(h)(10) election is not available to you (though a 336(e) election would be). Unless the buyer is also asking for a gross-up due to the tax impact of an asset deal, the ask is usually to simplify the transaction and avoid the hassle of an asset deal. Even with in this structure, however, the entire market has a bias to an F Reorg followed by a conversion and sale of a disregarded entity, which lands on the same tax treatment (but without the S election risk) and an equity deal for corporate purposes (e.g. no need for consents and novations). Any experienced M&A lawyer should be able to talk these structures through with you.

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