Sellers have asked for a true up in the purchase price if the pending tax increases are passed (during the diligence period). Has anyone else experienced this? Thoughts? It's an increase of 5% of the current pay portion and 8% of the earn-out, assuming the current proposals hold.
I know they're considering an ESOP as their second alternative, which is tax advantaged.
Thank you.
Is the opposite not true? That is, should price go down b/c of tax increase? I guess not for Search Funders b/c majority value based on multiples.
Having said above, if Seller's tax is low, a 5% change will not materially change the overall price. Strategic buyers have more reasons to buy than just ROI; hence small delta in price increase is irrelevant.. (Example: If seller's taxable gain is 50% of price, and if taxes go up by 5%, then buyer agreeing to picking up tax increase, increases price by 2.5%. Is that material? Most likely no unless the buyer is buying with very low equity.
ESOP is a rainbow or a mirage for most. It is a good solution if it is a 100% ESOP; nightmare otherwise. Most companies are not ESOP ready. Most seller's do not get "true" advise on pros/cons of ESOP (pre-transaction, post-transaction and eventual exit in case of a partial ESOP). I am currently advising a $2 M EBITDA engineering services company. We are looking at a) sale to a 3rd party with managers owning a equity, b) managers buying the company and, c) partial or 100% ESOP.