DealLawyers.com Blog

In July, we blogged about some of the key provisions of the One Big Beautiful Bill Act that M&A practitioners need to understand and take into account when negotiating pricing, transaction structure and deal terms. How are those changes likely to impact the way deals are structured? This Woodruff Sawyer blog — and the Rivkin Radler alert it highlights — discuss how the Act may reshape deal structures and impact RWI placement and coverage. Here’s a summary of their thoughts:

– Buyers will be even more incentivized to push for asset deals. The Act restores a Tax Cuts & Jobs Act provision that allows buyers to deduct 100% of the cost of depreciable tangible assets immediately. This can mean “higher cash flows in the critical early years post-acquisition, faster return of capital and stronger after-tax ROI.” It also means a stock sale is even less attractive to buyers and “harder for a seller to justify, absent a particular non-tax reason for doing so.” Woodruff Sawyer says:

Traditionally, asset deals are less frequently covered by RWI due to limited risk transfer. However, not all asset deals are created equal. We may see more creatively structured asset deals that transfer more risk while still capturing the advantages of the asset structure.

– More benefits of rollover equity. The Act updates the treatment of Qualified Small Business Stock (QSBS), providing a tiered approach to the years held to qualify, increasing the exclusion cap and taking a more flexible approach around corporate reorganizations and rollovers. This may make rollover equity more attractive while making RWI less attractive because “high rollover percentages often trigger pro-rata payouts in certain circumstances. While 100% payouts ($1 loss equals $1 of payment) are available for investor-level losses, only pro-rata payments (if the investor owns 47% of the company, for example, a $1 loss attracts only a 47-cent payment) are available for operational-level losses. This makes coverage far less attractive for clients.”

– Targets in favored industries will be highly sought-after. The Act could impact the types of companies that make attractive targets. That’s because the Act “restores full, immediate expensing of domestic research and development spending, reversing the TCJA’s five-year amortization requirement.” So R&D-heavy companies, including those in industries like AI, biotech and advanced manufacturing, “look stronger on paper.” Plus, the 100% deduction for qualified assets might shift buyers’ views on companies that require heavy upfront investment or have strong IP portfolios. 

For buyers, these changes shift the ROI calculus and should lead many buyers to adjust their models to reflect these tax-boosted returns. For sellers, they create an opportunity to reframe historically off-putting high capex numbers as a feature, not a bug, highlighting them as a driver of long-term value creation.

We’re posting memos on the OBBBA in our “Tax” Practice Area.

– Meredith Ervine