DealLawyers.com Blog

“In a market in which attractive assets draw fierce competition, smart buyers are finding ways to stand out through value creation rather than higher prices.” This Goodwin alert focuses on creative strategies that can position a buyer for success “without inflating headline prices or up-front equity requirements” at a time when competition among prospective acquirers is particularly intense.

One way buyers can do that is by viewing the transaction — and the tax implications in particular — through the sellers’ eyes.

In founder-backed businesses and lower middle-market deals, significant asymmetries may exist between the buyer’s and seller’s tax structuring sophistication. Rather than leaving sellers to navigate these complexities alone, successful acquirers engage experienced advisers and apply creative thinking to maximize a seller’s value.

Here are some specific examples:

The QSBS Opportunity: For US corporate business, qualified small business stock (QSBS) represents particularly fertile ground for value creation. Sellers may unknowingly hold QSBS without understanding its potential benefits. . . . Buyers that demonstrate creativity and flexibility around QSBS, as compared to competitors presenting “take it or leave it” structures, can build goodwill that extends far beyond “found money” for sellers. Investing resources in understanding a seller’s unique tax position signals a buyer’s commitment to partnership that helps earn a seller’s trust.

Additional Tax-Driven Differentiators. Beyond QSBS, several approaches can distinguish buyers:

– Partnership structures enabling go-forward equity incentives treated as profits interests rather than stock options, providing capital gains treatment on incentive equity to sellers who continue with the business
– Flexibility on pre-closing taxes, including seeking and transferring pre-closing income tax refunds as and when received or pursuing expedited refunds (so called “quickie” refunds) for estimated tax overpayments for the current taxable year
– Holistic seller needs assessment, addressing charitable giving goals or estate planning requirements through meaningful engagement with sellers’ advisers

In a follow-up to this piece, Goodwin explains how buyers can also better position themselves by demonstrating that they’re “the right next owner and partner for sellers.”

Programming note: In observance of Veterans Day, we will not be publishing a blog tomorrow. We will be back on Wednesday.

– Meredith Ervine