3. CASH
• The Holy Grail. It spends. It saves.
– There is no investment risk with cash.
• Downside – cash is ALWAYS subject to tax.
– May be at either ordinary income tax rates or
capital gains rates, depending on transaction
structure
• Federal ordinary income rate up to 37.9%
• Federal long‐term capital gains rate is 15%
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4. STOCK IN A PUBLIC COMPANY
• Liquid asset – but is it really?
– Is the stock you get in the deal registered or
otherwise able to be publicly traded?
– Is your stock “locked up”?
• Readily valued based on public market price.
– Discounts?
• May or may not be subject to tax, depending
on transaction structure
– May be at ordinary or capital gains rates.
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5. STOCK IN A PRIVATE COMPANY
• NOT liquid
– What is the path to an exit?
– Redemption rights and other liquidity options?
• May or may not be subject to tax, depending
on transaction structure
– May be at either ordinary income rates or capital
gains rates.
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7. WHEN?
• WHEN do I take the transaction consideration home?
What STRINGS are attached to my getting paid?
– Installment sale?
• Structured payment over time. Tax deferred until payment. Payment
amount is fixed.
– Typically 2 to 5 year delay, although many arrangements common.
– Earn out?
• Milestone based payments received over time. Tax deferred until
payment. Payment amount is not fixed.
– Typically 1 to 3 year delay.
8. WHEN?
• Holdbacks?
– Closing consideration retained against final
determination of working capital targets or other
financial metrics. Likely not taxed until received.
• Typically 3 to 6 month delay.
• Escrow fund?
– Funds held back as a reserve to satisfy
indemnification claims. May or may not be taxed
at closing.
• Typically 12 to 24 month delay.
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11. TAX‐FREE REORGANIZATIONS
• What about non‐stock consideration (“BOOT”)?
– Includes cash, assumption of liabilities and any other non‐
stock consideration
– Amount of permissible boot depends on transaction
structure.
• Zero boot allowed in some structures.
• Up to 60% boot allowed in other structures.
• Planning point is that type consideration being paid can affect
transaction structure.
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13. TAXABLE TRANSACTIONS
• Any business entity
• Any form of consideration.
– If receiving illiquid assets, such as private company stock,
have to plan how to generate cash to pay the taxes.
• Make sure you are receiving enough cash in the deal to pay the
taxes without coming out of pocket.
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14. LLC CONVERSIONS
• LLCs can convert to corporate status.
• When?
– No bright line rule. Earlier is better – try for at least 6
months to a year. Probably won’t work after an LOI is
signed.
• Conversion can be tax free.
– Except to the extent liabilities exceed basis.
• Can plan ahead for potential conversion in operating
agreement and important contracts.
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15. TAXABLE STOCK DEALS
• Sale of stock or LLC membership interests.
– Buyer gets all assets, assumes all liabilities. No “cherry
picking”
• Sellers prefer because get capital gains treatment.
– Certain exceptions in sale of tax partnership.
• Buyers may be able to utilize accumulated NOLs.
– Subject to limitations and restrictions on timing.
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16. TAXABLE ASSET DEALS
• Sale of company assets and assumption of company
liabilities.
– Buyer can pick and choose the assets it is acquiring and
liabilities it is assuming.
• Buyers prefer for tax purposes because get to “step‐
up” basis of acquired assets for depreciation
purposes.
• Sellers get mix of ordinary/capital gains treatment
• Sellers subject to double‐tax in a C corporation
structure.
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17. TAKE‐AWAYS
• Form of consideration and transaction structure
dramatically alters what you take home.
– For example, with a C corp seller a $4 million stock deal
may end up worth more after taxes than a $6 million asset
deal.
– Remember investment risk when you receive stock.
• Plan ahead with your advisors so you understand the
specifics of these issues when planning for and
negotiating a deal.
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