Ch 3 Deck 1 Flashcards
Three general sale side processes to sell a business
negotiated sale
targeted auction
broad auction
investment banker contacts the most likely buyer and negotiates with that buyer only
negotiated sale
this sell-side method is used when there is a strategic buyer who expects synergies from the business combination
negotiated sale
advantages of negotiated sale
confidentiality
minimum disruption to business
generally faster
disadvantages of negotiated sale
seller usually does not get the best possible offer because of lack of competition.
investment banker contacts a limited number of likely buyers (typically two to seven)
targeted auction
advantages of targeted auction
minimum disruption to the business
generally quicker than broader auction methods
offer tends to be better than a negotiated sale because of the increased competition.
investment banker contacts a larger group of potential buyers (usually over 10)
broad auction
Advantages of broad auction
offer tends to be higher because of the large range of possible buyers and the increased competition.
disadvantages of broad auction
confidentiality rarely maintained
target business often disrupted
reduction in an asset or investment
divestiture
company is looking to sell a portion of the business
spin-off
Major tax advantage of spinoff is
A spin-off can be made tax-free to the parent
To take advantage of a tax-free spin-off, a company must be
in business for at least five years
To take advantage of a tax-free spin-off, the SEC requires a company to submit
three years of audited financials
spinoffs provide tax advantages to both
parent and receiving shareholder
a company undergoing restructuring offers shares of a subsidiary in exchange for shares of the parent company
split-off
The worst acquisition structure for targets shareholders from a tax perspective is
asset purchase
asset purchase acquisitions are tax disadvantaged for the targets shareholders because
they are often subject to double taxation
in an asset purchase acquisition, target pays a tax on the gain from
the sale of its assets
in an asset purchase acquisition, the target’s shareholders pay tax on
dividend if the proceeds of the assets sale are distributed to them
in an asset purchase acquisition, If the company is liquidated, the shareholders must pay taxes on
the difference between the proceeds and their tax basis of their shares
Generally, in a stock acquisition in which the buyer pays cash for the target’s shares, and meets all the requirements of section 338
the target’s shareholders will need to pay a tax on their gain
Generally, in a stock acquisition If the buyer buys the target’s stock with its own stock and meets all the requirements of section 338
the target pays no corporate tax and the shareholders can defer taxation until they wish to sell the shares
Often in an acquisition, from a taxation perspective, the buyer will prefer
an asset acquisition
In an acquisition buyers often prefer acquisition of assets so that
the buyer will be able to step-up the cost basis of the assets to the fair market price
Often in an acquisition, from a taxation perspective, the seller will often prefer
a stock acquisition
In an acquisition sellers often prefer a stock acquisition in order to
avoid paying double tax
In an acquisition a seller may prefer an asset purchase if
the seller has substantial net operating losses, so that a gain on the acquisition may result in no taxes actually being paid
In acquisition selling owners of an S corporation may not mind an asset acquisition because
an S corporation is a flow-through entity where tax is only paid once
