Ch 3 Deck 1

Question 1

Three general sale side processes to sell a business

Answer 1

negotiated sale
targeted auction
broad auction

Question 2

investment banker contacts the most likely buyer and negotiates with that buyer only

Answer 2

negotiated sale

Question 3

this sell-side method is used when there is a strategic buyer who expects synergies from the business combination

Answer 3

negotiated sale

Question 4

advantages of negotiated sale

Answer 4

confidentiality
minimum disruption to business
generally faster

Question 5

disadvantages of negotiated sale

Answer 5

seller usually does not get the best possible offer because of lack of competition.

Question 6

investment banker contacts a limited number of likely buyers (typically two to seven)

Answer 6

targeted auction

Question 7

advantages of targeted auction

Answer 7

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.

Question 8

investment banker contacts a larger group of potential buyers (usually over 10)

Answer 8

broad auction

Question 9

Advantages of broad auction

Answer 9

offer tends to be higher because of the large range of possible buyers and the increased competition.

Question 10

disadvantages of broad auction

Answer 10

confidentiality rarely maintained

target business often disrupted

Question 11

reduction in an asset or investment

Answer 11

divestiture

Question 12

company is looking to sell a portion of the business

Answer 12

spin-off

Question 13

Major tax advantage of spinoff is

Answer 13

A spin-off can be made tax-free to the parent

Question 14

To take advantage of a tax-free spin-off, a company must be

Answer 14

in business for at least five years

Question 15

To take advantage of a tax-free spin-off, the SEC requires a company to submit

Answer 15

three years of audited financials

Question 16

spinoffs provide tax advantages to both

Answer 16

parent and receiving shareholder

Question 17

a company undergoing restructuring offers shares of a subsidiary in exchange for shares of the parent company

Answer 17

split-off

Question 18

The worst acquisition structure for targets shareholders from a tax perspective is

Answer 18

asset purchase

Question 19

asset purchase acquisitions are tax disadvantaged for the targets shareholders because

Answer 19

they are often subject to double taxation

Question 20

in an asset purchase acquisition, target pays a tax on the gain from

Answer 20

the sale of its assets

Question 21

in an asset purchase acquisition, the target’s shareholders pay tax on

Answer 21

dividend if the proceeds of the assets sale are distributed to them

Question 22

in an asset purchase acquisition, If the company is liquidated, the shareholders must pay taxes on

Answer 22

the difference between the proceeds and their tax basis of their shares

Question 23

Generally, in a stock acquisition in which the buyer pays cash for the target’s shares, and meets all the requirements of section 338

Answer 23

the target’s shareholders will need to pay a tax on their gain

Question 24

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

Answer 24

the target pays no corporate tax and the shareholders can defer taxation until they wish to sell the shares

Question 25

Often in an acquisition, from a taxation perspective, the buyer will prefer

Answer 25

an asset acquisition

Question 26

In an acquisition buyers often prefer acquisition of assets so that

Answer 26

the buyer will be able to step-up the cost basis of the assets to the fair market price

Question 27

Often in an acquisition, from a taxation perspective, the seller will often prefer

Answer 27

a stock acquisition

Question 28

In an acquisition sellers often prefer a stock acquisition in order to

Answer 28

avoid paying double tax

Question 29

In an acquisition a seller may prefer an asset purchase if

Answer 29

the seller has substantial net operating losses, so that a gain on the acquisition may result in no taxes actually being paid

Question 30

In acquisition selling owners of an S corporation may not mind an asset acquisition because

Answer 30

an S corporation is a flow-through entity where tax is only paid once