Thread by @bentigg

When acquiring a company, you either buy the STOCK or buy the ASSETS (stock deal or asset deal).

Why does it matter?

💲💲Cash flow 💲💲

This 🧵is summary of what I've learned doing #smallbusienss stock/asset deals. Ignoring this topic can be...painful (beware).

Goodwill = value of business in excess of the stated tangible net assets on the balance sheet

The seller has probably depreciated the heck out of the balance sheet assets (the net asset amount is low)

If you buy the stock, you have to step into that low asset basis (Bad!)

Asset purchase you can:

1. 'Step up' the basis of the acquired assets (basically taking that old piece of equipment and telling the IRS it's new again!)

2. Amortize goodwill over 15 years (more amort expense = lower taxes)

-> Has big cash flow impact to you as a buyer post-close

I assume all my valuations & LOIs are for asset deals

All else equal, if the seller prefers a stock sale, my purchase price is lowered because my after tax cash flow is lowered during my ownership period

Asset deal example (with high amount of Goodwill):

$4M purchase w $3.2M of goodwill (80% of purchase price)

$3.2M of goodwill depreciated over 15 years = $213K incremental loss each yar

At 40% tax = $85K of cash flow / yr

Taxes are real in profitable businesses

Sometime a stock deal is necessary due to customers, contracts, biz type, employees, etc

However stock deals also have other risks…

-buying the historical liabilities and obligations (lawsuits)

-S Corp tax designation isn’t valid (you get taxed as a C corp, ouch!)

Now in a stock deal, you do ultimately get to realize the benefit of goodwill but not until you sell the company

Do you want tax benefit now or later?

I want my cash NOW (asset deal!).

You can't pay grow or pay bills with equity.

You can do a stock deal and have it treated as an asset deal (for tax purposes).

This means you can buy the stock (retaining key customer contracts) and still get the step up and amortization of goodwill

Two options:
-F-reorg
-338(h)(10)

You may need some help structuring.

My pro list….

Legal (to structure): @SMB_Attorney @KHendersonCo @lawyer4SMBs @matthewwagoner

Accounting (to confirm): @patrickdichter @BoilerPlateCPA @ElliottEHolland @Chris_CayneQofE

@SMB_Attorney @KHendersonCo @lawyer4SMBs @matthewwagoner @patrickdichter @BoilerPlateCPA @ElliottEHolland @Chris_CayneQofE Example of pros and cons of asset deal from an actual deal (@Adrian_Pinto2)

GOOD: avoided lawsuit, step up basis, better cash flow

BAD: financing annoyances, customer contract changes were messy

https://twitter.com/1430334595405332482/status/1504101605813239812

@SMB_Attorney @KHendersonCo @lawyer4SMBs @matthewwagoner @patrickdichter @BoilerPlateCPA @ElliottEHolland @Chris_CayneQofE @Adrian_Pinto2 Stop overcomplicating; Let's make stuff simple and understandable.

This is not tax advice nor am I your lawyer or CPA, and I only claim to be right 90% of the time.

1. Follow me @bentigg
2. RT the first tweet or RT Quote with your own stock vs asset deal experience.

https://twitter.com/30272141/status/1597610796338536448