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  1. Home
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  3. Asset Acquisitions: The Dichotomy Between Buyer and Seller Objectives

Asset Acquisitions: The Dichotomy Between Buyer and Seller Objectives

Posted by Margaret Amsden and Ben Smith on January 16, 2018

Margaret Amsden

Growth through acquisition is an important option for business owners because it offers a significantly faster way to build market share in an existing market, to expand into new markets, or to launch expanded product lines.  In today’s business economy, companies are as likely to focus on growth through the acquisition of other companies, in the same or a complimentary business to their own, as they are to focus on organic growth.

When pursuing such acquisitions there are many issues a business owner must consider: including legal issues, financing issues, environmental issues, personnel issues, and tax and accounting issues.  Often, the tax and accounting issues will drive the structure of an acquisition transaction, and is controversial because what is favorable to the acquirer is generally unfavorable to a seller.  Hence, there is a natural tension between the parties.

From the seller perspective, it is often most efficient to sell stock or an ownership interest in the selling entity. Alternatively, from the buyers’ perspective it is often most beneficial to structure the transaction as a direct acquisition of assets, or as a deemed acquisition of assets.  This allows the acquirer to depreciate or amortize their purchase price; thus reducing net present value of the acquisition cost by allowing buyers to recognize a tax benefit earlier.  This opportunity is maximized by an effective purchase price allocation in the transaction agreements.

Assuming the buyer is able to negotiate an actual or deemed asset acquisition, the most effective purchase price allocation for the acquirer will maximize the value assigned to short lived assets, such as machinery and equipment, and minimize the value assigned to the longer lived assets, such as buildings, building improvements and real estate.  The most effective purchase price allocation for the seller is exactly the opposite.  As a result, the IRS has a requirement that the parties to a transaction must file forms identifying roles, certifying that they have all taken consistent positions with regard to the purchase price allocations.  With this dichotomy, it is important for the acquirer to negotiate and document the most favorable tax allocation as soon as possible during the structuring of a transaction.    

Adding an additional layer of complexity, it should also be noted that the allocation agreed to for tax purposes will not necessarily be the same as the allocation the buyer will use for financial statement purposes.  This is due to the fact that Generally Accepted Accounting Principles (GAAP) require the purchase price to be allocated based on the fair market value of the assets, and does not provide for as much leeway with regard to the agreement between the parties.

In conclusion, while during the heat of negotiations, it can be easy to lose sight of how the purchase price will be allocated for GAAP and tax purposes. It is important to make sure that the issues are addressed so that parties don’t unintentionally leave dollars on the table.

If you would like to discuss how this could impact you or a transaction that you are involved in or contemplating, contact Clayton & McKervey.

Our team is always ready to help.

Please contact us for more information.

Margaret Amsden

Shareholder

Contact Margaret   |   Read Margaret's bio

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Asset Acquisitions: The Dichotomy Between Buyer and Seller Objectives

Posted by Margaret Amsden on January 16, 2018

Margaret Amsden

Growth through acquisition is an important option for business owners because it offers a significantly faster way to build market share in an existing market, to expand into new markets, or to launch expanded product lines.  In today’s business economy, companies are as likely to focus on growth through the acquisition of other companies, in the same or a complimentary business to their own, as they are to focus on organic growth.

When pursuing such acquisitions there are many issues a business owner must consider: including legal issues, financing issues, environmental issues, personnel issues, and tax and accounting issues.  Often, the tax and accounting issues will drive the structure of an acquisition transaction, and is controversial because what is favorable to the acquirer is generally unfavorable to a seller.  Hence, there is a natural tension between the parties.

From the seller perspective, it is often most efficient to sell stock or an ownership interest in the selling entity. Alternatively, from the buyers’ perspective it is often most beneficial to structure the transaction as a direct acquisition of assets, or as a deemed acquisition of assets.  This allows the acquirer to depreciate or amortize their purchase price; thus reducing net present value of the acquisition cost by allowing buyers to recognize a tax benefit earlier.  This opportunity is maximized by an effective purchase price allocation in the transaction agreements.

Assuming the buyer is able to negotiate an actual or deemed asset acquisition, the most effective purchase price allocation for the acquirer will maximize the value assigned to short lived assets, such as machinery and equipment, and minimize the value assigned to the longer lived assets, such as buildings, building improvements and real estate.  The most effective purchase price allocation for the seller is exactly the opposite.  As a result, the IRS has a requirement that the parties to a transaction must file forms identifying roles, certifying that they have all taken consistent positions with regard to the purchase price allocations.  With this dichotomy, it is important for the acquirer to negotiate and document the most favorable tax allocation as soon as possible during the structuring of a transaction.    

Adding an additional layer of complexity, it should also be noted that the allocation agreed to for tax purposes will not necessarily be the same as the allocation the buyer will use for financial statement purposes.  This is due to the fact that Generally Accepted Accounting Principles (GAAP) require the purchase price to be allocated based on the fair market value of the assets, and does not provide for as much leeway with regard to the agreement between the parties.

In conclusion, while during the heat of negotiations, it can be easy to lose sight of how the purchase price will be allocated for GAAP and tax purposes. It is important to make sure that the issues are addressed so that parties don’t unintentionally leave dollars on the table.

If you would like to discuss how this could impact you or a transaction that you are involved in or contemplating, contact Clayton & McKervey.

Our team is always ready to help.

Please contact us for more information.

Margaret Amsden

Shareholder

Contact Margaret   |   Read Margaret's bio

related news

Industry 4.0 is Driving Transformation in Finance and Accounting

Clayton & McKervey, a certified public accounting and business advisory firm helping growth-driven companies compete in the global marketplace, has watched the advanced and automated technologies used by manufacturers increasingly…

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Maximizing the Tax Benefit of Charitable Giving

With the tax law changes that became effective in 2018, the average person has potentially lost the benefit of their charitable contributions.  However, there are several very straightforward options that…

Read full story

Leadership From Around the Globe

A few weeks ago I traveled to Rome, along with my fellow shareholder Sue Tuson, to attend the PrimeGlobal World Conference. PrimeGlobal is one of the five largest associations of independent…

Read full story

Considering Expanding to Mexico? Learn the Impacts of Taxes and Personnel Expenses

In our previous updates, we’ve reviewed two main types of taxes and related costs which may influence timing when expanding to Mexico.  These include: All the taxes related to the…

Read full story

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The term Industry 4.0 conjures up images of the high tech factories filled with connected robots performing work previously performed by people.  However, the technologies that are enabling this transformation…

Read full story

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  • Robert Dutkiewicz
  • Sarah Russell
  • Sue Tuson
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