Asset Acquisitions: The Dichotomy Between Buyer and Seller Objectives

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.