Advice for a C-Corp acquisition with some retained equity for sellers
October 07, 2024
by a searcher from University of Virginia in Nashville, TN, USA
Hi - I'm looking for some advice on structuring a deal for a c-corp. I'm unfamiliar with many of the legal/tax nuances that come along with a C-Corp, so hoping there's someone who's willing to elaborate on considerations I should keep in mind while negotiating purchase price and structure. A few notes: 1) they've been carrying forward some NOLs from 2020; 2) there are 3 key employees that are minority owners that may want to keep some equity. Some specific questions I have:
1. Asset vs stock sale - beyond the standard difference of these two transaction types (e.g. liability, step-up in assets for depreciation), is there anything specific to the entity being a c-corp that I need to keep in mind? The seller has specifically mentioned he doesn't want to do an asset sale because of the tax implications, but could the NOLs offset some/all of the tax liability if we were to do an asset sale .
2. Company structure - might be related to the questions above, but what are the pros/cons of keeping as a c-corp vs converting to an LLC?
3. Retained equity - what do I need to keep in mind in the event that one/all of the minority owners want to keep their ownership %'s (all under 10% individually and under <20% in aggregate).
4. SBA financing - anything I need to keep in mind as it relates to debt financing if I wanted to use a 7(a) loan?
5. I'm sure there are other key questions related to the selling entity being a c-corp that I should be asking so let me know what other info I should be asking the seller that could make a material impact on deal structure
from Harvard University in Nashville, TN, USA
1) Depends on situation, tax implications for seller may be huge if they qualify for QSBS. For you, to do the calculations on NOL, you'll likely need proper tax diligence.
2) Huge tax implications. Look out for double taxation on C-Corp. If you're looking to LLC as S-Corp, it's a pass-through, but the real break-even calculations depends on how much you're taking home/distributing. Additionally, you need it as a C-Corp if you want your own QSBS down the line.
...as I'm writing this out, I'm realizing, this is probably best via convo. There's not enough info here. I've found that there are always eligible qualifications and exceptions to those qualifications, etc. I'm no tax expert but I can point you towards where to look.
Email me at redacted and we can connect offline in Nashville!
from University of Waterloo in Mississauga, ON, Canada
If you plan to attract outside investment the C Corp is probably going to be needed on your side anyway... professional investors hesitate to invest in LLCs.
If you buy the assets you do get the stepup (but purchase prce does need to be allocated across all the assets) and eliminate most contingent liabilities, but you also have to convey the assests, assign contracts, assign the lease, and assign employment contracts. That may or may not be a big headache.
Like in most things, the best course of action requires a detailed analysis and for that need to dig into the details.