Evaluating Stock Sale vs Asset Sale: Determining an Appropriate Discount
February 26, 2025
by a searcher in Chicago, IL, USA
I'm currently evaluating an opportunity where the seller requires a stock sale. Setting aside the increased risk of assuming liabilities and focusing solely on the lack of stepped-up basis in the assets, I'm seeking input on determining an appropriate discount on the purchase price compared to an asset sale.
My preliminary thought is to discount the deal by an amount equal to the present value of the difference in cash flows that would be received in an asset sale versus a stock sale. This approach aims to quantify the financial impact of the lost step-up in basis. Are there additional factors I should consider when determining this discount? Are there other standard practices for discounting multiples in stock sales?
from University of Virginia in Holmes, NY 12531, USA
*most* of the consideration is paid at close. A related but tangential note - to the extent that as a result of equity structure, you’re taking certain assets and liabilities that you’d otherwise have excluded, make sure you get tight reps and warranties and indemnification coverage on those. All the best, Matt redacted
from Cornell University in Kansas City, MO, USA
That being said, I think it makes more sense to calc the NPV of the step-up D&A tax shield. Just make sure you model this correctly with the right interest deduction cap, year 1 accelerated depreciation, etc. and find the difference in taxes paid with and without your step-up depreciation. This is going to be sensitive to your discount rate... so make sure your WACC makes sense in a space where SBA debt is ~9%, KoE is ~30%, and your target capitalization likely varies significantly from your closing capitalization where you have ~90% debt funding.