M&A Monday: Deal Stories From Small M&A: A Blue-Collar Disaster, Averted.

February 18, 2025
by a professional from Georgetown University in Maryland, USA
Here is a breakdown of a closed deal and how sharp tax counsel saved a Dad and his kids millions of dollars. There are numerous take-aways for small M&A deals.
This deal started, like all complex deals, with a friend and Seller’s advisor reaching out and saying, this will be the most straightforward, easy deal you have ever done.
This was a blue-collar business, that Dad and his sons worked for years to build. At some point, Dad was approached by a young, charismatic buyer rolling up owner-operated businesses in his industry. I immediately had an affinity for these Sellers and my Sheepdog instinct kicked in full force. This was a small deal, but I accepted it anyway.
The parties negotiated and signed an LOI, as follows:
Cash: $1,000,000
Unsecured Promissory Note: $2,500,000 (6% interest; IO for 5 years, $200k until YR9, balloon in YR10)
Rollover Equity: $500,000
I sat down and read the LOI. I hate to come in after a signed LOI because I have respect for the terms that have been negotiated and agreed upon. I often say, an LOI is not legally binding, but it is “reputationally binding” and I always give a professional courtesy to the terms agreed upon.
Most M&A folks will immediately see that there were several issues with this structure from the Seller’s perspective (Buyer had negotiated a favorable deal).
First, the promissory note was huge and had a few problems (1) unsecured, (2) below-market interest, (3) below-market term and IO period, and (4) below-market percentage of the total compensation.
All these issues work together. From a seller’s perspective, a large note with a lengthy term needs to be more secure. So, how can we make this more secure? Our options without changing terms are (i) Second position security on buyer’s assets, (ii) corporate guaranty, or (iii) personal guarantee.
The LOI was silent on the note security. Usually in an LOI, if a note is not specifically secured, it means it is unsecured. However, the seller had conversations and buyer had verbally agreed to a second position security interest (second to buyer’s senior loan) on the Buyer’s assets. The personal guarantee would have been an overreach, but we did threaten it if they did not give us a security, we would insist on the PG.
After further discussions, we came to the conclusion that we wanted to move some of the note to rollover equity. The thought process was, in a downside, the note would not get paid (second position security is rarely impactful) and in an upside, Seller will still only get 6% per year. So, it is better to have equity and share in the upside. We reviewed the Buyer’s operating agreement and saw the buyer, personally, had put millions of his own money into the business. We came to believe in the buyer’s vision for the business and the potential upside. Frankly, the fact that Buyer had negotiated such a favorable LOI bode well for his ability to roll up these blue color owner-operated businesses and achieve his goals.
We went back to the buyer requesting a restructure of the deal. After many conversations, we agreed to the following:
Cash: $1,000,###-###-#### %)
Roll: $1,250,###-###-#### %)
Note: $1,750,###-###-#### %)
That is when we brought in Josh Siegel, Albrecht Law Partner, and in-house Transactional Tax genius to do a quick tax review of the deal, the purchase agreement, and ensure the rollover was tax-deferred, or so I thought.
This is when an already interesting deal got very interesting.
Josh quickly realized that our client was actually a c-corp and the asset sale out of a c-corp would result in massive taxation to the Sellers. There would a be corporate-level tax and a personal level of tax of over $2,200,000 (there were also additional assets that had to be distributed out of the corporation prior to the sale as discussed below). This was more than the cash proceeds Seller was receiving in the deal. Thus, Seller would have to take out a loan to pay their tax. Josh sounded the alarm and we paused the progress of the deal until we could figure this out. Note: Sellers realizing their post-tax proceeds is a primary deal-killing issue.
Through the genius of Josh, we figured out two options.
First, restructure to have the owner sell personal goodwill, which would be taxed, but not double taxed. Then, the remaining amount would be sold out of the c-corp in an asset sale and double taxed. This solution cut Seller’s tax burden significantly. (See Martin Ice Cream Co. v. Commissioner (1998)).
However, after some further diligence, Josh found out the C-corp could likely qualify for QSBS (for a variety of reasons and analysis beyond this already lengthy Deal Story). QSBS would allow our seller to pay $0 in federal taxes. However, to get the benefit of QSBS we had to switch to a stock purchase from the previous structure, which was an asset purchase.
We pitched this to the buyer and buyer flipped out.
Josh and I had multiple calls with the seller. Josh explained the deal and how the Buyer could buy the c-corp and wind it down using another tax technique that would not result in a big tax hit to Buyer. After checking with his own tax counsel, Buyer acknowledged Josh was right and agreed.
We were not done yet. The business had amassed almost 4m in undistributed cash in the c-corp (the business was capital intensive and if the deal did not go through almost all the cash would have been used to update the buyer’s facilities). Distributing that cash out of the c-corp would result in double taxation, again. Again, Josh had a solution. By structuring a “Zenz transaction" (a 1954 tax case), the distribution of cash is treated as a redemption, which, when combined with the sale of 100% the remainder of the issued and outstanding stock results in sale or exchange treatment for the entire amount (as opposed to part sale and part dividend). The Zenz structure and the QSBS benefit magically put another almost $1,000,000 back in the Sellers’ pocket.
When we were engaged, the Sellers were considering hiring a local counsel for the deal. The Sellers’ son said, in choosing your surgeon and your lawyer, always go with top quality. That decision saved the Dad and sons millions and losing their life’s work.
from Emory University in Atlanta, GA, USA
from Georgetown University in Maryland, USA