Sending LOI and hitting snag as deal is asset sale from a C-corp
November 28, 2022
by an investor from University of Oxford in San Francisco, CA, USA
Ready to go with the LOI and just read that a C-corp's asset sale is complicated as the step up and asset/goodwill valuation (and more obviously the double taxation) are tricky.
HBS guide only says "With C-corporations in the United States, for example, there are prohibitive taxes involved with asset purchases" and then later "If the seller organized their company as a C-corporation, you will probably not be able to effect a step-up, because the tax consequences to the seller are so unattractive that your purchase would no longer work for them."
Do you have any insights (or suggestions on where to read more) on this topic?
Hoping this doesn't ruin the deal!
from The University of Chicago in Chicago, IL, USA
I have faced C Corp, sale many times over 35 years of M&A, often with top US tax attorneys. My software allows me to interactively quantify the tax impact to buyer, to seller or to both sitting in the same room with advisors.
If the target has reasonable assets (i.e. goodwill is low), the value impact to buyer of Stock is 5-15%. Both parties should know that RWI are stronger in Stock sale which seller may not like. Similarly, Stock may invite larger seller Note and/or earn-out.
Imo, C-Corp sale is slightly more challenging than S=Corp sale, but it is NOT "prohibitive" nor "tricky".
Under current taxes, a step up would impact S-Asset more than it would impact a C-Asset seller.
from Stanford University in Honolulu, HI, USA
* Entity Selection: Search Fund Structure and Target Entity Concerns (Foreman): https://www.searchfunder.com/event/view/721
* Searchfunder Session: Tax Considerations during Due Diligence (Foreman) https://www.searchfunder.com/event/view/745
* Searchfunder Session: Importance of Tax Due Diligence (Shefferly) : https://www.searchfunder.com/event/view/356