Optimal tax structure Featured

11:44am EDT December 20, 2004
Thorough planning and careful implementation of numerous interrelated steps lead to successful acquisitions and divestitures. Many factors can make or break the transaction, including tax planning, accounting and business issues.

Buyers need to identify and evaluate acquisition candidates and compare them with other companies in the marketplace. Thorough due diligence is vital. Sellers need to maximize the sales value of the divestiture while reducing risk. Proper valuation analysis and determining fair market value help ensure that all stakeholders' objectives are met.

Whether buying or selling, designing the optimal tax structure is a critical component to the successful completion of an acquisition or divestiture. In general, the acquisition or divestiture can be structured as a stock transaction or as the acquisition of assets that represent the company's trade or business. There are numerous variations of these basic structures, but from a fundamental perspective, either stock or assets are changing hands. Tax planning involves modifying these two basic structures to accomplish the goals of both the buyer and seller.

Frequently, however, the goals of the buyer and seller are at odds. There are many alternatives. For example, if tax-free or partial tax-free treatment is a primary goal of the seller, selling shareholders must retain a significant continuing equity ownership in the combined entity, which has a direct effect on the structuring alternatives available.

From the buyer's perspective, he or she may want to obtain a step-up in the basis of the assets acquired to take advantage of future write-offs, which is generally only available in a taxable transaction. In such a situation, designing the optimal tax structure will play a critical role in the successful completion of the deal.

Source: Michael Milazzo, Skoda, Minotti & Co., (440) 449-6800 or mmilazzo@skodaminotti.com.