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Asset vs. Stock Sale

In most M&A transactions in the middle market of the aerospace and defense industry, the headline price is what usually attracts the most attention.  However, what really matters to the seller is the after tax proceeds. One of the most important drivers of the tax obligation associated with a sale of a business is whether the sale is structured as a sale of stock or a sale of assets.

For the avoidance of doubt, we are not tax advisors and do not give tax advice. However, we always advise our clients to address this important issue with their legal and tax advisors very early in the sale planning process and negotiate the issue in the letter of intent between the seller and buyer.

Under the current federal and state tax codes in the US, most of our clients are being advised by their tax advisors that their tax obligations would be lower in a sale structured as a sale of stock, versus as a sale of assets. Conversely, in most of our engagements over the past three years, buyers have been eager to structure their offers as a purchase of assets, not only because of the availability of a ‘step-up in basis’, which provides future tax benefits for the acquirer, but also for legal reasons as noted below.

Sorry for another caveat, but I need to also add that we are not legal counsel and do not give legal advice. However, we consistently hear from buyers that they want to structure their offers as purchases of assets not only for tax reasons but also because that would insulate them from future claims associated with prior period liabilities of the company, such as product defects, employment practices, or environmental contamination.

Of note, there is a middle ground here. If the structure cannot be agreed between the parties, there is a provision in the Internal Revenue Code (“IRC”) that permits a sale to be recognized as a stock sale from a legal perspective and simultaneously treated as an asset purchase for tax purposes (IRC section 338h10).

The determination of the structure of sale is usually based on four factors: 1) the current federal and state tax laws in place at the time, 2) the perceived level of risk associated with prior period liabilities, 3) change of control provisions in key supplier and customer contracts and 4) the respective negotiating leverage of the buyer and seller.

To ensure you benefit from the best structure, we encourage owners of middle market aerospace and defense companies to talk with their legal and tax advisors two years prior to when they expect to sell, to quantify the tax obligations associated with a sale under each scenario (asset vs. stock). We also encourage sellers to retain an experienced M&A Banker to ensure that the sellers have more leverage when it comes to transaction negotiations including, but not limited to, the negotiating of the structure of the sale.

Have a great day everyone.

Ryan Kirby
Vice President