Mergers and Acquisitions of Pass-Through Entities: Structuring to Minimize Taxes and Maximize Deal Value

Description

Purchasers and sellers in M&A deals seeking to improve the deal value and maximize income tax savings through flow-through structures need to consider various alternatives and impacts on both sellers and purchasers, such as maximizing tax basis step-up, allowing for tax deferral of a rollover, determining best acquisition financing methods and considering self-employment constraints on rollover and incentive equity holders.

Pass-through entities (i.e., partnerships and S corporations) are still often preferred for M&A transactions due to, among other attributes, their single level of taxation. Still, whether buying into a flow-through structure or trying to fit a target into a purchaser's current flow-through structure, parties on both the buy-side and sell-side of a deal have to consider structuring to achieve various objectives of both the sellers and purchasers. A proper structuring determination requires analyzing the tax burdens on operating income, distributions, and exit transactions and reviewing legal and practical business considerations.

In planning a transaction, the 2017 tax reform enabled full expensing of purchased assets, which may cause a purchaser to seek an acquisition that provides for a tax basis step-up in the assets. However, the chosen transaction structure may influence whether expensing is available.

Listen as our authoritative panel discusses the pros and cons of corporate and pass-through entity structures in M&A transactions.