Seller's Perspective: The seller’s shareholders pay tax at the more favorable capital gains rate on the difference between the agreed-upon selling price of the business and their basis in the stock.

Tax Implications of an Asset TransactionIn an asset transaction, the buyer purchases only the desired assets and assumes only specified liabilities from the seller. The seller retains ownership of the legal entity and any assets not acquired, and remains responsible for any liabilities not assumed by the buyer. The aggregate purchase price is allocated by a system of priorities among seven asset classes, mostly at their fair market value. Any amount not allocated to specific assets of the seller is allocated to goodwill.

Buyer's Perspective: Buyers typically prefer asset transactions for two reasons. First, they only purchase the desired assets and liabilities, reducing the legal and financial risks of unknown liabilities. Second, fixed assets and intangibles can be “written up,” meaning they may be ascribed a greater value than their depreciated book value as recorded on the seller’s financial statement. The buyer receives a tax benefit of depreciating the “written up” asset base.

The Technical Resource for the Region’s Largest Organizations

Understanding the Tax Impact on Stock and Asset Transactionsby Graig T. O'Shane, MBA, Vice President, Schneider Downs Corporate Finance, LP

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Feature Story

AUg/SepT 2012

ADVISORtHe

gaining Altitude; Releasing the Mind to M&A

Thought

by Frank A. Wisehart, MBA, CPA/ABV, CFE, CVA, Director, Business Advisory

Services

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A common issue discussed early in the negotiations of a merger or acquisition is how to best structure the transaction. The two most common transaction structures are stock transactions and asset transactions. Understanding the tax impact of both structures is vital to properly structuring the transaction.

Tax Implications of a Stock TransactionIn a stock transaction, the buyer acquires the outstanding shares of stock of the seller, and the corporate structure remains intact.

Buyer's Perspective: The benefits to the buyer in this transaction structure are: 1) leases and contracts remain in place, unless a change-of-control provision is written into these agreements; and 2) tax credits and tax loss carry-forwards are easily transferred to the buyers (subject to certain limitations under the tax code). The downside of a stock transaction from the buyer’s perspective is that the buyer assumes the operating liabilities of the target (both known and unknown), thus significantly increasing the risk of the transaction to the buyer, unless the stock purchase agreement indemnifies the buyer or an escrow account is created for the risk. Additionally, the buyer cannot "write up" the asset base. As a result, the buyer does not have the opportunity to take additional depreciation based on the purchase price, a potential tax benefit.

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For the past few years, many business owners’ strategic thoughts have been shackled from initiating serious acquisition or merger discussions. The economy has been uncertain, the tax rate might change and our health care costs are unpredictable under Obamacare. It is a full-frontal assault on business optimism. According to a recent poll conducted by Duke University’s Fuqua School of Business and CFO Magazine, 52% of all companies surveyed say they will not deploy available cash holdings due to the need for a liquidity buffer, uncertain economic conditions or a lack of attractive investment opportunities. The mentality lately has been to employ a prevent defense; pay down debt and hoard cash to ensure corporate survivability in the near term.

Seller's Perspective: Asset transactions are typically less desirable to the seller from a tax point of view. If the seller is unincorporated or is a shareholder in an S-Corporation, the seller will pay tax at the ordinary tax rate (up to 35%) on the portion of the gain related to depreciation recapture on the assets “written up” in the sale, instead of the lower capital gains rate of 15%.

If the seller is a C-Corporation, the seller faces “double taxation” on distribution of the proceeds. The C-Corporation pays one level of taxes on the proceeds from the sale of assets. Then, taxes are paid again when the proceeds from the transaction are distributed to the shareholders as dividends or as a distribution in liquidation of the corporation.

Understanding the key tax issues discussed above will allow the buyer and seller to structure a transaction that is fair and equitable to both parties. Material discussed is meant for general illustration and/or informational purposes only, and it is not to be construed as tax or legal advice. Please consult your tax or legal professional to determine which direction is best suited for your specific needs.

Schneider Downs Corporate Finance, LP is a registered broker/dealer. Member FINRA/SIPC.

aug/Sept 2012tHe aDVISor www.ScHneIDerDownS.com

Is there a topic you would like us to cover in the next issue? Contact Charles A. Oshurak, Senior Manager, at 412-697-5396 or coshurak@schneiderdowns.com with your suggestions.

Stock and asset transactions continued from Page 1

Frank Wisehart is the Director of Schneider Downs' Business Advisory Services. Frank has more than 20 years of experience in business advisory, including management consulting, litigation support, strategic planning and financial/transaction due diligence. Frank has testified as a qualified expert in matters of forensic accounting, business valuations, economic damages, lost wages, family law, dissipation of marital assets, bankruptcy, breach-of-contract and general commercial litigation. For more information on this article, or to discuss similar topics, contact Frank Wisehart at fwisehart@schneiderdowns.com.

mind to m&a thought continued from Page 1

Graig O'Shane is a Vice President of Schneider Downs Corporate Finance, LP. Graig has been actively involved in mergers and acquisitions, corporate finance strategy and capital

transactions for more than 10 years. He is responsible for business development, client service and customary transaction and analytical support for Schneider Downs Corporate Finance, LP. For more information on this article, or to discuss similar topics, contact Graig O'Shane at goshane@schneiderdowns.com.

Are things really that bad? On October 9, 2007, the Dow Jones Industrial Average peaked at 14,165. On March 9, 2009, the index dropped to 6,547. On August 20, 2012, the same index more than doubled to 13,272 in nearly 3 ½ years. In simple terms, from its low in 2009, the Dow Jones Industrial Average earned an annual rate of return of 29.4%. According to United States Federal Court information, bankruptcy filings, which tend to act as a trailing indicator of economic conditions, are down in every category in 2011 and 2012. Business bankruptcies in 2012 are down 24% from their peak in 2010.

According to the same Duke/CFO Magazine poll, nearly one-third of all companies reported that their employees are “maxed out,” and unable to shoulder additional work load burdens placed upon them. Second quarter, 2012 middle-market indices from The Ohio State Fisher College of Business and GE Capital report that, over, the next 12 months, only 6% of middle-market firms project revenue decline. The same survey shows 33% of all middle-market companies project stable revenue, and a whopping 61% project revenue growth in 2012. Further, unless banks give the money away, borrowing rates really cannot get any better.

Despite all of the positives in the marketplace, all we hear and see in the news is negativity. Is this negativity simply economic crop circles; an attention-mongering illusion in an otherwise fertile field? There are compelling facts that point to a decent business road ahead based on a multitude of factors: low interest rates, declining bankruptcies, continued projected revenue growth and narrowing capacity.

Given this set of facts rather than the sensational story lines, this may be the perfect time to reconsider and discover growth strategies through mergers and acquisitions. If you were to pursue aggressive expansion, what would that strategy be? How would you take your company on the offensive? Whom would you acquire? What lines of business would you open? Are we too caught up in the Chicken Little headlines that we do not consider the good things that have actually transpired? As many sports pundits will tell you, deploying a prevent defense strategy actually perpetuates your demise by allowing your aggressive-minded opponent multiple scoring opportunities. It may be time to raise our business mission altitude to focus on the opportunity that lies ahead.