Litigation + Valuation Perspectives

Demystifying Valuation, Economic Damages + Forensic Accounting

Are sellers of privately held companies leaving money on the table?

By way of background, when a buyer purchases an existing business, in most cases it is in the form of an asset purchase—or stated another way, the buyer sets up a vanilla shell legal entity and purchases all the assets of the selling business and then records the assets at fair value on the newly formed entity’s balance sheet.

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An example may be easier to follow. The buyer pays $5 million for the following identified assets: cash, accounts receivable, inventory, and some equipment.

The new balance sheet will look like this:

Purchaser’s Balance Sheet Day 1*

Cash                                                 300,000

Accounts Receivable                     800,000

Inventory                                         1,000,000

Fixed Assets                                   500,000

Intangible Assets/Goodwill         2,400,000

Total Assets                             5,000,000

*All assets stated at fair value.

The question I have been thinking about lately is this. Should the buyer and seller split the economic benefit created by the US Federal government allowing the subsidy of a portion of the transaction price?  In the case above, the buyer will be able to deduct amortization expense of $160,000 [$2.4 MM / 15] each year for fifteen years. This is worth approximately $50,000 in lower taxes each year and the present value of $50,000 over fifteen years at a 20% cost of capital is just over a quarter-of-a-million dollars.

So, at the end of the day, is the tax amortization benefit that is created in an asset deal belong only to the buyer? Or should the seller receive a portion of the present value of the tax amortization benefit in the form in an increased purchase price because it is derived from the value of the company they developed and created? Ultimately, I think sellers should remember during the negotiation process that the buyer has an unaccounted economic benefit created by the transaction itself which makes the purchase a little less risky to the buyer due to the tax savings of the non-cash amortization expense.

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Mike Metzler CPA/ABV, CMA, CGMA, ASA