Completely Confidential
1-949-863-1700

HOME | ABOUT US | SERVICES | ARTICLES | NEWSLETTERS | FAQ | REFERENCES | CONTACT US

Roger L. Neu

 

Newsletters

Free Guide

Valuation

Question: Why is the Buyer of my business offering me less if I sell my stock instead of selling Assets?

There are generally two reasons that a Buyer may pay less in a stock purchase as compared to an asset purchase. In a stock purchase, Buyers may be concerned about potential undisclosed liabilities and problems that could lead to a reduction in price. Another reason is that Buyers of a “C” corporation will carry forward a contingent double tax obligation. That contingent tax problem arises if the Buyer later sells in a transaction structured as an asset sale where there could be a tax at the corporate level and again at the shareholder level.

Question: Why is "debt" subtracted from the purchase price?

Debt that is subtracted from the purchase price is generally referred to as interest-bearing debt and is generally bank debt. In addition, capital lease obligations may also be included as part of debt. In determining the purchase price, interest expense is generally added back to net profit. This add back of interest expense causes the purchase price to be higher as a result of multiplying the purchase multiple times a higher recast net profit. If the specified debt was not subtracted from the purchase price, Buyer would get the benefit of a higher purchase price, while at the same time not being responsible for payment of the debt.

Question: Why is there a “working capital adjustment” built into the purchase price?

The working capital adjustment is determined by subtracting current liabilities from current assets. When buyer submits its bid it will be based on seller having a specified net working capital amount at closing (the “Target”). If the net working capital at closing is greater than the Target then buyer will increase the purchase price by said difference and if net working capital is less than the target at closing, the purchase price will be reduced by said difference. The purpose for setting the Target is so that the company purchased by buyer at the closing has the same resources as the company had at the time the bid was submitted.


HOME | ABOUT US | SERVICES | ARTICLES | NEWSLETTERS | FAQ | REFERENCES | FREE GUIDE | CONTACT US

© Copyright 2014 Roger L. Neu All Rights Reserved

Website By AdMarsh, Inc.