One of the big questions a corporate financier will have when structuring a transaction is to structure it as a stock or an asset deal. In other words, shall we sell the shares in the company or alternatively, shall we sell the assets, liquidate the company, and then take the cash? Let's take a look at an example of how you'd evaluate that decision. So, in this case, we can sell the assets. We've got a purchase price of 100. There's asset basis, or the inside basis is 40, so there's a gain of 60. This means at a tax rate of 20%, the net proceeds are 88, and the acquirer will get a new inside basis of 100. Commercially, if we sold the stock, the purchase price is 100, the outside basis is 50, so the gain is 50 and the tax rate's 20%. So, the net proceeds are slightly higher at 90 but the new inside basis for the acquirer is gonna stay at 40 because remember, the assets no longer retitled. Now, in this case, the person selling, the vendor, is gonna prefer to structure the transaction on a stock basis 'cause they're gonna make more money. This is assuming that there's no double taxation on the liquidation of the corporate entity if they sell the assets, and that potentially would make it even less attractive to the person selling because they would have to be taxed again on the net proceeds, assuming they're an individual. Without double taxation, in this situation, because the asset basis is smaller than the stock basis the vendor would prefer to structure the transaction as a stock transaction because they're going to make more money after tax, assuming no double taxation. So, under what circumstances would the acquirer potentially be interested in paying little bit more to compensate the vendor for the additional tax? Well, in this case, remember the inside basis is much higher if it's an asset deal. The asset step-up here has gone from a balance of 40 which is the old inside basis, to a new inside basis of 100, assuming that the assets are purchased. So, this means that there's an asset step-up of 60. Let's assume the depreciation period is 10 years, so this means there's going to be additional yearly depreciation of 6, which means we'll get a tax shield of the tax rate of 20% times 6, which is 1.2, and we'll have that tax shield for a 10 year period. Present valued back to today gives us a net present value of 8.4. This means potentially the acquirer would be willing to pay up to 8.4 million more to structure the transaction as an asset deal rather than a stock deal, which means in that situation, they could potentially convince the vendor to prefer an asset deal if the price went up because they're passing some of the benefits of the additional tax yield on the additional depreciation to the vendor. It gets very complicated because there'll be a number of different assets, and there's the potential of double taxation. So, you do need to take advice, but this, in principle, is how people evaluate this question.
