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Business Issues Teaching Founders to Roll Over: Deal Structures That Bridge the Valuation Gap
Business Issues Teaching Founders to Roll Over: Deal Structures That Bridge the Valuation Gap
| Teaching Founders to Roll Over: Deal Structures That Bridge the Valuation Gap |
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| Written by Steven J. Keeler, JD, and Robert J. McElroy, JD | |
| Wednesday, 28 May 2008 | |
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The tax tail should never wag the deal dog.
But in private equity, tax structures can significantly affect deal price and portfolio company returns. This is especially true in "rollover" transactions, where the private equity fund (PEF) encourages the founders (Fs) to leave part of their target company (T) stock in the deal. Rollovers not only help align the Fs' interests with those of the PEF, they also bridge valuation and transaction financing gaps. Fs often insist on a tax-deferred rollover -- meaning they pay no tax on their retained equity until it is sold in the future. At the same time, PEFs generally favor transaction structures that permit them to increase (or step up) the basis in T's assets by the amount of the deal price. This is because portfolio company cash flows and PEF returns can be enhanced by the ability to amortize and deduct purchase price against T's future profits. Unfortunately, deal structures that permit Fs to reinvest equity on a tax-deferred basis can limit the PEF's ability to step up the tax basis of T's assets. To read more, please download the latest edition of McGuireWoods' Private Equity Newsletter (PDF).  |
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