How a $100 million sale becomes a $45 million wire
The deal was $100 million. After rollover equity, debt, fees and escrow, the wire was $45 million, before taxes.
They underestimated how much would come out of that number. The headline number is the number in the press release, the number the banker congratulates you on, and the number you started spending in your head. It may also be far from what shows up in the bank account after closing.
In a typical deal, the buyer wants the seller to keep skin in the game, so $20 million is rolled into equity in the buyer. The purchase is for the business - cash-free and debt-free. The average middle market business has more than 19% liabilities at the time of sale - we will round to $20 million. The deal costs $10 million to do - bankers, lawyers, accountants, the bonuses promised to management. The buyer holds back $5 million in escrow against the representations in the purchase agreement. The wire at closing is $45 million. We have not even mentioned the taxes yet.
The rollover in this illustration is 20% of the headline. The $20 million of rollover equity has not disappeared, and neither has the seller's interest in the escrow. The escrow needs to survive any claims, and there is a good chance that not all of it is collected without a fight. The rollover has real value, but it is contingent on you staying and the business being sold, again. A lot can happen between now and then.
The tax still has to be calculated on the actual structure, basis, allocations and payment terms. Applying a rate to $45 million is not that calculation.
The seller is wealthier than before - just not $100 million wealthier, and in April the $45 million will be reduced by a large tax bill. Sellers that start planning around the headline overestimate what they will have left. The family that plans around the wire, after tax, with the rollover and the escrow in a separate column will be prepared for the day after, when the cash flow from the business stops coming in.
This post is part of Taxing the Deal, my series on business transactions involving private companies, within Secret Art of Planning.
