Distressed company mergers and acquisitions—tax considerations

Private equity liquidity can play a significant role during an economic downturn

Apr 30, 2020
International tax
Business tax M&A tax services Mergers & acquisition Private equity

Originally published April 2020, updated May 2022

Many private equity funds have available cash that enables them to make strategic investments in distressed businesses.

For a fund acquiring a distressed business, maximizing the return on its investment requires a clear picture of the facts and tax consequences at the outset of the acquisition. The most beneficial transaction structure will depend on the distressed company’s specific financial situation; it is not a one-size-fits-all template.

Generally, the tax ramifications of the acquisition will vary depending on how the transaction is structured and whether a bankruptcy filing is involved. These ramifications include the exclusion of income from debt cancellation and the reduction of tax attributes such as net operating loss carryforwards, tax credits, and the assets’ tax basis.

Many distressed acquisitions involve a so-called loan-to-own transaction—a multistep transaction in which the fund acquires new or existing debt of the company, followed by a swap into equity. RSM’s white paper examines different sets of circumstances that represent a loan-to-own transaction, detailing the tax ramifications and difference in results for each.

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