hard · Private Equity value-creation
A private equity firm is evaluating a target with significant 'Built-in Gains'.
If they acquire the company in a stock deal, what is the primary risk related to deferred taxes?
- The buyer inherits a large DTL without the benefit of tax-deductible step-up amortization to shield the future gains.
- The DTL will trigger an immediate legal obligation to pay additional cash taxes that comes due right at closing.
- The target company's existing NOL carryforwards become automatically disqualified once the new DTL is recorded on the books.
- The full amount of the DTL must instead be paid out directly to the selling shareholders as part of the escrow.
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