Tax Receivable Agreement

If you`re a business owner looking to acquire another company, you may have come across the term „tax receivable agreement“ (TRA). While it may sound like complex financial jargon, TRAs can have a significant impact on the financials of a deal. It`s essential to understand what they are and how they work before entering into any agreement.

A tax receivable agreement is an agreement between a buyer and seller that allows the buyer to receive tax benefits from the acquired company in the form of payments over time. After the acquisition, the buyer may be entitled to future tax benefits, including deductions or credits, related to certain items such as depreciation or net operating losses.

The seller, on the other hand, may be required to pay the buyer for these tax benefits. This payment is often calculated as a percentage of the tax savings the buyer will receive. For example, if the buyer expects to save $10 million in taxes over the next ten years, the seller may be required to pay the buyer a percentage of those tax savings each year.

While TRAs can be complicated, they can also provide significant financial benefits to both the buyer and the seller. For the buyer, TRAs can help reduce the cost of the acquisition by providing immediate cash flow through tax savings. The seller can benefit from a higher purchase price for the company in exchange for future tax benefits.

However, it`s important to note that TRAs can also be risky. There is always a chance that the tax savings anticipated by the buyer may not materialize, leaving the seller with a hefty bill to pay. Additionally, TRAs can be difficult to value accurately, which means that there`s a risk of overpaying or underpaying for the tax benefits.

In conclusion, tax receivable agreements can be an effective way to structure an acquisition deal to the benefit of both the buyer and seller. But it`s essential to have a thorough understanding of the agreement`s terms and potential risks before entering into any agreement. If you`re considering a TRA, it`s recommended to consult with a tax professional to ensure that it aligns with your business goals and objectives.