A banker pitches to sell a family-owned manufacturer. Across town, a strategic buyer studies the same target's defenses. Both sides run a disciplined process, and the exam tests every stage of each.
The relationship opens with the engagement letter. You negotiate the fee (a retainer plus a success fee, often a percentage of deal value), the scope, exclusivity, the term, indemnification, and a tail period that pays the bank if the client closes with an introduced buyer after the engagement ends.
Then you identify the transaction. A sale of the entire company transfers the whole business. A divestiture sells one division or subsidiary. A spinoff distributes a subsidiary's shares pro rata to existing parent shareholders, creating a separate public company with no cash changing hands. A split-off lets shareholders exchange their parent shares for subsidiary shares, which shrinks the parent's share count.
Structure has two axes. In a stock sale, the buyer purchases the target's equity and inherits all assets and liabilities. In an asset sale, the buyer cherry-picks specific assets and assumed liabilities.
Common mistakes
- Confusing spinoff with split-off. A spinoff is a pro-rata distribution that leaves parent shares intact; a split-off is an exchange that reduces the parent's share count. Candidates reverse these constantly.
- Thinking 338(h)(10) helps the seller. The election gives the buyer a stepped-up basis. It usually increases the seller's tax, so the seller demands a higher price.
- Misordering marketing documents. The teaser comes before the CIM, and the NDA comes before the CIM. Sending a named CIM before a signed confidentiality agreement breaks the process.
Bottom line
- Sell-side begins with the engagement letter; deal types are whole-company sale, divestiture (sell a unit), spinoff (pro-rata stock distribution to holders), and split-off (holders exchange parent shares for subsidiary shares)
- Structure splits two ways: asset sale vs stock sale, and statutory merger vs tender offer
- A tax-free reorganization needs stock consideration plus continuity of interest; cash consideration is taxable; an IRC Section 338(h)(10) election treats a stock purchase as an asset purchase, giving the buyer a stepped-up basis
- Golden parachutes: IRC Section 280G and 4999 impose a 20% excise tax and deny the deduction on excess parachute payments once total payments reach 3x the executive's base amount
Exam shortcut
Document order is alphabetical-ish by exposure: Teaser (anonymous) before CIM (named, post-NDA) before bidding-procedures letter before management presentation. NDA gates the CIM. Tax-free needs stock, taxable means cash. And 338(h)(10) always points to the buyer's step-up. If a question asks who benefits from the election, answer the buyer. 280G math: trigger at 3x base, tax the excess over 1x base at 20%, and lose the deduction.
The full lesson (about 2,195 words, 15 min read) adds 2 worked examples, all 6 common mistakes, a self-check, free in the app.
Learning objectives
- C21
- C22
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