If you`re a business owner looking to sell your company, you may have come across the term “tax receivable agreement” (TRA). This can be an important factor in determining the value of your company and negotiating a sale. But what exactly is a TRA, and how does it work?
In short, a TRA is an agreement between the buyer and seller of a company that allows the buyer to benefit from any future tax benefits associated with the sale. These benefits are typically related to the purchase price and any subsequent tax deductions that the buyer is entitled to.
Here`s how it works:
1. The seller and buyer agree on a purchase price for the company.
2. The seller transfers ownership of the company to the buyer.
3. As part of the TRA, the seller agrees to pay the buyer a percentage of any future tax benefits associated with the sale.
4. The amount of the payment is based on a formula that takes into account the tax benefits as well as any limitations on the seller`s ability to use those benefits.
5. The payments are usually made over a period of several years, depending on the length of the tax benefit period.
Why would a buyer want a TRA?
From the buyer`s perspective, a TRA can be a way to increase the return on their investment. By receiving a share of the tax benefits associated with the sale, the buyer can potentially increase their cash flow and improve their overall financial position.
Why would a seller agree to a TRA?
For the seller, a TRA can be a way to make the sale more attractive to the buyer. By agreeing to share in the tax benefits, the seller can potentially increase the purchase price of the company and improve their overall financial position. Additionally, a TRA can be a way to mitigate the risk of any future tax liabilities associated with the sale.
Of course, like any legal agreement, a TRA can be complex and should be reviewed by legal and tax professionals before signing. But for buyers and sellers looking to maximize the value of a company sale, a tax receivable agreement can be a valuable tool.