Due Diligence & Deal Structuring Flashcards

In an asset purchase transaction, which of the following is a primary advantage for the buyer?

Answer: The buyer receives a step-up in tax basis for acquired assets

In an asset purchase, the buyer can step up the tax basis of acquired assets to fair market value, increasing future depreciation and amortization deductions and reducing taxes.

An earnout provision in a deal structure requires the seller to receive additional consideration contingent upon:

Answer: The target achieving specified future financial performance milestones

An earnout ties a portion of the purchase price to future performance metrics such as revenue or EBITDA targets, bridging valuation gaps between buyer and seller.

A 'material adverse change' (MAC) or 'material adverse effect' (MAE) clause in a purchase agreement primarily allows:

Answer: The buyer to terminate the agreement if a significant negative event occurs before closing

A MAC/MAE clause gives the buyer the right to walk away from the deal without penalty if a significant adverse development materially impairs the target's business before closing.

In deal structuring, an indemnification escrow arrangement typically serves to:

Answer: Provide the buyer with recourse for post-closing breaches of representations and warranties

An escrow holdback retains a portion of the purchase price to compensate the buyer for losses arising from the seller's breach of representations, warranties, or indemnification obligations.

A 'working capital adjustment' in a purchase agreement is designed to:

Answer: Ensure the buyer receives the target with a normal level of operating liquidity at closing

Working capital adjustments true-up the purchase price so that the buyer receives the target with a normalized level of net working capital, preventing the seller from draining cash before closing.

A 'representations and warranties' section in a purchase agreement primarily serves to:

Answer: Allocate risk by having each party certify that certain statements of fact are true

Representations and warranties are factual statements made by each party that allocate risk; if a rep proves false, the harmed party may seek indemnification.

In a leveraged buyout (LBO) transaction structure, the acquisition vehicle is typically:

Answer: A newly formed holding company that incurs debt to purchase the target

LBOs use a newly formed 'newco' shell entity that borrows the majority of the acquisition financing, using the target's assets and cash flows as collateral.