Isaac Grossman Shares Insights on Structuring Tax-Free Rollovers in Add-On Acquisitions
Partner Isaac Grossman, chair of Morrison Cohen’s Tax Practice, authored an article for Bloomberg Tax titled “How to Structure Tax-Free Rollovers in Add-On Acquisitions.” The piece offers practical guidance for private equity sponsors on tailoring add-on acquisition structures to the unique circumstances of their portfolio companies in order to maximize tax efficiency.
Despite market headwinds and uncertainty slowing broader M&A activity, private equity buyers continue to pursue strategic add-ons. These transactions often involve rollover equity from sellers – a tool that can help align interests post-closing and defer capital gains taxes. But structuring rollovers to qualify as tax-deferred can be complex and highly dependent on the acquirer's legal and tax structure.
In the article, Isaac outlines three common models used in private equity deals:
Pass-Through Model: Generally the most straightforward for tax-deferred rollover. While rollovers into partnerships are typically tax-deferred, built-in gain allocation under IRC §704(c) can result in disproportionate income to sellers. Tax distributions can help manage this issue but may be resisted by buyers.
Hybrid Model: A pass-through parent holding a corporate subsidiary. This structure may defer built-in gain issues until exit, but can create complications for other investors sensitive to active business income. Creative structuring—such as the use of blocker entities—may be needed to preserve tax deferral.
Corporate Model: Most complex from a tax-deferral standpoint. Options include reorganization or contribution alternatives, both of which come with strict requirements. In some cases, a restructuring of the parent entity may be necessary to achieve a rollover structure that meets the needs of both buyer and seller.
Isaac notes that while there’s no universal solution, understanding the tax implications of each structure is essential to successfully navigating private equity dealmaking. With thoughtful planning and legal guidance, sponsors can design structures that support long-term growth strategies while minimizing tax friction.
Read the full article, attached below.
Contacts
- Isaac Paul Grossman Partner & Chair, Tax
- igrossman@morrisoncohen.com
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