A tax receivable agreement (TRA) is a legal document that is used in certain types of business transactions, primarily mergers and acquisitions (M&A). It allows the seller of a business to receive a portion of the tax benefits resulting from the acquisition, while also allowing the buyer to account for the transaction in a tax-efficient manner.
In a TRA, the buyer agrees to pay the seller a certain percentage of any tax savings that result from the acquisition. This can include savings from things like net operating losses, tax credits, and other tax attributes that the seller may have had prior to the acquisition. The TRA typically has a term of several years, during which the buyer is obligated to make these payments.
The purpose of the TRA is to provide a way for the seller to benefit from the tax attributes that they have built up over time, even after they have sold the business. Without a TRA, these tax benefits would usually transfer to the buyer as part of the acquisition, while the seller would not receive any additional compensation.
In addition to the financial benefits for the seller, a TRA can also be beneficial for the buyer. By structuring the acquisition in a tax-efficient manner, the buyer can potentially save a significant amount of money on their own tax bill. This can make the acquisition more attractive and provide additional value for the buyer.
However, TRAs can be complex documents that require careful attention to detail and understanding of tax laws and regulations. Both the buyer and the seller should work closely with tax experts and legal counsel to ensure that the TRA is properly structured and executed.
In conclusion, a tax receivable agreement is a legal document that can provide significant benefits for both buyers and sellers in certain types of business transactions. By allowing the seller to receive a portion of the tax benefits resulting from the acquisition, while also allowing the buyer to account for the transaction in a tax-efficient manner, a TRA can help to maximize the value of the deal for both parties involved. If you are considering an M&A transaction, it is important to work closely with experienced professionals to ensure that a TRA is structured and executed properly.