Due Diligence and Purchase Agreement Mechanics

Going deeper (optional). Up next: why an acquired pile of net operating losses (NOLs) is usually worth far less than its face amount -- the IRC Section 382 annual usage cap. An advanced aside you can skip on first pass and come back to anytime. Continue when you're curious.

Going Deeper -- acquired NOLs do not transfer freely. When a company with net operating loss carryforwards undergoes an ownership change (broadly, a more-than-50-percentage-point shift in its 5%-shareholder ownership -- most acquisitions qualify), IRC Section 382 caps the ANNUAL amount of pre-change NOLs the buyer can use at roughly the target's equity value at the change date multiplied by the long-term tax-exempt rate, an IRS-published rate that has recently sat in the low single digits (around 3-4%). Illustrative math with an assumed rate: a target with $500M of equity value at a 3.4% rate could use $500M x 3.4% = $17M of NOLs per year; against a 25% tax rate, that shields about $17M x 25% = $4.25M of cash taxes annually. So a $300M NOL balance is not a $75M tax asset arriving at close -- it is a stream of roughly $4M-a-year savings stretched over decades, and dollars arriving in year 15 are worth far less than dollars today. Value acquired NOLs as the DISCOUNTED stream of capped annual savings, never at face amount. The diligence table above lists NOL carryforwards under tax diligence for exactly this reason: the cap turns 'how big is the NOL?' into 'how fast can we actually use it?' AI prompt: "For this acquisition, the target has a large NOL carryforward. Walk me through how a Section 382 ownership change would cap annual usage, and estimate the present value of the NOLs under that cap versus their face amount."