What is an effect of capital gain taxes on cash offers in acquisitions?

Capital gain taxes are levied on the profits made from the sale of assets, including stocks and other investments. When a cash offer is made in an acquisition, the sellers of those assets may be subject to capital gains tax on the profits they realize from the sale.

This tax burden can influence the attractiveness of a cash offer. If sellers realize that they will incur a significant tax liability upon acceptance of a cash offer, they may perceive the offer as less attractive unless it is sufficiently high to compensate for the tax hit. In this context, if a buyer wants to entice sellers to engage in the transaction, the cash offer may need to be increased to account for the taxes they will pay, effectively diminishing the implied value of the offer itself to the sellers.

Thus, capital gain taxes typically lead to a decreased attractiveness of cash offers unless the offer is adjusted to a higher level to offset the expected tax consequences. This consideration is crucial for structuring the deal to ensure all parties find it beneficial.