Case Studies
Buy-Side Acquisition of Professional Services Firm from Founder with Integrated Merger Structure and IRC § 336(e) Tax Election
Our clients, a small group of attorneys, engaged our firm to represent them in the acquisition of a prominent plaintiff litigation law firm from its founder, who had built the practice over decades into a well-established regional firm. The transaction involved acquiring a substantial majority of the firm’s equity — structured as a combination of newly issued shares and shares purchased from the founder — with the founder retaining a minority interest and remaining involved in the business pursuant to an employment agreement. At an implied enterprise value of approximately $50 million, this was a complex and high-stakes transaction for individual attorneys acquiring a professional services firm through a newly formed acquisition vehicle, and every aspect of the deal required careful structuring to protect our clients while managing the unique regulatory constraints that govern the sale of a law firm.
The transaction structure itself was among the most technically demanding aspects of the engagement. Rather than a straightforward share purchase, the deal was structured as a share purchase immediately followed by a reverse merger of the acquisition entity into the target firm — with the result that our clients emerged post-closing holding equal majority stakes in the surviving professional corporation, directly, without an intermediate holding company. Coordinating a share subscription, a share transfer, a post-closing merger, and all associated closing deliveries as a single integrated transaction required precise sequencing of legal documentation and close coordination with regulatory counsel to ensure the professional corporation structure remained in compliance with applicable rules governing attorney ownership of law practices.
The tax structuring of this deal was equally significant. We negotiated a Section 336(e) election on behalf of our clients, which allowed the transaction to be treated as an asset purchase for federal income tax purposes despite being structured as a stock sale — enabling our clients to obtain a stepped-up basis in the underlying assets of the firm. This election required the seller to recognize additional tax on the deemed asset sale, and we negotiated a multi-million dollar gross-up payment from our clients to the seller to compensate for that incremental tax burden, structured as an estimated amount at closing subject to a post-closing true-up based on actual tax impact. Getting the gross-up mechanics right was critical: the amount had to be calibrated carefully to make the seller whole on an after-tax basis without overcompensating, and the true-up provisions had to provide our clients with enforceable rights if the initial estimate proved high.
Contingency exposure was a significant diligence and structuring concern. The target firm carried contingency fee interests in a substantial inventory of large litigation cases, the values of which were uncertain and highly variable. We negotiated the carve-out and assignment of these interests back to the seller at closing, removing the contingent upside and downside of those matters entirely from the acquired business. This protected our clients from inheriting unknown and potentially material exposure, while giving the seller the opportunity to retain recoveries from matters he had developed.
The escrow, post-closing purchase price adjustment mechanics, and indemnification framework — including a negotiated deductible, mini-basket, and indemnity cap calibrated to the size of the transaction — were negotiated to appropriately balance seller exposure against the nature and size of the transaction. Given the professional services context, we also paid close attention to the representations and warranties relating to the firm’s client matters, pending litigation, and regulatory compliance, tailoring the disclosure schedule review to identify any practice-specific exposures that standard commercial due diligence would not surface.
The personal guaranty obligations our clients assumed — covering the seller’s affiliate real estate leases and the amended and restated shareholders’ management agreement — were negotiated with defined scope and term limitations to avoid creating open-ended personal liability for our clients beyond the obligations directly tied to the transaction. Employment agreements for both the founder and a key senior employee were negotiated concurrently with the purchase agreement and executed simultaneously at closing, ensuring continuity of the firm’s leadership and institutional knowledge during the ownership transition.
The transaction closed as a single integrated event, with the share acquisition and reverse merger consummated simultaneously and our clients emerging as the direct majority owners of the surviving professional corporation. The Section 336(e) election was properly effectuated, and our clients obtained the intended step-up in asset basis. The contingency carve-outs were cleanly accomplished through assignment agreements executed at closing. Our clients assumed the business with a well-defined indemnification framework, a funded escrow, and employment agreements in place for the firm’s most critical personnel — providing stability and protection on both sides of the closing table.
This case study is provided for illustrative purposes and describes the nature of services rendered. Certain details have been generalized to preserve client confidentiality.