September 23, 2026
By:
Robert E. Harig
The Basics of an F Reorganization in an M&A Deal
When buying or selling a business, one of the most important negotiations often involves the structure of the transaction. Buyers frequently prefer an asset purchase because it can provide valuable tax benefits. Sellers, on the other hand, prefer to sell stock because it can be simpler and may produce more favorable tax treatment.
An F reorganization can help bridge that gap.
Under Section 368(a)(1)(F) of the Internal Revenue Code, an F reorganization is a tax-free restructuring involving a change in the identity, form, or place of organization of a single corporation. In the M&A context, it is used to restructure ownership of the seller’s business immediately prior to closing in order to allow the parties to achieve the benefits of both a stock sale and an asset sale.
How Does an F Reorganization Work?
The details may vary depending on the transaction, but the basic structure is as follows. First, the owners of the existing seller company create a new holding company, often called “Holdco.” The shareholders exchange their existing stock in the existing company for stock in Holdco. As a result, the existing company becomes a subsidiary of Holdco.
If the target company is an S corporation, additional steps may be taken, such as making an election for the existing company to become a Qualified Subchapter S Subsidiary. In some transactions, the existing corporation is converted into an LLC.
The key idea is that, from a tax perspective, the corporate structure is reorganized without treating the owners as having immediately sold their business during the restructuring process. The business, its assets, and its ownership generally continue in substantially the same form until the acquisition transaction by the buyer.
After the F reorganization has been completed, the buyer acquires all the ownership interests in the seller’s business from Holdco, often through a combination of cash and rollover equity in the buyer or in the buyer’s parent company.
Advantages for Buyers
One of the biggest benefits for a buyer is the potential for a tax basis step-up. An asset purchase generally allows the buyer to establish a new tax basis in the assets of the acquired business. This creates additional future tax deductions through depreciation and amortization.
The original operating company can retain its existing Employer Identification Number (EIN). This may help reduce administrative disruption involving licenses, customer and supplier contracts, and bank accounts.
The structure may also reduce the need for certain consents and approvals that could otherwise be triggered by a direct change in ownership or control.
Advantages for Sellers
For sellers, the favorable tax effects of an F reorganization can make the business more attractive to potential buyers and may lead to a higher purchase price.
It can help sellers accommodate a buyer’s desire for asset purchase tax benefits without requiring the parties to structure the entire transaction as a traditional asset sale.
An F reorganization may also provide greater flexibility regarding rollover equity. If the seller keeps or reinvests a portion of its ownership interest in the business following the transaction, the structure may allow taxes to be deferred on the portion that is rolled over, subject to the applicable tax rules.
A Flexible M&A Tool
An F reorganization is not appropriate for every transaction, and the rules must be followed carefully. Tax, corporate, and transaction documents must all be coordinated before the deal closes.
However, when properly structured, an F reorganization can be a valuable tool for bringing buyers and sellers together. By combining potential tax advantages with operational continuity and rollover flexibility, it may help both sides reach a deal that better meets their objectives.
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Author
Partner
Phone: 847-384-5938
Email: rharig@robbinsdimonte.com |