A tax receivable agreement (TRA) is a contractual agreement that can be used as part of mergers and acquisitions (M&A) transactions. The purpose of a TRA is to provide a mechanism for the buyer of a business to share in the tax benefits generated by the seller`s pre-transaction losses and other tax assets.

In an M&A transaction, the buyer may be willing to pay a higher price for the seller`s business if certain tax benefits can be realized. These benefits may include the ability to use the seller`s pre-transaction losses to offset future taxable income, or the ability to take advantage of tax credits or deductions that the seller had previously generated.

However, the tax benefits associated with these assets may not be fully realized by the buyer unless the seller agrees to share them through a TRA. Under a TRA, the seller agrees to pay the buyer a portion of any tax benefits that are realized in the future as a result of the pre-transaction assets.

The terms of a TRA can vary depending on the specifics of the deal. Some TRAs may provide for payment of a fixed amount or percentage of future tax benefits, while others may include a formula that measures the value of the benefits based on various factors such as the tax rate and the duration of the benefit.

One important consideration when using a TRA in an M&A transaction is the potential impact on the seller`s financial statements. In some cases, the seller may need to record a liability on their balance sheet to reflect the potential future payments under the TRA. This can reduce the seller`s reported net income and may affect their ability to obtain financing or other forms of credit.

In summary, a tax receivable agreement can be a valuable tool in M&A transactions where tax benefits are a significant consideration. However, the terms of the agreement should be carefully negotiated and the potential impact on the seller`s financial statements should be fully considered before entering into the agreement. An experienced tax professional or attorney can provide guidance to help ensure that the TRA is structured in a manner that meets the needs of both the buyer and the seller.