Module II· Special Situations ValuationIntermediate
Question
How do you value net operating losses (NOLs) in a DCF, and what change-of-control rules are critical?
Answer
NOL valuation
loss carryforward × tax rate × discount factor.
Deep diveShow more details
Example
$100m of loss carryforwards, 30% tax → $30m of future tax savings. PV at a 9% WACC over a 10-year usage trajectory: ~$17m. The critical trap in many jurisdictions is a change-of-ownership rule: NOLs are forfeited when more than 50% of the shares transfer to a new acquirer (within a defined window, e.g. 5 years) — the US analog is Section 382.
Consequence
in an LBO with a 100% equity takeover the NOL value can evaporate entirely — a difference of several hundred million dollars in some cases. Workarounds:
- Built-in-gains relief: NOLs are preserved to the extent of hidden reserves / unrealized gains in the assets.
- Restructuring/turnaround relief: rescue may be possible in a genuine restructuring (its EU-law status has been contested). Minimum-taxation rules: loss offsets above a threshold (e.g. $1m) may be limited to ~60% of profit → lengthening the usage period.
Pitch tip
'On every LBO/M&A, run change-of-control tax due diligence — NOL forfeiture can break a deal.'