How do net operating loss carryforwards (NOLs) affect valuation in an M&A context?

Answer

NOLs are accumulated tax losses that can offset future taxable income, reducing future cash tax payments. In an acquisition, NOLs can be valuable — but Section 382 of the IRS code caps how much an acquirer can use post-transaction (the annual limit is the target's market value × the applicable federal long-term tax-exempt rate).