Take-Private Transactions Explained: Why the Eliminated 'Funding Rule' Favors Strategic Buyers (2025 Tax Update)

The year 2026 marks a turning point in the world of mid-market and large-cap M&A. For nearly a decade, strategic corporate buyers were fighting with one hand tied behind their backs due to the onerous "funding rule" of Section 385. But as the smoke clears from the latest regulatory shifts, a new landscape has emerged—one where the going private advantages for established corporations have been restored. For board members and executives, the take-private transaction process is suddenly much more attractive.

In this analysis, we will explore why the revocation of the Section 385 "funding rule" is a historic win for strategic buyers. We will contrast the strategic buyer vs financial buyer dynamic in light of these changes and look at how M&A debt financing rules have been simplified to allow for more aggressive, tax-efficient bidding. Whether you are a publicly-traded firm eyeing a private competitor or an Illinois business considering a management-led buyout, the 2025 corporate tax law changes have shifted the deal-making math in your favor.

What Is a Take-Private Transaction? The Ultimate 2025 Guide for Corporate Leaders

A take-private transaction, at its core, is the process of a publicly-traded company being acquired and its stock being delisted from a stock exchange. Historically, this has been the domain of private equity "financial buyers" who specialized in leveraged buyouts (LBOs). These firms use "dry powder" and aggressive debt to take a company off the public market, restructure it away from the scrutiny of quarterly reports, and eventually exit for a profit.

However, the 2026 landscape is seeing a surge in "strategic" take-privates. This is where an established corporation (a "strategic buyer") acquires a public competitor or an upstream supplier to achieve synergies. The going private advantages are clear: lower regulatory compliance costs, freedom from short-termist public shareholders, and the ability to integrate the target's technology or operations more deeply into the buyer's core business.

As noted by Bloomberg Markets, the primary hurdle for strategic buyers has always been financing. Strategic buyers often use intercompany loans and internal cash pools, which—until recently—were subject to aggressive recharacterization rules that could turn their debt into taxable equity. That hurdle has now been removed.

The 'Funding Rule' Is Gone: How Revoked Section 385 Regulations Change M&A Financing

The "funding rule" (and its associated "per se" recharacterization rule) under Section 385 was originally designed to prevent "earnings stripping"—the practice of using intercompany debt to move profits into lower-tax jurisdictions. In practice, however, it became a massive compliance nightmare for any corporation involved in M&A.

The "Per Se" Problem

Under the old rule, if a company made a distribution (like a dividend) and then issued an intercompany loan within 36 months of that distribution, the IRS could "per se" recharacterize that debt as equity. This meant the interest payments were no longer tax-deductible, and the principal repayments were treated as taxable dividends. For strategic buyers who frequently move cash between subsidiaries, this rule made it almost impossible to use internal debt to fund a take-private transaction process.

The 2025 Revocation

In May 2024, the IRS finalized regulations that revoked the "funding rule." We have now returned to a "facts-and-circumstances" analysis. This means the section 385 regulations impact is now focused on the economic substance of the loan—whether there is a written agreement, a reasonable expectation of repayment, and an arm's-length interest rate. For corporate treasuries, this is a breath of fresh air.

Strategic vs. Financial Buyers: Why the New Tax Landscape Creates a Clear Advantage

The dynamic of strategic buyer vs financial buyer has historically favored the latter in take-private deals. Private equity firms typically use "clean" acquisition vehicles with no distribution history, meaning they were never at risk from the Section 385 funding rule. Strategic buyers, by contrast, were penalized for their existing corporate success and dividend history.

The 2026 tax landscape has leveled the playing field. Strategic buyers can now leverage their existing balance sheets and intercompany cash pools without the risk of an accidental $100 million tax bill. This provides three distinct advantages:

• Lower Cost of Capital: Strategic buyers can often borrow from their own subsidiaries or use their higher credit rating to secure cheaper debt than a stand-alone PE vehicle.
• Greater Synergies: A strategic buyer can justify a higher bid because they can extract more value from the target's operations than a purely financial investor.
• Simplified Integration: The removal of the M&A debt financing rules means that the post-merger movement of assets and debt is no longer a tax minefield.
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As we've explored in our companion guide on maximizing 2026 exit value, the ability to bid aggressively in a tax-clean environment is the key to winning the best deals. Strategic buyers are no longer the "underdogs" in the take-private arena.

Positioning for 2025: Key Actions for Illinois Businesses Eyeing a Take-Private Deal

For mid-market and large businesses in Illinois and beyond, the next 18 months represent a unique window of opportunity. Whether you are a potential target or a strategic acquirer, you must position yourself to capitalize on the 2025 corporate tax law changes.

1. Conduct a "Debt-Equity" Audit

Review your intercompany lending practices under the new "facts-and-circumstances" standard. Ensure all loans have proper documentation and arm's-length terms. This is critical for defending your interest deductions under the renewed IRS scrutiny that often follows the revocation of a rigid rule.

2. Evaluate "Going Private" Efficiencies

For mid-cap public companies, the cost of being public has never been higher. Evaluate whether a management-led buyout or a sale to a strategic partner provides a more efficient path for growth. The simplified M&A debt financing rules mean that a take-private deal is now more affordable and less legally risky.

3. Leverage "Synergy" Valuations

If you are a private company looking for an exit, look beyond the traditional PE firms. Reach out to strategic corporate buyers who may have been "sitting on the sidelines" due to financing complexities. Their ability to use internal debt may allow them to outbid financial competitors. Use our valuation tools to identify these potential synergies.

According to Reuters Finance, the trend toward strategic consolidation is expected to accelerate through 2026 as corporations deploy record amounts of sidelined cash. Being "deal-ready" is the only way to capture this premium.

Conclusion

The revocation of the Section 385 "funding rule" is more than just a technical adjustment; it's a strategic reset. By removing the arbitrary barriers to intercompany debt, the government has empowered strategic buyers to once again dominate the take-private transaction process. For business leaders, this means more competition, higher valuations, and a more straightforward path to growth.

At Jaken Equities, we specialize in identifying these shifts before they hit the mainstream. We help our clients navigate the complexities of the 2025 corporate tax law changes to ensure they are on the right side of the deal. Whether you are buying or selling, the new tax landscape requires a partner who understands the high-stakes world of strategic M&A.

The key phrases for your 2026 strategy are: take-private transaction process, strategic buyer vs financial buyer, section 385 regulations impact, M&A debt financing rules. If you are ready to explore the going private advantages for your firm, contact Jaken Equities today for a confidential consultation.