Sell-side
The value propositions of a sell-side deal advisory are to:
- Uncover potential issues before a buyer does
- Market the company in the best light possible
- Maximize the chances of a favorable price/deal terms
During the pre-transaction/sell-side process, a prospective seller has the opportunity, if effectuated well before the bidding process begins, to review transfer pricing policies and methodologies. The outgrowth of this process should be an assessment of where transfer pricing exposures exist and where either policies and/or master file and local file (i.e., country-specific) documentation reports are needed to help mitigate risk and possible penalties. Sellers should develop an inventory of the policies, including a quantitative analysis indicating whether actual results are aligned with such policies. A seller should then assess where additional transfer pricing documentation reports are required (i.e., either master file or local file).
Once a potential buyer executes a letter of intent (LOI), sellers should place relevant transfer pricing agreement(s) and transfer pricing report(s) in the data room and should consider including a quantitative analysis to demonstrate and support implementation of transfer pricing policies. Preparing such reports and analyses should assist in reducing or eliminating exclusions under representations and warranties insurance (RWI) policies as well as assisting in avoiding possible reductions in the transaction value. RSM US LLP’s M&A specialists can assist in preparing these reports and in structuring the transaction, including debt placement. This would include, but not limited to, the determination of debt capacity and terms.
Buy-side
The value propositions of a buy-side deal advisory are to:
- Gain a better understanding of the business and how it operates
- Identify key issues or risk areas
The value arises from opportunities to negotiate purchase price reductions, escrows, indemnities, etc.
A due diligence transfer pricing assessment can dynamically reshape key factors of a target screening from the buy-side perspective of a deal. Evaluating legacy risk in the target company can be increasingly complex if the target lacks proper transfer pricing. Risks from a misaligned transfer pricing model can lead to inaccuracy in the assessment of the target's business operations. Identifying key value drivers in the target's business model can depend on ensuring an accurate arm's-length return generated from a transfer pricing assessment of the target’s profile and its corresponding profits allocated by its economic centers. Key steps of a transfer pricing assessment may include:
- Review projected changes to combined business operations including head-office functions, supply chain, procurement, manufacturing and distribution, shared services, research and development (R&D), and intangible property (IP) ownership
- Value tangible or intangible assets pertaining to the transaction
- Prepare recommendations with respect to the application of transfer pricing to operational changes, and the potential effects to anticipated debt covenants and cash flows of the combined enterprise
- Design a detailed transfer pricing structure that enhances free cash flow and shareholder value of the combined entity
As such, a due diligence transfer pricing assessment incorporates conclusions and recommendations to address value generation from vetting potential synergies and identifying transfer pricing risks and opportunities. Preparation of a global transfer pricing strategy, execution of advanced pricing agreement(s) and establishing transition service agreement(s) for the combined enterprise can mitigate tax exposure risk and solidify future business plans.
Post-transaction, there is an opportunity to revisit the overall structure and strategy, to better integrate the target into an existing structure. Some examples may include making changes to historic methodologies, assisting in tax optimizing the supply chain (including possible IP migration), and assisting in effective utilization of free cash flow. Transfer pricing can be a critical component of an after-tax cash optimization strategy.
Key takeaway
Throughout an organization’s lifecycle, enhancement of transfer pricing policies can add value to your deal. Enterprises should consider reviewing transfer pricing policies if they are:
- Engaging in transition service agreements
- Transacting between a flow-through entity(s) and C corporation(s) within a legal entity structure
- Charging management/support service fees to related parties
- Operating in multiple U.S. states
- Holding multiple legal entities in foreign jurisdictions
- Considering migrating IP
- Requiring debt restructuring
RSM’s trusted advisors have a deep-rooted understanding of the opportunities and challenges presented by transfer pricing specifically within the M&A sector. From designing effective transfer pricing structures that enhance free cash flow and increase entity value to restructuring business operations following deal closures, RSM is equipped to assist on either side of a transaction.
