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Winning as a seller in a frenzied M&A market

Preparing for the tax impacts of a sale

INSIGHT ARTICLE  | 

Given today’s frenzied deal making pace, sellers are able to command top dollar if they go into the sales process ready to hit the ground running, which includes preparing for the tax impacts of sale. Jennifer Wiskus, a partner in Mergers and Acquisitions (M&A) Tax Services for RSM, and John Wozniczka, a partner with RSM’s state and local tax group, discuss how sellers can ultimately garner the best price with the least amount of headaches. 

How would you describe the M&A processes today?

Wiskus: In many sell-side processes where investment banks are involved, the processes are moving very quickly. And because those processes are moving so fast, our sell-side clients really need to be prepared going into the process. We are talking to our clients about the impact of the sale structure on capital versus ordinary income much earlier in the process.

Sellers are thinking much earlier in the process about the tax benefits they are going to be passing on to a buyer, the value of such tax benefits, and the potential positive impact on the sale price. On the flip side, sellers are trying to avoid any tax issues that need to be remediated that may have a negative impact on the sales price and trying to determine if any issues can be remediated to minimize any potential purchase price adjustment. If a seller needs to remediate any tax issues, planning and starting the remediation well in advance of a sales process will help the sales process go more smoothly and can minimize any negative tax impact. The most frequent exposure we see requiring remediation is sales tax exposures, which can take several months to a year to fix with tax authorities depending on the complexity of the situation.

Wozniczka: Sell-side due diligence serves two purposes. First, it is a validation of the state of a company’s tax compliance processes—having a report indicating that everything is handled properly goes a long way in helping to ensure a smooth sales process. It adds value and speeds up the sales process. 

The other benefit is that it allows sellers to identify potential problems before they become major problems during that transaction process. When a company conducts sell-side tax due diligence, the seller is giving itself the opportunity to understand and resolve any possible issues. Waiting until the due diligence process for a buyer to find tax issues can sometimes make a tax issue bigger, as the seller will have little time to gather data and perform a thorough analysis.

How sped up has the sales process become and are sellers preparing earlier as a result?

Wiskus: How quickly a deal moves is based on many factors. Deal speed will also determine the timing for sales preparation and the due diligence process. We are seeing more interest in preparing for sell-side transactions from a tax perspective and preparing sell-side tax diligence reports. Still, the interest in sell-side quality of earnings reports tends to be much greater than for sell-side tax diligence reports.

Sellers want to avoid deal fatigue and increase deal value, so it makes sense to do a quality of earnings report and sell-side tax reports, but it is not a one-size-fits-all approach. It depends on the seller, the complexity of the deal and the size of the deal. No matter what the deal dynamics are, generally the earlier you start preparing for sale the better.

How can tax issues affect the timing of a deal?

Wiskus: If the tax issues are complex, we have seen deals where it takes over a year to remediate issues and prepare for sale, especially if there are issues that the seller needs to work through with the IRS or work through state tax authorities. Simpler tax issues don’t take as much time to address.

The best thing to do if you are contemplating a sale is to pause and really think about your tax situation. Lots of sellers are busy running their businesses and don’t have excess capacity to go over every tax issue. Taking time prior to sale to work with an advisor to evaluate potential tax issues will allow sellers to weed out minor tax issues and address larger concerns. In many instances, after that initial evaluation there may be nothing to do and that allows sellers to confidently go into the sales process.

Wozniczka: If there are no issues, you can get through sell-side due diligence relatively quickly. When you do run into issues, they take time to sort out because you are dealing with a lot of transaction-level detail. Resolving issues, especially on the sales and use tax side, does take time and may require contacting customers to get the necessary documentation to support certain exemption claims. Ideally, six months would be enough time to identify issues and get them fixed if needed, but we have certainly done it in less time. That said, having a year to six months is ideal. Anytime there are multiple entities, sell-side due diligence tends to take longer.

Wiskus: I would also add that the sales processes for family-run businesses go a little longer. These businesses just don’t go through as many transactions as a private equity seller would go through, and their business is their heart and soul.

This interview was first published on MERGERS&ACQUISITIONS


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