Business owners build and nurture their business for years. And when the time comes for them to walk away, owners often overlook the importance of due diligence work and preparation. Sellers, however, often aren’t sure what buyers are actually looking for, and that can affect outcomes. Ignoring or de-emphasizing tax due diligence can result in significant transaction erosion, or worse: failed transactions, lost time and distraction from normal business operations.
“By understanding what buyers are looking for and how transactions might be structured, sellers can put themselves in a position to court buyers who will provide the value the seller wants in the end,” says Keri Boergert, a principal with Clark Schaefer Hackett CPAs & Advisors.
Smart Business spoke with Boergert about sale types, due diligence and what buyers are looking for in an acquisition.
What is the difference between an asset deal and a stock deal when selling a company?
In a stock deal, the entire company is sold. That means everything transfers to the buyer, including all the existing tax liability risk. Stock deals are used when a seller wants to get rid of the entire business. Sellers would prefer a stock deal.
Companies that have significant liabilities, however, may not be able to find a buyer for a stock sale. That’s because, from a buyer’s perspective, the tax liability is often a significant factor in their decision. In an asset deal, typically only certain tax liabilities transfer to a buyer.
Sellers might use an asset sale if they’re unable to get the value they want from the sale of the company through a stock sale.
How do buyers and sellers prepare for a deal, whether stock or asset?
All deals involve financial due diligence and an exploration of the tax situation to determine the company’s fair value and the risk to the buyer. The process is also a factor in determining whether the best approach is a stock or asset sale.
What are the benefits of due diligence for sellers?
The benefits of tax due diligence for sellers are myriad. The seller can optimize the value of the transaction, minimize exposure to risks and liabilities, assess oversights before entertaining buyers, gain increased negotiation power, retain better control and credibility throughout the transaction cycle and have a higher probability of closing the transaction.
What might sellers uncover in a due diligence process?
Tax attributes, for one. This analysis can be valuable to a seller. Attributes such as net operating loss carryovers, business credit carryovers, minimum tax credits and capital losses should be considered.
There are other tax considerations, as well. Employment tax can be a risk — sellers should know the particulars of how their employees are classified. Sales and use tax is an area to watch — sellers need to understand the post-Wayfair particulars of their state’s online sales tax and economic nexus laws. Lastly, Wayfair has also had implications on income tax. Both sellers and buyers should be aware of relevant economic nexus standards for income, franchise and gross receipts tax in their state(s).
How can sellers get the most value in a transaction?
For sellers concerned about moving on from their business, due diligence can seem unnecessary. But by identifying and understanding their risks, the seller has a chance to clean them up. That gives sellers the best chance to get the highest value for their company.
Sellers should work with an accounting firm that has a transaction advisory services team with a history of M&A transaction experience before going to market. They can put the company through tax and financial diligence to show the seller what buyers will see and deal with any issues well before a sale process.
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