Tax planning is a key component of mergers and acquisitions for both buyers and sellers. It can impact the deal price and play a role in the post-transaction integration.
Tax issues are probably more stressful for sellers, because if there are tax exposures they may need to make representations and warranties. It also can have a bigger impact on the seller’s individual taxes. However, from a buying standpoint, if you want management to stay on but there’s a tax problem, say with executive compensation plans, that can have an adverse effect on operations prospectively.
“It’s one of those things where lots of times people forget, and they bring tax in, in my mind, a little too late,” says Mark Reis, CPA, a tax partner in the Bay Area at Moss Adams LLP. “Or maybe they don’t have a clear understanding of how some of the tax considerations work because they are focused on operations or the deal, and then it can impact purchase price and the taxes of selling shareholders.
“Without the proper planning, you see a lot of things that do go wrong, versus go right,” he says.
Smart Business spoke with Reis about tax planning tips for M&A activity.
Why bring tax into a deal early?
It’s imperative to get all your advisers to the same table early, so they’re communicating throughout the process. If you’re worried about professional fees, remember with the size of these transactions, it’s a comparatively small cost to ensure everybody is on the same page. And many times you’ll end up spending more on professional fees than if you’d been proactive from the start.
Another problem with waiting is you may not get the maximum tax value or benefit. For example, on a recently closed deal, if the company had brought in experts six months earlier, it likely could have saved $1 million in California tax. It’s a matter of having the right people with the right expertise at the table together in order to plan versus react.
What’s important to know about the deal’s structure and its tax effects?
Often business leaders can be unclear on the differences between a stock transaction and an asset purchase, or a tax-free or partially tax-free transaction. Understanding available structures gives both buyers and sellers flexibility to maximize the benefits. For instance, one transaction started as a tax-free merger, but it became mutually beneficial to restructure it as an asset purchase.
Your advisers can help find the best and safest answer, looking at how to manage all the risks, including income tax. Getting a clear understanding of all issues both before and after a transaction closes helps eliminate unnecessary stress or surprises. There are a lot of traps for the unwary; take in as much as possible about the whole picture.
How should buyers attack tax exposures with the target business?
During the diligence process, look at all the exposures, including transactional taxes like sales and use tax, or income tax in other states where activities haven’t been reported. These liabilities may decrease your purchase price offer, or lead to requiring the seller to clean things up prior to doing the deal.
You want to know what you’re buying. With one transaction, the change-in-control agreements were drafted unclearly, which led to problems with the golden parachute rules and payroll taxes. Not only do you have to meet all compliance burdens, but also the last thing a buyer wants is to alienate a key employee who was part of the target.
Is there anything else to keep in mind?
When running projections, you need a solid understanding of the pro forma financial, the purchase accounting adjustments and what kind of resource strain the integration will put on your organization.
When budgeting, project out from both an EBITDA and tax standpoint. Do you have to do fair value accounting? Are you inheriting a liability or is it a true asset? If it’s an asset, what’s the value? How will you handle the transaction costs, which may or may not be deductible?
And the work isn’t done after the deal closes. Post-transaction actions can add value. Again, you need a strong relationship with your advisers, so everybody is talking as issues bubble up. Sometimes it can be a great tax answer, but it doesn’t make sense operationally — but at least you can make an informed decision. ●
Mark Reis, CPA, is a tax partner in the Bay Area at Moss Adams LLP. Reach him at (415) 677-8323 or [email protected].
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