Tax implications are an important factor to consider in the process of completing a business merger or acquisition.
But problems can arise when you alter the path of a deal simply to avoid a particular change in the tax laws or take advantage of a law that will soon be phased out.
“It’s just one of many things to take into consideration,” says Corinne Baughman, a partner with Moss Adams LLP.
“We don’t want the tax tail to wag the dog. I’ve seen plenty of deals where the client just couldn’t get it done in time. They decided they weren’t going to race just for that. It’s more important to make sure the deal is done correctly.”
Smart Business spoke with Baughman about how to make sure the deal you’re negotiating is right for your company.
What one step can help you make a more informed decision about a potential business transaction?
It’s always helpful if you have people on your negotiating team with experience in your industry, because they’ll know the nuances that come into play, especially as they relate to the types of assets and liabilities you’re negotiating over.
It might not be the person you use on a day-to-day basis, but rather somebody with a specific skill set who would be helpful in this situation.
How do you manage the people involved in this process?
If it’s a group of people who do this kind of work all the time, they know how to get through it. The individuals know that they can’t be seen as the one holding things up, so they keep everything moving forward. They have a working list of who has expertise in certain areas, and it’s all very organized.
One factor is the size of the deal. If you’re doing a $10 million deal, you shouldn’t have more than a handful of people involved. If it’s a $100 million deal and it’s in a highly regulated industry, you’re going to have to get more people involved.
What are some things to consider when assessing the merits of a potential deal?
In every deal there’s usually one side in the driver’s seat. So that side is going to drive the initial conversations about how the deal is going to be structured. Is it a purchase of assets? Is it a purchase of stock? Is it a purchase of limited liability company interests? You get into this process, and you start moving the boxes around.
Look at the proposed structure from a legal perspective and recognize the tax implications of the steps you need to go through prior to any merger or acquisition. There’s never just one step.
You also need to be a pessimist. Don’t expect that whatever positive thing you think is going to happen down the road will happen. If it’s not a good enough deal today— based on the money you get in cold cash — then it’s not a good enough deal period.
How important is it to look beyond the day the deal closes?
It is easy to lose focus because you’re thinking, ‘Hey, the deal is closing on Monday.’
You have the structure down, everyone’s happy and you really haven’t taken the time to model out what happens a year from now if you’re profitable.
What happens if you’re not profitable? What if you don’t hit your targets? What else could impact any future earn-out you’re supposed to get?
You need to not only look at how to get through the transaction, but also at what happens six months from now, a year from now, three years from now, etc.
What are all the things that could happen? Does everybody fully understand what the implications could be if one of those things were to happen?
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