What Sellers Want in Their Tax Strategy for M & A Transactions
By Michael French, CPA, ABV, CFE, Managing Director
Buyers and sellers ultimately want the same outcome in a business transaction – they want the transaction to move forward quickly and with as few obstacles as possible. But their needs are different in many ways and often counter to each other, so advisors on both sides must put in the due diligence to ensure they represent the clients’ interests, tax-wise.
In our last article, we discussed the factors that buyers look for when putting together a tax-efficient business transaction. In this article, we will focus on what sellers want as they try to maximize their interests in a transaction.
Move Forward Quickly
Clients’ needs are complex on both sides of the table, but for the seller putting together a deal that will move quickly is often the key to a successful transaction. As the saying goes, “Time kills all deals,” meaning the longer a transaction takes to put together, the higher the likelihood it will fall apart. So, crafting a deal structure that meets the seller’s desire for a rapid, tax-efficient transaction while also providing what the buyer wants is crucial.
On the sell side of a deal, the client’s needs are guided by the goal of a tightly tax-efficient structure, including:
- No adverse impact of tax issues on valuation.
- Tax assets reflected in purchase price.
- Minimize tax costs of transaction.
- Limit payments on escrow.
- Limit representations/indemnifications.
To reach a final deal that is holistically structured to meet the client’s tax goals, we must tee up the seller’s tax issues before negotiations begin and following through during the sales process. That means:
- Identifying areas of tax exposure prior to negotiations.
- Dealing with tax exposure prior to and during the negotiation process.
- Summarizing the tax position in a tax due diligence report.
Evaluating a tax-efficient deal structure requires looking at all factors from different perspectives, including that of the buyer. A one-sided deal structure that benefits the seller at the cost of any of the buyer’s interests is not going to fly, so it won’t benefit the seller in the long run. Evaluating the deal structure should include:
- Pre-closing reorganization/carve-out planning.
- Avoidance of blocking periods.
- Minimization of transaction taxes.
- Anticipation of the buyer’s tax needs.
Before closing the deal, sellers must receive assurance on how the deal structure will impact several factors that influence their tax positions, including:
- Pre-closing carve-out.
- Tax treatment of sales proceeds.
- Transaction taxes.
- Avoidance or limitation of tax representations and indemnifications.
- Avoidance of unjustified reductions of sales price due to tax issues.
After the tax due diligence and deal structure phases are complete, ensuring that the Purchase and Sale Agreement reflects everything that has been agreed upon is critical to protecting the client’s interests.
For more information about how to add value in tax planning and due diligence to your business transaction, contact your PKF Advisory team member or:
Michael French, CPA, ABV, CFE