By: Editorial Staff, Date: December 13th, 2022
The mergers and acquisitions (M&A) space rose to unprecedented heights in 2021 due to low-interest rates, easy access to capital, and a booming stock market. And although M&A activity slowed down in 2022, it is expected to bounce back to pre-pandemic levels in the coming year.
But with major geopolitical, financial, and regulatory headwinds ahead, buyers and sellers must keep up with current developments to successfully navigate the changing tides of M&A transactions.
Avoiding Tax Issues in M&A Transactions
The process companies undergo when negotiating M&A deals is fraught with issues, especially when it comes to taxes. Whether you’re planning to sell your business or preparing to buy one, tax compliance risks and issues may arise, which can complicate your deal and lead to hefty fines and penalties.
In this article, we’ll explore what companies need to do to prevent and mitigate risks.
Buyer-Side:
- Perform Tax Due Diligence
Have a good grasp of the sales and use tax compliance, audit history, and state and federal tax returns of the company you plan to acquire. This way, your firm can catch any red flags or anomalies that negatively affect your business.
- Review the Target Company’s Financials
Aside from sales and use tax risk, the purchaser will also inherit the company’s other state and local tax obligations. Thus, evaluating the target company’s state income and franchise tax nexus and compliance history, property tax history, unclaimed property reporting, and any other state or local tax items is of paramount importance.
- Consider the Market and Industry Outlook
Before closing a deal, it is important for buyers to understand the current trends, market outlook, and other commercial aspects, such as the competitive advantage and reputation of the company they are planning to acquire.
Seller-Side:
- Prepare an In-Depth Sell-Side Due Diligence Report
To ensure a seamless transaction, it is best to provide the prospective buyer with a comprehensive tax due diligence report. By having a third party examine the company’s financials, you can ensure that the sell-side report will accurately relay your organization’s information. Moreover, this can allow your company to address or resolve issues before they arise.
- Get multiple potential buyers
Increasing your ability to negotiate with other potential buyers puts your business at a significant advantage. Leverage the playing field by employing a competitive bidding process to auction to win a favorable deal and avoid being limited to one bidder’s demand.
- Hire M&A legal experts
Negotiating the best outcome in an M&A deal requires proven expertise and experience. With complex deal structures and legal risks involved, hiring an effective M&A attorney can save you from a huge headache and contentious issues. The M&A legal team you’ve chosen must be steeped in the shifting laws, legal considerations, and best practices in the M&A process to get to closing with minimum risks.
Since corporate tax due diligence issues are critical for any company going through an M&A deal, buyers, sellers, and other practitioners must stay updated with the latest trends and regulatory developments.
To learn more about the current M&A market and how to overcome potential state tax issues, join The Knowledge Group’s upcoming webcast: What’s Next in the M&A Market: Potential Hurdles and State Tax Considerations
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Sources:
https://www.foley.com/en/insights/publications/2022/10/no-crystal-ball-us-m-a-trends-predictions
https://www.eisneramper.com/sell-side-due-diligence-fs-blog-0322/
https://www.wolterskluwer.com/en/expert-insights/what-should-you-look-for-when-buying-a-business
