Actionable federal tax insights for sale of businesses in 2024

When preparing for and executing mergers and acquisitions (M&A), strategic and financial tax advice is important for businesses, impacting the entire trajectory of the deal and the future of the combined entity. Some of the reasons businesses should deeply care about obtaining expert advice in these areas include:

• Optimizing financial structures: Expert tax advice can help businesses structure the deal in a tax-efficient manner. Strategic planning can minimize tax liabilities, maximize tax benefits and optimize the financial structure to ensure the best use of resources post-merger.
• Mitigating risks and liabilities: M&A transactions come with inherent financial risks and potential tax liabilities. Professional advice can identify and assess these risks, allowing businesses to develop strategies to mitigate them effectively. This proactive approach safeguards the financial health of the new entity.
• Compliance and regulatory alignment: Tax laws and regulations can be complex and ever-changing. Engaging tax advisors ensures compliance with relevant laws and regulations, avoiding penalties and legal issues that could arise from oversight or misinterpretation of tax codes.
• Unlocking synergies and value creation: Strategic tax advice enables businesses to identify synergies that may otherwise be overlooked. It helps in identifying cost-saving opportunities, maximizing operational efficiencies and creating value beyond the sum of individual entities, enhancing the overall success of the merger.
• Enhancing decision-making: Informed decisions are critical in M&A. Financial tax advice provides crucial insights and scenarios — empowering businesses to make informed decisions at every stage of the transaction — from negotiation to integration.
• Long-term financial health: The effects of tax decisions made during M&A can have long-term implications on the financial health of the newly formed entity. Sound financial tax advice ensures that the merger aligns with the long-term strategic goals of the business, setting a solid foundation for sustainable growth.

Strategic and financial tax advice during M&A is not just about meeting regulatory requirements — it's about optimizing opportunities, mitigating risks and laying the groundwork for a financially healthy and successful combined entity. Businesses that prioritize this advice gain a competitive edge and set themselves up for long-term success in the marketplace.

Preparation for a sale or exit begins well before entering into a transaction. Planning often begins with considering the owner’s end goal, whether it is a complete exit, taking some money off the table or bringing in capital from an investor to assist with growth. Preparing for such an event requires careful planning for both tax and nontax considerations. There are several areas of focus to consider, including:

Preparation for the due diligence process

• Assemble data room: Significant emphasis will be placed on an entity’s financial and tax information during the due diligence process. Gathering this information in advance and proactively addressing any gaps will alleviate pressure.
• Address potential questions: The assembled data can help sellers preempt any significant questions that may arise during the diligence process.

Opportunities to reduce perceived risk to buyer

• Consider sell-side due diligence and understand potential exposures: Sell-side tax due diligence will provide a snapshot of the company’s tax compliance and potential risks or exposures. Identifying exposures and mitigating the corresponding risk (including through amended returns and voluntary disclosure agreements) will help maximize purchase price and improve deal terms. This due diligence typically covers federal, state and local taxes, including indirect taxes such as sales and use, payroll and property and international tax.
• Financial due diligence/quality of earnings (QOE): In addition to sell-side tax due diligence, additional benefits can be derived by undertaking sell-side financial due diligence or QOE review prior to entering the transaction process.

Consider key-employee incentives/retention programs

Sellers will often want to provide key employees with compensation such as equity, options or bonuses to ensure post-acquisition targets are met. The tax implications of these incentives vary greatly depending on their structure.

Modeling sale structure alternatives

Deals may be structured as either taxable or tax-free transactions and the terms can include the sale of equity/stock or assets. The structure of the transaction, as well as the type of consideration received (cash vs. equity), will impact the tax consequences of the transaction to the sellers. Modeling the tax implications of various structuring alternatives, including an estimate of potential after-tax proceeds, provides the seller with the information needed to best accomplish their goals for the sale.

The deal process can be very demanding and can take up a considerable amount of the owner’s and management’s time, all while continuing to operate the business. As such, proactive planning for a potential transaction can provide a number of benefits and ensure an efficient and successful sales process. We recommend engaging experienced M&A advisors two years in advance of a potential transaction.

In the aftermath of a private equity transaction, the need for robust infrastructure and strategic planning cannot be overstated. When a company undergoes such a transition, it often experiences significant changes in its structure, operations and financial strategy. To navigate this transformation successfully, having a solid infrastructure and plan of action in place is crucial.

Infrastructure in this context refers not only to a business’ physical assets and technological systems, but also to the organizational framework, processes and talent within the company. Post-private equity investment, infrastructural upgrades may be required to align with new strategies or goals introduced by the incoming stakeholders. This might include revamping IT systems, enhancing production facilities or restructuring departments to improve efficiency.

Moreover, meticulous planning is essential to steer the company through this transition phase. A well-defined road map helps in managing changes, setting achievable milestones and allocating resources effectively. This planning must encompass financial strategies, risk management, human resources and marketing tactics to ensure a smooth transition without disrupting day-to-day operations.

A lack of proper infrastructure or planning can result in operational inefficiencies, financial instability and potential setbacks in achieving the desired objectives set forth by the private equity investors. Without the right infrastructure and planning, the company might struggle to adapt to the new demands and objectives, hampering growth and potentially impacting the overall success of the post-private equity phase. Therefore, a focused approach on establishing a resilient infrastructure and meticulous planning is integral to facilitate a successful transformation of post-private equity involvement.

Private equity portfolio companies often employ various growth strategies that can significantly impact their tax positions. These strategies, while aiming for expansion and enhanced profitability, can have diverse tax implications that warrant careful consideration and planning by all involved.

Potential growth strategies discussion

One prevalent growth strategy involves mergers and acquisitions. When a portfolio company acquires or merges with another entity, the tax implications can be multifaceted. They may include considerations related to the purchase price allocation, tax attributes of the acquired entity, potential changes in tax structures and issues concerning depreciation and amortization. Effective planning is crucial to optimize tax benefits while complying with the rules in such scenarios.

Another common strategy involves international expansion. As portfolio companies expand into global markets, they face a complex web of international tax regulations. Tax implications may include transfer pricing, withholding taxes, foreign tax credits and local tax regulations. Ensuring tax efficiency while navigating diverse international tax laws is often complex and is critical for expansions to succeed.

Organic growth strategies like research and development investments or capital expenditures might offer tax benefits such as tax credits, or accelerated depreciation deductions. These strategies aim to spur innovation and improve competitiveness while also providing potential tax advantages for the company.

Debt financing, a strategy often used to fuel growth, also has tax implications. The tax deductibility of interest payments can impact the overall tax position of the company. Leveraging debt in the capital structure can provide tax advantages but also requires careful management to avoid excessive leverage that might adversely affect the company’s financial health.

Various growth strategies employed by private equity portfolio companies can have significant tax implications. Proper tax planning and compliance measures are essential to optimize tax benefits, mitigate risks and ensure regulatory adherence while pursuing these strategies for company growth.