What's the Role of a Tax Adviser in M&A?
Short answer: To save you boatloads of cash.
- By Mike Harvath
- June 21, 2017
Death and taxes, goes the old joke, are the only two things that are guaranteed in life. Maybe you can't avoid taxes, but when you're selling your IT services company, a good tax adviser can still save you a lot of money.
All year, we've been running a series in this space about the outside merger and acquisition (M&A) team you need to have in place when selling your professional services firm in this white-hot M&A market. You need an M&A adviser to quarterback, you must have an attorney focused on getting the deal done, and the third person on the team is a tax adviser.
A great tax adviser should be bent on making an important contribution in saving you cash. We've seen scenarios where tax advisers have saved up to 20 percent off a company's tax bill -- a substantial sum.
A good tax adviser will help you understand how much your firm is worth when selling your IT services business. As a rule, another firm that's acquiring you should be able to afford a business that's about one-half its size and can comfortably integrate the two companies.
Where a good tax adviser also fits in is when asking questions such as how much of a valuation should I expect for my firm? They'll calculate the financials related to valuations.
For an automated approximation of your firm's valuation, take a look at an online valuation calculator by visiting our site here.
To give you a back-of-the-envelope sense, staffing firms typically sell for two to four times trailing year earnings before interest, taxes and amortization, or EBITA. Value-added resellers (VARs), for instance, typically sell at a price of three to five times trailing year EBITA. Professional services firms typically sell at five to eight times earnings. Services companies that sell on the high side of that range will be firms that are aligned with the buyer's strategy and generate around 50 percent of their annual revenue from project-based business and 50 percent from recurring sources.
There are a few last things to know about a tax adviser.
A tax adviser will analyze tax issues relevant to your company, the company acquiring you and other parties involved in the M&A transaction when assessing the overall feasibility and post-reorganization cash flows. Another critical piece is the tax structuring goals of the seller and your buyer. These objectives may greatly differ in regard to the reorganization and the post-reorganization integration.
Tax due diligence also plays an important part in uncovering potential tax risks in the target company. A good tax adviser will work through potential pitfalls with your best interests in mind and develop countermeasures to mitigate such exposures. When developing the tax due diligence, this analysis should not be limited to a simple review of the tax returns. Comprehensive analysis of the tax attributes of the company needs to be completed, as well as determining taxation status, business flows, ownership of the organization, location and industry.
Ideally, a tax adviser will assess the tax components of the acquisition, structure acquisitions to optimize net cash flows, prepare businesses for disposal, carry out pre-acquisition or post-sale due diligence and ensure that tax compliance requirements are met, all while saving you cash. As long as your tax adviser is meeting these criteria, then you'll successfully get through selling your IT services business.
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Mike Harvath has spent his entire 30-year career advising partner companies on implementing winning growth strategies and facilitating mergers and acquisitions. As president and CEO of Revenue Rocket, he and his team have advised over 500 partner companies on reaching their growth goals.