More Ways Tax Advisers Can Help Your M&A
Besides answering questions about valuation, tax advisers can help partners settle the many other tax obligations that are part of selling any IT services company.
- By Reed Warren
- August 09, 2017
Whatever type of transaction you're contemplating, be it an acquisition, merger or joint venture, your tax obligations need to be carefully assessed as part of selling your IT services business.
That's why we have a little more to say about tax advisers. In this series, we've covered "The 3 Components of a Winning M&A Team," "Leave Lawyers in Their M&A Lane" and "The Role of a Tax Adviser in M&A." That last column on tax advisers focused primarily on the ways they can help with valuation questions.
There are a lot of other tax obligations that need to be assessed in the process of selling an IT services company, and we'll take a look at those here.
First, your cash flow needs to be optimized. Selling your firm has to be structured for optimizing your net cash flows.
Second, when working with an M&A firm and tax specialist, the focus should be on saving you money and ensuring the overall finances are as efficient as possible. When selling, you need to be absolutely sure that your tax adviser checks the following boxes:
- Gives sound tax-structuring advice
- Produces tax advice on your business valuation
- Helps you with international tax advice on cross-border transactions
- Focuses energy on strategic growth and profitability priorities
Third, there has to be an analysis of tax issues relevant to you (the seller), the buyer and other M&A transaction parties. This process represents a key element in assessing overall feasibility and post-reorganization cash flows.
Selling Your IT Services Firm: Tax Structuring
For example, tax regarding corporate reorganization falls under the classifications of "qualified" and "non-qualified" in M&A transactions. This is important because certain gains may not be subject to any immediate taxation based on how you're classified -- that is, corporate divisions, contributions in kind, distributions in kind and share transfers.
As a result, it's essential to analyze the tax impact for the relevant parties and, where necessary, consider tax structuring alternatives.
Tax structuring objectives of the seller and the buyer may also differ. While a tax-free reorganization is in many cases optimal from the perspective of the seller, the seller and buyer may come to an agreement that a tax-free reorganization is less favorable overall.
Similar tradeoffs apply to a reorganization and careful planning is required.
Selling Your IT Services Firm: Tax Due Diligence
Then there's the tax due diligence. This is vital in detecting potential tax risks that might require mitigating countermeasures.
A tax analysis shouldn't be limited to a review of the tax returns. Instead, a comprehensive analysis of the tax attributes needs to be carried out, including taxation status, business flows, organizational structure, location, industry and so on.
Tax risks identified through a tax due diligence process may be a significant consideration in negotiating provisions of the sale and purchase agreement.
As you can see, there's a lot to the tax component of selling your professional services firm. You should know that a good M&A adviser will do all the heavy lifting for you and has a plan to attack the overall tax part of the M&A process.
In the next issue, we'll close the series with a deeper dive into the role of the M&A adviser when you're selling your company.
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Reed Warren is vice president of Revenue Rocket, an IT services growth consultancy and M&A adviser. You can reach him at email@example.com.