By Mike French, CPA, ABV, CFE, Managing Director
Deal structure that is built around knowledgeable tax strategy is crucial to moving a business transaction forward. Buyers are seeking the most tax efficient deal possible, and while their needs may be different and, in most cases, counter to each other, advisors on both sides must put in the due diligence to ensure they represent clients’ interests, tax-wise.
Drilling down into the details on the buy side, clients’ needs are multi-layered. Above all, the buyer wants a tax-efficient transaction structure. This may include:
- Deductibility of transaction costs
- Maximization of depreciation and amortization
- Utilization of tax loss carryforwards
- Minimized tax cost of the transaction
- Identification and protection for historic tax risks
Buyers also are looking for a deal structure with tax optimization potential that may allow them to enhance their offer, especially when there are competing buyers.
This is where we get into the details of how a deal structure will move the transaction forward. Identifying tax risks and optimization potential involves:
- Identification of historic tax risks, ongoing and future tax risks [such as SALT (state and local tax) issues and Transfer Pricing], and tax optimization potential.
- Assessment of the amount of risk and likelihood of recurrence.
- Appropriate and useful recommendations on how to deal with tax findings in the valuation, Purchase and Sale Agreement, and post-closing requirements.
Looking forward, execution of entity(s) formation with a tax efficient structure to facilitate the acquisition and post-merger operation of the entity(s):
- Creating a tax effective acquisition structure involves:
- Avoiding transaction taxes
- Achieving ongoing tax effects (low effective tax rate)
- Making use of the target’s tax assets
- Tax efficient carve-out, if needed
- Tax efficient future exit, if planned
During this phase, consideration must be given to the seller’s tax situation, as the deal structure should respect the seller’s needs in order to increase the likelihood of an agreement. Toward that end, the deal should:
- Avoid or limit tax representations and indemnifications
- Avoid 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.
In our next article, we’ll describe how a tax efficient deal structure looks from the sell side of the transaction. In the meantime, 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