Dedicated, ExperiencedFinancial and M&A Tax Advisors Impact Deal Economics and Exposures
Why It Matters
When it comes to a contemplated transaction, having a strong, deeply experienced financial (principally, “Quality of Earnings” or “QoE”) and tax diligence team is crucial. The value of such an advisor is embedded in the ability to identify potential risks and opportunities that may impact the ultimate deal economics (i.e., purchase price does not mean ultimate cash trading hands/proceeds) and ensuring exposures are minimized and understood. As a buyer or seller evaluates their “deal team”, we share a few thoughts on matters to consider in weighing your decision to select advisors.
Financial Due Diligence
First, an experienced, dedicated financial/”QoE” advisor can help identify potential risks during diligence that may impact the transaction. An experienced advisor’s approach will be to not treat the process as producing a commoditized deliverable, rather, a process to understand and prioritize risks embedded in the operating results and balance sheets of the business. This is important because it allows the parties involved in the transaction to synthesize findings real time and position what’s best for the buyer or seller. For example, if the advisor identifies a potential risk related to the target company’s financial statements regarding unrecorded liabilities or improper revenue recognition, a high-quality advisor should be actively relaying this to the client to evaluate the magnitude of impact on the transaction. Without such an advisor, clients may not understand such risks timely, incur unwanted costs and have misaligned communications between buyer and seller.
Second, an experienced “QoE” advisor can help identify potential opportunities. For example, for a buyer, findings can yield a better outlook on adjusted EBITDA than originally shared by the seller or higher levels of recurring revenue streams that can change an investment thesis. Other opportunities arise with net working capital, indebtedness, and other purchase agreement definitions that impact deal economics.
Third, experience provides a clear understanding of the depth and breadth of a thorough and efficient financial diligence process. Each business and its management teams are constrained by the nature of their historical reporting, systems and the time they can dedicate to the process. An experienced advisor is great at navigating the natural tension between time, data and team while arriving to conclusions.
Tax Due Diligence
Choosing the right provider for tax due diligence can have a significant impact on the success of a transaction. Tax due diligence is a critical step in the M&A process, and it involves a thorough review of a company’s tax history, liabilities, and compliance with tax laws and regulations. By choosing an experienced tax advisor with the right qualifications you will be able to h
ave a smooth transaction for both you as the buyer, and the seller.
First, an experienced advisor can help minimize risk. A thorough tax due diligence process (which is often overlooked in the middle/lower middle market) can help identify potential tax risks and liabilities associated with a transaction. By choosing the right provider, you can ensure that all potential risks are identified and addressed before the transaction is completed, minimizing the risk of tax disputes or penalties.
Second, and in connection with the first, an experienced advisor can help maximize value. A comprehensive tax due diligence process can also help identify potential federal and state tax savings opportunities that can maximize the value of the transaction post close and for a future exit. Additionally, some of the missteps discovered in due diligence, while maybe not material, may offer insights for improvement as you continue to acquire and build, preventing small errors from becoming larger (possible exposures upon an exit).
Another critical component in choosing the right tax advisor is to look for a team approach. You want advisors who have a team of experts with different areas of expertise in tax, such as state and local, international, and more. The most knowledgeable and helpful advisors will be the ones who have the team in place to make sure you are getting the right answers the first time. You shouldn’t have to pay for research, you are paying for expertise.
While tax due diligence can be costly, do not make the mistake of assuming that skipping it will save money. In the long run the right tax advisor will help the company save time and money. By choosing a tax provider with the qualifications and team you will ensure a streamlined and efficient process, which will save time and money while still ensuring that all potential tax risks and opportunities are identified.
Lastly and most importantly, it is also important to choose a provider for tax due diligence who will work closely with you and your team to understand your business and operating style. Every business is unique, and a one-size-fits-all approach to tax due diligence is not usually effective.
Matt Bartholomew, Deal Services
Matt is based in Salt Lake City, a national leader in CLA’s Deal Services team with about 15 years of fully dedicated Quality of Earnings and other deal matters experience.
Brendan Sullivan, M&A Tax
Brendan is based in Denver, often working with Utah-based capital providers and businesses, a national leader in CLA’s Transaction Tax team with about 15 years of fully dedicated M&A tax experience.