Mergers & Acquisitions - What You Need to Be Concerned About
Either you’ve been approached about being acquired or you’ve grown to a size where you need to acquire another operation to grow (quickly) to the next level. What now? What happens (or should happen) during the “acquisition dance with your future partner”?
Whichever side of the transaction you’re sitting on, there are a number of things that you need to keep in mind.
Pretty much everyone views an initial offer as merely an “opening salvo” and the point from which negotiations proceed to achieve an agreed upon purchase price. You should treat it as such and realize that you’re involved in an auction. The Seller is looking to maximize their achievable price, while the Buyer is trying to minimize the cost of acquiring the object of their desire. Each party will need to move towards the other’s position to a point where both are satisfied with the result. Do your homework, looking at the situation from the viewpoint of the other party. Be ready to address objections to the price you are seeking to use for the deal. Sellers need to be able to point out benefits to the Buyer that has not been incorporated into their pricing, while Buyers need to address perceived weaknesses that undercuts the price they’re willing to pay. Each must educate the other, since complete information will lead to price adjustments and revised expectations that may permit a meeting of the minds.
Once the price has been agreed to, the currency in which it will be paid must be agreed upon. Sellers will want all cash, while Buyers usually prefer either using their stock or a combination of their stock and some cash. Beyond that, there may be earn outs and escrows to consider. In a cash deal, the Buyer will usually want an asset purchase (or, if possible, a stock purchase treated as an asset purchase, otherwise referred to as a “338 election” – referring to the provision of the tax law that permits this treatment). Where a 338 election is involved, the acquisition is usually of an existing “S” corporation and causes additional taxes to the corporation and/or the shareholders over what a stock sale would cause. Often, the Buyer must be prepared to compensate the Seller for not only the additional tax caused by this benefit (for the Buyer), but the additional tax on that extra “dollop” of compensation. We often compute these amounts, but the ultimate amount is another point of negotiation on the price of the deal.
Next is the “due diligence” work. Here, the Buyer is trying to make sure that nothing untoward jumps out of the “woodpile” to bite them. Often the stickiest part of this process (for the Seller) is prior period tax filings. Has the Seller filed all returns – income, excise, payroll and, more important, now, in the face of the “Wayfare” decision, sales and use tax. This is of less concern in an asset purchase, but is extremely important in a stock (or 338 election) acquisition. Where the Buyer acquires the Seller entity, all of the “warts” remain in place to be dealt with by the Buyer. Should any one of the thousands (let alone multiples) of state, count or municipalities imposing sales taxes seek compensation for such taxes for prior period sales by the Seller, the cash “hit” may sink the Buyer’s viability as a continuing business. For this reason, the Buyer’s M&A advisors will insist that the “flashlight up your butt” examination be conducted to make sure that nothing of this nature is waiting in the wings. If there are uncertainties in this area, significant escrows will be demanded of the Seller to assure the Buyer that what is really the Seller’s obligation will be paid by the Seller. The Seller needs to carefully, completely and objectively review and evaluate their exposures in this area and be prepared to address any challenges to their position regarding exemption for these taxes in any arena.
Finally, having a knowledgeable team of advisors comprised of attorneys, accountants and investment bankers (who may be able to find an alternative buyer to provide the prospect of a “bidding war” – or divine a competing buyer’s weaknesses if you are the buyer trying to close the deal - or facilitate the financing for the Buyer) should be included in the process. While you may perceive the cost as high, the cost of missing a critical point in the terms, pricing, conditions or risk exposure makes their fees “cheap insurance”. KNS has years of experience helping in M&A - we truly are experts.
Mark H. Misselbeck, C.P.A., M.S.T. is a Tax Principal at Katz, Nannis + Solomon, P.C. If you have any questions or would like to speak with one of our tax professionals, please contact our office at 781-453-8700.