Conversely, 63% of companies say they undertook pre-sale preparation to mitigate the price reduction for tax risk. So why is value still being lost?
Preparation often begins with sell-side due diligence. Commonly, value is lost when sellers identify tax risks in the first stage of preparation, but then fail to act to clarify and potentially mitigate those risks before the process starts. Bringing tax into the divestment strategy earlier can allow sufficient time to undertake an open assessment of the business through the eyes of a buyer, address issues identified, and only then commence diligence. It is not only how a vendor sees tax risk and opportunities that is important, but how a buyer would look at them from the outside in — which is easier said than done.
Negative value adjustments can occur where a seller underestimates the tax perspectives from a widening pool of buyers, including private equity and cross-sector. Preparing for these conversations may require sellers to review historical tax advice and the trail of why positions were taken to help provide the reassurance and granular data a purchaser requires — in some cases resulting in pre-sale tax authority clearances and negotiations.
If it is not possible to bridge the gap in tax views between buyers and sellers, the warranty and indemnity and tax insurance market can be an effective way to take protective measures around exposures.
Flexibility in sales structure
While 57% of companies say lack of flexibility in the sales structure eroded value, a significant number of companies who demonstrate flexibility are seeing a positive impact on their sale price. To improve flexibility, companies can start by weighing the tax impacts of different structures.
Tax teams should work alongside M&A teams early in the process to fully understand all commercial options, analyzing and modeling tax cost or saving of different structures. In tax free spin-off or demerger transactions, early analyses should include evaluation as to whether the proposed transaction can meet the tax requirements and regulations to achieve a tax-free transaction. This allows time to dive down into key tax variables, including potential exit structures, vendor costs, tax attributes and highlighting value perception on the buy-side (e.g., tax benefit of basis step-up) leading to a fuller and more flexible set of options, tax costs and benefits.
Trying to build in flexibility in the middle of a deal, with competing asks and time pressures, can mean value is lost when there is insufficient time to react with any degree of accuracy. Thinking about this up front supports greater agility, allowing sellers to make changes as external circumstances move, buyers’ priorities change or other issues arise.
One of the side effects of US tax reform is that US multinationals are generating even more detailed tax attribute information on a current basis to assist in new computations required under US tax reform. Having data regularly updated and on hand can assist tax functions in evaluating alternative disposition structures as they look to build in flexibility on the sale.