Key Takeaways:
- If your business is contemplating a liquidity event, it is critical to prioritize sell-side tax due diligence well before entering the market.
- It is especially important to focus on state and local tax (SALT) issues, as evidenced by South Dakota v. Wayfair, which widened the ability of states to tax out-of-state sales.
- Seek guidance from a sell-side advisor — doing so can significantly impact the success of your transaction.
~
If your business is contemplating a liquidity event, prioritizing sell-side tax due diligence — with a special focus on state and local tax (SALT) issues — is crucial. Engaging in sell-side tax diligence well before hitting the market, under the guidance of a sell-side tax advisor, is a strategic move that can significantly affect the success of the transaction.
Why Focus on SALT?
The complexity of SALT liabilities can pose major hurdles during buy-side diligence. This is especially true in the wake of South Dakota v. Wayfair, which broadened states’ ability to tax out-of-state sales. Addressing these issues proactively allows sellers to navigate potential deal delays and negotiate more favorable terms, and helps ensure a smoother transaction process. This focused approach not only showcases the business as well-managed and compliant with intricate SALT complexities, but it also enhances the company’s appeal as an acquisition target.
The Benefits of a Wellness Check
Conducting a thorough wellness check on your company’s state tax posture can minimize the risk of surprises that could lead to renegotiations or even deal termination. This also can position the seller to potentially secure a higher sale price by demonstrating a comprehensive approach to SALT compliance and risk management.
Mitigating SALT Exposures
Using voluntary disclosure agreements (VDAs) and diligently collecting sales tax exemption certificates are effective strategies for mitigating SALT exposures. VDAs allow sellers to address historical sales tax liabilities under favorable terms, including the elimination of penalties. The VDA process not only remediates historical tax liabilities, but it also signals a commitment to compliance that can be reassuring to buyers. Further, maintaining sales tax exemption certificates helps ensure that exempt sales are properly classified, which can reduce the risk of future exposure.
The Risk of Noncompliance
Attempting to address past noncompliance through prospective filings, rather than by remediating historical exposures, leaves businesses vulnerable to exposure identified by state tax authorities and buy-side diligence teams. A VDA can limit this exposure by reducing the lookback period and eliminating penalties. Without a VDA, businesses risk historical liabilities that can significantly exceed those that could have been negotiated under a VDA.
Being Proactive
Ultimately, sell-side due diligence empowers sellers to be in a better position with all issues related to tax compliance. This proactive approach is far more efficient than reacting to a conservative exposure identified by buy-side advisors, which can take significant time and resources to address or refute.
Prioritization Is Key
Prioritizing sell-side tax diligence, especially for SALT issues, is a strategic move that can enhance a company’s attractiveness to potential buyers, minimize transaction delays, and potentially lead to amore favorable sale outcome.
How MGO Can Help
Preparing for a liquidity event can feel like a battlefield — dodging land mines and watching where you step. Strategic planning and meticulous attention to your tax compliance are crucial, and MGO is well-equipped to support your business in navigating the challenge of sell-side tax due diligence. With our thorough understanding of the intricate dynamics of SALT issues and the impact they can have on your organization, we provide tailored guidance to help position your business for the best sale possible.
Our team excels in a proactive approach: conducting thorough wellness checks, identifying potential SALT liabilities, and implementing effective strategies to mitigate historical tax exposures and minimize transaction delays — and enhance your company’s appeal to those looking to buy. For inquiries or support in prioritizing your sell-side tax due diligence, reach out to our team today.
Written by Matthew Dyment and Thomas Leonardo. Copyright © 2024 BDO USA, P.C. All rights reserved.www.bdo.com