A few months ago I posted a blog about how we at Miles Consulting Group often work with other service providers. I’m proud to work with fellow CPAs, temporary CFOs, bookkeepers, enrolled agents, etc. who don’t specialize in multi-state taxes (often sales tax) to help them maximize client value by bringing issues to the attention of their clients. When we are brought in to assist, we can often take care of the pain the client is feeling as a result of an audit from state taxing authorities OR determining potential tax exposure for proper financial statement reporting. That said, much of what we do is on the remediation side – once a problem has already been created. We work on quantifying the problem (sometimes many years of retroactive taxes) and then remedies to bring the company into compliance and giving them peace of mind.
One particular area in which we can provide value on the front end of a transaction is in the case of a proposed merger or acquisition (M&A). And this is definitely an area where a consulting partnership between us and an attorney, CPA or other service provider is a huge value.
If your client is the seller
In a case where your client might be looking to sell his/her business in the upcoming years (or even months), they should ask some questions about the their multistate activities. For instance:
- Does the company make multistate sales?
- Does the company have a mobile sales team, such that salespeople travel to various regions regularly? If so, how often do they travel into any given state and what is the revenue generated by those sales calls?
- If the company has a salesforce, when did they begin entering the states?
- Are there employees living in other states, working on behalf of the company?
- Does the company store inventory or own property in states beyond their “home state”?
If the answers to any of these questions are yes, it likely makes sense to dig further to determine whether there is some underlying exposure for both state income tax and sales tax. Why is that important? Because the buyer will ask those questions during the course of their due diligence. And, as the seller, you’d rather know now, when you can still mitigate the problem. Once you get to the bargaining table, it’s difficult to negotiate away understated liabilities. And some buyers might walk away from a deal entirely if the situation is too sticky. I’ve seen deals where the liability (and holdback on the seller side) was in excess of $1M for a relatively small company and others where the deal didn’t happen at all – just because of the potential sales tax exposure.
If your client is the buyer
Where your client is on the purchasing side, they are likely to be somewhat more sophisticated in the M&A process (or not). They will definitely want to explore potentially unrecorded liabilities related to sales tax and income tax. Sure, there are ways to structure a purchase such that the liabilities don’t accrue to the purchaser, but there may be other factors in play in the transaction, so it may not be feasible to structure something as, say, an asset purchase versus a stock purchase. Buyers want to make sure that they know what they are buying. Similar to the seller’s side, surprises in M&A are generally not a good thing.
Some questions to ask, in addition to those above, might include:
- Has the company performed a nexus review or taxability study within the last 12 – 18 months?
- If so, who prepared the analysis and can we see a copy of the report? (Not all studies are created equal. An independent report prepared by a specialist in state tax consulting likely carries more weight than an internally prepared analysis.)
- In addition to typical inventory or property held in various states, does the company lease any equipment to customers? (If yes, these items likely create nexus, or taxable presence in a state and may create a liability.)
These are just some of the items to consider during the due diligence phase of a proposed M&A transaction – but it gets the conversation going. And it’s good to bring consultants like us to that table and in on that discussion earlier rather than later – particularly if you are representing the seller.
For more information on this topic, please take a look at this VIDEO which explains in a little more detail how we can assist. Questions? Give us a call at 408-266-2259.
