How should business owners prepare for an acquisition?
Have a plan in place. Set a time horizon, because, most of the time, things take longer than you think. It takes a while for both sides to perform financial and legal due diligence, and to figure out the operations. It’s not unusual that it would take four to six months from the time the letter of intent goes out until the deal is consummated. It’s more than a couple of meetings, but it also shouldn’t drag on too long or the individuals operating each entity may have their eyes off the ball of their own entities. You still need to run your own business.
What sort of tax ramifications should business owners prepare for with mergers or acquisitions?
Proper tax planning is important to make sure your corporate structure fits on an overall basis. Proper planning must be done with regard to the type of entity. Are you buying it as a subsidiary, a separate division or setting up a new company to do all this? For example, if a C corp. is buying an LLC, you have to prepare for the specific challenges for that situation.
Make sure you do your tax-related due diligence to ensure that all sales, property and payroll taxes have been paid, because the acquirer becomes liable for those taxes if they haven’t been paid, irrespective of the fact that it should have been paid by the seller. You could be on the hook for a lot of unpaid tax.
We just helped a client buy a company, and we found the company owed $300,000 in unpaid state and local taxes. That discovery drove a substantial purchase price adjustment.
Generally, when there is a problem, it is not so much federal income taxes; more often than not it is state and local taxes. Sales taxes, property taxes, payroll taxes — things like that.
How else can business owners determine what to pay when purchasing another company?
It’s important to understand the sustainability of the target company’s earnings. How does its revenue come together; what kind of clients do they have? For each client, determine if it is a special project client or if it is a client that has been around for a long time. Also, determine which clients will be continuing on with the company. That, as much as anything, drives purchase price.
Also, you must be aware of what kind of liabilities you will be assuming. Are there leases or mortgages? That is where financial diligence will uncover the liability side, and find out what is still owed to make sure there are no surprises. You don’t want to find out after an acquisition that you don’t really own your new assets — that you are leasing equipment.
Kenneth M. Haffey, CPA, CVA, is a partner with Skoda Minotti. Reach him at (440) 449-6800 or [email protected].
