Mergers and acquisitions (M&As) are complex processes requiring thorough due diligence, especially in the realm of taxation. While buyers typically conduct rigorous tax due diligence, the significance of sell-side tax diligence is often overlooked. This post delves into the value of sell-side tax diligence, particularly in today's challenging economic landscape characterized by rising inflation, bank instability, and increasing interest rates.

The Need for Sell-Side Tax Diligence:

In M&A transactions, both buyers and sellers encounter various tax risks. These range from sales tax collection and remittance issues to federal tax concerns like invalid S corporation elections and misclassification of employees. Sell-side tax diligence plays a crucial role in identifying and mitigating these risks before they become deal-breakers.

Timing and Benefits:

Engaging a sell-side tax adviser months before going to market is crucial. It helps in preparing the company for sale by identifying and addressing potential tax issues. This proactive approach not only smooths the transaction process but also can lead to a higher sale price, as it instills confidence in buyers and minimizes surprises during their due diligence.

Sell-Side vs. Buy-Side Diligence:

While both types of diligence are essential, they serve different purposes. Sell-side diligence focuses on risk mitigation, helping sellers to prepare and address potential issues. Buy-side diligence, on the other hand, is about identifying risks from the buyer’s perspective.

Common Issues and Mitigation Strategies:

The post highlights common tax diligence issues, such as sales tax nexus and employee retention credits, providing insights into how sell-side advisers can help mitigate these problems. For instance, addressing sales tax compliance and ensuring proper documentation for employee retention credits are critical steps that can significantly impact the outcome of a transaction.

Conclusion:

Sell-side tax diligence is an invaluable part of the M&A process. It not only streamlines the transaction but also ensures that sellers can secure the best possible deal. By taking control of the tax narrative and addressing issues proactively, sellers can navigate the complexities of M&A transactions more effectively.

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