4 Deal Roadblocks and How to Steer around Them
[ILLUSTRATION OMITTED] Few CEOs or CFOs would have such a high level of trust across the table that they could close a deal after a brief conversation and a handshake. Instead, they might engage in buy-side due diligence, scrutinizing every number and negotiating hard for the best sale price. In some cases, companies can spend great amounts of time and money but never complete the deal. Three areas that receive the most scrutiny during this process are quality of earnings, tax exposure, and IT integration. Cultural fit of the organizations, while sometimes overlooked, is the fourth area that can lead to acquisition derailment. The best move around these potential roadblocks is sell-side due diligence, for which benefits far outweigh upfront costs. Quality of earnings. Typically, buy-side due diligence involves tearing apart the balance sheet and profit-and-loss statements and normalizing EBITDA (earnings before interest, taxes, depreciation, and amortization) for what buyers think it may look like when they take over operations. They will identify atypical accounting policies, missing accruals, one-off transactions, and tax impacts. By closely examining business operations, they will identify pro forma adjustments to EBITDA affecting deal value. Any surprises uncovered during due diligence will leave a buyer feeling uncertain about whether there are other undiscovered issues. This will impact the purchase price as the buyer seeks to mitigate its risk. Tax exposure and deal structure. Taxes can be a roadblock for both sides in a deal. For the purchaser, the problem is potential unknown tax liabilities. For the seller, it is how to structure the deal to minimize tax impacts to shareholders. [ILLUSTRATION OMITTED] Potential liabilities may exist for the purchaser from federal and state returns, payroll tax liabilities, sales and use taxes, franchise tax, and multistate jurisdictions for tax years preceding the deal that are still open under the statute of limitation. But the biggest tax risk is unknown liabilities that could arise after the sale is complete. For the seller and its shareholders, it is imperative to look at the tax implications of the deal structure. There are many options and nuances to consider in determining whether an asset or stock sale is most appropriate and what the tax consequences will be. IT integration. Information technology is vital for business operations. Given its complexities, IT should not be an afterthought during the deal process. While companies are often focused on the financial aspects of an acquisition, IT can make or break a successful integration that creates value. …