How tax fact books boost deal value

By: Ryan J. Stecz

Tax matters can be a significant driver of value in mergers and acquisitions. That means that when a divestiture is contemplated, and the deal team begins to anticipate the due diligence potential buyers will conduct, it becomes vital for the seller to understand and be able to clearly explain all things tax. Indeed, when Deloitte surveyed executives recently about how they prioritize tasks ahead of a divestiture, they placed tax and legal structuring considerations high on the list, ranking it fourth among more than a dozen possible preparatory activities.

One way that more and more companies are recognizing the importance of tax matters in a divestiture is by preparing a report that fully describes the tax situation of the business being sold—a tax fact book.

What goes into this? Basically, everything about the tax profile of the company or business. At a minimum, this typically includes such information as how the business is structured from a tax and legal entity perspective, what jurisdictions the company operates in, and where the business files federal, state and local income tax returns. Audit history may be relevant, along with past transactions. The tax fact book should probably include the tax basis of relevant assets and explain book-to-tax differences.

Having a comprehensive tax fact book may benefit the seller during the sale process in multiple ways. First, better understanding of tax matters situation will help the seller to know the full value of the relevant tax assets (i.e. attributes and basis step-up)—and market them. Second, the seller will be prepared in advance for key questions that are likely to arise during due diligence, helping to keep the process moving quickly, which is typically an important goal. Finally, the seller may discover tax issues that need to be addressed, allowing for these concerns to be managed proactively.

Knowing the value

Understanding how tax issues affect the value of a business you’re divesting, and being able to communicate that, may be a viable reason for a tax fact book. The creation of the report may uncover tax benefits that might otherwise never become part of the marketing effort.

The tax fact book might, for instance, identify ways in which the seller can deliver a step-up in basis on assets that are being shed—boosting value for the acquirer, which might then be willing to pay more. The tax fact book might identify and highlight tax attributes such as net operating loss carryforwards that are of value to a buyer.

Anticipating due diligence

Historically, due diligence mostly proceeded with potential buyers asking questions and requesting documents—such as tax returns—and the seller responding. Today, that’s given way to a more active exchange of information, which may align with motivated sellers who want a process that will move quickly. A tax fact book is something the seller can offer to drive the discussion and help potential buyer to better understand the overall tax profile of the business.

Another benefit of a tax fact book is that it may help the seller to answer due diligence questions accurately and effectively. In putting the tax fact book together, the deal team will have likely gathered information in an efficient manner. Tax issues can be complex and nuanced, and the team will have had an opportunity to figure out how best to answer questions that buyers may raise. You are essentially putting the team through a due diligence process in a friendly environment.

Addressing any issues

We’ve raised the idea that you might discover hidden value when you create your tax fact book. You also might find problems—and this is another important reason to go through the exercise. If a tax-related issue exists, buyer due diligence will likely unearth it. The seller should be ready to explain the issue and should be able to address the issue before it arises in the due diligence period.

One common area where we’ve seen this happen is with multi-state taxation. For example, a company may not have been filing returns in several states where it should have been. The tax fact book preparation could uncover this issue, which would likely be raised as a concern during buyer due diligence. The company may be able to enter into a voluntary disclosure process with the relevant jurisdictions, and have the matter settled by the time due diligence started. If the company doesn’t handle this issue before a buyer raises it, it could face additional negotiations related to the potential liabilities. The buyer may also question whether there are other concerns that the seller neglected. The proactive effort can keep the deal on track.

An efficient process

Seeing all these reasons together, it seems that creating a tax fact book simply makes sense. It can impact the timeline and get the deal done faster, potentially capturing all the value that’s there, and avoiding pitfalls. That’s the definition of an efficient divestiture process—something everyone can agree they want.