Why Sell-Side Tax Diligence is Essential for a Successful M&A Transaction
Selling a business is a significant milestone, but failing to do your homework when it comes to tax due diligence can lead to transaction erosion, delays, or even deal failure. Proactive sell-side tax diligence empowers sellers to maximize value, uncover risks early, and enhance negotiation power, ensuring a smoother transaction process.
Key Benefits of Sell-Side Tax Diligence
A well-executed sell-side tax diligence process provides multiple advantages for sellers. By identifying potential tax risks in advance, sellers can strengthen their position and ensure higher transaction value. Addressing tax exposure before a sale reduces the risk of last-minute disruptions, giving buyers confidence in the deal. Additionally, a proactive approach enhances negotiation leverage, as well-prepared sellers are more likely to command favorable terms. Ultimately, thorough tax diligence leads to greater deal certainty, increasing the likelihood of a smooth and successful closing.
Critical Tax Considerations for Sellers
Tax Attributes: Businesses with net operating loss carryovers, credits, or capital losses may have valuable tax benefits that should be factored into deal structuring.
Employment Tax Compliance: Misclassified independent contractors could trigger penalties—addressing this issue pre-sale avoids complications.
Sales & Use Tax Risks: The Wayfair decision reshaped sales tax rules, making compliance more complex across states. Sellers must assess their exposure to ensure compliance.
Income Tax & Nexus Exposure: States are expanding economic nexus laws, creating potential income tax obligations in multiple jurisdictions. Buyers may demand reimbursement if unexpected tax liabilities surface.
Tax Diligence is Just One Piece of the Puzzle
While tax diligence is critical, it is only one component of a comprehensive due diligence process. A successful M&A transaction requires a holistic approach, integrating tax diligence with a Quality of Earnings (QofE) analysis to assess the true financial health of the business. A Quality of Earnings analysis uncovers sustainable earnings, identifies non-recurring items, and ensures that reported financials accurately reflect the company’s profitability.
Leverage a Trusted Partner
Relying solely on tax diligence or any single aspect of due diligence creates blind spots that could result in unforeseen risks post-transaction. CSH does not look at these factors in isolation but will instead take a comprehensive, integrated approach—analyzing tax, earnings quality, working capital, and operational risks to provide a full picture of the business’s financial position. Partnering with an advisor who understands the interplay between tax and financial performance is key to ensuring transparency, mitigating risk, and maximizing transaction value.
