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Sell-side tax due diligence reviews: A step many sellers overlook

July 27, 2015 / 2 min read

Sell-side tax due diligence is becoming increasingly prevalent in the U.S. marketplace. Some sellers are initiating due diligence reviews early in the transaction life cycle because they’ve proven so helpful. From maximizing transaction value to expediting the sale process to remediating tax exposure, here’s why it’s important not to overlook this crucial process.

Maximize transaction value

Sell-side due diligence can be used to negotiate a higher sales price in cases where the seller has substantial tax attributes, such as net operating losses, general business credits, or capital loss carryforwards. Sell-side tax due diligence could provide insight on the tax situation of the seller and the extent to which these tax attributes can be used after the transaction. Given this information, some buyers might increase their purchase price; some buyers also might more confidently submit offers if they better understand the tax situation of the target companies and believe that it’s less likely that their own due diligence would derail or add complexity to the deal process.

Expedite the sale process

A buyer will likely examine the seller’s records to determine whether the business has complied with all relevant tax requirements and that taxes filed were calculated accurately. A seller’s pre-sale review documentation can help expedite the buyer’s review. The buyer will still undoubtedly conduct its own due diligence, but the process may go faster to the extent that it’s more a verification of the seller’s work as opposed to a full-on examination from scratch. Sell-side due diligence also makes it less likely that a buyer would turn up tax issues previously unknown to the seller that could potentially change the deal structure or price, or possibly kill the deal altogether.

Opportunity to remediate tax exposures

If conducted early, sell-side due diligence allows time for sellers to remedy any previously undiscovered tax problems. While the types of problems and the remediation process may vary based on the taxing authority and underlying issue, the seller benefits from the early awareness of the issues regardless of the venue. This early awareness may allow sellers to take such steps as:

 These steps can relieve buyers from their concerns and fix, eliminate, or reduce the amount of their exposures. Even in cases where exposure is theoretical, most buyers will take steps to protect themselves from liability for tax errors made under the previous ownership. As a result, the elimination or minimization of these exposures can reduce or simplify the need for purchase price adjustments, indemnification provisions, and escrows later in the transaction cycle.

An effective tax due diligence review before going to market can increase a business’s selling price, reduce buy-side due diligence times and concerns, and increase credibility with potential buyers. Sellers who fail to take the necessary steps to review federal, state, and international obligations in the early stages of preparation could wind up paying for it down the road in delays, deal-time stress, or negotiation over the financial terms of the deal. As buyers conduct closer examination of taxes in their due diligence regimens, the value to sellers of reviewing and remediating tax issues prior to the sale continues to grow.

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