For entrepreneurs thinking about selling their company, maximizing after-tax sale proceeds is a key objective.
The most successful sales result from a co-ordinated effort by a team consisting of a tax adviser experienced in mergers and acquisitions (M&A), an M&A adviser and an M&A lawyer.
If you’re unclear about the role of an M&A tax adviser, let’s break it down, starting with timing.
When should you reach out to your tax adviser? The sooner, the better – more specifically, the moment you’re prepared to consider an exit. The ability to develop and structure a tax-effective sale diminishes the nearer you get to the closing date.
Beginning tax planning well before a sale maximizes opportunities to pinpoint tax risks and avoids surprises during the tax due-diligence stage. Identifying all possible tax planning opportunities (under an asset or a share sale) and other non-transaction opportunities (potential estate planning considerations, for example) takes time, so you’re best off doing it without the added pressure of sale negotiations. By contrast, for vendors contacting a tax adviser after a deal closes, their only option is ensuring that they report it accurately on the right tax return.
Successful business owners are prudent entrepreneurs who understand value for money. As such, they often ask what a tax adviser will do at each stage of a transaction and what value the adviser’s work will add.
Here’s a brief description of a tax adviser’s role in the various stages of a business sale.
•Deciding to sell
It’s prudent to discuss the reasons for selling and what, as a business owner, you want to accomplish. Moving on from the business and retiring will call for different steps and structure than taking chips off the table but staying involved.
At this stage, I would review a client’s corporate structure and the relevant tax attributes of the business and its shareholders, such as access to the lifetime capital gains exemption. The goal is to identify risks we can mitigate and opportunities we can maximize.
•Letter of intent (LOI)
The M&A adviser and/or the lawyer typically negotiates the LOI’s terms. It’s also critical to involve a tax adviser here because the tax implications of the proposed sale terms aren’t always obvious.
At the LOI stage, your tax adviser can quantify the difference in tax under alternative sale structures and identify possible pre-closing steps that can minimize or defer the tax due on closing. This information provides a clearer picture of how hard a seller might want to push for specific LOI terms. There could be an opportunity to create a tax win-win, so knowing the facts allows for strategic negotiations on other aspects of the LOI.
•Drafting the share purchase/asset purchase agreement
For the most part, both parties’ lawyers negotiate the agreement. You must have your tax adviser review it and any supporting agreements for potential tax implications. Pay close attention to the terms of any non-compete agreements, earn-out provisions, sale price allocations and potential stock option agreements, among others. The wording of these deals could have significant unintended tax consequences.
During this stage, a tax adviser focuses on finalizing the tax structuring and any pre-closing transactions for the seller, while also acting as a liaison between the business owner and the buyer on tax due diligence.
•Closing
The lawyers for both parties close the deal, handling the signing of documents and the moving of funds. An experienced tax adviser is usually involved in preparing the flow-of-funds calculations to ensure that the amounts and sequence match the agreed-upon tax plan. He or she will also ensure that any relevant tax elections are signed and copies retained for filing.
•Post-closing
This stage involves many tax compliance activities, such as preparing and filing any returns and/or elections required after closing. A schedule of required tax payments should be prepared by a tax adviser to minimize Canada Revenue Agency interest charges. •
Kevin Walsh is a tax partner at Walsh King LLP, where he advises clients on Canadian and cross-border tax matters with an emphasis on Canadian corporate taxation, trust and estate planning and effective tax structuring on the purchase and sale of businesses.
