| Having trouble reading this newsletter? |
 |
||||||
Forward to a Friend
|
||||||
 |
|
|
|||
|
Recent Transactions   About SC&H Capital SC&H Capital - an affiliate of SC&H Group, LLC - offers a portfolio of services that assist companies throughout the entire life cycle of the business. Our services help companies to grow the business organically, to expand the business through acquisitions, and to develop the optimal exit strategy. Led by a team with experience in the fields of buying, growing, and selling businesses, SC&H Capital provides the methodology, tools, and resources to define and execute clear business and transactional strategies. Our services include:
Our professionals focus on consistently providing value and delivering effective outcomes everyday – not just on the day our clients decide to sell the business. For more information on SC&H Capital, please visit us on the web at www.scandh.com/cc.
|
 |
Welcome
We are especially grateful to our clients and referral sources as it is because of these strong relationships that we are able to advise so many companies in their business transactions. As always, our SC&H Capital team is prepared to invest time getting to know you and your business. For more information on our services or to schedule a complimentary advisory session, please call me at (410) 785-8049. Best Regards, The Importance of Sales Tax Due Diligence in M&A Transactions Which business tax is the most often overlooked in M&A transactions? Which business tax is the one that most often derails a transaction? There is just one answer to both of these questions: Sales tax. The discovery that a target company has not correctly handled its sales tax compliance and reporting obligations could lead to a large accrual relating to this previously unrecorded liability. Such actions may play havoc with the target company's earnings and balance sheet, affecting the purchase price a buyer may be willing to pay, or earn-out amounts expected by the seller. If such tax liabilities are not discovered during due diligence, and bulk sale notification and tax clearance certificate requirements have not been followed, unrecorded sales tax liabilities may become the responsibility of the buyer. This could be true even if the liability relates to periods prior to the buyer's ownership. Saddled with this unexpected liability, the buyer may come to realize that they paid too much for the target or the expected return on investment is not what it was thought to have been. Often, an in-depth sales tax review is not a part of the due diligence process. Buyers tend to feel that indemnity clauses and escrow agreements offer sufficient protection from the vagaries of sales tax, but this is not always the case. A three to five year period is not an unusual timeframe for a sales tax audit, and by the time an assessment is issued, money to cover such a liability may no longer be escrowed. SC&H State & Local Tax has represented clients in such circumstances. In one case, a state audited the target company after its acquisition had occurred. The audit spanned a period including pre and post buyer ownership. Because a tax clearance certificate was not obtained in relation to the sale, the state assessed the buyer at a time when there was no money left in escrow. The buyer sought satisfaction from the seller, relying on the indemnity language in the purchase agreement. The seller balked, arguing that it was the buyer's post-acquisition actions that precipitated the audit and resulting liability. In addition to paying the assessment, the buyer incurred legal fees in its attempt to force the seller to honor the terms of the indemnity agreement. Eventually they reached a settlement but not before significant time and money were spent resolving the impasse. On another occasion, SC&H was asked to review the operations of a particular company subsequent to its acquisition. Our review indicated that even though a sales tax review had been previously performed, the individual performing the due diligence did not fully understand the nature of the company's industry. This led to the erroneous conclusion that the company was in compliance with the sales tax laws for those states in which it operated. Our review uncovered nuances that indicated otherwise. The magnitude of the liability and proposed remedial actions threatened the company's cash flow. Although money was still in escrow, the relationship between buyer and seller was strained and once again a buyer was forced into the legal arena, building a sterling case that would allow them access to the funds. Sales tax is a complex area. One must be able to understand and keep abreast of evolving nexus standards. This understanding then needs to be applied to an organization's structure and business activities while monitoring for events that may trigger a sales tax filing requirement. Once it has been determined that a filing requirement exists, a company needs to understand the taxability of its goods and services for those states in which it does business. The evolution of business processes and the paper that surrounds business transactions only serve to complicate an already difficult area of compliance. While we have successfully defended our clients' interests subsequent to acquisitions, we prefer to be involved on the front end of the transaction. Our representation at this stage of the deal brings a larger return on investment and the knowledge gained by the buyer provides value long after we have completed our field work. Ed Ben is a Director with SC&H Group, where he is in charge of the sales & use tax division of SC&H State & Local Tax. Contact him at 410.403.1517 or eben@scandh.com.
This communication does not represent a solicitation of an offer to sell any securities.
|
