Considering a Liquidity Event? Prioritize Sell-Side Tax Diligence for a Smooth Transaction

If your business is contemplating a liquidity event, prioritizing sell-side tax due diligence — with a special focus on state and local tax (SALT) issues — is crucial. Engaging in sell-side tax diligence well before hitting the market, under the guidance of a sell-side tax advisor, is a strategic move that can significantly affect the success of the transaction.

Why Focus on SALT?

The complexity of SALT liabilities can pose major hurdles during buy-side diligence. This is especially true in the wake of South Dakota v. Wayfair, which broadened states' ability to tax out-of-state sales. Addressing these issues proactively allows sellers to navigate potential deal delays and negotiate more favorable terms, and helps ensure a smoother transaction process. This focused approach not only showcases the business as well-managed and compliant with intricate SALT complexities, but it also enhances the company’s appeal as an acquisition target.

The Benefits of a Wellness Check

Conducting a thorough wellness check on your company’s state tax posture can minimize the risk of surprises that could lead to renegotiations or even deal termination. This also can position the seller to potentially secure a higher sale price by demonstrating a comprehensive approach to SALT compliance and risk management.

Mitigating SALT Exposures

Using voluntary disclosure agreements (VDAs) and diligently collecting sales tax exemption certificates are effective strategies for mitigating SALT exposures. VDAs allow sellers to address historical sales tax liabilities under favorable terms, including the elimination of penalties. The VDA process not only remediates historical tax liabilities, but it also signals a commitment to compliance that can be reassuring to buyers. Further, maintaining sales tax exemption certificates helps ensure that exempt sales are properly classified, which can reduce the risk of future exposure. Learn more about how to become sales and use tax compliant.

The Risk of Noncompliance

Attempting to address past noncompliance through prospective filings, rather than by remediating historical exposures, leaves businesses vulnerable to exposure identified by state tax authorities and buy-side diligence teams. A VDA can limit this exposure by reducing the lookback period and eliminating penalties. Without a VDA, businesses risk historical liabilities that can significantly exceed those that could have been negotiated under a VDA.

Being Proactive

Ultimately, sell-side due diligence empowers sellers to be in a better position with all issues related to tax compliance. This proactive approach is far more efficient than reacting to a conservative exposure identified by buy-side advisors, which can take significant time and resources to address or refute.

Prioritization Is Key

Prioritizing sell-side tax diligence, especially for SALT issues, is a strategic move that can enhance a company’s attractiveness to potential buyers, minimize transaction delays, and potentially lead to a more favorable sale outcome. The State & Local Tax Services team at BDO is ready to answer your questions and help guide you through the process.