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Is Your Client Thinking of Selling a Business? Tax Planning Software Can Help

In early 2020, the market for mergers and acquisitions (M&A) was booming. But when the pandemic hit, that market dried up almost overnight. Businesses shuttered their doors and investors pulled back to wait out the worst of the financial crisis. Although the financial markets will take years to fully mend, M&As have more or less recovered. Sellers are more willing to compromise, and buyers are more optimistic for the future.

If your clients are considering a merger or acquisition, are you prepared to help? Whether they are the buyer or seller, there are ways you can make the M&A process easier. As their accountant, you can help them prepare their finances for the sale, and as their tax advisor, you can show them how that sale will affect their tax return. If you have a good tax planning software like ours at Corvee, you can show them exactly how the M&A will affect their business taxes and how the transaction will affect their personal tax return.

Tidy Up Before Using Tax Planning Software

If your client is thinking of selling a business or merging with another, they need to tidy up. This goes beyond simply cleaning up the books (although that is also important); it requires you and your client to anticipate the buyer or seller’s needs and clean up operations, activities, and financials to meet those needs.

  • Clean up the financials – If you know the date the M&A will take place, you can reconcile accounts, post accruals, and clean up asset balances. But even if the closing date hasn’t been finalized, there’s plenty you can do. You can:
    • Ensure the business is compliant with generally accepted accounting principles (GAAP) or international accounting standards (IAS), whichever is requested from the other party to the transaction.
    • Make sure assets and liabilities are classified as they should be. For example, moving a liability from the long-term to the short-term bucket may affect financial ratios that affect the sales price.
    • Remove unnecessary line items on the trial balance and consolidate those that can be combined.
    • Dispose of unused assets, true up inventory, consolidate loan balances, and take similar actions that simplify your clients’ reports.
  • Come into compliance – A business that is behind on sales tax returns, for example, may receive a lower valuation than a business that does not have that risk. Taxes require certain levels of compliance, but businesses should also be compliant with debt covenants and insurance policies before the M&A process begins.
  • Collect useful information – The other party in the transaction may request some of the following information:
    • Meeting minutes
    • Projections
    • Information about key contracts
    • Employment contracts for key employees
    • Contact information for suppliers and clients
    • Details about operations with related parties

Don’t wait until the other party in the transaction makes official requests. If you know they will ask for it, begin collecting that information now so the M&A process can proceed smoothly.

Understand Timing

An M&A transaction will only be successful if the timing is right for both the buyer and the seller. But how do you and your clients know when the timing is right? There are a few things you should think about.

Economic Growth Cycle

Most M&As are successful when the economy is growing. Investors are optimistic that the growth will continue, and business owners are confident that their current successes represent future value to the purchasers. Unfortunately, neither you nor anyone else knows for certain where the economy is on its growth trajectory. Your client’s and the other party’s perceptions of the economy are what matters.

Industry Growth Cycle

Just as the economy goes through phases of growth and recessions, so do industries. Learn where your client’s industry is in their growth phase. Although many investors prefer to get on board when in the early stages of growth, not all do. Some buyers prefer to sign on when an industry is approaching its maturity phase when there is lower risk to their investment.

Product Growth Cycle

Within a certain industry, products or services also go through growth phases. If your client is introducing a new product, is that risk something that the buyer is willing to take on? If your client is the buyer, at what stage do they want to come aboard – the development stage, where they have a say in the end product, or in the growth or maturity stages where the outcome is more certain?

There is no perfect combination, but each growth cycle will have an affect on the final sales price, so talk to your clients to see if the timing feels right.

Be Prepared to Negotiate

The negotiation process is where you and your skills can truly shine. Financial data, valuations, estimates, and projections will establish a good starting point for negotiations. The final sales price may change based on non-financial data, like client relationships or business synergies, but your client’s financial position will set the tone for everything that follows.

First, begin with a clean trial balance and make sure your clients’ records are kept current. From there, one of the most useful things you can do is run projections. This is where a good tax planning software can come into play. Our Corvee software shows tax projections years into the future, and it displays that information in a simple and easy-to-understand format. Having a dynamic tax planning software like this can play a crucial role in the negotiation process.

Have a Transition Plan

If the negotiations go well and your clients are prepared to sign on the dotted line, they should have a transition plan in place. Although this list is not exhaustive, here are a few things they should be thinking about:

  • Will the acquiring entity retain any of the selling entity’s employees?
  • How will the selling entity’s stock options be managed?
  • Will employees of the selling entity get bonuses? When?
  • Will employees be expected to do any additional work to finalize the transaction?
  • What tax consequences will there be for business owners?
  • Does the IT system need to be updated, altered, or merged with another system?
  • Is human resources prepared to handle the hiring and firing of employees?
  • How can business leaders ensure operations will continue?
  • Which entity’s culture will win out in the end?

And – most importantly – the business needs to communicate their transition plan.

Establish a Communication Plan

In any M&A process, communication is essential, but not all parties need to be notified at the same time. For example, bankers will need to know about the M&A early in the process, as will your client’s legal team and key members of leadership. As time goes on, they will need to inform insurance agents, clients, vendors, investors, employees, benefit plan administrators, and – eventually – all stakeholders. Work with your client’s leadership team to establish a communication plan and stick with it.

Rely on the Best Tax Planning Software

Each merger or acquisition is unique, but they all require the same thing: reliable financial data. If you have the best tax planning software, you can even provide this information in a format that is straightforward and easy to understand. Our tax planning software is unique in part because of the reports it generates. If you enter basic information about your client’s business into the software, you can run different scenarios to see how their taxes and financial position will change. Because our tax planning software is so dynamic, you can change assumptions quickly and get new results instantly. If you want to see how our tax software works, contact us today for a demo.

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Corvee has been recognized by Inc. magazine’s annual Inc. 5000 list as one of the nation’s fastest-growing private companies.