Baker Tilly’s inaugural Tax Strategy Playbook discusses the outlook for the new year’s tax policy landscape, outlines how current tax policy impacts your business and discusses opportunities for tax planning and mitigating inherent risks. We delve into various areas within federal, global and state and local tax.
Our Tax Strategy Playbook addresses federal tax updates related to the sale of businesses, including how you're seen in the market, merger and acquisition (M&A) exit readiness and proactively planning to sell a business, successfully navigating the post-private equity acquisition journey and private equity growth strategy tax impact.
When preparing for and executing mergers and acquisitions (M&A), strategic and financial tax advice is important for businesses, impacting the entire trajectory of the deal and the future of the combined entity. Some of the reasons businesses should deeply care about obtaining expert advice in these areas include:
Strategic and financial tax advice during M&A is not just about meeting regulatory requirements — it's about optimizing opportunities, mitigating risks and laying the groundwork for a financially healthy and successful combined entity. Businesses that prioritize this advice gain a competitive edge and set themselves up for long-term success in the marketplace.
Preparation for a sale or exit begins well before entering into a transaction. Planning often begins with considering the owner’s end goal, whether it is a complete exit, taking some money off the table or bringing in capital from an investor to assist with growth. Preparing for such an event requires careful planning for both tax and nontax considerations. There are several areas of focus to consider, including:
Sellers will often want to provide key employees with compensation such as equity, options or bonuses to ensure post-acquisition targets are met. The tax implications of these incentives vary greatly depending on their structure.
Deals may be structured as either taxable or tax-free transactions and the terms can include the sale of equity/stock or assets. The structure of the transaction, as well as the type of consideration received (cash vs. equity), will impact the tax consequences of the transaction to the sellers. Modeling the tax implications of various structuring alternatives, including an estimate of potential after-tax proceeds, provides the seller with the information needed to best accomplish their goals for the sale.
The deal process can be very demanding and can take up a considerable amount of the owner’s and management’s time, all while continuing to operate the business. As such, proactive planning for a potential transaction can provide a number of benefits and ensure an efficient and successful sales process. We recommend engaging experienced M&A advisors two years in advance of a potential transaction.
In the aftermath of a private equity transaction, the need for robust infrastructure and strategic planning cannot be overstated. When a company undergoes such a transition, it often experiences significant changes in its structure, operations and financial strategy. To navigate this transformation successfully, having a solid infrastructure and plan of action in place is crucial.
Infrastructure in this context refers not only to a business’ physical assets and technological systems, but also to the organizational framework, processes and talent within the company. Post-private equity investment, infrastructural upgrades may be required to align with new strategies or goals introduced by the incoming stakeholders. This might include revamping IT systems, enhancing production facilities or restructuring departments to improve efficiency.
Moreover, meticulous planning is essential to steer the company through this transition phase. A well-defined roadmap helps in managing changes, setting achievable milestones and allocating resources effectively. This planning must encompass financial strategies, risk management, human resources and marketing tactics to ensure a smooth transition without disrupting day-to-day operations.
A lack of proper infrastructure or planning can result in operational inefficiencies, financial instability and potential setbacks in achieving the desired objectives set forth by the private equity investors. Without the right infrastructure and planning, the company might struggle to adapt to the new demands and objectives, hampering growth and potentially impacting the overall success of the post-private equity phase. Therefore, a focused approach on establishing a resilient infrastructure and meticulous planning is integral to facilitate a successful transformation of post-private equity involvement.
Private equity portfolio companies often employ various growth strategies that can significantly impact their tax positions. These strategies, while aiming for expansion and enhanced profitability, can have diverse tax implications that warrant careful consideration and planning by all involved.
One prevalent growth strategy involves mergers and acquisitions. When a portfolio company acquires or merges with another entity, the tax implications can be multifaceted. They may include considerations related to the purchase price allocation, tax attributes of the acquired entity, potential changes in tax structures and issues concerning depreciation and amortization. Effective planning is crucial to optimize tax benefits while complying with the rules in such scenarios.
Another common strategy involves international expansion. As portfolio companies expand into global markets, they face a complex web of international tax regulations. Tax implications may include transfer pricing, withholding taxes, foreign tax credits and local tax regulations. Ensuring tax efficiency while navigating diverse international tax laws is often complex and is critical for expansions to succeed.
Organic growth strategies like research and development investments or capital expenditures might offer tax benefits such as tax credits, or accelerated depreciation deductions. These strategies aim to spur innovation and improve competitiveness while also providing potential tax advantages for the company.
Debt financing, a strategy often used to fuel growth, also has tax implications. The tax deductibility of interest payments can impact the overall tax position of the company. Leveraging debt in the capital structure can provide tax advantages but also requires careful management to avoid excessive leverage that might adversely affect the company’s financial health.
Various growth strategies employed by private equity portfolio companies can have significant tax implications. Proper tax planning and compliance measures are essential to optimize tax benefits, mitigate risks and ensure regulatory adherence while pursuing these strategies for company growth.
The information provided here is of a general nature and is not intended to address the specific circumstances of any individual or entity. In specific circumstances, the services of a professional should be sought. Tax information, if any, contained in this communication was not intended or written to be used by any person for the purpose of avoiding penalties, nor should such information be construed as an opinion upon which any person may rely. The intended recipients of this communication and any attachments are not subject to any limitation on the disclosure of the tax treatment or tax structure of any transaction or matter that is the subject of this communication and any attachments. Baker Tilly US, LLP does not practice law, nor does it give legal advice, and makes no representations regarding questions of legal interpretation.