Due Diligence - preparing your business for transactions

I was recently reading Nigel Barratt’s article “M&A Trends – plan for success”, where he noted a real up-tick in deal activity, which is something I have also seen in our M&A tax practice.

We act for both buyers and sellers, and we have worked on around 30 deals in the last 12 months, and our M&A tax team are usually active on seven or eight tax DD projects at any one time, such is the energy currently in the market. We pick up various themes and recurrent issues, but I wanted to reflect in a bit more detail on some particular aspects of “deal-readiness”.

Getting a deal over the line, both on the buy-side and sell-side, can be a challenging process. The rewards are certainly worth it. Sellers can diversify their investments and buyers get to invest into great companies. But I frequently see businesses that are not really prepared for the rigours of the transaction process. This typically becomes evident in the due diligence process.

Due diligence (“DD”) is simply an appraisal of a business  to establish its viability and to flush out commercial, financial, legal and tax issues. Findings from a DD process can impact deal documentation such as the warranties and indemnities offered by sellers. In some instances, issues found via DD impact on the price a buyer is prepared to pay for a business. So it’s an important thing to get right.

DD is predominantly done by a buyer. This is because it enables them to check the business is what the owners say it is, and to make pricing decisions accordingly.

However, sellers sometimes pre-emptively do their own DD, so-called “Vendor DD” (VDD). VDD is a great tool to allow a business to identify issues before a deal process starts, so that these can be addressed and ultimately so that they do not reduce the price offered for the business. The findings can also be used to support a seller’s prospectus for their business.

So, what are the consistent themes we see from our tax DD reviews?

Interestingly, it’s not what you might think. In most instances, business are largely compliant with corporation tax and VAT. The areas where we most often see errors or omissions are employment taxes. Typical issues include:

• Failures to account for share acquisitions properly
• Issues with the employment status of contractors or other off-payroll workers
• National Minimum Wage risks

We also often come across general issues around tax accounting and tax governance. This can lead to further questions about the control environment in a business.

So what do I recommend?

Get compliant.

If you are looking to sell your business, make sure you are fully up to speed with compliance across all taxes. A DD provider will definitely want to know.

Get prepared.

Consider commissioning a tax health-check or VDD. It will allow you to put your business in the best light and secure the best price.

Brace yourself.

A sales process is challenging. But it can also be great fun. The better prepared you are, the smoother the process will be.