Mergers and Acquisitions - For the Seller
Michael J. Fleming is the founder and president of Sales Tax and More, a full-service consulting and solutions firm with a passion for state tax. He is one of the country's leading authorities on sales tax issues such as consulting and research, registrations, returns, nexus, drop-shipping, eCommerce, and service providers.
Michael is a renowned writer and speaker, and he regularly presents on webinars. He is also the host of the Sales Tax and More Podcast, where he shares his wisdom and learnings with his audience in order to help them navigate the tricky world of taxes.
In this episode…
Mike Fleming and Ellie Moffat talk about what a business needs to be concerned about if they're going to be looking at selling their company.
Here’s a glimpse of what you’ll learn:
What do sellers of a business, need to be concerned about if they're going to be looking at selling their company?
What should they do if they find out that they have issues? What do they need to disclose?
If someone were to choose to not disclose, could they be facing any consequences for that?
What are liability issues that the seller of the business could potentially run into if they don't take care of exposure?
Connect with Michael
Episode Transcript - Audio Version
[00:00:00] Welcome to Sales Tax and More, your go to resource for all things state tax related. Now, here is your host, Michael Fleming.
Hi, Mike Fleming here, founder of Sales Tax and More. And today's co host of the Sales Tax and More podcast, where we talk about everybody's favorite topic, which is of course, sales tax. Now, today we're going to talk about mergers and acquisitions. And there's enough to talk about that. We, we broke this down into two different episodes.
In this first episode, we're We're going to talk about, the sell side. What does sellers of a business, need to be concerned about, if they're going to be looking at selling their
[00:01:00] company, but before we get into that, let me introduce you to my cohost, Ellie Moffat. Hey, everyone. Great to be here.
And I'll do a quick introduction as I always do for Sales Tax and More, but we wouldn't want you to forget who we are. So we are a full service consulting and solutions firm. We have a really great team here of experienced tax professionals. And we are very dedicated. To fulfilling any of your state tax and related needs.
So we do a lot of sales tax returns, sales tax registrations, consultations, research, and like our name states more. So if you have questions about our services or you'd like to work with us, please reach out. We'd love to hear from you and we would love to work with you. So Mike, what would be the first piece of advice you would give to a business that is about to merge or be acquired from a sales tax perspective?
Good question. Let's talk about a little bit of a background first. Why is someone who's buying your company? Why would they be
[00:02:00] concerned with any of this? Well, there's this pesky little thing out there called successor liability, and your attorney or your accountant may have told you, well, you don't have to worry about that because we're doing an asset sale.
Unfortunately, what a lot of accountants and a lot of attorneys don't realize that normal liabilities in an asset sale. The purchaser doesn't have to worry about, but sales tax liabilities follow the assets. So they're treated entirely different than normal liabilities. So if someone's buying your company, and you have sales tax problems, they're acquiring your problems also.
Because of that, more and more companies are adding sales tax to their due diligence process. So, it's not just the states that you have to worry about. Yeah, being found by a state is, is not fun. However, some companies
[00:03:00] go their entire existence, never found by a state, then they go to sell themselves, and the seller breaks the bad news to them.
I'll give you an example. We had this one company. And they had put themselves up for sale. It was a father son company. They built this company from nothing to about 30 million dollars. They got their 30 million dollar sales price and they had an accountant who was working for him for 30 years, while they were building this company.
And they never thought about sales tax and, unfortunately they were using independent contractors all across the country. So they had nexus everywhere, didn't realize it. Most companies don't realize that third parties, can actually create a link or connection with a state we call nexus. Most companies think about what they're doing themselves, not about third parties.
So they had nexus everywhere. And they should have been collecting tax all across the country. So when they get into
[00:04:00] negotiations. They get their 30 million dollar sales price, but once the due diligence starts, the seller came back and said, Hey, you got, you know, issues all across the country here. We want you to put, 15 million into an escrow account.
So that's 50 percent of the sales price. So. The accountant gives us a call and he's all in a panic. He says, is this a, you know, some type of ploy, you know, to get a cheaper price or something. And unfortunately we had to let him know, no, this is, this is the real deal. This is a big issue. And now the accountant, he's really worried.
So if you're an accountant out there, You know, this man has been signing off on loans, and he's been doing audits, and never once mentioned the possibility of any contingent liabilities or anything else, and now 50 percent of the sales price, 15 million dollars. These two gentlemen thought that
[00:05:00] they were going to be getting they're no longer getting or not getting right away and a portion of that money
has got to go to fix what the problems are. So it's not just the states you have to worry about no one wants to be buying your problems so that's often uncovered during the sale process. So my first piece of advice Is don't wait until you're putting yourself up for sale. Know what your potential exposure could be and address it well before.
You start talking about putting a company up for sale. And the longer you wait to do this, I mean, these types of problems don't go away. They just build with time. So, you know, the sooner you know what your nexus footprint is, in other words, where you have the potential to collect, potential responsibility to collect or remit tax.
That's what your nexus footprint
[00:06:00] is. And until you know what that is, and until you know what the potential amounts could be, you really don't, want to be putting yourself up for sale. This is something that, why not today? Why not tomorrow? I mean, you really shouldn't be putting this off because as I said, it just grows with time.
So the first thing to do is to figure out what's your nexus footprint. Where could you potentially have a requirement to pay and remit sales tax? So, Mike, with that first piece of advice, someone's going along, they do, they do the work, they figure out what the problems are, what the pain points are, what should they do if they find out that they have issues?
What, what do they have to disclose? What, what next, basically? Technically, it depends on what they're asked. I mean, you can't hide information from the
[00:07:00] acquirer, but maybe the acquired doesn't ask those questions. So we said the first thing you want to do is to figure out where you may have a responsibility to file tax.
The second thing is to see if what you're selling is taxable in the states where you may have a responsibility to collect the tax and then you got to figure out how to get registered. If you're going to
have a lot of exposure and you're going to be selling the company in a short period of time. You probably want to take care of all of that back exposure through what's called the voluntary disclosure agreement. Instead of allowing a state to come back 7, 8, 10 years. You're gonna be limiting their look back period to either 345 years, which knocks off a whole bunch of back tax penalty and interest.
And then even during that process, that 3, if it's 3 years. They'll waive the penalty. You still have to pay the back tax for those three years. Still have to pay the interest in a state
[00:08:00] like California state, like Texas, they waive a hundred percent of the penalty and a hundred percent of the interest.
So you got to figure out the first step is where you might be able to, have a requirement to register. Second is figure out if what you sell is taxable in all these states. The third is what's your potential past exposure. The fourth is looking at how long from, you know, how far from today you're going to be, looking to sell your company.
If it's five years, we may have a different strategy for you. Maybe you just want to get registered on a perspective basis. If it's going to be within the next year, then maybe you do want to utilize that voluntary disclosure agreement. I mean, if you've been collecting and remitting tax for five years, a lot of companies that are doing their due diligence don't care about the period before that.
If you've only been collecting tax for a year. Yeah, they're probably going to care about the period before that. So, it
[00:09:00] all depends on how much lead time you have before you plan on selling your company as to what the next steps are, how you want to address that past exposure. Now, if all of a sudden you get an offer out of the blue and someone wants to buy your company, then it falls back on what questions are they asking you?
And believe it or not, even though most, responsible companies are actually checking their, sales tax of the potential, acquisition, some companies still don't. So if they're not asking you any questions. You know, if you need that, you want to be totally honest, then you can disclose everything, but there's not a requirement to disclose it.
A lot of times you won't even know it. To disclose it. So if you're not asked a question, you know, don't bother, with the, you know, with disclosing it, you know, the old Adam with the buyer beware. If the buyer is not doing their due diligence, if they're not doing their job,
[00:10:00] there's no obligation on you unless there's going to be something written into the contract, that says, Hey, if this comes up, we're coming back to you.
So generally, this is your money, and you're going to be a better steward of your money than the purchaser. So if you leave it up to them to go out and get everything fixed, they're just going to do it in the quickest way possible because they're utilizing your money. So generally you want to have control of the process, which is another reason you want to do it sooner rather than later.
I mean, if you're under the crunch, a lot of your options go away. Whenever a purchaser asks you a specific question, you got to answer truthfully to the best of your ability. So, that's what you, you, you have to disclose. You got to give them whatever records they're, they're looking for. Now, a lot of times the purchaser is going to say, well, we need tax clearance letters.
Well, if you've been registered, a tax
[00:11:00] clearance letter is a fairly simple process. You go to the state and say, hey, I'm going to be selling my company. I need a tax clearance letter. The state has a certain amount of time to come back and say, okay, you don't owe any taxes. You're clear. If they're not going to meet that letter, some of these states, you know, can say, well, we're going to audit you just to make sure you don't know anything.
So asking for a tax clearance letter can trigger an audit. So that's number one. Number two, if the, if you're not registered, then you can't get a tax clearance certificate. What do you do at that point? Well, you can either do a voluntary disclosure agreement again. You want to be in charge here and you pay any of the past exposure when you're doing this.
You're going to want to make sure that, you get the penalty waiver and that the right nexus date is used and the right look back period is used because you want to be paying as little as legally possible in order to clear all of your past
[00:12:00] exposure. So, again. At what stage of the process are we talking about?
You know, once the sellers done their due diligence, you don't have a lot of options. You got to pretty much do what they're telling you to do, especially if you're looking for a fast close and, you know, getting money back from the purchaser, you know, if it's set aside in escrow is always a lot harder than not having anything set up in an escrow account because all of your tax issues are taken care of prior to, entering into, talks about selling the company.
Mike, if someone were to choose to not disclose, could they be facing any consequences for that? Liability issues, that the seller of the business could potentially run into if they don't take care of that exposure? Well, I'm not an attorney, so don't construe any of this as legal advice. But, you know, a lot of times this happens
[00:13:00] and the seller of the companies is unaware of this.
A lot of times if they were aware of their issues, they would have taken care of them. So if the buyer doesn't do their job, if they don't do adequate due diligence, well, shame on the buyer. And that's why we're seeing more and more sales tax, become part of the due diligence, process, because these companies have gotten burned.
A number of them have gotten burned. But if there's nothing written into the, the contract from a layman's point of view, I don't think that, the purchaser of the company has any recourse, unless they, you know, can prove that there was fraud or something was intentionally misheld. But if, if they don't ask for it, you know, and it could have asked for it in a number of oblique ways.
But if it's never asked. Then I don't see how there's, there's any exposure. The problem is if you're going to be
[00:14:00] selling your company, do you really want to hope that the buyer doesn't ask you any questions because nowadays most companies, as I said, you know, include sales tax as part of their due diligence process.
So, you know, the smarter companies out there are taking care of these issues sooner rather than later. They're they want all of their ducks in a row prior to talking about selling the company. They have more options on how to handle the potential exposure. If they're addressing this sooner rather than later, you know, once the the seller, excuse me, once the purchaser knows about this, The hands are kind of tied.
A lot of these options are off the table, especially if there's a tight time frame for this, deal to be closing.
All right. Anything additional that you may want a seller to know or a seller may want to know. And as a reminder to everyone, we are going to do an episode that's for, for the
[00:15:00] buyers too. So if you're a buyer, make sure to check that out, but anything else we want people to know here. Yeah, there are lots of reasons to want to take care of this sooner rather than later.
I mean, if a state finds you, these mitigation programs like a voluntary disclosure agreement are generally not available. And if a state finds you, and it happens all of the time, They're going to want either seven years or eight years or 10 years of all of the back tax. They can go longer than that, but that's just generally what they do, depending on the state.
They're going to want all of the back tax, plus the penalty, plus the interest. And over an eight year period, it's the interest that's going to kill you. I mean, it can quickly, the penalty and interest can quickly add up, to 50, 60, 65%. So that's something you gotta. Got to look out for. A state like Washington, the penalty rate alone, just the penalty is
[00:16:00] 39%. Most states are 25%. Some states are as low as 10%. But on average, it's going to be somewhere in the neighborhood of 25, 30%. So that's just the penalty. Then you have the interest on top of that. And, you know, if the state finds you there, there's no wheeling. There's no dealing. A lot of people says, well, I'm going to wait until the state finds me.
You know, there are programs out there to deal with this before the state finds you. I mean, you might be able to get some type of payment plan if the state finds you, but you're not going to be able to talk them down. A lot of attorneys say, well, we'll, we'll negotiate that when you get caught. Well, unfortunately, you know, 15 years ago, maybe that was the case, but nowadays, unless you're going to be insolvent and you've got to prove with personal bank returns and business bank returns and business bank statements and personal bank statements
[00:17:00] that paying the state is literally going to make you insolvent.
I mean the state wants their money then generally, they're not going to cut a deal with you. It's not like the IRS. States are 10 times worse than the IRS was in its heyday when they were, you know, now we've got this newer friendlier IRS, but the IRS used to be miserable and the states are worse than that.
They're not going to cut deals, at the drop of the hat because you get a sweet talking, attorney. A lot of times people who deal with the IRS all the time, get it into, someone's head that, oh, we can talk to the states the same way we talk to the IRS. And that's just not true. Sometimes the states will want to make an example out of someone.
And they will force them into bankruptcy. So there's a lot of reasons to deal with this sooner rather than later. If you want to take care of the past exposure, you know, these VDAs are great tools. I
[00:18:00] mean, you can waive years. I mean, like in California, they find you, it's eight years. You step forward voluntarily, it's 36 months.
You're saving five years worth of back taxless penalty and interest. And then for that three year period, you're getting the penalty waives. Still got to pay the back tax, still got to pay the, the interest. But it's a great tool. It's a whole lot better than letting that state find you and states have you.
It's called discovery units. They're always out there looking for people they believe should be collecting and paying their taxes. And when the times get tough, when we're in a recession or companies are making less money, they're paying less income tax. They're paying less sales tax. The efforts of these discovery units are stepped up.
So, It's not just the sale of a company you got to be working worried about. I mean, you could be found by, by state any day. To sum up. So you
[00:19:00] got this reason anyway, you don't want the states to find you first. If you know that you're going to be selling the company in five years or so, let's put together a strategy and figure out, you know, which states you may want to utilize this, VDA tool, which states maybe just makes sense to
register prospectively on a going forward basis. Maybe you have no, idea what your exposure is. Maybe we do a nexus, project. Maybe we do an exposure type project. We have one, service that we offer. It's called a, an exposure review with a VDA cost benefit analysis, and it comes out with recommendations on whether a VDA makes sense or whether, registration, makes sense.
There's also historical registrations. There's lots of different programs you can take advantage of, and that's what a program like that is going to tell you. So you got to know what the issue is before you can deal with the issue. And then it's a whole nother problem. If all of a sudden you've
[00:20:00] not done any of these things and you're entering into negotiations, you're limited.
So what can we do, within the parameters of what the purchaser of the company is going to allow? So, if you're going to be selling your company, Sooner rather than later is when you want to address this, but at any step along the way, I think you need some help. You need to reach out to someone, whether it be us or someone like us to help you work through these issues and, plan the best path forward.
Thank you so much, Mike. And you know, along with the services that Mike has mentioned here, we have even more of them. We have all kinds of services to help with your sales tax needs. And if you have questions about those services, if you have questions about many, one of the many free resources that we have on our website, please reach out to me directly.
My email is emoffat, E M O F F A T at salestaxandmore. com. You can also go right to our
[00:21:00] website, salestaxandmore.com. And if you've enjoyed what you've listened to here today, if you've been enjoying our podcast, please like, and subscribe, we would greatly appreciate it and thank you so much for listening.
Thank you everyone. And we hope to see you on the next episode of the Sales Tax and More podcast. The next, episode is going to be about the buy side in a merger and acquisition. Take care of everyone. Bye bye.