Due diligence in mergers and acquisitions

THEVOZ Attorneys’ knowledge of the fundamentals of international tax planning can guide the due diligence process for mergers and acquisitions

When buying or selling a company in a global business environment, it is a good idea to have someone who understands international tax law on your team. The tax implications of an acquisition or merger can be fundamental to profitability and, therefore, directly affects the offer price.

There are buyers and sellers in every transaction and the process for each side is fundamentally different. The seller is interested in maintaining control of the information about the company being sold. Some information will undoubtedly be positive, but some may not be. A lot of information will be ambiguous, and it is difficult to know which information that is and how it can be used in the sale.

What is important to sellers is that they do not lose control of the information or the process of releasing it. The general rule of thumb is the larger the company, the more information there is to disclose and the more vigilant the seller needs to be about controlling it. The seller will have everyone with access to information sign a non-compete and non- disclosure agreement.

There are several ways to share information. The seller can send documents digitally to prospective buyers, but this affords the seller the lowest degree of security. It was once common, in the days before everything was digitized and easy to transfer, to have sellers set up a secure room for viewing documents, with a strict “window” for viewing (something like two weeks during business hours) and strict sign-in procedures, including provisions that nothing could be photographed or copied and buyers were not allowed to take notes.

The method currently preferred by many sellers is to set up a secure digital portal upon which to load documents, with tight security precautions and strict permissions as to who may access the portal. There are many advantages to this method, for example, the ability to see which documents are being viewed, which could potentially give the seller an idea of the negotiation strategy of a buyer.

Buyers’ due diligence is a prelude to making an offer and then negotiating a contract to purchase the business. There are strategies to increase the likelihood of getting the best offer from buyers. The document release strategy is part of that because the seller wants to release the information that makes the company look like a good investment. But sellers can also require that buyers follow a strict timeline to make an offer and may also require that offers be structured and communicated according to a specific format.

Buyers may also be given the opportunity to submit questions along with their offer. The answers to the buyer’s most important questions may impact negotiations.

THEVOZ Attorneys can help sellers design the process for a merger or acquisition. That will include information flow, permissions required and developing an offer template for buyers. THEVOZ Attorneys can also be involved with negotiations and contract development to finalize the sale.

BUYERS NEED TO ASSESS ALL THE RISKS OF THE TARGET COMPANY

The process for the buyer is quite different, because buyers need to develop an understanding of the target company. This includes closely reviewing financial statements, operations and production, the market the company serves, and the technology the company uses. In general, the buyer’s side needs a team of experts in each of these fields, as well as lawyers who specialize in that industry or the process. Generally, the buyer team has a leader who assigns the due diligence work and establishes deadlines for each task, as well as deliverables.

The due diligence process is one of risk evaluation. The risks are often buried in the documents and it takes experience and expertise to uncover them. The buyer’s team members need to ask the right questions and find the right evidence to determine if the target company is a good investment.

After investigating risks, the team members summarize and analyze each risk on a percentage basis. Are there legal risks, like product liability lawsuits filed against the company? Are their market risks, such as an aging buyer segment that will negatively impact sales? Who covers which risk, the buyer or the seller? When the offer is made, risk assignment is an important part of the negotiation. The buyer may ask for guarantees to mitigate specific risks, and they may be willing to increase the offer price to get those guarantees.

When working on behalf of a buyer group, THEVOZ Attorneys, with deep experience in the fundamentals of international tax planning, will look closely at the bilateral taxation issues relevant to the purchase, as well as make a recommendation about how to structure the group to optimize tax liability. THEVOZ Attorneys has experience with mergers and acquisitions and is prepared to lead the process and help select the team to analyze the target company as a prospective investment, as well as participating in drafting the contract between buyer and seller.

 

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