Address potential future due diligence headaches well before attempting to exit
A step we take with our clients, as we guide them on their journey to experiencing a euphoric exit event one day, is to conduct a due diligence dress rehearsal at least one year prior to beginning the sale process. There are common challenges that arise during any due diligence process as an acquirer kicks the tires of a company they are looking to buy, and all can be either avoided or better managed to reduce the stress on you, the seller.
One such challenge that commonly arises in due diligence by an acquirer is your company’s handling of State income and sales tax reporting for the various States that you might conduct business in. And where it can get gray is what is the definition of “conducting” business and does it expose you not just to paying income tax in that State but potentially sales tax as well. An acquirer wants to understand this because if it’s found that there is an issue and any State or States challenge you, it could lead to a future risk or liability to the acquirer under their ownership.
An example of this is let’s say your company sells a product to a business in another State, such as a distributor or a service type partner. This of course opens you to paying an income tax in that State but how about having to pay a sales tax? State tax authorities look to see what they call a “nexus” or connection between your company and their State tax paying requirements. Generally, the income tax you owe is clear but what can be gray relates to how your company is handling the sales tax.
A good due diligence dress rehearsal will find such potential hangups that could concern a potential acquirer. Use time as a friend today to find such potential hangups and address them so they don’t bog down your ultimate due diligence process. If you’re thinking about exiting in the next 1-2 years, think about conducting a due diligence dress rehearsal. We can help by visiting our Business Diagnostics page on our website where we have a helpful tool to get you thinking about successfully preparing for due diligence. (Due Diligence Dress Rehearsal Diagnostic)
