In many of the M&A transactions where we serve as shareholder representative, post-closing issues arise around whether the selling company had properly reported and filed tax returns over state sales and use taxes. Using a shareholder representative with experience analyzing and resolving these issues is critical to minimizing charges against working capital and indemnity escrows, maximizing shareholder returns.
Many venture-backed companies appropriately focus their capital and time on developing and selling next generation products. That success attracts the attention of big companies, often leading to successful M&A exits. However, analysis and compliance with complex state-by-state sales and use tax regulations often is deferred or handled in the most expedient manner so as not to detract from the core mission of execution on product development and launch. This lack of attention can lead to significant liabilities when the buyer takes over and begins auditing and correcting past sales and use tax practices.
Given that typically all the costs incurred for pre-closing tax issues will be paid out of either a working capital escrow or an indemnity escrow, the buyer has little incentive to minimize taxes, penalties and fees payable on seller’s pre-closing sales. Fortis, with its in-house team of experts, has successfully resolved tax matters for shareholders on multiple occasions.
In a recent transaction where Fortis served as shareholder representative, the buyer notified Fortis after closing that the seller potentially owed over $2 million in back sales and use taxes for sales made pre-closing in multiple states. The buyer had the right to remediate the matter in its discretion, and had no incentive to mitigate or minimize the taxes, costs, penalties or fees payable in remediation because buyer could charge all costs against the indemnity escrow.
Fortis promptly contacted the buyer and proposed that Fortis would lead the efforts to remediate the sales and use tax matters, allowing buyer to approve in advance all filings and settlements in the matter.
Fortis pursued voluntary disclosure agreements and other settlement opportunities with states in which seller had made sales pre-closing. In the end, Fortis was able to resolve all tax issues for under $1 million, saving the shareholders over $1 million off of buyer’s original estimate.
M&A transactions present a wide range of situations where post-closing claims can arise. As a leading post-closing shareholder representative on private M&A transactions, we have faced these issues many times on behalf of selling shareholders. Effectively dealing with these issues requires experience, judgement and the ability to work with and establish credibility with all parties to the transaction. Fortis, serving as shareholder representative on the deal, recognized the importance of controlling and resolving the tax issues on behalf of the shareholders, and was able to construct a proposal that benefited all parties.
Please contact us if you would like to discuss this issue or any other post-closing matter in connection with M&A transactions. Also, please check out Fortis Advisors’ Forsite™ M&A Deal Tool. As a leading post-closing shareholder representative on private M&A deals, we have collected data on hundreds of M&A agreements and we have used that data to build a reference tool for the M&A community to empower dealmakers with the data they need to understand “market,” negotiate better deals and follow emerging trends.