Nov 7, 2012
By John Cho, Partner, KPMG Enterprise
Getting ready to sell your business? Now is the time to solve tax issues.
As you prepare your business for sale, think about making it as appealing as possible to prospective buyers. When considering all of the factors that can shape the business' value to a buyer, remember to include tax matters. If questionable tax issues remain unsettled, it can reduce the offer amount you may receive for your business. On the other hand, being able to transparently show your company has a positive tax position can help boost your business' value.
In today's economic market, tax issues and risks are coming under increased scrutiny which can lead to a longer sale process and necessitate more negotiation. Prospective buyers may seek a reduction in price or payment holdbacks if your company has unresolved tax issues.
How can you avoid these problems? Simply put, by being as well prepared as possible. If you pinpoint tax issues and risks a buyer may be worried about prior to the onset of the negotiation period, you'll likely have the much needed time to asses and diminish these risks. Furthermore, recognizing these issues can help you deliberate the most tax effective sale options for your company and evaluate the prospective advantages of a pre-sale reorganization.
As part of your preparatory process, contemplate whether your company has unclaimed losses for tax principles. The new owner of the company could profit if the losses are still accessible for use to counterbalance income and decrease tax after they obtain control of the business. But, not all losses remain accessible for use after an acquisition of control; for example, capital losses will not exist after the acquisition.
You may wish to look at past sales deals and operating activities to decide whether the enterprise has any noteworthy losses from property or discontinued businesses that might possibly expire on acquisition of control. In some instances, you might be able to take actions so that the losses are utilized to generate prospective tax deductions for a buyer after the acquisition of the company.
If you've decided that the enterprise has unclaimed losses that can benefit a buyer, you might be able to raise your price if you can demonstrate the tax benefits of the tax losses to a prospective buyer.
Buyers will also concentrate on tax risks linked to any overseas operations you may have. They will want reassurance that these matters are under control, seeing that this is a sensitive area for Canada Revenue Agency reassessments. With that said, you should confirm that your transfer pricing studies are up-to-date and complete, and that you have carefully examined the tax implications to operating in other jurisdictions. By doing this, you can help diminish the need for holdbacks.
It's also useful to make sure your tax filing positions are properly documented and noted. You may wish to contemplate the tax treatment of capital gains aside from sales of shares, the tax treatment of past deal fees, support for exempt dividends appropriated from overseas affiliates, and sizeable adjustments that do not recur year over year, to name a few.
When beginning the due diligence process with a prospective buyer, make sure to have the following information at your fingertips:
- Records such as tax returns, financial statements and supporting schedules for all open years (i.e., years that are not statute-barred)
- Memos from tax advisers
- All CRA information such assessments and reassessments as well as audit proposal letters
- Support for tax exposure supplied in the tax provision to the financial statements
- Transfer pricing documents
- Compensation to non-resident shareholders
- T106 forms (information returns of non-arm's length deals with non-residents), T1134 forms (information returns
pertaining to foreign affiliates), and NR4 forms (statements of sums paid or credited to non-residents of Canada) in the event that you have any transactions with non-residents of Canada.
You should also have tables of years that are open or closed to tax authority challenges, and R&D tax credit claim acceptance letters.
Also, don't forget indirect taxes such as GST and HST, applicable provincial sales taxes, any payroll and withholding taxes, as well as customs duties. If your enterprise does business in the US, you might have sales tax issues there as well. You may benefit if you can assure your prospective buyer that these taxes have been handled properly.
These are a handful of issues you'll need to think about when getting ready to sell your business. The tax consequences of selling a company are generally far more complex than this brief summary can communicate. Consider reaching out to a professional to get detailed, comprehensive advice to help you make sure all tax implications are carefully addressed and considered. Making tax planning a fundamental component of your preparations to sell your company can help the process move more efficiently and help you get the best price for your business.
John Cho is a Partner with KPMG Enterprise™. He can be reached at 416 777 3994 or firstname.lastname@example.org
The views and opinions expressed herein are those of the author and do not necessarily represent the views and opinions of KPMG LLP. The information contained herein is of a general nature and is not intended to address the circumstances of any particular individual or entity. Although we endeavor to provide accurate and timely information, there can be no guarantee that such information is accurate as of the date it is received or that it will continue to be accurate in the future. No one should act on such information without appropriate professional advice after a thorough examination of the particular situation.
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