International M&A: Why Taxes Matter Even for Small Companies
In the past year I’ve seen an increasing amount of M&A activity especially with my international clients. Every transaction I’ve worked on has had substantial tax content to it. I continue to see similar tax issues crop up in each transaction. What it tells me is that in most cases start-up CEOs often pay too little attention to international tax issues at start-up or as their business grows.
For example, I recently began working with a fast growing U.S. software company with just under $1.6m in 2014 bookings. It has an engineering and sales subsidiary overseas as well as 80% of its subscription growth opportunities outside of the U.S. Getting the compliance reporting under control was the first move as equity investor reviews of tax policies highlighted this problem during due diligence process. Resolving the proper ownership of the IP is a 2015 goal while valuation is still reasonable. In addition, the CFO needs to establish procedures to recover tax withholdings deducted from foreign customer payments. Unless you get these things under control early on in the life of the business, you likely won’t even get to M&A.
Some observations made by the authors of a piece I saw recently are worth repeating:
1. In a global economy all companies, even small ones, have cross border aspects of their business.
2. Compliance with both US and foreign tax laws is critical to enabling a transaction to go forward.
3. Because tax rates vary dramatically among developed countries, it is imperative to locate assets such as appreciating intellectual property rights or other intangible assets, manufacturing capabilities, research and development and other items of economic substance into specific countries early in the life of a developing enterprise. Migrating these assets when they are economically mature is often tax cost prohibitive.
4. In a due diligence process tax structures come under intense scrutiny. If they have been administered well they may enhance transaction value. If not, then they may reduce transaction value.
If you are a business owner or executive running an enterprise with even modest international operations and are contemplating a sale of your business as an exit strategy in 3 to 5 years, getting some top notch international tax advice early on is one of the best things you can do to assure yourself of optimizing transaction value when you are ready to sell.
Dennis Ondyak and Christine Ballard of Moss Adams make a compelling case for good international tax planning in their recent article published in the Silicon Valley Business Journal.
In 1986, Mr. Weis became a pioneer in the contingent management movement as the founder of CFOs2GO. As “the original CFO”, he served as Chief Financial Officer for more than 100 companies developing the proven practices that make “as needed” support valuable.
Bob leads the International Practice Group helping companies set up and maintain foreign operations inside and outside of the U.S. as well as attract top talent for their US team. He also co-leads the M&A Practice Group.
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