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The Value of Financial & Tax Due Diligence – Preparing for an M&A Transaction in 2024

Merger and acquisitions (“M&A”) activity fell to its lowest level in ten years globally in 2023, as high interest rates and an economic slowdown weighed on companies’ dealmaking confidence. Total M&A volumes fell 18% to about $3 trillion, according to the most recent data from Dealogic[i], the lowest since 2013 when deal volumes were at $2.8 trillion.

However, the Goldman Sachs ‘2024 M&A Outlook’[ii] predicts a sharp shift toward recovery in dealmaking, noting activity is set to align with pre-2018 median levels. The macroeconomic backdrop is stabilizing, and financing markets are reopening. Notably, M&A volumes reflect the strongest level of activity since the beginning of the current rate-hiking cycle. 

Key themes for the strategic M&A market in 2024 include:

• Elevated focus on M&A as a strategic lever by corporate acquirers
• Amplified activity in growth sectors like technology and healthcare
• Continued simplification of business models
• Increased cross-border activity
• Increased sponsor dealmaking

With the recovery of the M&A market, time is of the essence when a company is involved in a transaction. Whether it is a buy-side or sell-side transaction, the diligence process and the time between signing and closing a deal is extremely fast, and the critical due diligence and structuring work is compressed into a very tight timeline. Companies need to have as much information as possible readily available to make important decisions and maximize value in M&A deals.

If you are a seller or a buyer, it is key that you identify a strong financial and tax due diligence partner for the anticipated upswing in deal activity. The following are some of the value drivers of third-party due diligence, which are critical to all transactions:

• Seller Considerations
  • Sell-side readiness:
    • Identification of long-term or short-term projects necessary to expand enterprise value
    • Cash to accrual conversion
    • Preparation of management team and identification of gaps in leadership
  • Sell-side financial and tax due diligence:
    • Gives bidders confidence and saves time
    • Focus on issues that can be resolved or mitigated before the Company goes to the market (i.e., set the narrative)
    • Expansion of enterprise value

• Buyer Considerations
  • The primary objective is to evaluate the strengths and weaknesses of a target’s business
  • Assessment of the quality of reported earnings (i.e., confirmation of EBITDA)
  • Assessment of net working capital on an adjusted basis
  • Identification of debt-like considerations
  • Identification of key value drivers and key risks that are critical to the investment decision
  • Validate or disprove key assumptions in the investment model (go or no-go decision)
  • Identification of financial and tax issues to be included/addressed in the Purchase Agreement

Many companies often overlook tax until items are requested in diligence that can be value drivers in determining the purchase price. Compiling these items “quickly” during the tight tax due diligence timeline is very difficult. In particular, sellers should have the following information readily available as buyers will request these items:

• An organizational chart that shows U.S. federal income tax (“USFIT”) classification by legal entity
  • Having an organizational chart by legal entity for USFIT purposes, especially if it includes tax attributes by legal entity, will help streamline the tax due diligence process and add to buyer confidence in a company’s historical tax positions.

• A schedule of all uncertain tax positions (“UTPs”) with all detail supporting the tax positions
  • This is an important diligence item and the more documentation that you have that supports the tax position the better.

• Tax Attribute Analysis
  • It is essential to have a consolidated schedule, as well as schedules by legal entity, for USFIT and state income tax purposes of all tax attributes. It is also important to determine if there are any limitations on your (or a potential buyer’s) ability to utilize any of these tax attributes in the future (i.e., Sections 382/383). Important tax attributes to consider include:
    • Net operating losses (“NOLs”)
    • Credit carryforwards
    • Capital losses
    • Section 163(j) carryforwards
    • Consolidated and separate company tax basis balance sheets
    • Tax basis in the stock of subsidiaries
    • Schedule of intercompany gains and losses
    • Earnings and profits (“E&P”)

• Tax Structuring & Legal Entity Rationalization and Optimization
  • Once you have a tax organizational chart and all your tax attributes, it may make sense to perform a formal Legal Entity Rationalization (“LER”). A company may need to carve out certain assets in anticipation of a sale, so separating these assets in connection with LER is the most efficient from a time and cost perspective. Based on the answers around business and financial planning, you may be able to liquidate or merge legal entities to streamline your business, optimize the utilization of tax attributes, and reduce the annual cost of compliance for maintaining each legal entity.

How Centri Can Help

Centri’s M&A Advisory team can support your company through all stages of the M&A lifecycle, including the time you build, manage, and enhance your business organically and when you are ready for a purchase or sale. Our team includes our National Office of former Big 4 professionals who have over 40 years of experience in their respective fields. We utilize our vast deal experience to provide a unique value measurement solution, enabling you to achieve your goals through successful planning and execution of both buy-side and sell-side transactions. Contact us to learn how our financial and tax due diligence experts can help your company succeed.

[i] https://www.reuters.com/markets/deals/dealmakers-see-rebound-after-global-ma-volumes-hit-decade-low-2023-12-21/

[ii] https://www.goldmansachs.com/what-we-do/investment-banking/insights/articles/ma-outlook-2024/report.pdf

Maxwell B. Heller

Managing Director | M&A Advisory Practice Leader

Max is a Managing Director at Centri Business Consulting and the leader of the firm’s M&A Advisory Practice. He has more than 20 years of merger and acquisition consulting experience and provides M&A advisory services to private equity firms, venture capital firms, family offices, and strategic/corporate clients. View Maxwell B. Heller's Full Bio

Brittany Burke

Managing Director | Tax Advisory | CPA

Brittany is a Managing Director at Centri Business Consulting. She has more than 14 years of experience assisting clients with tax issues pertaining to mergers and acquisitions, sell-side transactions, attribute services work, tax due diligence, legal entity rationalization and structuring, corporate compliance & provisions (ASC 740), financial modeling, and corporate restructurings for domestic and cross-border transactions involving multinational corporations and S corporations. View Brittany Burke's Full Bio