What is Tax Due Diligence?
What Does Tax Due Diligence Entail?
If you’re thinking of buying a practice, be aware of what you’ll end up with… (caption)
We were recently approached by a partner who was in the final stages of due diligence to acquire a similar sized accounting firm from a retiring practitioner. The acquisition included a long tail indemnity policy but as the shares in the business were being acquired, there was an inherent level of risk. A quick conversation about the firm brought up a few issues, and we suggested grabbing a few files for a look… a story of the need for tax due diligence was in the making.
The first file we picked up was the largest client in the firm, a long-standing client, everything looked good until we looked at the Family Trust Election (FTE). Dividends were being paid to non-family members and had been done so for several years. As part of the profit share arrangement, the family trust (which owned the business) had been incentivising senior staff through “dividends” paid from the family trust. This would be a requirement of years of returns, loss of franking credits and penalty taxes.
The second file we looked at was a shareholder (and controller) of several businesses, each of which were running their own Payroll Tax threshold. A brief file note showed that it was considered but never followed up, it was clear that there was a substantial exposure, as the group provisions clearly applied and there were several years of liability.
The third and most frightening was a calculation for the small business concessions, the practitioner did not count the entire assets of the client (which substantially exceeded the threshold). When asked, he stated that it was only the value of the business that counted. Our partner almost fell off his chair, and he wondered what had been going on in the practice.
Whilst three clients out of a touch under 500 does not make a practice, it was clear that there were some endemic issues in the advice that had been given, and the exposure for the incoming purchaser was substantial. It was clear that there was an education gap and that the retiring practitioner may not have been keeping on top of the game.
Working with our partner and the retiring practitioner, we were able to find a solution where the risk issues would be identified, articulated and managed, and that the retiring practitioner would undertake a three year transition handover of the business, taking steps to rectify any of the outstanding issues and then transferring the clients to the acquiring firm, rather than just selling the shares in the business. Whilst this added a substantial workload, it was understood that unless these steps were taken the deal couldn’t proceed.
Financial analysis of an acquired business is one step, understanding what comes with it is another.
The experienced team at C&D can provide assistance in completing your due diligence before a business purchase. You can contact us on 1300 023 782 or email us at email@example.com