While some industries are holding back on merger and acquisition (M&A) activity due to the impact of COVID-19, others are accelerating. In this piece, ADP Tax Director Paul VanHuysen shares his thoughts around the considerations that organizations need to take into account when considering M&A transactions.

Even in the best economic conditions, mergers and acquisitions can pose their fair share of challenges. And for small businesses considering such a deal, there's increased risk to making these moves due to the ongoing global health crisis.

But strange times can also create opportunities when deals are set up with due diligence. Paul VanHuysen, Tax Director at ADP, explains the mergers and acquisitions tax considerations that come into play in these scenarios as well as other critical financial issues that can influence the success of these deals.

M&A deal flow during COVID-19

VanHuysen sees two mindsets in businesses during the COVID-19 crisis. "Uncertainty of the future leaves some companies wanting to hold off on M&A, while others are in the opposite camp and want to accelerate," he says.

Additionally, VanHuysen notes that some of these differences depend on the industry and the organization's outlook on the future. "Are they comfortable with their uncertainty? Do they have deals in play? Do they have confidence in the speed of recovery?" he asks. Strategic goals, such as acquiring talent or market share, still factor into M&A decisions in today's environment as well.

When an organization is considering a deal, VanHuysen advises caution due to the unusual conditions of the current business landscape. "Between government restrictions, lower consumer confidence and disrupted supply chains, a lot of businesses have been impacted in fundamental ways," he says. "Consider whether the COVID-19 impact will be temporary or permanent for potential deal partners."

Mergers and acquisitions tax considerations

VanHuysen notes that there are a few additional tax considerations businesses need to be aware of in the COVID-19 environment with evolving guidance and legislation. First, they need to research which government tax benefits potential deal partners used as part of their COVID-19 relief.

"Initially in 2020, companies that took a forgivable PPP loan could not also use the Employee Retention Credit under the CARES Act," VanHuysen says. "However, legislative changes in subsequent stimulus packages have allowed qualifying employers to tap into both benefits subject to some limitations."

If your organization used one of these tax breaks and the deal partner took the other, you may find that one of the tax breaks is disallowed after the merger/acquisition, which would require you to factor extra tax costs into your estimates.

You also need to consider the potential nexus consequences, which may require you to collect payroll and other taxes for additional states after the merger/acquisition. The COVID-19 work-from-home era has made this process more complicated, as VanHuysen points out, "You might not only gain nexus in the location of the new company, but also the numerous states where their employees are working from home."

Potential tax benefits

Beyond mergers and acquisitions tax considerations, VanHuysen notes that there are potential tax benefits waiting to be uncovered. As part of your due diligence, you should also check to see whether the organization you're looking to merge with or acquire has taken advantage of all possible tax credits, as some can be claimed retroactively.

The federal Empowerment Zone Credit and disaster-based retention credits from 2017 to 2020 are two commonly overlooked examples that can be claimed retroactively. "These are extra, hidden pockets of value that could make a difference in your decision," VanHuysen notes.

Wage considerations

According to VanHuysen, figuring out wages can be a trouble spot during M&A proceedings. For instance, the partner organization may pay its employees more or less than what your staff makes, even if their job titles are similar.

If there's a wage discrepancy, take the time to understand why that's the case rather than immediately moving everyone to your current wage scale, which could lead to turnover. Reasons why wages could be different include:

  • Location. If the state or local taxes and cost of living are higher in the other organization's location, wages need to be too.
  • Work responsibilities. Employees at the other organization may be doing extra work despite having similar job titles. Make sure you understand exactly what's being performed by people in similar roles across the two businesses.
  • Special skills. If roles in the other organization require special skills or training, they may need to pay a wage premium to get suitable workers.

As a final piece of advice, VanHuysen recommends looking around your industry for deal activity. If you're hesitant but others are making moves, it might make sense to approach making a deal from a position of confidence. On the other hand, if there are no other deals going on, you may want to be more cautious.

In the end, there is always going to be risk and uncertainty in moving forward with a potential merger or acquisition. However, if you consider all relevant tax and wage trouble spots and the terms of the deal still look profitable, the best bet for your business may be to move forward with that deal, even in today's unusual landscape.

Don't miss out on valuable tax credits and business incentives. Learn about the ADP SmartCompliance Tax Credits Module.

Tags: Tax Tax Credit Workforce Planning Change Management Articles Midsize Business Large Business