State and local tax (SALT) issues are really starting to rear up in Quality of Earnings review during diligence. But they're not new.
"Buyers, over the last five to 10 years, have become more aware as the states have gotten more aggressive," says Clearview Group Managing Director & CEO Brian Davis. "When it comes to SALT, that liability transfers a lot of times. The states are looking at the headlines and they're seeing who's acquired what and what's going on, and then they just start poking around and see what's there."
Davis says it's possible to learn a lot about a target's tax situation from the Q of E side because it gives buyers data driven from contracts.
"The reality of SALT is that words matter," he says. "Contracts drive the taxability of things."
But not all tax issues are deal killers. He says knowing whether something moves the needle or not requires looking at those contracts to see the wording, and then figure out how it's being handled.
"The one thing I can tell you about SALT is it's extremely complex," Davis says. "It's so complex that I can virtually guarantee you that no company is fully compliant with state and local tax issues. So we're not going in there looking to boil the ocean as they say and nitpick. What we're looking for is material non-compliance. And when you do it the right way, you can have adjustments, you can have escrows, and then there are some times that you just got to run for the hills because the liability is just too big."
Not only are there different degrees of SALT issues, but where those issues reside is another consideration. He says places such as New York and California are very aggressive on their tax collection, for instance.
"It's really a matter of degree of non-compliance and how much cleanup we have to do post-closing," says Calvert Street Capital Partners Partner Brian Guerin. "And for those areas that there is material exposure, there's always going to be an escrow or a holdback or something that's going to give us some cover for those kinds of issues. But it always comes down to degree of how much time and resources you've got to throw at it after to get compliant and stay compliant."
Guerin and Davis, along with Nemphos Braue LLC's George Nemphos, The Courtney Group's Alan Macksey and ICSG Holdings & Incorp Industries' Peter Vrettakos, spoke at last year's Baltimore Smart Business Dealmakers Conference about the current buy-side environment and best practices for closing acquisitions. Hit play on the video above to catch the full panel discussion.