After a deal year marked by a high volume of fast transactions, those who were on the buy-side in 2021 are now taking a hard look at their assets as the time to go back to market approaches. As they do so, they're facing a much different market. For instance, recent legislation has led many to focus on taxes. And while taxes aren't likely ever to be the deal maker, they can definitely be a deal breaker, says Aon Managing Director, M&A and Transaction Solutions, Jessica Harger.

"Whenever there's new legislation our phones start ringing off the hook because everybody's trying to navigate a new environment and navigate new rules," she says. "Nobody really has a crystal ball and knows what's going to happen."

For example, the Inflation Reduction Act of 2022, she says, brought a lot of opportunity to people in the form of new tax credits and energy initiatives that are now transferable, something she expects will be seen a lot in M&A transactions. On the flip side, the administration's increased IRS budget that was introduced — adding some $80 billion in funding to the tax-collecting agency over the next 10 years, includes some $46 billion for litigation and enforcement efforts.

"What we've seen come out of that is a heightened view of what does this mean for our deals, particularly there's more pressure on valuations," Harger said during the St. Louis Smart Business Dealmakers Conference. "Negotiations are starting to get a little bit tougher. I think that that's something that's becoming increasingly a challenge, maybe something that's going to start to really change the focus, not because necessarily people are worried that they're doing something wrong but more that there might be ambiguity or disagreements in positions that have been taken. And with the new budget, what does that mean as far as is the IRS going to be looking at me? Am I going to have to pay a lot of money just to get to the right end of the spectrum here? And how do we manage that upfront in the deal?"

After 2021's crazy deal year where transactions tended to happen quickly, what she says was seen on the tax side in 2022 was that a lot of buyers, because of that speed and volume, had swept some things under the rug during deal negotiations, essentially throwing money at issues and assuming they could be dealt with later.

"As time went on in 2022, taking a look back and saying, Okay, what did we really have here? What do we got going on? And so, without things like negotiated indemnities or escrows for things like large, identified tax exposures, people were really taking a step back and looking at what they had and saying, We now need something here to help us protect the value of this investment that we've made," she says. "That was something interesting that we saw in '22 was really buyers going back and saying, Now what do I do? And looking to things like tax insurance to help protect that investment for those things that a seller indemnity wasn't available for. They don't have that nice escrow sitting there just in case the 'if and when' happens and the IRS comes knocking and they have to go through some sort of prolonged litigation to get to a good end result."

What used to be something where she'd come in with buyers at the negotiation table and help with their tax risks, it seemed to be focused more on looking backward at what they had. This year, she says, it seems like people are preparing for the sale knowing that the market is a little bit harder and looking for what they can do now in advance of a potential auction scenario to make sure they're getting the most out of that deal when they sell it.

"We want to ring-fence these issues, we want to take it off the table, we want to make sure we have a nice clean negotiation process, and that we're able to sell it for the proceeds we expect to get, ultimately, when we're at that table; and so really thinking more in advance," she says. "And it's really interesting how quickly it's happened to go from that really quick deal environment in '21 to see things kind of slow down and people be a little bit more retrospective in what they've invested in, and now looking forward towards the potential sale thinking, Alright, we know we have this lingering, flagged issue that we haven't necessarily identified. What can we do in advance? So really going from buy-side insurance in many instances to more sell-side insurance, buy-side insurance maybe after the deal has been done, or now even target- or portfolio-company-level insurance, just thinking about the possibility of a future sale."