Chronicles of an M&A tax professional

The tax profession offers a myriad of potential paths to a successful, satisfying and rewarding career. On this episode, listen in as Will Weatherford, CPA, Managing Director — Transaction Advisory Services, Forvis, and Teri Hanson, Managing Director — Alvarez & Marsal Tax, LLC, share their perspectives of what it's like to be in the mergers and acquisitions (M&A) tax niche from both a federal and state perspective.

What you'll learn in this episode

• A day in the life of an M&A tax professional (0:58)
• Steps when starting an engagement (4:20)
• Red flags and lessons learned (9:24)
• Saving the day (12:02)
• Reflections — past and future (16:31)
• Career drivers (17:14)
• Pages from Will and Teri's travel journals (21:18)

AICPA resources

• Salt Roadmap and Resource Center — Browse the reference library for the latest guidance and tools to address your state and local tax needs. Navigate to the interactive U.S. map to reference taxes imposed, tax rates, due dates, tax forms and more. View the SALT resources index for additional resources by topic.
• 2022 State Tax Nexus Guide — Learn about state tax nexus including the many types of nexus (affiliate, economic, click-through, cookie, etc.), the physical presence standard and more.
• 2022 State Tax Nexus Checklist — Access a comprehensive checklist about state tax nexus considerations involving income, franchise, sales and use taxes.
• 6 reasons an S corporation wouldn't need a PLR | Tax Section Odyssey — On this podcast episode, Tony Nitti, CPA, Partner — National Tax, EY discusses Rev. Proc. 2022-19, which provides procedures to allow S corporations and their shareholders to resolve frequently encountered issues without requesting a PLR.
• Wayfair Client Notification Letter — The U.S. Supreme Court ruling in South Dakota v. Wayfair, Inc. opens the door for possible economic nexus issues. Use this letter to initiate client planning.

Transcript

April Walker: On today's podcast, listen to hear more about a day in the life of M&A tax professionals.

Hello everyone and welcome to the AICPA's Tax Section Odyssey podcast, where we offer thought leadership on all things tax facing the profession. I'm April Walker, a Lead Manager from the Tax Section, and today I'm excited to share our guests.

They are Will Weatherford. He is a Managing Director of Transaction Advisory Services with FORVIS, and Teri Hansen, who's also a Managing Director with Alvarez & Marsal Tax.

Just to kick us off, we hear so much about the CPA pipeline and how students and professionals entering the CPA profession don't see the excitement and don't see — all we do as tax professionals is just crank out tax returns. It might be fun to explore a day in your life, a day in the life of Will and Teri.

They're going to tell us…Will, we'll start out with you. Tell us a little bit about your background, and your role, and M&A tax due diligence in general and then once you're done, Teri, go right ahead.

Will Weatherford: Sure. Thanks, April. I'm a Managing Director with FORVIS as you said, and my job is really to lead our M&A tax engagements. I have a team that works for me, but I'm the one leading it — the one signing off at the end of the day.

From an M&A tax perspective our work really breaks down into what I call the diligence, which I think we're probably start off talking about tax diligence in that, and then the structuring which I think will also get to. But from a tax due diligence perspective, that is really about when one company is buying another part of the process of acquiring…is doing diligence. It's really no different than for people who bought a house where you hire an inspector to come in and look around and see if there's any problems. It's really a similar concept and there'll be various service providers.

I come in, the lawyers come in and do legal due diligence, and maybe other insurance advisor will come in and do an insurance diligence. We are brought in to really review the company's historical tax filings and the positions they have taken and really just understand what the company has done historically from a tax perspective and really to understand if there's any tax liabilities both from a federal-international perspective, which is what I focus on.

We're really looking at the federal income taxes and to the extent that there's any cross-border activity, the foreign taxes, and we have local teams that do that…then, what Teri focuses on, and she'll get into is, the state and local tax perspective, any state taxes — both income and non-income.

The goal is really to go in and get an understanding of the company's tax posture and again, really looking to understand if there's any historical liabilities that would be inherited by a buyer in connection with the acquisition. It's a bit of a fine line to walk because the goal is not to find 9,000 things the company did wrong. Nobody is going to be — given the nature of our tax system — no one's going to be 100% compliant all the time. Just like auditors when we operate with materiality threshold, but we really want to find those material tax exposures that would influence, or impact a person's decision-making, and then we want to understand them.

We want to ring fence what that is, and then also part of it is working to see if there's ways that we can mitigate them either. There may be something that the selling company can do pre-closing to mitigate the issue or if it's something that our client has to deal with post-acquisition. That's what my role from a federal and international perspective.

Teri, I'd love to hear about what you do from a state perspective.

Hanson: We actually do pretty similar things, it's just a slightly different focus.

As you mentioned, I focused on the state and local taxes, that's any state income tax, any non-income tax, that's sales and use, gross receipts, property tax, payroll tax, excise taxes, unclaimed property, though that really technically isn't a tax.

We're also going in, we're looking at companies to make sure we understand their business and their profile, and then we're trying to help our clients make sure they're appropriately protected in the purchase agreement to the extent we do find those material issues.

Walker: Great. Definitely, I think it's pretty obvious why due diligence is so important to a buyer. But maybe we'll start with Teri, maybe talk about the process, the steps you actually go through as you're starting an engagement, and how you actually make this happen.

Hanson: Yeah. The first thing we really do, anytime we kick off a deal, we want to understand as much as we can about the target. Whether it's understanding what kind of structured it is, I'm sure we'll get into that. There's really different tax implications.

If we're working with a C Corporation, or an S Corporation, or a partnership. We need to understand what the income tax profile looks like.

From a state and local perspective it's very important to understand exactly what the company buys and sells. We tried to get all the information that we can to make sure we're advising our clients on the best way to approach something.

Once that process gets kicked off, the next step is really a fact-gathering phase where we're requesting information to review. We're having conversations with the management team — whether it's the CEO or the CFO, the various tax advisers, and understanding exactly what they do, where we think they should be filing, and again, picking that apart to see where we might have some problems.

Walker: I would imagine, especially in the state and local area. I'm sure we'll find lots of problems too, but I feel like I hear so much about trying to figure out where you have nexus and — just from a compliance standpoint — that I would feel like in a due diligence process…I'm sure that is a very challenging adventure in trying to figure out every client is compliant or not.

Hanson: That is an understatement. Yeah.

It's especially for some of these smaller companies with very small tax departments or maybe even non-existent tax departments. It's really challenging to understand every tax and every single state.

Unfortunately, the rules are constantly changing, so we find the taxpayers just have a really difficult time keeping up.

Walker: Now Will, what would you like to add to that from a process standpoint and how might it be the same or how might it be different?

Weatherford: I will say that for us from a federal perspective, understanding the transaction structure is really critical, and there's quite a lot of misinformation out there.

People think, oh, I'm purchasing assets, no tax liabilities come over. That's not true. We spend a lot of time explaining that concept of people, but from my perspective, again, understanding what type of legal entity are we buying?

Are we buying a C corporation, or are we buying a S corporation? If you're buying a C corporation, I have to look at everything, right. All the tax liabilities will come over.

S corporations are very interesting just only because S corporations don't really pay taxes other than in very specific circumstances. But to be in that position, you have to have a valid S selection, and those S selection rules are very arcane, hyper-technical, and we have to spend most of our time really diligently seeing the validity of that election and that involves some candid, very uncomfortable conversations because there's very specific rules around the types of shareholders and things like that.

We have to get on the phone candidly and ask people, hey, what was your marital status? What's your residency status? If they have trusts, we have to ask to see this trust agreements, and a lot of times you read these trust agreements and just all the skeletons. You just follow the closet because you're reading all this stuff and people obviously get very sensitive about that. I can tell you, I've been called about every possible name you can think of. Most of it I can't repeat on the air unless this is that kind of podcast, but I didn't think it was.

Walker: No, not today unfortunately!

Weatherford: People obviously get very sensitive about this, but that's what we have to do.

You have to definitely need a thick skin to work in M&A because you will run into people who…and candidly you're going in, you're oftentimes dealing with a tax preparer, and you're reviewing their work and they obviously don't want to look bad in front of their client.

But sometimes you just find problems and you find things they've done wrong and you have to have the very uncomfortable conversation because nobody wants to admit they were wrong, particularly if it becomes like an economic point in the deal.

Walker: And, probably professionals that did things wrong, potentially.

Weatherford: Oh yeah. It happens where there's someone who had a big miss or something and we have to raise it and there's implications for them on terms of them having to deal with that on the backend — from a diligence perspective, understanding the entity.

It's a very similar process to what Teri outlined. There was a fact-finding phase, gathering the documents, reviewing the tax returns. We're not performing an audit. Not going in and ticking and tying every single number, but we certainly do look at the material things and we do have to rely quite a bit on what management is telling us.

Obviously, if they're telling us something that's just doesn't reconcile with what we're seeing we need to investigate that. But we do try to make it a collaborative process. I always tell the management teams that were working with — that we understand they have day jobs.

Our intent is not to create a second job for them, and we try to ask for documents and things that are off the shelf, things that can be readily provided. If something is not readily available, we have different ways of working with things. I always tell them I'm like, look guys, if you're working, I'm working. If you're dealing with this 11:00 o'clock at night and you got a question, just text me or whatever because our goal is not to.

Walker: Make things harder. Yeah.

Weatherford: Exactly.

Walker: You brought it up. People loved to hear horror stories, protecting the innocent, of course. Tell us about a big miss you've seen as a business went through this process.

Weatherford: I would say a lot of the big misses, again, there's always the quotidian stuff, I'll say that, which is just very everyday things, it's not very material.

I would say the big misses are really around prior acquisitions when a company previously went through a transaction and then was held and then our client is acquiring it. And, we generally have to go back and look at that prior acquisition and maybe they structured it to get a step up. Depending on how that waas structure if they did a 338(h)(10) election, that could potentially be invalid.

I run into anti-turning more often than I would like. Especially if some of these very old founder companies that are, maybe they're finally exiting or they're exiting to a sponsor. I've definitely seen some issues where a company thought they've taken these large amortization deductions may go in and we say, hey, this was all subject to anti-churning. It can't amortize any of it. I've dealt with that.

Walker: You are the enemy. Except you can also be the hero. It's not all about that.

Weatherford: It's hard, right. Because with what we do, the best thing that we can tell our client is, hey, the company was doing everything it was supposed to, was complying with the law and paying its taxes.

It's not often that we can come in and find…and be like, hey, look, sometimes we can find an opportunity where we can say, hey, look, the company is not taking advantage of this tax benefit. That does come up occasionally, but more often than not, we're just delivering either basically no news or delivering some bad news.

Diligence is…it's a necessary process, but we'll get into the structuring aspect, but I think the structuring is more where we I think deliver the real value. Not that diligence isn't important process, but I think the real value to a lot of our clients is really around the structuring aspect of it.

Walker: Perfect. Teri, I'II love if you have a horror story you'd like to share.

Hanson: I find on the state and local tax side, sales tax is almost an issue on every single deal. And it's after the Supreme Court, Wayfair Supreme Court back in 2018, the sales tax rules just changed so drastically and it didn't change consistently, unfortunately.

Every single state has got some different type of qualification as far as when you need to file. What you're selling is potentially taxable or not taxable. We just find that it's really difficult for taxpayers to stay on top of that with the inconsistencies.

Once you start adding on pretty significant amounts of revenue that are going into these various states, the exposures add up very quickly. As Will said, my favorite deal is when we don't find anything at all. But unfortunately, it's just not the case; sales tax seems to bear it's ugly head more often than not.

Walker: Circling back to you something you said, Will. Let's talk about when you can be the hero. Let's talk about when you can play a really important role as an adviser in M&A deals.

Weatherford: I think part of our goal is one with the diligence like we've discussed. But and again, that's just if we find issues, we have to raise them.

I think part of where we can add value is really, I think Teri said this earlier, is that helping our clients understand any exposures and how that can be mitigated. Sometimes the target can do something prior to the closing to clean up an issue and then that way it's just not dealt with.

Otherwise, it's just about framing issues and ring-fencing them and then being able to appropriately addressthat in the agreement in terms of just contractual protections. That's, I think, one way that we can add value there to our clients is just really helping them understand these issues and just making sure that they're protected and that there's not any surprises later.

Then I think the other part is the structuring element, which I've alluded to a few times.

That's really all the work we do outside of diligence. Again, I think that's more we're advising on the transaction structure and telling our clients, hey, if you structure it this way, you can get a step-up in the transaction and that's a real cash tax benefit to a lot of our clients.

Part of it is working with the attorneys to put together the transaction structure and the steps. Lot of times we're putting together PowerPoint decks and laying out each step and a lot of circles and triangles and squares and things like that, and arrows and things are moving around.

I think to a lot of non-tax people, it doesn't make a lot of sense, but it definitely makes sense to tax people and the lawyers and whatnot. I think that's one area, and we can do that and it's really all the things around that.

We'll review the purchase agreement, and provide comments on that. We work really closely with a lot of tax attorneys and very collaboratively with them in terms of helping them understand. Because they're very obviously…their main focus is getting the purchase agreement drafted correctly, but they need our input in terms of the issues that we're seeing and whatnot. We work very closely with the attorneys.

A lot of times there's a lot of modeling involved. This job is very…you need to be pretty decent with Excel, we do a lot of modeling. A lot of our clients really liked the modeling and that's I think, a big value driver for them in terms of helping them to understand what the go-forward tax rate is or what's going to be their step-up or what taxes are they going to pay in the future.

That's another area where we can add a lot of values to help our clients see the projections and what this is going to look like going forward. Then really just everything around that structuring is just the all encompassing everything other than diligence and we just get called upon to do.

Really a lot of things end up in taxes' wheelhouse, even though it may not necessarily be tax-related, as Teri said.

There's some things that are like unclaimed property is not really a tax, but we just end up having to deal with it. There's a lot of things that we just tell pile onto our basket that we have to help address and tax for whatever reason — always just seems to go down to the wire on some of these deals. We're working right until the very end to try to get these deals closed. And, tax often becomes, once they got through some of the other business-level issues, people become very focused on the taxes.

Walker: You always hear or I feel like I always hear, "Don't let the tail wag the dog." But it seems [tax] definitely is a huge part. You all play a really important role.

Weatherford: I think that's actually a really important point that you raise.

It's just that I know I've been told throughout my career that don't change the business deal and our job is really to take the business deal and implement it. However, what's been agreed to as commercial matter and make the tax framework work within that.

I think one of the worst things you can do as an M&A professional is to have to change the business deal because of something tax-related, unless that was contemplated beforehand. You just don't want to change that, but everyone just this is the business deal, this is what was agreed to and then people would react very negatively if a tax issue was changing the business deal in some way that affects one party or the other.

I think the difference between a very successful M&A professional and one who's maybe not so successful as one who really understands that you need to implement the business deal and needed to implement what was agreed to commercially. That needs to wag the tax tail and not the tax tail wagging the business deal, dog analogy makes any sense whatsoever?

Walker: I was struggling with it, too! Teri, do you have anything to add on that, or what role you can play helping businesses?

Tei Hanson: One of the other areas that we really add a lot of value is when our clients are selling companies. We're going to try to help them get the absolute best deal price that they can.

Whether that's identifying issues in advance and helping them clean that up before the company goes to market, or making sure that we fully appreciate the issues that we uncover and we can put a positive spin on that before potential buyers come in and ask for some pretty big concessions on the exit strategy.

Walker: I feel like 2022 was like a boom of M&A activity, not sure where we are in 2023 and what you guys are thinking going forward.

Hanson: For us, it seems like the markets, but a little bit softer in the first half of the year. Health care has been pretty consistent since COVID, which obviously makes a little bit of sense.

But we're seeing a very big uptick in our bankruptcy work right now. That said, based on conversations we've been having with our clients and what we're seeing as far as new deals pop up, it seems like the back half of the year is probably going to be pretty busy compared to the prior years.

Weatherford: I would say it's pretty consistent. 2023 has been a little choppy so far, but we're extremely busy right now, which is a high-class problem to have, obviously.

Walker: It is. In closing, both of you, I'd love for you to share what keeps you energized and motivated to stay in this business. I'm sure you have some hectic times when deals are wrapping up. Share what you love about your job. Hopefully, you're having a good day and it's good day to share that.

Weatherford: For me, what keeps me coming back to M&A tax is just that you have to have a very broad knowledge and in working in M&A tax, you just gain a very broad knowledge of tech because you work on enough deals.

You've seen everything after awhile and it's just amazing the most obscure topic can suddenly rise to the forefront and you're called upon to be the expert on it. That to me is always very interesting and I always tell people that M&A tax, we're the tip of the spear because we're the ones who get in first for a company and we have to go through everything, we see everything and then if that company becomes a compliance client of our firm, we're having to explain it all to the compliance team later on.

We really are the first people to get in and see what's going on and particularly in deligence for me, I think it's very interesting to go in and just look at what different companies have been doing and the positions they'd been taking and you really get a sense for what's going on in the market in terms of the overall tax.

Then, like I said from the structuring perspective, to me, I think someone I used to work with said that with structuring you're making history basically, and I like that because you really are getting in there and getting to put together a transaction structure and it's really interesting just going through and seeing all the moving pieces to that.

The last piece I really like is we work with a lot of different attorneys. For me, I work with our state and local team at FORVIS. We work very closely with them. We need their input. For example, in structuring, we need the state and local input. I think it was Peter Riley, the guy who writes for Forbes, he said that a plan that doesn't include state and local tax isn't much of a plan and that really is true and frankly with the way the state taxes are going, it's important to get that kind of input.

Hanson: From my perspective, I can honestly say that I'm never bored.

I think you've alluded to this at the very beginning, but tax compliance as tax compliance, it can really only be so exciting.

With M&A, I feel challenged every single day. Target companies that just completely run the gamut as far as industries and types of businesses and it's really impossible to know everything about every kind of tax. I feel that I'm constantly learning new things. I never know exactly what my day is going to entail and for me that keeps it very interesting.

My first month doing M&A, I worked on a crime scene cleanup company and a roof manufacturer and a healthcare clinic and a restaurant tour. You just see so many different things and I really don't see many other areas in tax or accounting in general where you get that broad range.

But I think the second thing, I think that really keeps me coming back every day, it's my team. M&A really provides an opportunity to work very closely with a large number of individuals. Like we side, we work very closely with our federal colleagues and with our financial colleagues and the team of people who are doing the M&A itself and it's very collaborative and it just it makes it fun.

Weatherford: I think Teri makes a good point. The people that we work with, I've worked with some very highly intelligent, very smart people over the years. To me, I really like working for people who can teach me a lot and so that's the opportunity I get within tax.

You work with other people from different law firms and things and a lot of very smart people there. It's a very small community. I always tell the people working for you, I'm like, doesn't pay to be (unkind) in M&A tax because it's just such a small field, you're going to run into people after awhile. You got to be nice to everybody.

Walker: I say that, in general, I think the profession is small and I've told people through my whole career — people will circle back in a way that you cannot even imagine, so it does not pay to blow the doors off.

Weatherford: I'll tell you, it's even smaller in M&A tax. You'd be surprised how often you run into the same people over and over again and some of them are really fun to work with and very smart and they have great perspective on things and some of them you just got to find a way to work with them.

Walker: There you go. That is like life lessons. I have a fun question as we're wrapping up. The title of this podcast is Tax Section Odyssey, so I like to think of us as taking a journey toward a better profession. When doing so, I like to get a glimpse of my guest's other journeys outside tax.

Sometimes those journeys probably add to my bucket list. Teri, share a page from your travel journal or bucket list place you would like to go?

Hanson: That is a good question. I would really like to go back to South Africa. I was there a long time ago and I absolutely love it.

Walker: Nice. What about you, Will?

Weatherford: Well, people know me, I really like wine and I really enjoy going to the Willamette Valley right outside Portland in Oregon and they have some fantastic pinot noir there and try to get out there at least once a year or so and to me, it's just like Napa Valley, but 25 years ago. So it's not quite as touristy and commercial.

Walker: I've never been to Oregon and it's been on the list for so many years anyway. I almost always add something to my list when I'm doing these podcasts.

Thank you so much, Will and Teri. This has been fun. I hope everybody enjoyed listening.

Again, this is April Walker from the AICPA Tax Section. This community is your go-to source for technical guidance and resources designed especially for CPA tax practitioners like you in mind. This is a podcast from AICPA and CIMA together as the Association of International Certified Professional Accountants. You can find us wherever you listen to your podcasts and we encourage you to follow us so you don't miss an episode.

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