Buying (or selling) a US business? Don't let tax be the deal-breaker you didn't see coming

Every deal has a story: find the target, agree the price, sign the contract, close, move on. The best stories also include a chapter devoted to diligence – tax diligence to be specific.

Whether you're a UK asset manager evaluating a US portfolio company or an entrepreneur looking to expand your business to the other side of the Atlantic, the same principle applies - US tax is not a box to tick; it's a risk to actively manage, on both sides of the table.

The US tax system doesn't do simple - federal, state and local rules stack on top of each other, tax elections can change how a target is taxed and state nexus rules mean a business can owe tax in states outside its state of incorporation. For UK buyers accustomed to a comparatively tidy single-jurisdiction system, this complexity is often the first genuine surprise of a US deal.

On the buy side, the goal is simple to state and complex to execute - know exactly what you're inheriting before you sign, not after. On the sell side, clean, well-documented tax history and robust procedures are key to keep the deal moving at pace and stops buyers using "unknowns" as leverage to chip away at price on the eve of close.

A tax due diligence also gives buy side insight into target’s tax practices and unpacks its history. The process starts with a review of tax returns (federal, as well as state and local filings) and continues with an analysis of related party transactions and agreements, any audits, previous M&A transactions, state apportionment and nexus studies, among others.

Done properly, US tax due diligence isn't a compliance formality - it's where risks are identified and quantified, potentially including:

• Historic exposure - unfiled returns, questions around validity of S-corporation elections, unrecognised state nexus and/or sales and use tax gaps
• Inherited structuring risk - inefficient holding structures, permanent establishment concerns and/or financing arrangements that aren’t necessarily fit for purpose

The point isn't to generate a long list of scary findings - it's to give you, as buyer or seller, a clear-eyed view of what you're actually dealing with so decisions get made with facts, not assumptions.

Diligence findings should feed directly into how the deal is structured and should not sit in a report that gets filed away once the deal team moves on to signing. Entity choice, financing structures and cash repatriation planning all have long tails, and getting them wrong at the outset tends to be far more expensive to unwind later. Not to mention correcting any delinquent filings and entering into voluntary disclosure agreements so that target can start a fresh chapter.

Key to any diligence exercise is getting the scope right. The scope (and attached price tag) should reflect the size of the deal, the materiality of the US within the overall transaction perimeter and management’s risk threshold. There isn’t a “one-size-fits-all” approach to scope as it can range from a “red flag” report to a full-scope tax due diligence. In all cases though, tax review of the transaction legal documentation is critical.

Why work with us

Our US Corporate & International Tax team built its foundations at Big Four firms, doing exactly this kind of work for exactly this kind of deal. We've brought that expertise into a firm where our clients get direct, senior attention. Our clients can expect to get sophisticated, technically rigorous advice at a price point that actually fits the size of the deal.

If you're weighing up a US acquisition, preparing a US business for sale, or simply want a second look at the US tax exposure within your existing operations - we'd be glad to have that conversation.

The information in this publication provides a broad overview of the topics addressed. While we strive for accuracy, we cannot guarantee it will remain accurate in the future. This is not tax advice; please contact us directly to discuss your specific circumstances.