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SMEs at forefront of M&A activity amid COVID-19

Adrian Flores
Adrian Flores
22 June 2020 2 minute readShare
Dennis Tomaras

Privately owned small to medium businesses should be factoring in a few key considerations when undertaking a merger as they lead the wave of M&A activity in Australia due to COVID-19, recommends a law firm.

According to Dennis Tomaras of law firm Cornwalls, current M&A activity is especially prominent in the technology, agricultural, services and manufacturing sectors.

“It’s probably 50-50 between those businesses looking to merge for survival reasons and those seizing the initiative in difficult times to acquire a competitor, supplier or even a key client in some cases,” Mr Tomaras said.

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“Now that Australian business has recovered over the initial shock of COVID-19, SMEs are learning to live with the virus and trying to make the most of it, by considering M&A opportunities.”

Structuring considerations in an M&A deal

 

Mr Tomaras cited four main concerns that businesses should consider when structuring an M&A deal:

1. Buying shares or assets in the target company

Mr Tomaras said that there are numerous pros and cons of each and no two M&A deals are ever quite the same; however, vendors typically prefer selling their shares and buyers typically prefer acquiring assets.

“As a general rule, Australia’s capital gains tax laws tend to favour a sale of shares for the sellers creating a degree of tension between the interests of the buyer and the seller,” he said.

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“However, the GST and state tax implications of the deal should also be considered by the parties.”

2. Are the entities ready for an M&A deal? 

Mr Tomaras believed the biggest mistake businesses make is that they are underprepared for an M&A deal.

“You wouldn’t sell your house without making sure it’s ready for inspection, and it’s the same in a business deal. Acquirers and target entities need to make sure their legal and financial affairs are up to date and that all federal and state tax returns are in order.”

According to Mr Tomaras, buyers often conduct due diligence on the seller, too, as they want to know their business and staff are going to be in good hands.

“A good idea is to get the company advisers to undertake a high-level health check of the business before any M&A activities commence,” he said.

“Directors of companies also need to be aware that they may be personally liable for certain past tax liabilities of a target company.”

3. Effect on tax losses of the deal 

Mr Tomaras said Australia’s income tax laws contain detailed rules as to the usage of company tax losses.

“Tax losses — whether of a revenue or a capital nature — can be valuable assets to a buyer of a company. Typically, the so-called ‘continuity of ownership’ test will be failed on an acquisition of the target company,” he said.

“Even though the ‘continuity of business’ test is available regarding the future use of the losses, this is a more difficult test to satisfy, and care is required in what business improvements and changes in personnel are made in the target company.”

4. The allocation of consideration over the assets acquired 

One of the most contentious issues particularly on a future ATO audit, according to Mr Tomaras, is the allocation of consideration against the assets acquired. 

He said this is an area of interest both to business and taxation authorities alike as, for example, tax depreciation is based on the acquisition cost of an asset.

“Likewise, there may be different tax outcomes for both GST and state taxes based on the allocation of consideration to the assets acquired,” Mr Tomaras said.

SMEs at forefront of M&A activity amid COVID-19
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Adrian Flores
Adrian Flores

Adrian Flores is the deputy editor of MyBusiness. Before that, he was the deputy editor for SMSF Adviser as well as features editor for ifa (Independent Financial Adviser), InvestorDaily, Risk Adviser, Fintech Business and Adviser Innovation.

You can email Adrian at [email protected].

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