Companies and business owners should not rush into deals just because there is still a high level of merger and acquisitions activity in Australia, as fear of missing out – or FOMO – could lead to hasty decisions not necessarily based on sound business strategy.

Prospective purchasers and vendors need to be across everything from the deal structure through to valuations, tax implications and any onerous future obligations.

There is an increasing number of complex deal structures being negotiated, where the traditional onus on cash has been morphing into combinations including multiple cash instalments, contingent consideration, and future equity allocations.

Increased complexity also requires increased scrutiny from all parties. If there are different phases or triggers in a sale, there needs to be adequate due diligence on both the buy and sell side. Also, a rush to complete a deal means increased pressure, the potential for poor decision making, and a greater risk of mistakes.

A key area under increasing scrutiny in deal-making is the valuation of the equity or the underlying asset(s). Understanding the value of the equity or the underlying asset(s) may seem to be a fundamental principle.

However, depending on the equity/ assets being transferred, whether concessional tax treatments are being sought or an asset-for-asset swap being undertaken, how and when the value is determined is critical.

There have been times where it has effectively been up to the market to determine the value but this may not be appropriate where valuations needed to have been conducted at different times, or the valuation split between specific asset classes.

Over recent years, federal and state tax authorities have been increasingly questioning valuations which has seen buyers and sellers hit with significant post-deal tax liabilities.

A full understanding of all tax implications, including federal taxes and state duties, is critical, and just when that tax will be payable is equally as important.

This article on business sales was first published in the Winter 2022 issue of Financial Times.