YOUR TAXES: From Exodus to exit

How does an Israeli tech company exit (M&A deal) at a good price?

By LEON HARRIS
April 3, 2018 19:48
4 minute read.
money

money. (photo credit: REUTERS)

 
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At Passover we celebrate our exodus from Egypt and the season of our freedom. In modern times, that means the start-up nation in the promised land is free to make money from exits – selling tech and other businesses to multinational groups that need to stay ahead at all costs.

For example, Intel paid $15 billion for Mobileye in 2017 and KLA-Tencor is paying $3.4 billion in 2018 for Orbotech.

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How does an Israeli tech company exit (M&A deal) at a good price? A corporate auction may sometimes double the starting price, but how does a seller company get to the best starting price in the first place? And what are potential buyers likely to look for in an Israeli business? In this article we briefly discuss some factors for Israeli sellers to check out ahead of any M&A/exit deal.

Prepare for the deal:

There are a number of stages in any deal including the following. Prepare your objectives, reasons, information, advisers and the business itself. Identify candidates. Auction, woo and negotiate. Check the seller has finance in place. Execute the deal. Post deal integration.

What types of deal do you want?

There are many ways to cut the deal. Do you want a share sale? An asset purchase? A management buyout by existing management? A management buy-in by a new hungry but experienced team? Or a just an exclusive license or supply contract. Much will depend on tax, who is the stronger party and the overall circumstances – see below.

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What are the seller’s reasons for selling?

The seller must have a plausible answer to this question.

Opportunity to make a capital gain? Forced to sell -bankruptcy, death or sickness? Retiring? Increased regulation? Increased competition or failing business? If the latter – is there a turnaround opportunity or an asset opportunity for the buyer?

What are the buyer’s reasons for buying?

In the Israeli tech sector, the buyer typically wants access to a new product or new technology. But not always. Other reasons for buying include access to new customers or sector, economies of scale, market dominance, turnaround opportunity, asset opportunity. But the buyer must do due diligence and be careful not to overspend.

What are the main methods of sale?

Methods of sale include a trade sale, financial sale, auction, IPO, exclusive license or supply, buy-out, buy-in.

Questions to ask before selling a business.

Is this the right time? Is the business in good shape? Can profitability be reasonably enhanced? Careless cost-cutting may be spotted in due diligence. So may window dressing the financial statements – typical techniques not recommended include inflating inventory, “losing” supplier invoices, premature income recognition. Are personnel performing well? Are management performing well? Is the customer relations management system doing its job? Do you know the realistic value range of the business? Who will help sell the business? What will the key negotiation issues be- price and what else? Will you accept sale installments, typically linked to sales or performance milestones? Are you prepared to stay on to help ensure a smooth handover?

Have your business plan ready.

As Paul Simon sang, “Get a new plan, Stan!” (50 Ways to Leave Your Lover).

Every business should have a business plan. Set goals.

Have a strategy and time-table for achieving the goals.

Share relevant parts with employees. For this, management needs to demonstrate leadership. Leadership means a longer term vision and entrepreneurial skills to make it all happen roughly to plan (mishaps happen along the way). Check intellectual property is patented or otherwise protected. Assess the market and strategy for reaching the market. Identify unique selling points, points of competitive advantage, e.g. niche product, trend or clientele. List your competitors and why you think you are better. Have past financials ready and a budget going 3 – 5 years into the future, reflecting your milestones (see above about vision).

Predicting the future is difficult, but necessary to help identify relevant factors. What matters in particular are the assumptions made – they need to be listed and make sense.

What about the tax side?

Sellers usually prefer a share sale. That way shareholders may pay 25%-33% Israeli capital gains tax, or 0% if they are foreign investors who invested after 2008, but they should check their home country taxation. Employees on a stock option plan approved under Section 102 of the Income Tax Ordinance may pay Israeli tax as low as 25% and no national insurance. But the buyers typically prefer to buy the main assets – which can increase the overall Israeli tax liability for all selling shareholders to around 50%.

Sometimes buyers, especially those listed on a stock exchange, pay with their own stock (shares), not cash.

There may even be a lock-up period or installments. If so, the sellers must go upfront to the Israeli Tax Authority for a deferral ruling. Detailed rules exist and advance planning is absolutely essential for both sides.

Moreover, the buyer must withhold tax – typically 30% - from the sale consideration unless the sellers produce clearance for any lesser rate of tax.

The transaction agreement will need to reflect all these tax aspects among many others.

As always, consult experienced legal and tax advisers in each country at an early stage in specific cases.

leon@hcat.co

The writer is a certified public accountant at Harris Consulting & Tax Ltd with much M&A experience.

    

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