Post Covid-19 economy inspiring increased M&A activity with financial advisers


Dennis Tomaras

Dennis Tomaras, a partner in eastern seaboard law firm, Cornwalls, believes that Covid-19 will be a significant contributing factor inspiring a wave of merger and acquisition activity in the financial advisory sector.

‘Financial advisers have been exiting the industry in growing numbers over recent years and this is fuelling advice businesses seeking M & A opportunities.  It’s probably a 50 / 50 split between those businesses seizing the initiative to merge for survival reasons and those acquiring a practice that will facilitate growth aspirations says Tomaras.

‘Financial advisory practices are primarily small business operations and are no different to their peers in the broader SME sector recovering firstly from the initial shock of Covid-19 and now learning to live with the virus.  In making the most of the situation, considering M&A opportunities is an outcome of the current scenario’ says Tomaras.

As a Tax adviser, Tomaras believes that there are four main structuring considerations that financial advisers should consider in any M&A deal.  These are as follows.

Buying shares or assets in the target company.  Tomaras says 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 – mainly being client contracts.  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.
However, the GST and state tax implications of the deal should also be considered by the parties.

Are the entities ready for an M&A deal?  Tomaras believes the biggest mistake financial advisory 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’ says Tomaras.  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.

In an industry accustomed to the rigors diligence in the provision of compliant financial advice, sellers too want to know their business and staff are going to be in good hands.  A good idea he says is to get the company advisers to undertake a high-level health check of the business before any M&A activities commence.  Directors of companies also need to be aware that they may be personally liable for certain past tax liabilities of a target company.

Effect on tax losses of the deal.  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 any company – and it’s the same for financial advisory businesses.  Typically, the so called ‘continuity of ownership’ test will be failed on an acquisition of the target company.

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, says Tomaras.

The allocation of consideration over the assets acquired.  One of the most contentious issues, particularly on a future ATO audit, is the allocation of consideration against the assets acquired.  For financial advisory businesses, internally created intellectual property and software systems need to considered carefully, as well as the value of client relationships.  This is an area of interest both to business and taxation authorities alike as for example, tax depreciation, (where available), 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.  Tomaras recommends involving a qualified valuer to contemporaneously opine on how consideration has been allocated across assets, so as to avoid future disputes with taxation authorities.

The bottom line says Tomaras is that as M&A activities increase in the financial advisory sector, both buyers and sellers need to be ready for a deal and need to do their homework across a range of revenue law and other relevant issues.

You must be logged in to post or view comments.