[author: Greg Urbach]
The current administration’s pro-domestic energy policies indicate an increase in M&A activity in the energy industry in 2025. As a result, sellers will be looking to find cost-effective and useful ways to maximize deal value. A tax factbook is a tool that many companies have successfully used to do just that.
Tax Factbook: What is it?
Simply put, a tax factbook is a report that summarizes the tax profile of the target and is typically prepared prior to the bidding process. Information about the target (depending on whether the seller is divesting assets or a legal entity) may include its legal entity structure denoting the tax classification of each entity, historical M&A activity, operating and/or filing jurisdictions, location of offices, a tax filing calendar, federal and state and local audit history, tax attributes, tax compliance policies and procedures, and tax service providers. Depending on the specific nature of the transaction, a tax factbook may also include anticipated benefits of pre-transaction structuring to illustrate the value such structuring brings to the transaction (e.g., deliver a step-up to the buyer, minimize liability transfer, etc.).
Creating a tax factbook allows the seller to anticipate a buyer’s questions proactively by presenting the target’s tax-related information in a favorable and accurate manner. It is often most useful to get sell-side tax advisors involved early on in the sale process. Early involvement yields a detailed and tailored finished product that allows for potential pre-transaction structuring planning that may attract more desirable buyers.
Once completed, the tax factbook is often shared with potential bidders in conjunction with an informational presentation prepared by an investment banking team.
Tax Factbook: What is it not?
A tax factbook summarizes the tax profile of the target company, including information from federal and state and local tax returns, historical M&A activity, and any of the information noted above. A tax factbook does not, however, explain, analyze, or compute any potential tax exposures related to tax items discussed. Such analysis is more common in full-scope sell-side diligence reports (sometimes referred to as a vendor due diligence report).
As a result of its summary nature, a tax factbook is typically a more cost-effective and timely endeavor for a seller who is preparing for the bidding process.
Benefits of a Tax Factbook
A tax factbook drives value to the seller for a variety of reasons, including (1) summarizing relevant tax related information from a variety of sources, (2) preparing the sellers for the diligence phase, (3) discovering, and potentially remedying, potential tax related issues, (4) highlighting tax planning considerations, and (5) improve efficiency and buyer confidence in the deal.
Summarize tax information: As noted above, a tax factbook contains a variety of useful information. Such information is gathered from a review of tax returns, formation documents, structure charts, audit documents, etc. As any readers of this article who has reviewed a highly populated data room can attest to, relevant tax information is routinely found in a combination of up to hundreds of documents. While a buyer and their tax advisor will still need to review the underlying documents and forms, having a tax factbook as a summary is a welcomed sight from a buyer’s perspective and often instills buyer confidence that their counterparty has put in the extra effort in the tax due diligence process.
Additionally, if the proposed transaction is expected to be a carve-out of a disregarded subsidiary, it is common for a Seller to be unwilling to provide tax documentation that reveals specific details of the entire consolidated group. A tax factbook can be a useful and effective way to communicate only the relevant information of the subsidiary target without divulging sensitive information related to the non-target members of the consolidated group.
Prepare Sellers for the diligence process: Depending on the seller’s business and organizational structure, the individuals from the seller who will be involved in the tax due diligence process may not be tax professionals. Although the sell-side tax advisors are typically on calls between the seller and a potential bidder, the fact-finding discussions between the seller and the sell-side tax advisors are meant to closely resemble future questioning from a buyer’s tax due diligence advisor. As a result, preparation of the tax factbook allows the seller’s to become more familiar with the tax due diligence process and anticipate a buyer’s potential concerns.
Addressing known tax issues: When preparing a tax factbook, the sell-side tax advisor pours through several documents and analyzes everything from the target’s legal structure to its tax attributes, filing status in relevant jurisdictions, and more. During the preparation of the tax factbook, it is not uncommon for the sell-side tax advisor to uncover potential tax issues. For example, during the fact-finding process, the tax advisor determines that the target has not filed income and non-income tax returns in three required jurisdictions. Depending on the overall deal timing, preparation of the tax factbook has, at best, given the sellers the ability to seek a proactive solution or, at worst, provided the potential buyer with a candid response to something that would have been discovered during due diligence. Ideally, the issue is found early and the seller will have time to remedy the filing error by filing the late returns or pursuing voluntary disclosure agreements with the relevant jurisdictions. If there is not enough time to remedy the issue, the tax factbook would indicate that the seller is aware of the missing returns and is taking steps to remedy the situation. Either way, the tax factbook, or the process of preparing the tax factbook, has shown a buyer that the seller is knowledgeable and wants to make the diligence process as smooth as possible.
Highlight tax structuring alternatives: A tax factbook can also discuss potential transaction planning alternatives or considerations. Depending on the specific facts and circumstances, relaying important structuring considerations to a potential bidder helps drive the deal towards a structure that better aligns with the seller’s desired outcome. For example, the target in a proposed transaction is treated as an S corporation and the sellers want to divest 100% of the equity of the target. The tax factbook can outline the transaction’s eligibility for, and general benefits of, two common structuring alternatives: a Section 338(h)(10) election or a pre-transaction F reorganization. Communicating the availability of structuring alternatives informs the buyer of the availability of a desirable step-up in tax basis of target’s underlying assets and gives the buyer confidence in the seller’s understanding of complex tax concepts.
Improve deal efficiency: The sharing of a tax factbook early on in the deal life cycle promotes an efficient due diligence process. Similar to the financial reports prepared by investment bankers or financial due diligence teams that are delivered to bidders in the deal process, the tax factbook provides the same information to all potential bidders. Knowing that all bidders have been given identical tax information may allow sellers to quickly evaluate multiple bidders in Phase 1. Additionally, deal timelines are often compressed for reasons beyond the parties’ control. Having a tax factbook available to bidders can help to alleviate any major concerns and speed up the tax due diligence process from a buyer’s perspective. Money saved during buy-side due diligence can translate to inherent deal value if buyers are evaluating multiple acquisitions.
Navigating Sell-Side Objectives with Confidence
A tax factbook provides prospective buyers with a summary of the target’s tax profile, highlights key tax structuring alternatives, and details other items that increase a deal’s perceived value. The process prepares the sellers for any tax-related issues or questions that may come up during the buy-side diligence process. It may allow sellers to remedy a potential issue before delivering the report. Engaging a sell-side tax advisor early in the deal process also allows the seller to gather all necessary tax information for a data room, which will ensure tax does not slow down the overall deal timeline. Whether the tax factbook uncovers issues or presents a complex subject like tax in a summarized manner, the tax factbook is an effective way for sellers to ensure an efficient due diligence process.
