Key themes for CFOs to consider throughout the PE investment lifecycle

Csanad Csorba, Associate Director – Corporate Tax & Private Equity and Alastair Dixon, Partner at RSM UK at RSM UK explore what CFO’s should consider throughout the lifecycle of a PE investment including post deal actions, approaches to growth and expansion through to exit preparation.

Over the lifecycle of a private equity (PE) investment, the finance teams of portfolio companies will face unique challenges. From proactively managing the often complex tax landscape to preserving asset value, Chief Financial Officers (CFOs) need to manage a range of factors that impact portfolio investment. While there are resources available to CFOs, it’s often difficult to prioritise issues as they arise – especially when internal resources are limited. However, there are some consistent and recurring themes CFOs and financial teams will encounter throughout an investment lifecycle. Let’s take a closer look at some of them.
 

Setting up the structure: post-deal actions

A PE acquisition often brings immediate complexities with the involvement of a number of additional holding companies combined with a sizeable list of ‘post-deal’ actions normally suggested by tax structuring teams as part of a ‘100-day plan’.

It’s important to consider each item carefully and prioritise those that can help immediately boost value. Some initial early actions could include:

• Analysing the various transaction costs incurred by the acquisition vehicle (often a ‘Bidco’) to defend recovery of input VAT suffered and support corporation tax deductions. This is often combined with an accounting exercise to prepare the opening balance sheet entries for the various holding companies, reflecting the fund’s flow of the transaction.
• Ensuring transactional reporting requirements are met while the details of the transaction are fresh, including employment related securities (ERS) reporting, VAT registration of ‘Bidco’ and registering new entities for corporation tax.
• Considering the impact of the new tax profile of the expanded group structure. This often involves bringing another layer of tax rules into scope, including justifying interest deductions, accelerated quarterly instalment payments and management of ongoing tax compliance requirements.

By prioritising some of these early tax considerations, CFOs can unlock immediate value, reduce risk exposure and lay a solid foundation for an efficient tax structure.
 

Growth and expansion

After successfully embedding the new PE structure, businesses typically turn their attention to growth and expansion. CFOs should continue to look for ongoing opportunities to preserve business value through tax, make sure tax leakages are minimised and manage appropriate documentation to defend positions taken. Areas of focus could include:

• Setting up a tax effective management incentive plan (MIP) including, where possible, the use of tax-advantaged share schemes such as an Enterprise Management Investment (EMI) scheme or a Company Share Options Plan (CSOP) to crystallise additional tax deductions for the group and incentivise employees.
• Seeking early tax advice ahead of expanding overseas or acquiring bolt-on subsidiaries to ensure a tax-effective structure is implemented, helping reduce professional costs and tax leakage.
• Monitoring the group’s international effective tax rate and ensuring that an appropriate transfer pricing policy and tax strategy is maintained, supporting the commercial objectives of the group.

As the business evolves, CFOs should maintain a proactive and strategic approach to tax. This should ensure that growth is supported by an effective framework, helping to safeguard value and drive long-term success.
 

Exit preparation

A smooth and successful exit process is key to preserving and capitalising on value built during the investment cycle. It is important for CFOs to think about how common risks areas are managed and documented well in advance of a planned exit.

CFOs should consider the following possible actions:

• Performing ‘tax health checks’ in each of the main areas of tax (VAT, employment taxes, corporation tax) 12-24 months before a planned exit to identify, quantify and respond to risks appropriately. This helps minimise the chance of a value chip during commercial negotiations.
• Building a comprehensive database or ‘tax bible’ of documentation prepared throughout the investment lifecycle to demonstrate strong controls over tax risk to a potential buyer.
• Preparing forecasts and tax models to demonstrate the use of any potential tax assets expected to remain within the business at the point of sale, such as tax losses or corporate interest restrictions. These will also need to have an agreed value as part of exit negotiations.

Early preparation and clear documentation are vital for streamlining the exit process. They can also help maximise deal value by demonstrating strong tax governance and minimise surprises during due diligence.
 

Beyond tax

The nature of the PE market means portfolio companies are often very dynamic and constantly evolving – whether these are bolt-on acquisitions, international expansions or rationalisations.

But no matter how complex the landscape often is, it’s vital for CFOs to maintain a deep understanding of reporting and data analysis to inform, monitor and steer portfolio companies. Partnering with global advisors with a wide breadth of expertise and understanding of your business and its stakeholders should provide a strong foundation for supporting finance teams throughout a valuable investment cycle and beyond. 

The views expressed in this article are those of the authors. For more insights from RSM, visit RSM Insights.