The Business and Tax Aspects of Acqui-hires



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Acqui-Hires Acqui-hires is the term used to describe a business acquisition strategy of acquiring another firm primarily for the skills and expertise of their staff.   Although aqui-hire is mostly associated with Silicon Valley tech firm acquisitions, many accountants and lawyers are familiar with Aqui-hire concepts as they see their own firms and competitors effectuate mergers to access specialized talent.

Acqui-hires require careful consideration and planning since the principal asset is highly skilled people. Skilled worker-based firms can have markedly different cultures which may not mix well despite each firm being successful on a stand-alone basis.   Many acquiring businesses, however, have good reasons for integration, such as achieving economies of scale or developing a more interactive workforce culture.  These types of integrations should be addressed carefully.

New Due Diligence Tools

Linkedin, the professional networking application, enables acquirers to preview the technical backgrounds of the acquirees team even before approaching the company.  Instantly accessible connection patterns can quickly present diagrams of individuals’ networks and contacts so it becomes more apparent what the specific backgrounds are of the acquiree's staff. However, deeper due diligence and in-person meetings are critical to determining if the firms potentially fit.  Standard due diligence templates are a good start but managers should not rely on them.  Ultimately, any successful due diligence plan will be narrowly tailored toward the people of the business and industry.

Implementation Plan

Another potential problem is the retention of talented employees.  Since a true acqui-hire is a purchase of really talented employees, retaining those employees is often key to a successful investment.  Acquirers should have a well-thought-out plan to retain employees.  Monetary incentives are always helpful but there are additional ways to discourage departure as well. Managers should interview employees to determine their concerns and reservations.  Those issues should be discussed and creative solutions should be considered.  Positive reinforcement can significantly boost morale and inject confidence into the workforce as well.  

Tax Credit Opportunities

Tech-based firm acquiree's present multiple new opportunities based on recent changes in the Research  & Development (R&D) tax credit legislation enacted in the Protecting Americans for Tax Hikes (PATH) Act of 2015.  The R&D tax credit is now permanent tax legislation which for the first time enables an acquirer to include multi-year estimated tax benefits of the R&D tax credit in their financial acquisition ROI models.  Acquirees that have experienced tax net operating losses may have trapped R&D tax credit carryovers that can be monetized by the acquirer.  Moreover, effective January 1, 2016, R&D tax credits can now be used to offset the alternative minimum tax which previously presented a barrier to utilizing the credit for many growing companies.

Acqui-hire Owners Nearing Retirement

Many companies become available to potential acquirers because the owners are nearing retirement age and there is no alternative succession plan in place. An acqui-hire can be attractive to a founder who is mostly concerned with retirement planning.  These companies may be available at favorable purchase prices if the selling owners are interested in receiving payments of unfunded retirement benefits or a comparable way to provide retirement earnings.

Aqui-hires present an excellent opportunity for many acquirers. With a less than 5% employment environment and shortage of certain skilled workers, we should expect to see more Acqui-hires in the near future.  

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Authors

Charles R Goulding Attorney/CPA, is the President of R&D Tax Savers.

Michael Wilshere is a Tax Analyst with R&D Tax Savers.