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Due Diligence Fails Employee Nexus

One of the more common problems that we have seen in buyer due diligence is “Employee Nexus”.  Employee Nexus problems arise when a seller has not properly worked with legal counsel in advance to test and document the Nexus of employees who are remote or off site. These may be administrative employees who often work from home or sales staff who travel regularly and have a home office.  

Although some of us at Alderman & Company have legal degrees and/or have practiced law in the past, we are not a law firm and we cannot provide and do not offer legal advice.  But, as M&A Bankers, we have seen far too often the harm that can be done when sellers of middle market aerospace and defense companies improperly handle Employee Nexus issues.

In layman’s terms, states have the right to impose taxes and penalties on your company if you have failed to report and pay the proper amount of state taxes, based on the unique facts and circumstances of your remote and traveling employees. Accordingly, most sophisticated buyers will conduct thorough due diligence on your Employee Nexus issues, to ensure that there are no potential back taxes or penalties owed for your prior Nexus errors.

When the facts and circumstances of each remote or frequently traveling employee are evaluated by the buyer in due diligence, they may find that you have a substantial off balance sheet liability in the form of additional income, sales and employment taxes and associated penalties owed to numerous states. Not only can such problems cause a significant reduction in the purchase price, but just as importantly they can cause a substantial delay in the closing, as Employee Nexus problems can take substantial time to quantify. 

As is the case with 90% of the buyer due diligence issues that we have seen over the past 21 years – with proper preparation (long before a sale is contemplated) most Employee Nexus due diligence problems can be completely eliminated. 

Have a great day everyone. 

Bill Alderman