Global merger and acquisition (M&A) volume is expected to surpass $4 trillion in 2025, the highest in four years, according to Reuters. Reasons for the anticipated surge include recent interest rate cuts by the Federal Reserve and GOP promises of fewer regulations and lower taxes for U.S. businesses and their owners. Tariffs — if enacted — also could spur consolidation in certain industries.
If your business is planning to jump on the M&A bandwagon, working with a business valuation professional can help during this exciting — but stressful — process.
Getting your business sale-ready
Business buyers are most interested in a company’s core competencies. Nonessential items — such as underperforming segments, nonoperating assets, shareholder loans and minority investors — complicate a deal. An experienced business valuation pro can help sellers clean up their balance sheets and position their income statements to attract potential buyers and maximize the selling price.
For example, sales of private businesses are often based on multiples of earnings or earnings before interest, taxes, depreciation and amortization (EBITDA). Proactive measures — like cutting extraneous expenses, minimizing related-party transactions and operating lean — can boost profits and reduce the need to adjust the financial statements when negotiating the selling price.
Valuators can also help sellers prepare a comprehensive offer package that includes more than just financial statements and tax returns. However, before you give out any information or allow potential buyers to tour your facilities, work with your attorney to draft a confidentiality agreement to protect your proprietary information.
Conducting acquisition due diligence
Comprehensive due diligence is essential to a successful deal. Buyers typically home in on the last one to three years of financial results. But it pays to look beyond the financials and tax returns. Depending on the industry and level of sophistication, buyers should consider asking for:
- Marketing collateral,
- Business plans and financial projections,
- Fixed asset registers and inventory listings,
- Working capital analyses,
- Quality of earnings reports, and
- Customer concentration analyses.
Reviewing major contracts, such as leases, insurance policies, franchise deals, employee noncompete agreements and loan documents, is also prudent. Experienced valuation professionals can help buyers “kick the tires” of a deal. They’re trained to unearth undisclosed liabilities and potential risks that may cause buyers to overpay. They can also help buyers adjust a company’s EBITDA for such items as above-market salaries paid to owners and their relatives and excessive expenses the business incurs for owners, like luxury vehicles and country club dues.
Negotiating the deal
If there’s a significant gap between the seller’s asking price and the buyer’s offer price, a valuator can devise creative deal structures to facilitate the deal. For example, earnout provisions allow buyers to mitigate performance risks and incentivize sellers to provide post-sale assistance. With an earnout, part of the selling price is contingent on the business achieving specific financial benchmarks over a certain time.
Some buyers also may want the owner to stay on the payroll for three to five years to help smooth the transition to new management. Seller financing, installment sales and equity participation also are popular in management buyouts and purchases by joint venture partners.
Taxes are another negotiating tool during the M&A process. Deal terms — for example, installment payments, consulting arrangements and asset vs. stock sales — also affect the parties’ tax outcomes. A business valuation professional can help you evaluate different ways to structure the deal to minimize taxes.
Managing post-deal integration issues
If employees from two merged companies are unable or unwilling to work together, effectively and efficiently, the combined entity won’t achieve its expected cash-flow and cost-saving synergies. Experienced valuators can help management work through such integration issues as:
- Which company’s administrative policies and procedures will the new entity follow?
- Which company’s standard employment arrangement — including benefits, perks and contractual restrictions — will prevail?
- Which locations will close or merge?
- Which positions can be eliminated or combined?
- Which computer system will become the standard for the combined entity?
- Are there any assets or divisions that the buyer plans to divest within the next year?
Another important part of post-deal integration is promptly renegotiating contractual agreements with suppliers, customers, employees, lenders and other stakeholders. In some situations, the buyer may need to obtain consent to assign contracts to a new owner.
Post-deal financial reporting can also present challenges. After closing, the merged companies will prepare combined financial statements and federal and state tax returns. Consolidation of the financial reporting function requires management to choose between different accounting systems, methods, policies and personnel as soon as feasible.
If the companies use different methods of accounting for tax or book purposes and the combined entity issues comparative financial statements, it might be necessary to amend previous tax filings or restate financial performance.
Enterprise resource planning (ERP) software can further complicate matters. Failure to synchronize ERP software could slow down the collection of financial data — or even result in missing or inaccurate data.
Yet another financial reporting challenge is that, after the deal closes, the buyer must allocate the purchase price to the company’s assets and liabilities. Some indefinite-lived intangibles may require impairment testing in subsequent periods if the asset’s fair value falls below its book value. Inaccurate intangible asset valuation and hasty purchase price allocations may lead to unnecessary write-offs in the future. A valuation pro can help ensure you get it right.
Accounting issues can, in turn, give rise to tax liabilities and complications. For example, you may inadvertently trigger a tax liability if the IRS decides that parachute clauses paid to departing executives are excessive. Or your income may be subject to higher taxes if you consolidate operations in a less favorable tax locale than your previous location. In addition, merging employee stock option programs can potentially have tax implications for your company and its employees. Proactive tax planning can prevent costly post-closing tax surprises.
From start to finish
A valuation professional with M&A experience can help you navigate all the stages of your deal — even beyond the closing date. Contact us for more information.
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