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M&A Goes Smoother with Experts on Your Side

2/13/18 – Keith Carlson

As easy as 1, 2, 3

Would you allow your dentist to perform an open heart surgery on you or a loved one? The easy answer is no. This analogy applies to many things in business and life – it definitely applies to business owners embarking on selling their business or buying another business.  Given the level of risk and complexity associated with a Merger and Acquisition (M&A) transaction, you don’t want to cut corners or mistakenly choose to tough it out or go it alone due to overconfidence or naïveté. Both buyers and sellers have a much better shot at a winning deal, and the deal being successful post-close, if they use experts who are proficient and distinguished in various or all aspects of transaction execution including modeling, valuation, basic diligence, deep due diligence, negotiations, analysis of offers, tax consequences, and legal documentation/legal consequences. Here, I'll describe some of the specific assistance that certain types of experts can provide before, during, and after the deal.

Stage 1: Pre-deal assistance

M&A advisors are able to assist sellers in the early stages of a sale in many ways. The areas of assistance most people are familiar with are helping a business owner be more aware regarding a reasonable price for their business and also creating a detailed prospectus (often referred to as a ‘CIM’ or Confidential Information Memorandum) to distribute to qualified buyers.

The early tasks usually addressed by a quality M&A advisor are:

  1. Constructing detailed models and performing baseline and best-case financial valuations.
  2. Conducting thorough review of the company (operations, financial, risk, etc.) to better understand its value proposition to prospective buyers and the nature of its business.
  3. Preparing detailed company-overview materials in order to provide potential buyers with the information required to determine interest levels and receive indications of preliminary valuations.
  4. Formulate a targeted / suitable buyers list. 

A quality sell-side advisor will also help you understand where your business will most likely receive the most scrutiny. This is why former buyers often make great sell-side advisors.

After a deal is in market, your M&A advisor should also field all initial due diligence and indicative offers from interested partners. These offers will then be presented to clients with recommendations regarding value and risk.  This is important as not all purchase prices are created equal and just because one offer has higher monetary value, it doesn’t make it the best for your situation. 

Stage 2: Just before closing

How the M&A deal is structured is critical. Why? Because structure affects how the balance sheet looks in the future, how much risk the new business and seller are exposed to post close, and tax obligations.

Accounting and M&A experts know which terms are effective in reaching objectives of buyers or sellers. For example, earn-outs are especially popular in uncertain economies or where the seller is critical to the future success of company cash flows; because of this, the seller retains some risk. If sales don’t pan out as expected, the seller will receive lower earn-out payments. To minimize their risk, many sellers stay on as consultants to ease management transitions and help the business meet its short-term goals.

The parties also must agree on whether to transfer specific assets or stock in the business, and financial experts can contribute insights on which way to go.

Stage 3: After the dust settles

After the deal closes, an accounting and tax expert can help the parties handle their post-deal tax and accounting issues including post-closing purchase price adjustments. In-house accounting personnel are often unfamiliar with how to account for changes following an M&A transaction.

For the seller, this means winding down any unsold business operations and handling capital gains tax issues. For the buyer, this translates to fresh-start accounting including new depreciation schedules and purchase price allocations.

A little easier

As a private business owner, you may find that an M&A transaction is the most important and difficult challenge you’ll ever face. Why leave anything to chance? Add savvy M&A, accounting, and legal experts to your team to make life at least a little easier.