Mergers & Acquisitions Require Financial Expertise

Helping Your Clients Realize the Best Deal

After years of sluggish activity, the merger and acquisition (M&A) market has picked up dramatically. Some of your clients may have indicated that they are thinking of selling their businesses or making acquisitions. In addition to legal advice, they are going to need financial expertise. Help them understand that, to successfully close an M&A transaction, they will likely need a team of experienced advisors.

Early Stages

Financial experts are able to assist business sellers in the early stages of an M&A deal in several ways. An expert can help an owner establish realistic expectations about value based on comparable business sales so the owner sets a reasonable asking price. The expert can also create an informal prospectus to distribute to prospective buyers.

On the buy side, financial experts provide objective estimates of what the target business and its underlying assets are worth so a potential buyer makes a reasonable, but not excessive, offer. Buyers can also turn to a financial expert for help identifying assets and liabilities that are not on the balance sheet, such as customer lists, brand names, undisclosed pending litigation and contingent tax liabilities. During the due diligence stage, financial experts assist buyers in verifying inventory and receivables, normalizing financial statements to determine the cash flow, and reviewing loan documents and other agreements.

Deal Negotiations

How an M&A deal is structured is critical — but also potentially contentious. It affects everything from the seller’s tax liability to the amount of risk the buyer will assume. Financial experts can help buyers and sellers with conflicting priorities reach an agreement that satisfies both.

For example, a financial expert might suggest an earnout, where a buyer makes installment payments to a seller based on the company’s post-sale performance. If growth does not pan out as expected, the seller receives lower earnout payments. To protect sellers, many earnout agreements enable them to retain a role in the sold business so they can help guide future performance.

Financial experts also can help the parties determine whether the transaction should be an asset or stock sale. When a buyer acquires assets of a business, they are reported at fair market value. The buyer receives a step-up in cost basis, which lowers future capital gains tax and starts depreciation anew. However, the seller must pay capital gains tax on the assets sold and, if the seller is a C corporation, may owe tax on the sale of the business.

Stock sales generally are less messy because assets remain at book value and existing depreciation schedules apply. But stock sales carry additional risks; the new buyer inherits all of the seller’s liabilities, including any undisclosed and contingent obligations.

Post-Closing Issues

After an M&A transaction closes, financial experts help the parties with post-closing tax and accounting issues. These aftermath topics can include purchase price adjustments, which may be tricky for in-house accounting personnel to handle.

At this stage, sellers usually need to wind down any unsold business operations and manage capital gains tax issues. They may also require retirement and estate planning guidance. Buyers often turn to financial experts for help integrating their acquisition, particularly the sellers’ accounting systems.

Best Price and Terms

For most businesses, a sale or acquisition is a major — and often risky — financial event. Do not let your clients think they can work through the complicated M&A process alone and emerge with the most successful deal possible. To realize the best price and deal terms, they need experienced financial experts at their side.