M&A goes smoother with a financial expert on your side

Merger and acquisition (M&A) transactions can be daunting endeavors for both buyers and sellers. That’s why putting a financial expert proficient in valuation methods on your side, whichever side it may be, can help reduce guesswork and give you a better shot at a winning deal.

Stage 1: Pre-deal assistance

Financial experts are able to assist sellers in the early stages of an ownership transfer in many ways. For starters, he or she can help you establish realistic expectations about value based on comparable business sales and, thereby, assist you in setting a reasonable asking price.

An expert can create an informal prospectus to distribute to qualified buyers. Or, if you’re gifting interests to your heirs, a formal appraisal can be used in conjunction with a gift tax return. Perhaps a fairness opinion would help support a management buyout in such cases.

On the flip side, buyers tend to undervalue a business. When you’re considering expanding through M&A, an expert can provide an objective estimate of what the business and its underlying assets are worth — so you make a reasonable offer without overpaying.

You can also turn to a financial expert for help in identifying assets and liabilities that aren’t on the balance sheet, such as:

  • Customer lists,
  • Brand names,
  • Goodwill,
  • Undisclosed pending litigation, and
  • Contingent tax liabilities.

Other due diligence hot spots include inventory and receivables verification; assignability of leases, loans and franchise agreements; revenue recognition policies; employee retention; normalization adjustments; and related-party transactions.

Stage 2: Just before closing

How the M&A deal is structured is critical. Why? Because it affects how the balance sheet looks in the future, how much risk the new business is exposed to and how much the new business will owe in taxes.

Experts know which terms are effective in reaching objectives of buyers or sellers. For example, earnouts are especially popular in an uncertain economy, because the seller retains some risk. If sales don’t pan out as expected, the seller will receive lower earnout 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. Asset sales are like a fresh start; after a new entity acquires the specific assets and liabilities, new contracts, licenses, titles and permits are required.

Acquired assets are reported at fair market value, and the buyer receives a step-up in basis, which lowers future capital gains tax and starts depreciation anew. The seller, however, must pay capital gains on the assets sold and, if the seller is a C corporation, again when winding down the business.

When stock (rather than assets) changes hands, business operations continue uninterrupted. Stock sales are generally less messy, because assets stay 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 undisclosed and contingent obligations.

Stage 3: After the dust settles

After the deal closes, a financial 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, it translates to fresh-start accounting, including new depreciation schedules and purchase price allocations in accordance with FASB Codification Topic 805, Business Combinations (formerly Statement No. 141R).

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 a valuation-savvy financial expert to your team to make life at least a little easier.

If you have questions about this, or any other matter, visit http://warrenaverett.com/services/advisory/mergers/ to learn more about our Mergers and Acquisition services, as well as Forensic, Valuation and Litigation Support Services.