If ever someone were to think that mergers and acquisitions (M&As) were limited to the news headlines realm of one multi-national corporation melding into another, he or she, of course, would be mistaken. A wave of New Jersey Baby Boomers is beginning to retire, and when “succession planning” reveals that the owners’ adult children do not wish to assume control of businesses because they have their own careers (or for other reasons), the businesses must be sold or closed. When selling, veteran business owners are plunged into the complex M&A sphere with which they may have little – if any – experience, unless the businesses had been partly grown via M&As.
Meanwhile, in the everyday course of commerce, company “A” might merge with firm “B,” yielding economies of scale through one, rather than two corporate departments for: human resources, information technology, finance or customer service, for example. The balance sheet savings for such endeavors can be staggering, not only from an employee headcount standpoint, but from technology and other resources angles.
In the case of either the retiring Baby Boomer or “general M&A” (many more M&A examples/scenarios exist), both attorneys and accountants tell New Jersey Business magazine that careful, proper approaches to the process might reduce untold headaches and even possible litigation.
Most experts suggest that a business owner or company hire not necessarily their long-time accountants or attorneys, but people with M&A expertise. Jason Navarino, partner in the tax and corporate departments at the law firm of Riker Danzig Scherer Hyland & Perretti LLP, says, “I am reminded of the commercials on T.V.: ‘Kids, don’t try this at home.’ It is a tough process, and if you have never been through it, you don’t want to go through it alone. It is very important for a business owner to have the right team of professionals and advisors at [his or her] side, to get them through the process – people who have done these deals before and know how they work, to really help them and guide [the business owners.”]
Navarino additionally relates that business owners might meet with buyers, sign a non-disclosure agreement, share financial figures, and then exchange a letter of intent or term sheet. Navarino says, “The [seller] signs it, and the letter of intent will talk about doing further diligence, and there will be a definitive agreement. But, it will also say ‘the price is X; we expect to close on this date.’ [The sellers] think, ‘Okay, all the hard stuff is done. My company is great. I am sure they are not going to find any problems. The lawyers will do what they have to do, and that will be it. We are off to the races.’
“What they don’t realize is the difference between the five-page letter of intent and the 50-page purchase agreement is 45 pages of additional detail that they haven’t thought about. And, so, what happens is, they say, ‘I thought we had agreed on everything.’ [And the answer is] ‘Well, no, there is a lot of stuff you didn’t even know to think about, yet.’”
An extraordinarily long list of debatable points range from, in effect, what the definition of “working capital” is, to whether or not “assets” include books and records, and tax returns, for example. Additionally, what business liabilities will the buyer assume? Will the buyer, for example, be responsible for a bill that is necessary for the business, but that is six months past due?
In broad terms, Navarino says, “Once you get past that letter of intent and due diligence, the price only goes in one direction – it never goes up after the initial offer; it only goes down, as they find more issues. The extent that you can be prepared and have your business in shape so that you are ready to answer the questions that are going to come up in diligence, the better you are going to do. And that means having an accountant who has an experience doing deals, to really get your books and records in order, and to make suggestions.”
The accountant is, for many people, the first expert to consult with, not only regarding the company’s valuation, but other financial factors, including whether or not selling the business is an appropriate action in the first place. If selling is proper, experts say today’s sophisticated buyers seek in-depth, accurate analysis, including, but not limited to: key financial results, budgets, forecasts and historical data.
Jonathan Moore, partner, transaction advisory services at PKF O’Connor Davies, and also head of corporate finance for PKF North America, says, “I think in order to maximize the value on a transaction, a company would have to have a more robust financial reporting system in place – more financial dashboards, if you will, or key performance indicators.”
He adds, “I have seen many deals fall through just because the buyer just kind of gets a ‘hunker’ that something is wrong. Sometimes it just has to do with the inability of a company to produce reliable financial information, consistently, over a longer period of time.”
Attorney Scott P. Borsack, partner and chair of the business practice at the law firm of Szaferman, Lakind, Blumstein & Blader, PC, says, “An individual who is contemplating selling [his or her] business, but hasn’t identified a buyer, should obviously look to within, considering family members and key employees. Once they get outside of those circles, they need to have a conversation certainly with their accountants to examine tax returns, financial statements, to satisfy themselves that there are no issues that will crop up if an unrelated third-party purchaser comes and looks at the business, for a purchase.”
He adds, “That period of time before you actually market a business for sale is an opportunity for a potential seller to clean everything up and deal with the potential problems that sometimes derail sale transactions. The process of looking to sell a business begins long before there is a buyer on the horizon.”
Sylvie Gadant, partner at Citrin Cooperman, and the practice leader for the transaction advisory group, says, in part, “We would have to scrub the numbers to make sure that we would withstand somebody else’s due diligence, and then come up with a value.”
While Gadant is an expert on many M&A matters, perhaps underscoring the depth of her expertise, she highlights the “people” aspects in M&As, which is an ever-present, enormous factor.
Gadant explains, “There is cultural due diligence: How do you [conduct] business? Will you be able to monitor the employees who are working for a different company, motivate them to be part of your brand and your culture, and your aspirations? Is that something that needs to be addressed sooner than later, so the deal works? Usually, the deals that look great on paper but they don’t work out … it is because the people were not on board. … It is a very important issue in M&A.”
Although volumes of books may exist on that topic, of note, a business owner who “stays on” after an M&A deal can create competing interests with the new buyer, because the former may desire quick profits, for example, while the latter may begin making capital expenditure investments, with a long-term growth vision.
The M&A market is vastly improved from the doldrums following the 2008 financial crisis of a decade ago, all within a low interest rate environment.
Citrin’s Gadant says, “We are in what we call a seller’s environment, meaning it is a great time to sell your company because there is so much demand for transactions; the valuations are extremely high.” How long these dynamics remain is speculation, but for a company seeking to sell, now might possibly be a good time, if the transaction is approached with great care and with the assistance of various experts versed in the intricacies of M&As.
If there are two overarching, recurring themes in the legal and accounting arenas, they might be: seek counsel from highly trained professionals at the early stages of any endeavor, especially one involving potential conflict; and spend money early for preventive measures to possibly prevent a “legal mess” that could span years. It’s the old adage that “an ounce of prevention is worth a pound of cure,” for which at least some humans – arguably those with the extraordinary intelligence and bravery necessary to operate a business in the first place – might not always heed.
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