Fueled by a growing economy, abundant capital, and a retiring boomer generation, the M&A marketplace reached new heights in 2021. Steve Brady, CPA, a partner and leader of the transaction advisory practice at Withum Smith and Brown, PC, reports, “The total value of middle-market transactions under $200 million reached $625 billion in 2021, according to our sources at PitchBook Data, Inc. This represents an increase from $255 billion in 2020, which was previously the highest year in the last five years. With the supply of deals and valuations remaining strong, I believe that continued access to both financing and capital will continue to fuel intense M&A activity in 2022.”
Brady’s prediction is similarly voiced in Deloitte’s 2022 Future of M&A Trends Survey, which polled 1,300 executives at corporations and private equity investor firms. The survey reveals 92% of respondents are confident that deal activity will either rise or remain the same this year.
Darker realities also fuel deal-making. “COVID-related fatigue has hit some owners,” Brady says. While the pandemic has changed everything from workforce safety to supply chain impacts, ongoing regulatory uncertainty, inflation and taxes remain primary concerns. For example, 54% of Deloitte’s study respondents credit regulatory tightening as a motivation for the increases in deal-making.
Shawn Henderson, CPA, MST of Citrin Cooperman Advisors, LLC, opines a more specific cause and effect. “Now that the President Biden’s Build Back Better tax increases appear to be dead, business owners looking to sell will likely be taking advantage of this lower tax environment while it lasts.”
Supply chain issues are also contributing to owner fatigue. “If you are a business owner importing products, you have witnessed the cost of freight rise 20 times more than what it cost last year,” notes Todd D. Polyniak, CPA, partner and leader of SAX LLP’s transition advisory team.
All this uncertainty and change is encouraging M&As. It is also cause to elevate the advisory role for CPAs.
To meet the need, many of New Jersey’s CPA firms have built transaction advisory teams. Comprising a sort of A-Team of expertise, owners rely upon these accountants for everything from directional advice to nuts-and-bolts financial housecleaning. Services offered include fraud checks, cleaning up bookkeeping and accounting records, as well as improving internal controls. Firms are also stepping up assurance from a compilation or review to a full audit, as well as crafting a comprehensive business valuation to help benchmark the value of the business. Sax LLP’s Polyniak refers to this compliance as the “formal” roles for a CPA. Advisory services represent the more informal role for transition practitioners.
“When business owners consider selling or doing a generational transition, we are often talking to them years in advance of any transaction. If adult children are being groomed for leadership, our transition timeframe might be 5 to 10 years,” notes Todd, adding that “the value of a CPA relationship is the insight we provide the owner. Sometimes, it’s tough love.”
“We offer clients perspective and experience,” Withum’s Brady says, adding, “We take a holistic view of each transaction. That ultimately means driving value to the client with every step to ensure they achieve the results originally expressed at the beginning of the process.”
Quite often, that tough love includes convincing an owner to alter behaviors, including tightening operations and financials in preparation for sale. “We look at cleaning up high-risk areas in order to increase value,” notes Citrin’s Henderson. “We pull out all the personal elements so we can add as much as we can back into cash flow.”
The reason seems clear enough. As Polyniak explains, “Buyers are always interested in the quality of earnings.”
Successful CPA firm partners have honed their advisory skills and created deep bonds with clients. “It’s a kind of partnership,” Polyniak explains. “We offer perspective, contacts and resources. It is our job to learn what the owner wants from the sale, and determine if they are 100% committed. If not, it won’t work.”
Todd says that only then can the team begin looking at the details and asking pointed questions. “For example, every entity selection carries a unique tax structure. Depending on the type of sale, the impact of taxes could significantly reduce what the owner needs from the proceeds,” he says. Restructuring for tax purposes is an option, but it comes at a cost and requires time.
Henderson agrees: “We ask them what they want to walk away with, and what they want to do with themselves afterward. It becomes a complex conversation. Do you care about your employees? Does a stock sale or an asset purchase yield the best result? What tax-planning issues need to be addressed? Do we have contract issues, nexus issues, or service issues that could impact results? It is all on the table.”
On the buyer’s side of things, Henderson notes that their firm is often involved in due diligence research and discovery to determine if the stated value can be verified. This task includes everything from examining financial statements to researching potential liabilities and studying the business valuation.
Withum follows a similar process. However, Brady stresses his entire team is senior-level people. “We don’t leverage tasks off to lesser-experienced staff,” he says. His group also pays particular attention to technology. From a detailed overview of systems to cyber security and even environmental concerns, no stone is left unturned. “That includes human capital,” Brady says.
With a strong market and an abundance of cash, private equity investors will continue looking at non-traditional investments. According to Henderson, non-traditional industries, from HVAC companies to healthcare and even CPA firms are welcomed targets.
“If a private equity firm can create efficiency and value by buying several smaller companies to create a strong, perhaps regional player, they can achieve their short-to-mid-term revenue goals. They buy, build, and then divest,” Shawn says. “The cycle is happening,” confirms Sax LLP’s Polyniak.
There is no doubt that M&As are changing the local marketplace, replacing small local businesses with leaner, larger regional companies. From plumbers and landscapers to professional services firms, competition is transforming. As to the question of when these private equity firms divest of these newly bundled assets and to whom they sell to remains a bit of a mystery. What seems certain is that New Jersey’s CPA firms will be by their side, playing an active support role in the next round.
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