If you are going to sell your business only once, do it right the first time! Owners cannot do it alone, so it is essential to assemble a collaborative team of M&A experts to guide you and your company through the lengthy and complex process of selling your business.
M&A Experts: The Core Four
There are four experts that are essential to creating the best possible outcome in any M&A transaction, collectively, “The Core Four”:
- Legal counsel
- Accounting team
- Private wealth advisors
- Sell-side investment bank
With any of these advisors, we highly recommend hiring experienced M&A transaction specialists that can help address and manage the many complexities of a transaction. While dentists and brain surgeons are both medical doctors with years of education, multiple advanced degrees, and extensive experience in their respective fields, we would never recommend using a dentist for brain surgery or vice versa. Hire the right experts!
Hiring the experts is not an expense; it is an investment in your success. The process starts with collaborative planning and preparation, moves though a disciplined process progression and concludes with a successful closing that exceeds the expectations of the seller. The right team can deliver much more value every step of the way via an increase in purchase price, more seller friendly terms and conditions, smaller tax bill, and/or protection from post closing issues.
Over this series of CMG Insights, we will explore the primary roles of each of the Core Four and the value that they bring to your engagement.
Accounting Team For Your M&A Transaction (Part 2 of 4)
Simplistically stated, your accounting team is there to present the numbers with accuracy and in the best possible light and minimize the tax impact of the transaction. While your CPA is critical for many reasons, from a deal execution perspective, there are two main focus areas that are important to manage: the quality of earnings and tax analysis.
Quality of Earnings:
A Quality of Earnings (“QofE”) is a specialized analysis prepared by a reputable accounting firm that presents the company’s adjusted financial results in the best possible way to maximize value for the sellers, and provides additional credibility behind these results. A QofE report is now considered ‘standard operating procedure’ for middle market M&A and has become a critical factor in the success of any sale process. Generally accepted accounting principles (“GAAP”), the baseline standard for all deals, does not offer fixed ‘rules’ but rather provides a ‘set of guardrails’ for owners to consider when reporting the results of the business. Most family-held and founder-led businesses use accounting policies to proactively minimize their annual tax burden, but those reported results often understates the real value of the business. For example, under GAAP, owners are allowed to reduce earnings (minimizing taxes) by expense certain items that may be more personal in nature (so long as there is a reasonable business purpose) and/or expense certain investments as opposed to capitalizing them. Usually, there are also certain expenses that would not continue to be incurred after the closing with a new owner. All of these are great for minimizing annual taxes, but they should be ‘added back’ to reported profitability to help maximize the value of the business. Yes, a QofE is an investment in your success, but consider the following: if the QofE firm uncovers, validates or defends $500 thousand in positive adjustments, and the business is valued at 8x EBITDA, that QofE firm just helped increase the value of the firm by $4 million. The investment of the QofE was well worth it!
Click here to read a CMG article discussing the benefits of a QofE in more detail.
While most people initially focus on the headline valuation as a definition of success, we believe the real focus should be on the amount that the seller actually keeps in the bank account, after tax. Upfront tax structuring is critical and, when done right, can save sellers millions. There are dramatically different results depending on the type of business (C-corp, S-corp, LLC), the type transaction (asset sale vs. a stock sale) and how the transaction itself is structured (F Re-Orgs, installment sales, contingent consideration). Every seller would prefer capital gains taxes over ordinary income tax, but these structure issues are the key determinant. There is no shortage of other tax considerations that need to be reviewed, analyzed and addressed (Federal, SALT, Employment, Franchise) as well. Adding qualified tax professionals to the Core Four team, ideally early in the process, is critical to ensure that after-tax proceeds are maximized.
Building Your M&A Advisory Team
One of the best ways to build your M&A Core Four team is to solicit references from your existing trusted advisors. Every M&A professional has a small group of trusted experts with whom they regularly collaborate and can help you maximize the outcome of your ‘once in a lifetime’ opportunity. For more than 35 years and having completed hundreds of transactions, CMG has partnered with a wide range of experts, and we would be happy to make tailored recommendations for your specific circumstance as you build your Core Four team.