Interest in merger and acquisition activity is expected to continue this year, despite some uncertainty in the political landscape, and business owners have plenty of reasons to remain hopeful.
“Companies have high liquidity and interest rates are rising slowly, making it an optimal time for deal-making,” says Jerry Kelsheimer, regional president, Fifth Third Bank, Northeastern Ohio.
Mike Burr, senior managing director of mergers and acquisitions at Fifth Third Securities, has words of caution for owners looking to sell their businesses.
“Great market or not, business owners may not draw the high prices they expect without first taking the time to add value to their companies and create a plan for the transition,” Burr says.
Before businesses put themselves on the auction block, Burr recommends taking some of the following steps:
Determine your priorities
Are you looking solely at the economics, such as getting the highest after-tax value possible for your company?
Are you willing to take less cash upfront if it means carving out a continuing role for yourself at the business? Defining your financial objectives and parameters for a sale before the process begins will increase the likelihood of a good outcome.
Engage a personal
wealth adviser
Selling your business will likely be a significant “trigger” in re-evaluating your personal wealth strategy. It is important to engage with a personal wealth adviser that understands how the sale of your business can and will impact your broader wealth/estate planning strategy.
In some cases, there may be the need to preemptively put in place various estate planning mechanisms to ensure the best possible outcome from a tax and retention of wealth standpoint. A seasoned financial adviser with M&A transaction experience can assist sellers with this important consideration.
Build company value
Taking time to strengthen company operations before hitting the marketplace will put you in a stronger negotiating position and increase your potential for a good sale price.
For example, if your profits are low compared to the norms in your industry, you may be able to renegotiate contracts that will cut ongoing expenses and improve your margins. You may also be able to shore up your client base and strengthen your revenue projections by reducing your reliance on a small base of customers.
Obtain a Quality of Earnings review
Hiring an outside accounting firm to perform a Quality of Earnings report prior to initiating a sales process has become increasingly common. While prospective buyers will always hire someone to perform a QofE on their behalf, a preemptive QofE helps sellers, and their advisers, get a firm starting point for valuation expectations.
They serve as mechanisms to identify any financial reporting issues that would be best to tackle before opening up the company to review by buyers and their advisers.
This step can also improve certainty of closing by reducing the likelihood of surprises that can negatively impact valuation during diligence and negotiations. ●
Fifth Third does not provide tax advice. Please consult your tax advisor before making any decisions or taking any action based on this information. Fifth Third Securities is the trade name used by Fifth Third Securities, Inc., member FINRA/SIPC, a wholly owned subsidiary of Fifth Third Bank, a registered broker-dealer, and a registered investment advisor registered with the U.S. Securities and Exchange Commission (SEC). Registration does not imply a certain level of skill or training. Securities and investments offered through Fifth Third Securities, Inc.: Are Not FDIC Insured, Offer No Bank Guarantee, May Lose Value, Are Not Insured By Any Federal Government Agency, Are Not A Deposit.
