Check the Details of M&A Before Putting up a “For Sale” Sign

Lindabury partner, Robert Anderson, shares his insight in NJBIZ’s recent article:  “The inside scoop on M&As: Plenty of big companies have learned the hard way how difficult mergers can be”

Sometimes, a planned M&A can get torpedoed because of decisions that were made long ago, notes Robert W. Anderson.  So a potential seller may wish to review its books and records long before putting up a “For Sale” sign.

One suggestion: do some housecleaning, and scour around for any loose ends. That’s because for a buyer, a “big part of an M&A involves due diligence; understanding what they’re buying and how the target company fits in with the acquirer’s business operations and goals,” says Anderson. “If they see a lot of issues, like unsigned contracts, or potential tax and other liabilities, they may back away from the deal.”

Cybersecurity can be another issue, he adds.  “Buyers want to see if the target firm has policies in place to guard against breaches and handle the fallout in case there is a breach,” Anderson explains. “Large companies like Equifax and Target that have been hacked have the resources to deal with the fallout, but some studies indicate that up to half of smaller and middle market companies that are breached go out of business in a year.”

Tax concerns also matter, and there can be a 180-degree difference between what buyers and sellers want, Anderson cautions. “A buyer may want to structure the deal as an asset purchase, instead of buying the stock of the target corporation itself, since the acquiring company may be able to step up certain of the target’s assets to a higher value. This may let the surviving firm take a higher depreciation write-off against taxable income.”

He notes that buyers “will also want” some kind of claw back provision that would require the seller to refund a portion of the purchase price if its representation of condition was not accurate at the time of sale. “But during the negotiations, a target company may try to limit the time a buyer has to exercise this right, and may try to put a clause in that exempts errors that are de minimis, or minor,” Anderson says.

Finally, the way the target company’s earnings were computed can be a sore spot, Anderson adds. “Many times, business owners run their operations in a way that legitimately minimizes earnings, so they won’t have to pay as much in income taxes,” he details. “But that can hurt your sales price when you try to sell your company. A buyer will typically review three to five years of tax returns, so think about this when you get to a point where you’re seriously looking to sell your business.”

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