Exit Readiness: A Perfect Storm Fuels Surge in M & A | Rea CPA

Exit Readiness: A Perfect Storm Fuels Surge in M & A

Business man stepping over puddle

Call it the perfect storm. The Baby Boom generation has reached retirement age and is making the largest transfer of generational wealth in history. At the same time, international investors are hungry for American businesses, which are considered the best investments in the world. Finally, a dramatic surge in M & A activity has emerged as an unexpected consequence of the COVID-19 pandemic, which upended the global supply chain.

What does all this mean?

It means you, as a business owner, may get a phone call from a buyer offering you an eye-popping price for your business – a business you had no intention of selling.

What Will You Do?

The time to consider your options is now, before that phone call comes. Unsolicited offers to buy businesses are prevalent today in part because of the global supply chain disruptions caused by the pandemic. Manufacturers and distributors in particular are attractive to companies that are looking for ways to guarantee their supplies of raw materials and component parts. They were unable to get those goods during the pandemic, so they are shifting to vertical integration by acquiring manufacturers and distributors that can help them ride out the next business crisis.

But the ramp-up in offers and prices goes well beyond the manufacturing and distribution sectors. An Ohio fast food restaurant chain recently was offered a multiple of 18 in an industry that typically sees multiples of eight to ten. Other industries that are seeing unusually strong offers include trucking, medical innovation, and professional services firms.

Buyers don’t mind paying more for acquisitions right now, including premiums of 15 to 18 percent, because they are looking for synergies. That’s why competitors are increasingly buying each other, and companies are buying their suppliers.

Can You Wait 10 Years?

Fueling the momentum is the reality that prices may not be this high again until the height of the next business cycle, which could be 10 or more years from now.

Business owners considering an exit within that timeframe should seriously consider any offer that comes their way. We expect today’s strong prices to continue into 2022 and 2023, but don’t sit around and wait for the phone to ring. Become educated about the stages of making a deal, talk to your business partners or family members (if your business is family-owned) and consider your personal goals. Most importantly, talk to your trusted advisors.

When you receive an unsolicited offer, find out if it is a good offer in today’s environment. You may be caught off guard by the suddenness of the offer, but don’t let that discourage you from considering it. Conversely, don’t jump in and accept it without doing your due diligence. The value of your business is in the eye of the beholder. A competitor making the offer has a different motivation than a private equity buyer or an ESOP. Valuation is a range and sales price is a negotiated amount. If you decide to move ahead, you’ll need to consider several variables to help determine a fair price.

‘It Depends’ Is Not an Answer

There are no quick answers, and “it depends” is never the right answer. When clients come to us with offers on their businesses, we work through all the options and pros and cons so they can make decisions based on facts, not emotion.

Personal considerations are an important part of the discussion, particularly with family-owned businesses. The family business is probably a topic of discussion at most holiday dinners, and each family member is a stakeholder in the business. Emotions can run high. But an effort should be made to make the family discussion as clear-eyed as the financial due diligence of an offer. How will younger family members who are expected to own the business now plan for their futures? Do they want to remain in the business as employees? Or could the proceeds from the sale be used to invest in new businesses more suited to their talents and interests?

This is the liquidity event of your lifetime. Once you’ve sold your largest asset, what’s next? The time is now to do the tax planning, wealth management planning, and estate planning that will help you preserve your wealth and minimize income taxes. This may include setting up trusts and exploring options for what to do with your new wealth. Do you want to start another business? Invest in real estate or securities? How do you want to succeed your wealth to the next generation of your family?

People often don’t realize how much thinking time is involved in a business transfer. This is the largest move you’ll make in your life. It takes time and energy, and it should result in the best decision you’ll ever make.

Contact your Rea advisor to start a discussion about your exit readiness. You never know who will be on the line the next time the phone rings. We will help you sort through the myriad of issues and be prepared to make the best decisions possible for your unique situation.

By Paul Weisinger, CPA/ABV, CVA, CEPA (Cleveland Office)