Feb. 17, 2021

This paid piece is sponsored by Eide Bailly.

By Jim Jarding, Eide Bailly Sioux Falls office (Note: A version of this article previously appeared on EideBailly.com.)

Mergers and acquisitions have always been part of the history of corporate America. Now, more than ever, the merger and acquisition market stands poised to help organizations navigate through the economic uncertainty caused by the effects of COVID-19. Baby boomers are transitioning their business and looking for exit strategies. Other companies are looking for economies of scale and looking at strategic acquisitions. All of this still continues in Sioux Falls, even amid a global pandemic.

Disruptions related to COVID-19 led to a quick slowdown in the M&A market in the first two quarters of 2020. Significant uncertainty surrounding COVID-19 caused many financial and strategic buyers to pause existing deals, both to evaluate the cash flow situation within their own operations and assess any changes in performance and financial well-being of acquisition targets. As the economy slowly reopens, buying and lending activity is beginning to resume.

Despite fluctuating market conditions because of COVID-19, there is never a wrong time to begin preparing for an eventual sale. Merger and acquisition activity is important to consider regardless of the size or industry of your organization. Buyers are looking for management who know what they’re doing and defendable growth projections. You easily can have these regardless of your size.

Important M&A items to consider

Divesting or acquiring a business may seem like a monumental task. The key to a successful transaction could be summed up in one word: information. There will always be an element of risk involved in transactions; however, starting the process with certain questions and an understanding of topics will act as a road map that can lead to an informed decision of what is best for your organization. Some important items to consider are:

• Adjusted EBITDA.
• Working capital.
• Profitability by segment.
• Capacity for growth.

Understand the importance of due diligence

When negotiating mergers or acquisitions, due diligence serves as an in-depth review of the target organization — both its operations and its people. Much of due diligence involves a review of the quality of the assets and earnings to be acquired, but it also includes a review of operations, technology and staff.

The scope of the due diligence procedures depends on the structure of the proposed transaction. If it’s an asset purchase, you are obviously focused on the assets being acquired and staff to be hired. If it’s a stock purchase or merger, there is more due diligence required regarding organizational issues since you are stepping into the seller’s shoes in such transactions. The review needs to include a review of organizational documents as well as tax issues such as the S corporation election.

In addition, since many acquisitions involve organizations not subject to a financial statement audit prepared under generally accepted audit standards, the strength of internal controls can vary widely. It is through the due diligence process that you identify potential risks and develop a list of issues to be addressed in the definitive agreement.

Tax considerations 

When a business engages in a restructure, merger, sale or acquisition of another business, proper planning is vital to obtain the necessary information to fulfill various tax reporting requirements for the transaction. The type and extent of tax compliance that will be required depends on a variety of factors.

For example, is the transaction taxable or tax-free? Is the transaction a sale of actual assets or a stock sale? The answer to these questions determines the next steps in the compliance and reporting process.

Importance of planning and implementation

The merger, acquisition and divestiture process typically focuses on the transaction deal and negotiations involved. The implementation portion is often a second thought or prepared for after the fact. However, an implementation that includes a structured plan, defined process and comprehensive communication plan will impact more stakeholders and oftentimes be the measure of a successful deal. Planning and preparing for each of these three significant items and the ongoing management requires tools, experience and leadership.

The need for a trusted adviser 

Does your staff have the experience and capacity to avoid the stumbling blocks mentioned above? It is important to understand that engaging transaction advisers and due diligence providers can be as simple or extensive as the seller or buyer wishes. Involving your advisers early in the due diligence process allows them to better understand your needs and help you formulate an appropriate due diligence strategy for your sale or acquisition. Whether it’s a high-level analysis of the entity in preparation for a potential sale, a gross margin analysis of a seller’s new product offering or a detailed historical four-year and projected EBITDA and working capital analysis, your adviser can make sure you don’t overlook things that could cause surprises.

To learn more, contact the Sioux Falls Eide Bailly team at 605-339-1999 or click here.