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Tip of the Spear Ventures

Venture Capital | Private Equity

mergers

5 Ways Coronavirus has Changed Mergers and Acquisitions

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The Point: The COVID-19 pandemic has altered our expectations of mergers and acquisitions. If speed kills deals, and the coronavirus impact on mergers and acquisitions was not spared, the swiftness of doubt and uncertainty inflicted has shifted business values. As a result, we’re seeing mergers and acquisitions in a new light. So in this post, we present 5 ways coronavirus has changed mergers and acquisitions… Enjoy!

5 Ways Coronavirus has Changed M&A

There are five important shifts in mergers and acquisitions as a result of the coronavirus, which will permanently change the business of merging and/or acquiring businesses:

Change in the Understanding of Employees

Businesses have realized the value of their front-line teams in getting stuff done. Together with the efforts of the team members — many of whom are often at the lower end of the pay scale — many companies could not have lasted through the pandemic. So, how are individual perceptions of meaningful work and a special calling in some specific jobs influenced by the Covid-19 pandemic? It’s only when a crisis hits that we can identify the attractiveness of some functions — while other functions tend to lose out to those identified as low or dull. Ask yourself, who’d be the Most Valuable Player (MVP) for you now — someone who produces the materials/tools/information which you require or your C-Suite leader who coordinates/reports on? Where exactly is the value now? The answers to these questions pose serious implications for M&A.

Shift in Culture Priorities

Being kept apart from friends or family has shown team members where their true priorities lie — and it’s not work. Our relationships to the jobs we conduct have changed as a result of the pandemic. If you asked any part of your team what matters today, it will almost surely be family and their health. That’s where people wish to spend the majority of their time. When you realize that you could lose the people you love most, you see what actually matters. M&A will need to take and work with the changed priorities of organizational culture and the team members because when it comes to a choice, work will not come out on the top.

Change in Empathy and Compassion Expectations

One of the biggest adjustments demands M&A adapt to the individual’s with empathy and compassion. Whether they are in the workplace or working from your home, M&A professionals will need to use their own emotional intelligence (EQ) to understand each person’s situation, pressures, priorities, and values. No longer can M&A think of the organization’s team as a single thing or object — and this can and will be hard. More than ever, M&A will need to reveal themselves as people and build relationships with their own folks. Honest, accurate discussions about work and life will improve connection. Empathy and compassion will solidify it.

Change in the Power of Leadership

Having remote teams has meant leaders needed to step back from the job and let their people manage themselves. The M&A firms who gave their teams some autonomy and decision-making are the ones who have had the best results. It makes sense. To retain power, M&A will be to increase agility and decrease costs for the company in the long run. When you have the right people in the M&A function, don’t be afraid to show your faith in them? It’s time to let go of control over the particulars of people’s work and instead, begin to support them. Be certain they have everything that they need to make the ideal choice and get the job done.

Change in Attention and Direction

If there is one thing we learned during this time, it is that plans can be shattered at the drop of a hat. While planning is still important — Since you have to understand where you’re headed — it’s the results leaders need to concentrate on instead of the journey. Your purpose in M&A is to act as a driver, and that’s what’s going to maintain mergers and acquisitions strategy leading to results — or lack thereof.

SUMMARY

I see a significant move from strategy or process-led mergers and acquisitions towards a more agile one. While we still value powerful and elastic M&A, there’s presently a heavy focus on agility at Tip of the Spear.

Understanding Mergers and Acquisitions Strategy

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The Point: When most people think about starting a business, they often think of starting from scratch — designing the business from scratch and making your own concepts and plans. But is this the right — or best — strategy for an entrepreneur? In this post, we’ll explore understanding mergers and acquisitions strategy… Enjoy!

Tip of the Spear Understanding Mergers and Acquisitions

This is actually easier than starting an entirely new company, as you have a known product to base your business around. However, buying an existing company can still help you get started on the right foot. Here is what you should know to get a lot out of your purchase. Read on for more information on mergers and acquisitions.

There are two ways to go about mergers and acquisitions (M&A). One way is through an all-cash transaction, which allows you to take over a majority of the assets of the other companies and you keep all of the equity. Another way to approach the process is by conducting a financial transaction, where you receive cash for a portion of the total equity. Both methods have different advantages and disadvantages, so it’s important that you carefully consider which option will be best for you.

The first thing to consider is whether or not there are synergies between the two companies. You want to be able to add to the strength of one company while keeping away from the weakness of the other. For example, buying a hospital that offers medical equipment to nursing homes could be a good move for both companies. However, buying a manufacturing company that makes products for the home repair industry could be a bad move for both companies. So the two mergers and acquisitions strategies have to be well thought out before you make a decision.

You also have to understand the benefits of the mergers and acquisitions. Some examples of these benefits include saving cash, leveling the corporate ladder, combining research and development, and better service to customers. In order for these benefits to be realized, you have to look at the costs of the transactions carefully. This means looking at both the direct and indirect costs involved with the transactions.

You should also determine the value of the acquired assets. You should compare the total assets acquired, including goodwill, to the total market value of the combined company. Remember that these purchases do not always result in absolute value. Sometimes, the actual net worth of the acquired business is less than the purchase price.

SUMMARY

In summary, the main goal of the acquisition and mergers and acquisitions strategies is to acquire a company that can provide a service or product that solves a problem for the buyer. One of the main downsides to acquisitions is the risk of acquiring weak companies that might not be able to support the obligations you have with them. Be sure to get all the facts before you decide on a strategy. Make sure you are familiar with all the terms before you enter into any agreements.

Business Acquisition Due Diligence – Accounting

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The Point: The world of mergers and acquisitions is fantastic, especially once you have an prospective organization under Letter of Intent (LOI). This time period is one where due diligence is conducted to confirm whether the organization is what it says it is. Especially important during this due diligence time period is the analysis conducted by an Accountant. So in this post, we’ll explore business acquisition due diligence from an accounting perspective… Enjoy!

For many accountants, business acquisition is an onerous and time-consuming process. It is not just the cost of purchasing additional capital or paying for legal assistance, that can be a drain on funds. The sheer complexity of mergers and acquisitions often requires a large investment in professional services in addition to time, dedication, and effort. However, many accountants fail to realize that the vast majority of mergers and acquisitions are performed by lawyers and accountants. This post will highlight some of the challenges accountants face in the process of business acquisition due diligence.

Due Diligence – 2 Primary Challenges

There are two primary reasons why accountants are the primary force behind acquisition activities. First, they have access to the appropriate legal information and personnel to make a knowledgeable purchase of a business. Second, they are well-versed in the financial statements and the business plans of both companies. In short, they understand the products and services that each company offers and the expectations from the purchase. Although these key assets are important, it is sometimes unrealistic to put such great faith in them when it comes to the complex negotiations that must precede a transaction. For this reason, it is vital that accountants remain neutral in their recommendations to the management regarding the proposed merger or acquisition.

In reality, most business transactions occur at a slow pace, with little or no external input. Therefore, accountants become involved only after significant due diligence has been conducted. The process may begin with a simple review of financial statements and company records to determine if the prospective acquirer is making a sound purchase or is entering into a deal with unrealistic expectations. This preliminary examination of the business’s records should not take more than a few hours, and is time consuming, but it is time well spent.

Accountants and Lenders in Due Diligence

When a company is in the process of obtaining financing, there may also be instances where the lender requires diligence in connection with the loan. Lenders are becoming increasingly educated about the benefits associated with acquiring an existing business rather than an entirely new one. As a result, the process may include requesting business information from accountants as a part of the due diligence process. Accountants may provide information concerning the companies’ credit ratings, operational revenue, and cash flow, as well as any positive or negative indicators that reflect on the business’s financial health.

Accuracy Counts in Due Diligence

For the individual who has entered into a business acquisition transaction, it is imperative to maintain accurate accounts in order to ensure that the transaction goes as smoothly as possible. Good accountants will have access to information that is rarely shared within a business acquisition firm. This type of specialized information allows individuals to make intelligent decisions regarding the purchase of a business. It will provide the acquirer with accurate information that can be used to determine the amount of funds needed for the acquisition and to determine if the business has the potential to increase profit and revenue. In fact, business acquisition due diligence is so important that businesses have their own internal accountants as well as outside accountants who are responsible for performing these tasks.

SUMMARY

Most business acquisition firms prefer to hire accountants who have previous experience in acquisitions as they know how to manage the due diligence process. Additionally, a business acquisition consultant should focus on developing relationships with other business acquirers to ensure that the due diligence process goes as smoothly as possible. Most consultants will perform all of these tasks on behalf of the acquirer. In fact, most will dedicate several of their business acquisition specialists to working exclusively with the acquirer.

SMB Sustainability: Five Urgent M&A Issues and Implications

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Selling a Small Business – 5 Tips for Baby Boomers Approaching Retirement

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The Point: As a small business owner, you pour your blood, sweat, and tears into your business! The day-in/day-out challenges associated with leading a business as it’s owner are supposed to be offset by the “golden” years of selling it and retiring. As the largest demographic in our society, the Baby Boomers, approach their exit it appears as though the golden years are turning to rust before our very eyes! So, in this post we’ll explore selling a small business with 5 tips for Baby Boomers approaching retirement… Enjoy! (NOTE: While the focus of this article is on Baby Boomers, it can be applied to any small business owner looking to successfully exit!)

The Baby Boomers

Baby Boomers born between 1946 and 1964 represent an estimated 73 million people in our society (The second-largest age group after their children, the Millennials, born from 1982 to 2000). Baby Boomers represent 41% of small business owners or franchise owners (Second to Gen X’ers born between 1965 and 1980 at 44%).

This demographic rapidly approaching retirement age (generally thought of as age 62 – the age at which a person is expected or required to cease work and is usually the age at which they may be entitled to receive superannuation or other government benefits, like a state pension). As they achieve this milestone, few appear to be financially ready/able to successfully retire. The top two reasons being that (1) they were the first generation expected to establish for themselves self-retirement tools/savings as opposed to government provisions and (2) the economic recession from 2008 reducing significant savings (if any were established).

Baby Boomer Small Business Owners

Statistics reflect that almost 40% of Baby Boomer small business owners feel they don’t have the financial confidence to retire before they’re 65, let alone three years earlier at 62! What’s more, a recent study suggests a full 72% don’t even have an exit strategy. Exit strategies for small business owners typically consist of the following (in popularity order):

  1. Liquidation
  2. Liquidation Over Time
  3. Keep Your Business in the Family (i.e., Succession Planning)
  4. Sell Your Business to Managers and/or Employees (i.e., Employee Stock Ownership Planning – ESOP)
  5. Sell the Business in the Open Market (i.e., Mergers)
  6. Sell to Another Business (i.e., Acquisitions)
  7. The IPO (Initial Public Offering)

Tips for Baby Boomers Selling Their Small Business for Retirement

As an active acquirer of small businesses (You can view my firms Acquisition Criteria here: https://tipofthespearventures.com/acquisitions/), I’ve compiled the following five (5) strategies or tips for successfully selling the Baby Boomer owned small business. (Note: As a somewhat conservative investor, I caution against the “all-your-eggs-in-one-basket” mentality when it comes to selling your business ahead of retirement).

Tip #1 – Diversify Your Money

One of the biggest strategies I see small business owners do is hinge their entire retirement on the sale of their business. A better strategy consists of acting well before the sale. It is important that small business owners take money out of the business from a personal standpoint and invest those funds no less than three years prior to an anticipated sale. Typically, most businesses will provide the most recent years financial statements as part of the financial packet to prospective buyers. Statements that reflect anomalies are scrutinized, leading to a sale multiple (3-5x) that will be less than or undesirable.

Tip #2 – Financial Statement Cleaning

Along those lines, the organization’s financial statements are the foundation reviewed during acquisition due diligence when selling any business. Updating the core documents like profit and loss statements can make a big difference to anyone exploring the enterprise.

Updated balance sheets and tax returns for at least the last three fiscal years is crucial in projecting the best financial position possible. The goal being to make sure everything ties together, making sense to potential acquirers and being easy to understand.

Tip #3 – Removing Yourself from the Business

Do you have staffing that’s able to run the business after your exit? As an active Owner Investor (as opposed to Owner Operator) I typically look for organizations that have depth of staff that will allow the organization under new leadership to continue on without current ownership running the entity day-in/day-out. Easing the transition here means hiring employees that will stay as the face of your business when the ownership changes. This strategy allows small business owners to potentially increase the value of their business and the likelihood it will sell.

Tip #4 – Operational Documentation

Having an Operational Guide is important for every business to successfully operate/run. These Operational Guides are critical details for manufacturing, distribution and sales. This guide that is written down and documented makes it easier for the new buyer to pick-up where the old owner left off and drive the organization forward. They also make it easier/less stressful for those employees remaining with the business.

Tip #5 – Identify Legal Barriers

Identifying if the sale of your business is an Asset (when a buyer is interested in purchasing the operating assets of a business instead of stock shares) or Stock (shareholders of the target company receive shares in the acquiring company as payment, rather than cash) sale will ease the exit process. Removing any of the legal hurdles can make the road to a sale less difficult for acquisition. For example, one that we keep coming up against is the transfer of the lease (Landlords using the sale of the business as an opportunity to renegotiate leases and up the rent can be viewed as undesirable to potential buyers).

SUMMARY

In this post, we’ve explored selling a small business with 5 tips for Baby Boomers approaching retirement along with 5 tips. All of these strategies are desirable for potential acquirers. As such, Baby Boomers looking to sell their business should look to complete them to position their business as they look to exit into their golden years of retirement.

Sam Palazzolo

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