BY NORMAN G. GRILL JR.
If your company is struggling, the thought of expanding through a merger or acquisition may seem farfetched. But there could be a business that wants to add yours to its roster.
Or perhaps you”™re a market leader and acquiring a suitable company would further cement your dominance.
Whatever the case, a basic understanding of mergers or acquisitions (M&As) can help prepare you to take advantage of opportunities that arise.
Beyond retirement
Perhaps the first thing to cross any business owner”™s mind when the prospect of an M&A deal comes up is: Should I do this now? Whether you”™re a seller or a buyer, timing is critical.
So, as a seller, when is the right time? Well, retirement is the most obvious example. If you plan to, at least in part, live off the proceeds of the sale of your business after you retire, you”™ll need to start hunting for the right M&A deal well in advance of your bon voyage party.
Yet don”™t assume the perfect buyer will emerge right when you”™re ready to hang it up. You may find the ideal candidate a few years before your planned retirement date. In that case, you”™ll have to make the tough call as to whether to retire early or risk losing your suitor. On the bright side, in many cases former owners can stay involved with the company as a consultant.
Of course, even when an owner hasn”™t been planning to sell the business anytime soon, an urgent need to sell can come up ”” especially these days. Shifting market conditions, obsolete product lines, outmoded technologies and lack of credit may be signals that it”™s time to move on.
Opportunity + capital
For buyers, timing is somewhat simpler. It”™s generally a matter of opportunity plus capital. That is, you encounter a suitable target to merge with or acquire and you have the finances to get the deal done. But that doesn”™t mean it will always or even usually be an easy decision.
An M&A target must fit in with your strategic goals. You”™ve got to ensure that the business you”™re buying will make you more competitive and profitable, not just briefly put your name in the news.
Due diligence is of paramount importance. That means not only fully grasping the target”™s finances and any legal issues involved, but also looking closely at the target”™s operations. Scrutinize its marketing and sales, production and administration departments carefully. These functions can often hold deal-breaking pitfalls.
Taxes and sale structure
As you might expect, Uncle Sam will want a piece of any M&A transaction. But not every business sale need be immediately taxable. Some arrangements may qualify for tax-deferred treatment. Examples include transactions in which the seller receives buyer stock or certain qualifying property in exchange for their stock or assets. Corporate or partnership/limited liability company (L.L.C.) mergers may be eligible for tax deferrals as well.
Understandably enough, many parties to M&A deals favor the idea of a tax-deferred sale. But there are situations in which paying taxes upfront is the better way to go. For example, despite immediate taxability, cash-only sales are simpler and often quicker to execute. Buyers typically favor a taxable sale to get a stepped-up basis in the assets, which can reduce future taxes.
If your company or one you”™re thinking about buying is structured as a corporation, you”™ll have to choose between a stock sale and an asset sale. Parties to an M&A deal often end up at odds here: Sellers look to stock sales to get favorable capital gains treatment. Meanwhile, buyers prefer asset sales to maximize future depreciation write-offs and to limit legal liability.
Buyers also tend to frown on stock sales because they”™ll have to deal with the carryover basis in the assets, which may raise their future tax liability. Conversely, stock sales of C-corporations appeal greatly to sellers because the departing owner(s) may avoid double taxation when they sell the assets and then distribute cash to shareholders.
Deal ready
The uncertain economy has put a dent in the frequency of M&A deals. But plenty are still going down and much depends on the industry in question. Even if a business sale or purchase is the furthest thing from your mind at the moment, keeping your company in “deal ready” shape can strengthen your leverage should an intriguing opportunity arise.
Norman Grill is managing partner of Grill & Partners L.L.C., with offices in Fairfield and Darien. He can be reached at N.Grill@GRILL1.com or 254-3880.
