Are you positioned to capitalize on the latest opportunities in the ever-evolving mergers and acquisitions (M&A) landscape? That was the central question at the recent event, “Navigating the M&A Landscape: Market Trends and Opportunities,” co-hosted by Lake Street Advisors and Mintz.
Jim Machinchick, Wealth Advisor at Lake Street Advisors, led an insightful panel featuring industry experts: Dean Zioze, Co-Chair, Mergers & Acquisitions Practice at Mintz; Robert MacLeod, Managing Director & Co-CEO at Bigelow LLC; and Michael Stravin, Principal at Wolf & Co. Together, they discussed key considerations for sellers in today’s market, providing valuable insights into how companies can enhance their appeal and ensure smooth transactions.
Here’s a recap of the major takeaways from the panel discussion:
(Disclaimer: answers are paraphrased from the panel discussion)
Enhancing Appeal & Navigating Market Conditions
What steps can companies take to enhance their appeal and ensure a smooth closing in the current M&A landscape?
Robert MacLeod emphasized that the key to a smooth closing process is avoiding surprises, particularly in areas like company performance, customer relationships, and legal or tax issues. He advised sellers to prepare thoroughly for due diligence early on, ensuring all potential problems are identified and addressed before they become deal-breakers. MacLeod highlighted that investors have short attention spans, so a clean, clear story is essential to keeping them engaged. By eliminating uncertainty and being well-prepared, sellers can enhance their appeal and avoid pitfalls during the closing process.
How have recent market conditions and trends affected deal structures and terms beyond valuation? What adjustments should sellers and investors consider for deals through the remainder of 2024?
Dean Zioze discussed how recent market conditions have led to longer deal timelines and shifts in leverage from sellers to buyers. As a result, earnouts and special indemnities have become more common as mechanisms to bridge valuation gaps. While deals for high-quality assets remain competitive, sellers need to be prepared for lower valuations and may need to take on more post-closing liability. Despite these challenges, deals are still being made—particularly for strong companies—with evolving terms that reflect the current choppy market
Robert MacLeod added context to the discussion by noting that while the market feels slower compared to the peak of 2021, the number of transactions and valuations are similar to those seen in 2019. Sellers should be aware of this normalization and adjust their expectations accordingly.
Understanding Buyer Dynamics & Due Diligence
How have the profiles of strategic versus financial buyers evolved recently? What trends should sellers and investors be aware of, and how should they adjust their strategies accordingly?
The panel explored the evolving profiles of strategic and financial buyers, with Robert MacLeod explaining that private equity (PE) buyers have been particularly impacted by rising debt costs. PE buyers typically rely on leverage to fund transactions, and the increased cost of borrowing has limited their ability to push up prices. In contrast, strategic buyers, who are often cash-rich and less reliant on debt, have been more aggressive in pursuing acquisitions.
MacLeod noted that this shift has leveled the playing field somewhat, with Bigelow observing their clients split evenly between choosing strategic and financial buyers. To navigate this landscape effectively, sellers must understand the strengths and weaknesses of both buyer types and tailor their strategies accordingly, ensuring they maximize value regardless of who is on the other side of the table.
What are the latest trends in buyer due diligence, and how do these changes impact both sellers and buyers? What innovative practices are being adopted on both sides?
Due diligence is becoming increasingly comprehensive and specialized. Dean Zioze highlighted that buyers are now assembling larger teams and employing more third-party consultants to conduct thorough reviews, especially in areas like cybersecurity and privacy. While the due diligence process has become more involved, it has also become more time-consuming, which can pose risks for sellers. A longer timeline increases the likelihood of deals falling through, but sellers can mitigate this risk by preparing for due diligence early and being proactive in identifying potential issues.
Michael Stravin added that sellers are becoming more willing to invest in their own diligence upfront, which can help expedite the process and minimize delays. While financial and technology due diligence remain top priorities, innovative tools and practices, including artificial intelligence (AI), are starting to play a role in speeding up and enhancing the diligence process.
Preparing for a Successful Sale
How should companies prepare themselves for a sale given the current market landscape? What are the first steps to take once the decision to sell is made, and how can these steps be optimized?
Preparation is crucial when it comes to selling a business, and the panelists agreed that building a team of advisors early is one of the most important steps a seller can take. Robert MacLeod stressed that sellers should assess whether their business is more suited for generating capital gains or for long-term ownership. Once the decision to sell is made, sellers should bring together a team of professionals—including wealth advisors, bankers, attorneys, tax experts, and estate planners—to identify and address any potential issues and streamline the process from start to finish.
Dean Zioze noted that starting early not only gives sellers ample time to address any financial or legal concerns, but also allows them to work with their advisors to structure the deal in a way that maximizes value and minimizes risk.
What are the key financial and estate planning considerations for business owners planning to sell their business? How should they address these considerations in light of current market conditions?
Jim Machinchick underscored the importance of early estate planning, especially when it comes to gifting shares of a business. With the current lifetime gift and estate tax exemption expected to be cut in half by the end of 2025, gifting shares prior to a sale can significantly reduce tax liabilities. However, Machinchick warned that waiting too long to implement these strategies could bring tax complications back into play, such as disqualification of the gift or inclusion of capital gains in charitable transfers.
Michael Stravin highlighted the benefits of Qualified Small Business Stock (QSBS), which allows eligible shareholders to exclude up to 100% of capital gains from taxes, provided certain requirements are met. Sellers be proactive in understanding these requirements and begin planning early to fully capitalize on these tax benefits.
The Role of Reps and Warranty Insurance and Overlooked Aspects
How does Reps and Warranty Insurance contribute to a smoother transaction, and what should both sellers and buyers consider when evaluating this option?
Dean Zioze described Reps and Warranty (R&W) Insurance as a product that has simplified negotiations by shifting post-closing liability from the seller to an insurer. This insurance allows sellers to reduce the amount of money held in escrow, allowing them to retain more capital post-closing. With premium costs relatively low, R&W Insurance is gaining popularity among both buyers and sellers, as it helps to streamline transactions and mitigate post-closing risks.
What aspects of a deal are often overlooked but are crucial for maximizing value? How can both buyers and sellers ensure these elements are addressed?
One commonly overlooked aspect of deal preparation is the emotional side of the process for business owners. Robert MacLeod pointed out that private company owners often struggle with the emotional transition of selling their business, which can complicate the decision-making process. Having trusted advisors who can help navigate both the financial and emotional aspects of a sale is critical to ensuring a smooth transaction. Sellers should also be mindful of the future upside potential of their business, making sure they fully understand its long-term value before negotiating the sale.
Conclusion: Preparation is Key to Success in Today's M&A Market
Sellers in today’s M&A landscape face a complex and evolving set of challenges, but the right preparation can make all the difference. By starting the process early, building a team of trusted advisors, and staying informed on market trends, sellers can enhance their appeal to buyers and ensure a smoother closing process. As the panelists emphasized, whether it’s preparing for due diligence, adapting to new deal structures, or planning for the financial and tax implications of a sale, careful preparation is essential for maximizing value and success in today’s competitive market.
If you’re looking to navigate the complexities of the M&A landscape and capitalize on upcoming opportunities, please don’t hesitate to reach out.
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