How to help make your client’s M&A a success

It looks like being a boom year for mergers and acquisitions. If your client is looking to sell or merge, here’s how to ensure it’s a success.

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Key points

  • When deals fall apart, it’s often due to the buyer discovering unforeseen issues during due diligence
  • A professional adviser can increase chances of success by preparing the business for sale ahead of time
  • Accounts, tax liabilities, succession planning and realistic price expectations are all areas that need attention

Mergers and acquisitions for small-to-medium Australian businesses are back on the agenda, which is exciting news for those planning to sell. And when it comes to maximising the value of a sale, professional advisers should work with their clients well in advance to ensure their accounting and legal affairs are in great shape.

After a lull in the early days of the pandemic, mergers and acquisitions (M&As) are predicted to bounce back. A report from Mergermarket found at least 84 per cent of dealmakers expect to do a deal in 2021. And so-called ‘mid-market gems’ – with a value of between $10 million and $250 million – are particularly attractive in Australia. Furthermore, there’s lots of interest in domestic as opposed to overseas companies. A separate report from Deloitte found around 85 per cent of buyers see Australian companies as attractive targets.

Despite these encouraging numbers, completing a sale or merger is not an easy or straightforward process. According to figures from Harvard Business Review, as many as 70 to 90 per cent fail.

So, how can advisers ensure their client’s M&A is a success?

Make proper preparation your start point

First, to point out what should be obvious but is sometimes ignored, running a sale process or merger is best left to the experts. Even if an accountant or solicitor has worked with a business for years, having a team of specialist M&A advisers for the actual transaction is a must.

“I’ve worked on deals where a client or the other party insisted on using non-M&A experts for tax and legal advice,” says Helen Sutherland, partner in M&A at KPMG. “It slowed down the whole process and ended up costing my client more in adviser fees because the legal documents were missing so much standard content, and a lot of re-drafting was required.”

Having said that, if you are your client’s trusted business adviser, there’s a lot you can do well in advance of a sale. It’s all about making sure they have their affairs in order, so no problems come up later.

“The most common reason why deals fail is because a buyer discovers material new information during due diligence that is inconsistent with what they were provided with initially and had been used as the basis of their valuation,” Sutherland explains.

“This then undermines the credibility of the company in the buyer’s eyes, which can be damaging to the momentum of the sale process. It may not lead to the buyer pulling out altogether, but it often reduces the price they are willing to pay.”

Sometimes, it may be that the owners don’t even realise they have these issues before the due diligence reveals them – for example, they have unknowingly triggered tax liabilities that remain unpaid, or they haven’t thought to register a trademark they have been using for 20 years.

“That’s why it’s really important for owners to get their affairs in order before they go to market,” Sutherland says. “They’re less likely to get an unwelcome surprise when the buyer and their advisers go through due diligence. Plus, if a vendor is aware of an issue up front, it can either be addressed or disclosed.”

Essentially it comes down to thorough preparation and as their long-time accountant, lawyer, or financial adviser, your insights and help here can be invaluable.

Beware bad bookkeeping

One of the most important pieces of preparation is to make sure accounting systems are in top shape before a buyer looks. Making that clear to your clients is critical. Sutherland has seen many companies for sale where the accounts are in disarray, including those that still use cash accounting.

Within this, tax specialists also have a role, as deals can fall apart due to issues like tax liabilities.

“The seller’s tax liabilities are an area where buyers expect to not assume any risk, even if they are acquiring the shares of a company,” Sutherland says.

“Tax liabilities can be perceived as a ‘black hole’, particularly with penalties and interest added into the mix. Getting to the bottom of tax liabilities can also soak up a lot of time and cost, so it can really push out the timetable if the seller is not aware of them before the process begins.”

Planning for succession

Long-term thinking is also crucial and, again, it’s where a trusted business adviser can add real value. A couple of years ago, a report from KPMG, Family business – the balance for success, found just 17 per cent of Australian family businesses have documented plans for leadership and ownership succession.

This is of concern whatever stage a business is at, but certainly it can stymie a successful merger or sale. Sutherland repeatedly sees cases where there is no succession plan in place, or a company has a complicated ownership structure. This can be a particular issue when a sale is hastily initiated because one person has to exit suddenly, for example, due to illness. The owner typically has less negotiating leverage if the buyer is aware of their motivations.

“Businesses should be talking to their advisers early on to put all these things in place, even if there’s no immediate plans for a sale,” Sutherland says. If they haven’t, it’s your job to raise it as an issue and help them through the process.

Keeping it real

The final area that businesses should be advised about in advance is valuation, in particular advising that any price expectations should be supported by financial performance.

Sutherland has seen owners who have independently provided specific price guides to buyers well ahead of any preparation to get the business sale-ready. Then, when the sale process formally kicks off and the advisers start approaching buyers, they struggle to maintain the seller’s price expectations.

“A lot of the time, the seller’s price expectations are based on what the shareholders believe their business is worth, rather than an objective assessment of value. Perhaps they’ve seen a company sell for a certain price and they think theirs is comparable. Or they have calculated how much they need to retire and priced the business in line with that.”

Ultimately, the key to success is being prepared – well in advance of any sale. That’s why it’s important to encourage your clients to come to you early so you can steer them in the right direction. That way, they can maximise their chance of a successful deal.