M&A Trends in 2023: Processes, Challenges and Solutions

In this Solutions InSight session from March of 2023, we’re joined by Stu Brown, partner at Brown Moskowitz & Kallen, P.C., and Scott Daspin, director at Investment Banking Triad Securities Corp., for a multi-discipline discussion regarding sales of businesses in the middle market, focusing on selecting a buyer, assembling the right deal team, and the anatomy of a deal through closing. Our experts will also discuss some of the current trends they see in the marketplace with their clients.

Selling a business can be an emotional time. In most cases, it represents an individual or a family's life work and is likely their largest financial asset. While every transaction differs, many similarities in the process and common issues arise during the sales of middle-market entities.

How to find the right buyer for your organization

When a client is thinking about selling their organization, they first need to understand what they're trying to accomplish and what the perfect outcome would be. Owners also need to understand their business's value and have reasonable expectations. Planning for a deal is just as critical as the deal itself. It should begin years in advance to leave time for estate planning, determine whether the ownership structure makes sense, collect required documents, and undergo internal due diligence.

Each seller has a different opinion of what's most important to them. If the seller is going to be involved in the business and continue working there, it's essential to understand their role in the company and their responsibilities to the buyer. If a business owner has never worked for anyone, they should understand what that will look like before the transaction to avoid unwanted surprises.

Limited auction processes, in which there's competition to get the best price and terms, can be a good way for sellers to find the right buyer. While looking at the top-line purchase price number is essential, it's equally important to consider the payment method and when the seller will recoup the profits.

M&A processes: Anatomy of a deal

Once the auction process is complete, the parties begin working on a letter of intent ("LOI"). This non-binding agreement acts as the roadmap for the transaction and includes the purchase price, payment method, and other information related to the sale of the business.

While that process continues, the buyer will do limited due diligence on the seller, including a deep dive into the seller’s business, financials, employees, and regulatory issues. Once the preliminary due diligence is complete and the LOI is executed, the parties move forward with the purchase agreement, which includes what's known as representations and warranties and a tax analysis of how the parties will complete the transaction. Once the purchase agreement is complete, the parties move into closing, meaning that the buyer has lined up their financing and the seller has received all the third-party consents needed to complete the transaction.
It’s important to remember during the M&A process that disclosures are a seller’s friend. For example, if the buyer wants to know precisely how many employees the company has or how many lawsuits there have been, they’re entitled to that information. The seller will be much better off making full disclosures in these cases.

2023 M&A trends

Many deals are structured with payments post-closing, such as earnouts, where the seller is entitled to additional compensation if the business hits specific targets after closing. Earnouts can be a great compromise when a buyer wants to pay a lower amount for an entity, and we're seeing earnouts grow in popularity as money gets tighter.

While stock sales used to be more beneficial to the seller than asset sales, there are many instances now where doing an asset deal could be favorable from a tax perspective due to changes in tax law, particularly the limitation on the deduction of state and local taxes (a.k.a. SALT cap).

Post transaction, we're seeing a trend of companies extending announcements by 20 to 30 days so the seller can communicate their messaging before their audience sees it from other sources. Building your messaging to employees, clients, and vendors is essential.

Assembling the right M&A deal team

During the M&A process, clients often get so enamored with their business transactions that they lose sight of their primary role: running their business. The phrase "it takes a village" is very apt in the field of M&As, and sellers need to have the right advisors (a.k.a. the “deal team”) by their side to help prepare for and execute a transaction. While many sellers might not understand terms used throughout the transaction or know the various types of agreements, the right deal team can help clarify these points, answer any questions the seller or buyer may have, and make sure both the buyer's and seller's expectations are in order.

The deal team consists of three primary disciplines: an investment banker, an accountant, and a lawyer, with various elements within each field. When working with the right deal team, each partner can help educate the seller regarding what seems normal, explain how the deal will affect the seller's bottom line, and walk them through financial ramifications as the sale progresses. It's imperative to work with advisors experienced in the M&A field who have seen numerous transactions and can alert the seller to anything that seems abnormal.

M&A transactions can be emotional for middle-market business owners and involve a significant financial commitment from the seller without a guarantee that the deal will close. Whether walking away from the business or staying engaged, with proper planning and the right advisors, you can feel good that you’ve met the expectations set out at the beginning of your journey.