Last week, ACG National Capital sponsored an event entitled, “The Art Before the Deal: Effective Pre-Transaction Planning.” The event looked at the financial and personal finance decisions and considerations that all owners of small and medium-sized businesses should keep in mind as they begin the process of selling their companies and exploring M&A deals.
While this may seem like a strange time to talk about selling businesses – in the midst of a global pandemic – M&A deal activity has rebounded in recent months, and the number of deals in the region is anticipated to increase as we move further into 2021. And many business owners may want to take advantage of this increased deal flow to sell their companies.
Unfortunately for many of the business leaders at the helm of small and medium-sized businesses, the financial considerations of an M&A deal may be more complex and convoluted than simply receiving and pocketing a large check from an acquiring organization. While they may think that the money acquired from selling their company could be enough to ride off into the sunset of their careers or lives, that may not necessarily be the case.
Following last week’s event, we sat down with the panel’s moderator, Jordan Forney of Bernstein Private Wealth Management, to talk about the current M&A environment within the National Capital Region, the impact that selling a company can have on a business owner’s personal finances and the planning that needs to preface any potential steps taken to sell a business.
Here is what Jordan had to say:
Corporate Growth, Capital Style (CGCS): We’re at the one-year anniversary of the beginning of the COVID-19 pandemic. Looking back, how has the pandemic influenced or impacted M&A deal activity? What do you anticipate happening with deal activity in 2021 now that it seems the pandemic may be coming to an end?
Jordan Forney: What a year it has been. In the beginning, through the middle of 2020, deals were mostly on pause with the uncertainty brought on by the pandemic. Companies focused internally to address idiosyncratic issues pertinent to their business and to ensure they could endure potential hardships.
There was a shift in that conservatism, though, in the latter half of the year and at the start of 2021. We have seen a strong resurgence in M&A pursuits since then. That is, sales processes have resumed at an impressive clip as companies now look externally to expand. Some of the influencing factors include inexpensive financing, financial sponsors with record levels of dry powder, and active public equity markets described, in part, by the re-emergence of SPACs.
I anticipate this uptick in activity to continue in 2021 as the economy continues to re-open for many of those same reasons. Additionally, there are substantial proposed tax increases on the horizon which may further incentivize the completion of business transactions before the end of the year.
I have found this tax issue to be most top of mind for business owners today.
CGCS: Within the National Capital Region, do you anticipate that any particular markets or industries may see more M&A deal activity than others?
Jordan Forney: Without a doubt, government services have long been a significant contributor in the National Capital Region. I trust their strong market influence will continue and that they will remain steadfast in deal participation moving forward.
More specifically, the technology-focused companies in areas like cybersecurity, artificial intelligence, and SaaS have thrived. The virtual world expedited this growth and the region is bourgeoning as a hub for technological innovation.
“It is important to note that the planning process is iterative and it can be emotional. The market environment can be volatile, businesses evolve, and aspirations change. An early start on the planning process does not have to set things in stone.”Jordan Forney
At the macro-level, the broad economic re-opening should also be beneficial to industries that may have been hit the hardest during the past year. I suspect a bounce-back in the consumer and industrial sectors, too, especially for businesses that are well-capitalized.
Taken together, I expect robust market activity across the board in 2021.
CGCS: Last week, you moderated a panel of experts discussing pre-transaction planning. When does this planning take place? When business owners are considering an exit? When building a growth strategy?
Jordan Forney: The pervasive theme of the discussion is that it is never too early to start the planning process. Assembling a team of external trustworthy professional advisors is one important initial step.
Being thoughtful and intentional about who is on your internal executive team is also a critical decision. That includes deciding when and why they are brought into the fold. And, as an owner, dimensioning your goals and objectives – both for the business and for your family – often facilitates a successful outcome.
“The biggest financial consideration, though, is taxes. After all, it is not what you earn on the sale of your business – but what you keep.”Jordan Forney
It is important to note that the planning process is iterative and it can be emotional. The market environment can be volatile, businesses evolve, and aspirations change. An early start on the planning process does not have to set things in stone. A well-informed team approach can help owners be nimble and address challenges along their journey.
CGCS: What are some of the financial considerations that business owners have to think about or plan for following a transaction that many may overlook or fail to consider? What potential ramifications could they face if they fail to plan or account for these things?
Jordan Forney: We often ask owners, “Do you know your number?” The number we are referring to is the amount of money they need to sustain their lifestyle upon completion of a sale.
Owners may have a loose figure in mind, but having that rooted in a comprehensive financial planning analysis is key. Further, defining what to do with anything in excess of that core number is just as important, whether that be for charity or for the next generation. Depending on the situation, there may be implementation strategies before the actual sale to most efficiently act on these ambitions.
“Without a doubt, government services have long been a significant contributor in the National Capital Region. I trust their strong market influence will continue and that they will remain steadfast in deal participation moving forward.”Jordan Forney
The biggest financial consideration, though, is taxes. After all, it is not what you earn on the sale of your business – but what you keep. There are several proposed tax legislation changes right now that may significantly increase income and capital gains tax rates and estate taxes. This would reduce the net value to an owner selling their business. But it’s an issue that can be alleviated if you plan for it.
There is research that shows a surprisingly high percentage of business owners that – upon completing a transaction – are unsatisfied. I surmise that this is highly correlated to business owners who did not plan for what life looks like after an exit.
Pre-transaction planning is a crucial part of the business sale process and aims to create a clear roadmap to success for owners.
To learn more about Bernstein Private Wealth Management, visit them online by clicking HERE. For a list of upcoming ACG National Capital events, click HERE.