Mergers and Acquisitions Insights

Every M&A is unique, and is dependent on the context and circumstances of the deal. Nevertheless, certain factors consistently make or break deals and mergers. Here are three takeaways from my experience: 1. Strategic Alignment & Execution: Clarity on "why" you’re doing the deal is everything. It should guide decisions at every stage. In one transaction, misalignment between us and the sellers led to a tough integration process—and the departure of key team members. That lesson stuck. In the next deal, we made the “why” central to every discussion, aligning everyone around a shared goal. The result was a smoother process, strong team retention, and long-term success. 2. De-risking deal roadblocks: Every deal comes with risks—but they aren’t one-size-fits-all. Evaluating risks in the specific context of the buyer, seller, and market is critical. Use data to dig deep into culture, product, financials, and go-to-market risks, and create actionable plans to mitigate them early. 3. Process & Integration: Closing the deal is just the start. A clear integration plan that ties back to the why we did this deal with well defined milestones can expedite ROI. At the same time, flexibility is key. Start with a well defined plan but stay agile and ready to change as the integration progresses. 

EBITDA isn't everything. Recently, I had an enlightening conversation with a business owner who was contemplating a merger with a partner service provider. On the surface, the synergy seemed promising — two companies of similar size, complementary services, and a shared history of collaboration. However, as we delved deeper into the financials, we uncovered critical insights that could have easily been overlooked. While revenue and earnings are often the main early focus in M&A discussions, we discovered that the cash conversion cycles of the two businesses were markedly different, one business was using expensive debt (with no returns, revenues were falling), and differing strategies on operational expenses. Key takeaways: 💸 Cash Conversion Cycle Matters: It's vital to understand how quickly a business can convert its investments into cash flow. A lengthy cash conversion cycle can signal inefficiencies that can derail potential synergies post-acquisition. ⚔ Debt Usage is Double-Edged: While debt can fuel growth, mismanagement or the wrong debt can choke it. Analyzing the debt levels and capital structure is crucial to assess the potential risk and financial stability (and potential opportunities) of the acquisition target. 👑 Culture & Strategy are King: These are important topics to explore when considering M&A. While the black and white figures in a P&L are not the full story, the financial statements can be indicators for cultural and strategic differences to explore. For the right acquirer, these areas can be "low hanging fruit," areas ripe for improvement. For a business where owners will now be partners, it could be a source of ongoing tension or worse -- instead of 1+1=3, the businesses are worse off together than when they were apart. This business owner was super sharp, and had a sense of some of the concerns I raised. However, this is the value of having an advisor in your corner. In a few minutes, I was able to outline a handful of areas to discuss deeper or consider fully as they considered this potential transaction. #mergersandacquisitions #finance #entrepreneur #investmentbanking

M&A Monday: The Almighty F-Reorg. This M&A Monday is co-drafted and posted with Joshua A. Siegel, Partner and Chair of Transactional Tax Group at Albrecht Law, Mergers & Acquisitions because he is the tax genius, expert on F-Reorgs, and all things-tax. Josh told me something yesterday that blew my mind. More and more of our clients are opting to acquire the equity of a target rather than acquiring the assets of a target. For smaller buyers, this is driven by the SBA 7(a) loan now allowing a buyer to buy less than all of the equity of a seller (Rollover explainer here: https://lnkd.in/eP3NP5Sx). For our independent sponsors and small PE buyers, the benefits of an equity acquisition, include (i) ease of transition, (ii) not having to assign contracts, (iii) retaining licenses, and (iv) not losing preferential pricing. (Deep dive into acquisition structures: https://lnkd.in/eY7utvpd) There are two major downsides: (i) inheriting historical target liabilities, and (2) no "step-up" on the basis of the target (the buyer steps into the seller's depreciation schedule and does not get to depreciate the full purchase price). For the “step-up” problem, there are tax structuring opportunities that can treat the acquisition of equity in a substantially similar way as an asset purchase. The best way for a buyer is the F Reorganization (“F-Reorg”). Alternatively, a Section 338(h)(10) or Section 336(e) election can be made (Josh will tell us when the facts and circumstances of each deal makes this election proper). Both of these tax elections and the F-Reorg allow the buyer to purchase equity, but achieve the coveted step-up in tax basis in the target’s assets. Here is where my mind was blown. I always knew the risk of choosing an Election (not doing an F-reorg) and buying an S-corp is that somewhere along the road the target tripped up the S-corp requirements and the IRS could impute C-corp taxes from the moment the target busted the S-corp. However, Josh informed me that there is also a risk that if a buyer does an election relying on the target being an S-corp and the IRS retroactively says the S-corp was busted (thus, the target was a C-corp), the buyer may not be entitled to the Step-Up either. The risk of not doing an F-reorg is not just past C-corp taxes (bad), but also significantly lower depreciation (even worse). This would be detrimental to a buyer. This greatly tips the scale in favor on an F-reorg in almost all deals where we are acquiring the equity of an S-corp. Continue reading -----------> https://lnkd.in/eQXEAFGh

Me: “What’s your timeline for diligence on this deal?” Client: "Diana, honestly … we need it yesterday." We were brought in pretty late into the deal. I’m always shocked at how quickly M&A can move. So, you don't have time to check everything, you need to prioritize. While every deal is different, here’s a good starting point of where to look: 1) Key executives: Focus on the C-suite for corporate governance issues and key business leads that are crucial to the company's core operations. 2) Business model risks: What could tank this company overnight? Regulatory changes? Tech disruption? Concentrate there. 3) Material partners: Who are the top 3-5 partners (be it customers and/or suppliers) that could cripple operations if they walked? Are there special or privileged relationships that will fall apart after the deal? 4) High-risk locales: If they're operating in known trouble spots, those merit extra attention, especially as it increase bribery/corruption and financial crimes risk. Remember, the goal isn't perfection. Especially under a time crunch. You're not trying to uncover every pebble. You're looking for the boulders that could derail the entire deal. Once you’re comfortable with these risks, you can dig deeper after signing. #mergersandacquisitions #duediligence #riskbasedapproach #investments

So, I bought a lemon. …no, not the fruit or the kind of car. Entrepreneurship is fraught with both challenges and opportunities. A complex aspect I've navigated is the acquisition of businesses with significant liabilities. It's a process that demands not just a keen eye for potential. It demands a deep understanding of the intricacies involved in such transactions. In one instance, we were considering the acquisition of a business that, on the surface, appeared to be a valuable asset with promising growth potential. However, a closer examination revealed a tangled web of liabilities. Each could have derailed the venture if not addressed with precise and strategic foresight. The crux of the challenge lay in distinguishing between the types of liabilities we were willing to take on. It was important to differentiate simple financial liabilities from operational. → Financial liabilities could be quantified and managed. → Operational liabilities could pose significant risks to the business's ongoing viability. Our approach was methodical. 1. 𝐖𝐞 𝐝𝐞𝐥𝐯𝐞𝐝 𝐝𝐞𝐞𝐩 𝐢𝐧𝐭𝐨 𝐭𝐡𝐞 𝐜𝐨𝐦𝐩𝐚𝐧𝐲. → financial records → contracts → operational frameworks Our goal was to identify and assess every liability. This wasn't just about crunching numbers. It was about understanding the story behind each liability. 2. 𝐖𝐞 𝐭𝐫𝐲 𝐭𝐨 𝐮𝐧𝐝𝐞𝐫𝐬𝐭𝐚𝐧𝐝 𝐢𝐭𝐬 𝐩𝐨𝐭𝐞𝐧𝐭𝐢𝐚𝐥 𝐢𝐦𝐩𝐚𝐜𝐭 𝐨𝐧 𝐭𝐡𝐞 𝐟𝐮𝐭𝐮𝐫𝐞 𝐨𝐟 𝐭𝐡𝐞 𝐛𝐮𝐬𝐢𝐧𝐞𝐬𝐬. 3. 𝐄𝐧𝐠𝐚𝐠𝐞 𝐰𝐢𝐭𝐡 𝐭𝐡𝐞 𝐩𝐫𝐞𝐯𝐢𝐨𝐮𝐬 𝐨𝐰𝐧𝐞𝐫𝐬. This was to gain insights into how these liabilities were managed (or mismanaged). 4. 𝐖𝐞 𝐢𝐝𝐞𝐧𝐭𝐢𝐟𝐲 𝐚𝐧𝐲 𝐩𝐚𝐭𝐭𝐞𝐫𝐧𝐬 𝐨𝐟 𝐝𝐞𝐜𝐢𝐬𝐢𝐨𝐧-𝐦𝐚𝐤𝐢𝐧𝐠 𝐭𝐡𝐚𝐭 𝐜𝐨𝐮𝐥𝐝 𝐢𝐧𝐟𝐨𝐫𝐦 𝐨𝐮𝐫 𝐚𝐩𝐩𝐫𝐨𝐚𝐜𝐡 𝐦𝐨𝐯𝐢𝐧𝐠 𝐟𝐨𝐫𝐰𝐚𝐫𝐝. The decision to proceed with the acquisition wasn't taken lightly. It was based on a comprehensive risk assessment that balanced the potential for growth against the challenges posed by existing liabilities.  • 𝐓𝐡𝐢𝐬 𝐩𝐫𝐨𝐜𝐞𝐬𝐬 𝐮𝐧𝐝𝐞𝐫𝐬𝐜𝐨𝐫𝐞𝐝 𝐭𝐡𝐞 𝐢𝐦𝐩𝐨𝐫𝐭𝐚𝐧𝐜𝐞 𝐨𝐟 𝐝𝐮𝐞 𝐝𝐢𝐥𝐢𝐠𝐞𝐧𝐜𝐞. Not just as a procedural step in acquisitions but as a fundamental strategy that informs every aspect of the decision-making process. Ultimately, this experience reinforced a crucial lesson: 𝐭𝐡𝐞 𝐯𝐚𝐥𝐮𝐞 𝐨𝐟 𝐚 𝐛𝐮𝐬𝐢𝐧𝐞𝐬𝐬 𝐢𝐬𝐧'𝐭 𝐣𝐮𝐬𝐭 𝐢𝐧 𝐢𝐭𝐬 𝐚𝐬𝐬𝐞𝐭𝐬 𝐨𝐫 𝐩𝐫𝐨𝐟𝐢𝐭𝐚𝐛𝐢𝐥𝐢𝐭𝐲. 𝐈𝐭 𝐢𝐬 𝐢𝐧 𝐢𝐭𝐬 𝐩𝐨𝐭𝐞𝐧𝐭𝐢𝐚𝐥 𝐭𝐨 𝐠𝐫𝐨𝐰 𝐚𝐧𝐝 𝐞𝐯𝐨𝐥𝐯𝐞 𝐝𝐞𝐬𝐩𝐢𝐭𝐞 𝐢𝐭𝐬 𝐥𝐢𝐚𝐛𝐢𝐥𝐢𝐭𝐢𝐞𝐬. Navigating these complexities requires a blend of analytical rigor, strategic foresight, and an unwavering commitment to the vision that drives us as entrepreneurs. Thorough due diligence and strategic foresight are indispensable in navigating the complexities of business acquisitions. They highlight the importance of understanding and managing liabilities to unlock the true potential of an investment.

Think this deal is safe? Think again. Most people chase returns. They see double digits and their brain hits “GO.” But that’s the wrong first question. The right one is What risk am I really taking to get that return? Before I ever say yes to a deal, here’s what I look at 1. Risk vs Return Do I have the liquidity and the stomach for this? If not, it’s a no even if the numbers are shiny. 2. Borrower Strength Track record, decision-making under pressure, and ideally… a phone call that doesn’t raise red flags. 3. Financials & Skin in the Game I want to see capital invested, not just effort. Do the operators have real dollars in play? Is the balance sheet healthy, or built on duct tape and hope? Strong equity. Solid reserves. Real commitments. 4. Market Demand Are people moving in or moving out? Is the job growth and are the industries balanced 5. Exit Strategy If this borrower gets hit by a meteor tomorrow, can someone else finish the job and sell it? Quick Checklist ✅ ☑️ Risk fits my personal liquidity ☑️ Sponsor is solid, references check out ☑️ Financials show strength: reserves, margin, and room for error ☑️ Market demand is real, not wishful thinking ☑️ Multiple exit options Too many make emotional investment choices. Cold logic beats hype 10 times out of 10. If you want long-term wealth, you don’t just buy the return… You underwrite the story behind the return. Do you lead with return or risk when investing? Want a better framework to vet deals fast? Let’s swap checklists.

Last October, a seasoned investor lost $1.1 million in a single afternoon. Why? Because he skipped proper financial due diligence to "seize the opportunity”. Then he came to us. Here’s how we helped: 1️⃣ Quality of Earnings Analysis We looked past profits. Isolated recurring revenue from one-time gains. Uncovered accounting adjustments hiding real performance. 2️⃣ Balance Sheet Verification We verified assets. Identified off-balance sheet liabilities. Validated working capital to support the deal value. 3️⃣ Cash Flow Assessment We traced historical cash flow. Tested capex needs and future projections. Stress-tested numbers against market realities. 4️⃣ Tax Structure Review We flagged hidden tax risks. Checked compliance gaps. Found restructuring opportunities to optimize post-deal outcomes. 5️⃣ Financial Control Evaluation We assessed internal controls. Reviewed reporting systems. Spotted governance risks that could derail integration. The results?  ✅ ROI increased by 34% ✅ Deal risk reduced by 78% ✅ 92% of surprises eliminated post-acquisition. The investor later admitted: "I thought speed was my edge. Now I know—it’s only smart if you're rushing in the right direction." Strong due diligence tells the story behind the numbers. Don't let hidden risks sink your next deal. I help investors uncover the truth, fast and thoroughly. DM "Diligence" to protect your next transaction. #financialduediligence #finance #accounting 

Acquirers: Valuation is just the opening move when it comes to M&A. I’ve had three discovery calls recently with companies that started off with “We came across a company that we may want to acquire. We need some help with valuing the target”. Yes, valuation is super important but that’s just where it starts. Beyond the valuation, make sure you understand what comes next and be prepared to solve for long-term value. Here's just a few (in no particular order). 1️⃣ Understanding the components of the value - what is the intrinsic value of the acquisition target (without the acquirer in the picture) and what additional value the acquirer is bringing to the table 2️⃣ Structuring a win-win deal that incentivizes the target to do the deal but also maximizes the value of the business after close. This requires iteration and creativity. 3️⃣ Knowing the high-risk areas in the deal, and scoping the right diligence areas to uncover and mitigate these risks 4️⃣ Building internal conviction with the exec team and the Board that the deal and the target’s management team will advance the acquirer’s strategic goals 5️⃣ Ensuring that you have (or will have) the right integration plan at the right time to convert the “on paper” valuation to concrete business value We can start solving for the opening move but also be ready for what comes ahead 10…20.. 50 steps down the line. #mergersandacquisitions #valuation #diligence #integration

Here is something I often see in SMEs: A company is approached by someone they know or an investment bank about an M&A opportunity. The target looks interesting, and they jump on that opportunity. Sounds familiar? There are two big problems with that approach: - The company hasn't discussed M&A with the board of directors and other stakeholders as a tool to achieve its long-term strategic goals, so the transaction comes as a surprise to them. - The company hasn't screened the market to see whether other M&A targets may be a better fit. To avoid that, it's vital first to develop a clear understanding of how M&A can help achieve the company's long-term objectives. Here are a few of those reasons: - Industry Consolidation: The target helps you to increase the market share - Diversification: The target helps to expand your product and service offering - Geographic Growth: You can grow in other areas and countries - Talent Acquisition: The target has talented people that you need - Financial Gain: The target will improve the financial results of the group - Turnaround Opportunity: You can turn around the target and improve the financials significantly - Time to Market: The target will help you to be quicker on the market with a specific product/service - Tax Optimization: You can improve your overall tax position with the target Once you have a good understanding of how M&A can help you achieve your company's long-term goals, it's time to discuss it with your stakeholders, especially the Board of Directors and financing partners, and get their buy-in. The next step is developing an M&A target pipeline and assessing the companies with quantitative and qualitative criteria on an M&A scorecard. Using internal knowledge and external help from investment banks and advisors is crucial. Otherwise, you may miss some targets that would be a better fit. But you don't stop there. It's critical to continuously check that the M&A strategy aligns with the company strategy. We live in a quickly changing world, and companies must adjust their strategy to the changing economic environment. The same applies to the M&A pipeline. New companies can be added, others must be eliminated, and some assessments may change because the target changes. In summary, a process-driven M&A approach may be more work, but it adds significant value and increases the ROI and probability of a successful transaction. Read more about it in my latest blog post. Enjoy!

One common thread that I've found often get overlooked in M&A is tax due diligence. Most people know the impact of legal due diligence and financial due diligence. But tax due diligence is where the real magic happens. A 🧵 At a high-level tax due diligence is merely the process of ensuring there are not any hidden tax liabilities that could impact the deal. 𝗠𝗶𝘀𝘀𝗶𝗻𝗴 𝗧𝗮𝘅 𝗥𝗲𝘁𝘂𝗿𝗻𝘀 This could include payroll returns, income returns, sales & use tax returns, and state and local tax returns. If a seller hasn't file returns buyer could be on the hook for unpaid tax liabilities. 𝗩𝗮𝗹𝗶𝗱𝗶𝘁𝘆 𝗼𝗳 𝘁𝗵𝗲 𝗦 𝗖𝗼𝗿𝗽 𝗘𝗹𝗲𝗰𝘁𝗶𝗼𝗻 If the target is missing their S Corp election the target will be taxed as a C Corp, potentially opening buyer up to corporate income tax for all open tax years post-termination. 𝗟𝗼𝘀𝘀 𝗟𝗶𝗺𝗶𝘁𝗮𝘁𝗶𝗼𝗻𝘀 Less relevant after 2017, as NOLs are just less valuable. It's possible that the availability of the NOLs have been impacted from prior M&A activity. Without tax due diligence, you may think you're buying more NOLs than actually available 𝗦𝗔𝗟𝗧 𝗜𝘀𝘀𝘂𝗲𝘀 Whether attending conferences, misinterpreting state tax law, or EE's not disclosing where they are, a target may establish nexus without any awareness of the issue. Depending on the deal structure, buyer could be subject to additional Sales tax. 𝗪𝗼𝗿𝗸𝗲𝗿 𝗖𝗹𝗮𝘀𝘀𝗶𝗳𝗶𝗰𝗮𝘁𝗶𝗼𝗻 A common pitfall is when employers have workers who are incorrectly classified as independent contractors when they are in fact employees. Misclassification often leads to payroll tax exposure that without DD would go unnoticed. When issues are identified in tax due diligence there are a number of ways to handle them: - Purchase Price Reductions - Escrow - Restructuring - Individual or joint 338 elections If you fail to conduct tax due diligence consequences could be bad: - Buyer is on the hook for historical fed and state taxes - Penalties and interest - loss of tax attributed - over-valuing the company. For buyers these issues exist regardless of the deal size. Which is why it is important to have the right deal team in place during every acquisition. For sell-side, Sellers can engage a tax attorney to do a "Tax Health Check" to identify these issues too. This avoids deals blowing up, escrowing part of the purchase price, or reductions in their company value. I.e., this puts money back in the seller's pocket. DISCLAIMER: The content of this post is meant for educational purposes only and should not be construed as legal advice. This post is not intended to establish the attorney-client relationship between your and Josh Lowenthal or The Law Office of Joshua A. Lowenthal, PLC.