As deal activity begins to bounce back to pre-2023 levels, individuals and entities will increasingly consider their strategic alternatives in the marketplace. Executing a sale transaction can be a daunting exercise for lower middle market companies — one that requires careful preparation and real-time vigilance. Below, we outline three considerations for sellers to think about before pursuing a sale process.
1. Value Expectations
Business owners often struggle to objectively value their companies, whether it be related to an emotional attachment to the company, hesitation to sell something the business owner has worked their whole lives on, or a litany of other reasons. However, setting realistic pricing expectations is crucial for a successful sale. Value to potential buyers (on which offer prices are predicated) is a function of three aspects of the business — its cash flows (both historic and future), its risk profile, and its prospects for sustainable growth. For sellers, it is important to enter the transaction process with clear expectations regarding value in the marketplace, which can only be gained from analyzing the business in terms of the aspects laid out above. Doing so will ensure a disciplined transaction process for sellers when the time comes to evaluate market offers.
2. Tax Implications
When evaluating the net proceeds from a transaction, it is crucial to consider the tax implications, including distinctions between ordinary income and capital gains, asset sales versus stock sales, and issues like depreciation recapture and purchase price allocations. The type of corporate entity by which a business is organized can also significantly impact tax liability. We recommend consultation with an outside accountant or tax specialist early in the transaction process to begin to think through these issues. This is essential for understanding these complexities and potentially implementing strategies to optimize tax-related outcomes.
3. Reason to Exit
Sellers, like buyers, need a strategic plan for a transaction beyond receiving a financial windfall. Sellers must have a compelling reason for exiting the business, such as retirement, consolidation with a larger entity, or bringing in a financial partner for ownership transition. Selling a business involves giving up something valuable, so having a non-financial motivation is critical in navigating the complex process. Diligently planning early can help ensure a smooth and controlled sale, rather than a rushed and chaotic experience.
Since 1982, Mercer Capital has offered M&A advisory services to a diverse range of public and private companies, leveraging extensive valuation and investment banking experience to guide clients through complex transactions. While our team provides objective advice, we also advocate for our clients while navigating the competitive marketplace of private equity groups, family offices, and strategic buyers. We facilitate informed decision-making with a tailored, multi-phased approach to planning and executing transactions. For confidential consultation on your transaction-related needs, contact us today.
Originally appeared in Mercer Capital's Middle Market Transaction Update Newsletter: Fall 2024