by Michael J. McKitrick
Many post-pandemic signals indicate that Merger and Acquisition (M&A) activity has increased and is expected to continue to increase. Listings for sales of existing businesses surged in 2021, according to Rob Schmitt, a business broker at the St. Louis Group. Reasons for this increase include: (1) post-pandemic stability; (2) low interest rates; (3) low capital gain rates; (4) access to government benefits like the PPP program; (4), retiring baby boomers; (5) robust stock values; and (6) the presence of capital on the sidelines waiting to be put to use.
Conditions are favorable for willing sellers and buyers in the M&A arena. Some businesses, including retail and hospitality, have not yet recovered from the pandemic. While some may not consider these to be good subjects for M&A activity, their valuations are low and may present attractive opportunities. There are also sellers who have experienced both the 2008-2009 financial crisis and COVID-19 and have decided that they will not wait any longer to exit. On the other hand, many companies look to expand operations in this favorable environment.
The process typically begins by contacting a M&A specialist, investment banker, business broker or similar advisor to determine how to position your business for sale, or, if you are a buyer, what acquisition candidates exist. After the initial match, the parties conduct informal due diligence about the business, assets, and basic financial information. When the parties are ready to proceed, they sign a Letter of Intent, usually considered a non-binding obligation but often with terms important to the process going forward. There may be binding terms such as confidentiality to keep all information exchanged confidential and often an agreement to not solicit other candidates for a limited period of time while the transaction moves forward.
The next step is a legally binding and definitive agreement. It is critical that each party works with an experienced attorney and accountant to ensure that legal and tax issues are adequately addressed. The agreement provides how the transaction will be structured - whether it will be a sale of the seller’s assets or the stock of its owners. Tax implications should be discussed and agreed upon by the parties and their advisors. Most importantly, there will be extensive representations and warranties by the parties, most particularly by the seller that the buyer can rely upon in closing the transaction.
Once the agreement is reached, the parties conduct formal due diligence, including visiting facilities, investigating title to assets, extensive financial disclosures and interviewing senior management. When this is satisfactory, the parties proceed to closing where the transfer documents are exchanged for the sale proceeds. Closings can be virtual, where the parties sign separately, conducted by the title company if there is real estate, or at the offices of a lender if financing is a major part of the transaction.
This increased M&A activity is good for the economy and can be good for your company whether a buyer or seller.
Michael J. McKitrick, a corporate law attorney with Danna McKitrick, P.C., has over 40 years of commercial litigation and transactional law experience. His practice encompasses business and transactional advice, commercial real estate matters, and regulatory and practice management guidance for health care professionals. Mike can be reached at 314.889.7122 or firstname.lastname@example.org.