Author: Dave Richards

Navigating Purchase Price Allocation in Asset Sales

Negotiating a purchase price allocation in an asset sale is a pivotal step that can influence the financial outcomes for both buyers and sellers. One of the most critical aspects of these negotiations is understanding the tax implications. Different asset classes have unique depreciation and amortization schedules, which can significantly affect a buyer’s future tax deductions. Moreover, how goodwill is treated, often the residual amount after all identifiable assets are allocated, can vary based on accounting standards and tax regulations. Buyers typically aim for a higher allocation to depreciable assets to maximize tax benefits, while sellers might prefer a greater allocation to goodwill to reduce their taxable gains. Navigating these complex tax considerations is essential for both parties to achieve a favorable outcome.

Fair valuation of assets is another key factor in these negotiations. Accurate assessments, often conducted by professional appraisers, help ensure that the purchase price reflects the true value of the tangible and intangible assets involved. Establishing a clear methodology for valuation can mitigate potential disputes; incorporating mechanisms such as arbitration or third-party appraisals can streamline resolution if disagreements arise. Additionally, both parties must collaboratively determine how the purchase price will be allocated among various asset categories. This allocation not only impacts financial statements and tax consequences but also shapes the strategic integration plans post-acquisition.

Lastly, thorough documentation and compliance with accounting standards are crucial in securing a successful negotiation. A well-documented allocation schedule that justifies the distribution of purchase price across assets and liabilities can protect both parties during audits and future financial reporting. Engaging legal and tax advisors throughout the process is advisable, as their expertise can illuminate complex regulations and ensure compliance. Ultimately, clear communication and alignment of interests between the buyer and seller, coupled with an understanding of market conditions, can lead to a mutually beneficial agreement that supports the transaction’s overall success.

Have any questions regarding how to negotiate a favorable purchase price allocation for your business? We can help. Click here to get started.

How does an election year impact M&A activity?

Election years often bring a unique set of uncertainties that can have a notable impact on mergers and acquisitions (M&A) activity. Here’s how election dynamics generally influence M&A trends:

1. Uncertainty in Policy and Regulation
   As elections approach, policy stances on taxation, trade, antitrust regulation, and industry-specific rules become focal points. Companies may hold off on M&A deals if they anticipate significant regulatory changes under a potential new administration. For example, if a candidate promises stricter antitrust enforcement, some businesses may hesitate to pursue mergers that could draw scrutiny.
2. Valuation Fluctuations Due to Market Volatility
   Elections can cause stock market volatility as investors react to shifting political forecasts. This market fluctuation impacts company valuations, which can affect M&A. If prices become too uncertain or inflated, buyers might delay acquisitions, or sellers may decide to wait until valuations stabilize post-election.
3. Changes in Access to Capital
   Election uncertainty can make lenders cautious, which impacts financing options for M&A. This is especially true in deals that rely heavily on borrowed capital, such as leveraged buyouts. If lenders anticipate economic instability, they may tighten credit standards, leading to higher costs for financing M&A transactions.
4. Industry-Specific Impacts
   Some industries are more affected by potential election outcomes than others. Sectors like healthcare, energy, technology, and defense are especially sensitive to shifts in policy. For instance, potential changes in healthcare policy could delay deals in pharmaceuticals or insurance until there is more clarity on the regulatory outlook.
5. Cross-Border M&A Caution
   Foreign companies may hold back on acquiring U.S. companies during election years due to concerns about trade policies, tariffs, and foreign investment restrictions that could change post-election. Similarly, U.S. firms may hesitate to pursue international acquisitions if there is uncertainty about foreign policy directions.
6. Opportunistic Buying
   Some companies view election-related volatility as an opportunity, targeting undervalued assets or businesses with strategic advantages. Private equity in particular may become more active if they see an opportunity to acquire assets at lower valuations during market fluctuations.

Ultimately, M&A activity during an election year tends to reflect a balance between strategic goals and the level of risk companies are willing to take. Many deals do proceed, but firms are often more conservative in the timing, pricing, and structuring of transactions to manage election-related uncertainty. We’re happy to talk through this in more detail, contact us here

Stay Bonuses Will Add Value When Selling A Business

M&A Advisor Tip

Beware the Benchmark Valuation

You can practice some back of the napkin math to value a company, but it’s not always reliable. A company with $3 million in EBITDA, may, as a general rule of thumb, sell at a 4x to 6x multiple. In other words, it might sell for $12 million to $18 million in an average market.

Pulling a multiple on EBITDA is the most simplistic form of doing a valuation. But it doesn’t tell the whole story. It doesn’t account for standout business qualities that drive up value, and it doesn’t account for current market dynamics.

If you own a business, it’s a good idea to get an estimate of value every few years. Knowing what your business is worth (and what’s behind that value), can help inform your growth plans. Alternately, you may also find the business is worth more than you expected – and accelerate your exit plans.

Owners Who Engaged in No Formal Planning Prior to Engagement to Sell

Presented by IBBA & M&A Source

M&A Feature Article

Stay Bonuses Add Value When Selling a Business

We’re selling a business in which a management team member holds a minority equity stake. This critical employee stands to get a small windfall in the sale. On top of that, the seller was telling us she meant to give this employee a nice financial gift as a thank you afterwards.

That’s where we pumped the breaks a bit. We’re all for recognizing your key contributors as you exit your business, but let’s talk about structuring those payments as a stay bonus instead of an outright gift.

A stay bonus provides an incentive for an employee to stay with the company during and after a sale. They’re designed to protect the company in times of change.

Recognize that a business transition can create a lot of uncertainty and anxiety for employees. Some managers may wonder if they’ll be let go after a sale. Or, more likely in this talent market, valuable team members may feel the timing is right to pursue new opportunities—rather than put themselves through the uncomfortable process of an ownership change.

Who Gets a Stay Bonus

Typically, we see stay bonuses used in situations like these:

• An employee who must be told. Normally, we advise business owners to keep the sale process strictly confidential. If employees become aware of a pending sale, they may look for other positions rather than risk the uncertainty of a business transition. But sometimes certain team members must be included in the sale process, particularly when the owners are no longer active in day-to-day operations.
• An employee who must do extra work. Sometimes certain employees like your CFO or your HR leader will need to be told the business is for sale. They’ll be heavily involved in gathering due diligence information, which can be a big job on top of their normal duties. Unfortunately, these administrative leaders pitching in extra time are the most likely to be made redundant in a transition. A stay bonus can help ensure they stick around to help the sale go smoothly.
• An employee who’s critical to the business. Stay bonuses become increasingly important in a tight labor market. Turnover in a key position creates substantial risk for a buyer, but a stay bonus can reduce that risk and add value
  to the sale process.

How They Work

Stay bonuses can be structured in any number of ways, depending on the employee’s role, compensation, and potential value to a buyer. You need to find a balance between a meaningful incentive and a gift so “life changing” that the employee is likely to walk away as soon as they get it. Between 50% to 100% of an employee’s annual salary is often a good guideline.

Payouts usually happen in two parts – a small payment (between 25% – 50%) when the sale closes and the remainder six months to a year later. Structuring these deals can be a point of negotiation with your buyer. They may be willing to share the cost of an incentive.

Similarly, some transition negotiations will include an employment agreement for key staff members. This establishes that certain severance payments are to be made if an employee is terminated after a sale. This is another way for the business owner to protect their employees and discourage management from seeking new jobs.

Timing

When do you talk to employees about a stay bonus? Telling an employee the business is for sale is always a sensitive issue, and timing will vary based on your individual scenario.

But you can’t wait too long, especially if you believe your sale could be dependent on keeping key talent in place. If you present it to the employee when the deal is still in the early stages, you can avoid last minute pressure to get contracts signed days before the closing date.

Otherwise, you may find your employee has gained an unhealthy amount of leverage. I have actually seen a key employee take a deal hostage, demanding a higher salary and bonus, because they knew the transition hinged on their retention agreement.

Talent Continuity

Buyers will pay a higher price for a business when they can eliminate perceived risks. A proven management team who will maintain key operations and relationships can help a buyer achieve performance targets.

That’s why we consistently advise sellers to develop a strong, empowered management team who can run the business. Buyers may pay a premium if they know they’ll have an experienced team to not only maintain the business but take it to the next level.