Normally a business owner does not want any contact with a merger and acquisition firm until immediately prior to selling the business. Because of this, one of the strategies we have employed to obtain deal flow for our investment banking practice is to cultivate relationships with local accounting firms or local offices of national accounting firms.
In that process, I have established a few good friendships with accountants that have evolved into social relationships. In spite of these efforts, I have gotten very few referrals, even from the accountants that I would consider close personal friends.
One of the reasons is that many accounting firms are establishing their own merger and acquisition departments. I remember having a discussion with the head of one of those captive M and A firms and she expressed her frustration over the lack of client referrals from the accountants in her own firm. She said that only a handful of the more than 300 accountants in her firm had ever referred an internal client to her investment banking group.
Recently a national accounting firm with offices in 30 major cities and a headquarters in the Chicago area announced the closing of their capital markets group - their merger and acquisitions department. I find that remarkable given the current demographic profile of business owners. Baby Boomers are the owners of almost 50% of all privately held businesses in America.
Baby Boomers are starting to retire in large numbers. According to a BSI Global Research Study, 42% of all CEO's plan on retiring within five years. The translation of this phenomenon to business owners is that a growing number of businesses are changing hands.
According to a Gallup Poll and a VIP Forum study, up to $8.3 trillion in wealth will transfer over the next ten years due to ownership changes in privately held businesses. These businesses are either being sold, passed on to the next generation, acquired in a management buyout or ESOP, or simply shut down.
So back to our accountants. This national accounting firm could not economically justify a merger and acquisition group of 8 people in this environment of exploding opportunity. Yes, I know we have a rough patch, but this will pass and the volume of activity will be steadily increasing for the next decade.
What really happened in this accounting firm? The same thing that is happening in the entire profession. Your accountant does not want you to sell your business. Your accountant has an annuity with your business - your quarterly and annual tax filings, your audit, and an occasional special consulting project that you probably initiated. Guess what. If you sell your business, your accountant loses his annuity. He will have to replace you with a new account. Accountants hate to prospect for new accounts. He does not want you to sell your business.
This position of denial by your accountant may interfere with the planning necessary to get you the best results when you exit your business. Are you planning to transfer ownership to your heirs? Have you formed multiple minority owned LLC's to reduce your gift and estate liability? Are you planning to sell out to your employees? Most of the time this is a bad idea for the owner's net worth.
Do you know the real value of your business? Do you know what to do when a competitor approaches you with an unsolicited offer to buy your business? How will a buyer view your business? Are there some minor changes you could make that would dramatically increase the value of your business? What are the tax consequences of an asset sale versus a stock sale?
The two or three years prior to selling your business are critical to your family's financial future. Normally a business owner sells only one business in his or her lifetime. The process is very complex with many variables. Good planning and good merger and acquisition process can result in swings of hundreds of thousands or even millions of dollars in your after tax proceeds.
Dave Kauppi is a Merger and Acquisition Advisor and President of MidMarket Capital, providing business broker and investment banking services to owners in the sale of lower middle market companies. For more information about exit planning and selling a business, click to subscribe to our free newsletter The Exit Strategist
