How to prepare your business for a rise in mergers and acquisitions

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A new administration is in Washington D.C., and corporate tax reforms are likely to come.

While that’s good news for businesses hoping to reinvest revenue in growth and expansion, there is another benefit for owners of small and medium-sized companies who are looking for an exit strategy: tax reductions are likely to spark a steady rise in mergers and acquisitions.

Then-President-elect Donald Trump proposed a dramatic reduction in the corporate income tax rate, from 35 percent to 15 percent, along with an initiative to allow corporations to repatriate profits held offshore at a one-time tax rate of 10 percent. These plans will certainly evolve through the legislative process, but there is widespread belief that the coming tax reductions will likely be substantial.

In this future tax environment, companies will have more cash on hand, and more incentive to pursue rapid income-building tactics. So, if you are a small and mid-sized business owner who has been considering a sale or merger, now is the time to take the initiative, map your strategy, and prepare for new, favorable opportunities. By working with key advisors to complete the tax planning and business valuation steps necessary for a successful transaction, you will be at a significant advantage in the coming year.

Here are several key steps you should consider:

Business valuation

The first step in preparing for a sale or merger is to obtain an up-to-date business valuation. A business valuation expert — usually a CPA who is a certified valuation analyst (CVA) — will analyze all of the elements of the value equation, including your company’s sales, earnings, performance, personnel, net book value, and fair market replacement value, as well as overall industry and market outlooks.

Also included in the examination will be a review of intangible assets such as the relative worth of your organization’s brand and reputation. In the end, a minimum to maximum value range will be determined.

Getting a valuation now will streamline future negotiations, and will ensure maximum tax advantages and compliance in the event that assets are transferred to family members.

Financial statements

If you have never had financial statements prepared by a qualified CPA, it is critical that you put the process in motion. Independently prepared financial statements document the financial results and condition of the business, examining the balance sheet, income and cash flow.

For those companies with existing financial statements, consider upgrading the level from a compilation to a review, or from a review to an audit. For inventory-based businesses, consider having a qualified accounting firm complete a thorough independent inventory review.

Quality of earnings report

Mergers and acquisitions transactions often involve the preparation of a quality of earnings report prepared by an independent expert. Along with financial statements and the business valuation, potential acquirers will look to this report to gauge the financial strength of your company, in this case by assessing the accuracy of historical earnings and projecting future potential earnings.

You may want to pursue a quality of earnings report now in order to better understand your position in negotiations, and to expedite the process.

Tax review and planning

To ensure you receive maximum financial returns from selling your company, you should work closely with financial advisors to review the tax efficiency of your current corporate structure. This structure will inform the way in which income from a sale is taxed. In addition, you should work with a CPA with expertise in estate planning to explore the tax benefits of gifting assets to members of your family.

Corporate transactional attorney

Finally, to prepare for a potential sale or merger, you should find an experienced corporate transactional attorney to work with your CPA team. You may also want to consult with an investment advisor to assist with your financial strategy.

Potential corporate tax reforms are good news for your business — and they may influence your personal financial long-term plans as well. To make the most of the opportunity, get started early.

Marta Alfonso and David Rosenbaum contributed to this article.