How M&A Market Trends Will Change Tax Planning

10 minute read

On a global scale, mergers and acquisitions (M&As) took a nosedive when the pandemic hit. In the second quarter of 2020, both private and public-sector M&As reported steep declines after years of steady activity. But the fallout was short lived. In the last half of 2020, global and domestic M&As shot back up to pre-pandemic levels. In fact, some industries recovered so well that their transaction volume has since surpassed the M&A activity reported in early 2020. How will these trends affect your clients, and how can your tax planning services help them?

How Did the Pandemic Affect M&As?

Government lockdowns, business shutdowns, and public health fears spurred disruptions to our economy like we’ve never seen before. In February 2020, businesses were operating normally, and just a month later, demand had waned, and supply systems had crashed. This financial upset caused many investors to pull back from deals they had been considering. Their uncertainty in the market’s ability to rebound encouraged them to hold onto their capital and consider M&As only when the economy stabilized itself.

Business owners who were ready to sell last summer had few buyers to choose from, and many were unwilling to accept a loss that would be the likely result of unfavorable business valuations. Instead, to get by, many businesses relied on government-funded stimulus programs like:

  • The Paycheck Protection Program (PPP)
  • The Economic Injury Disaster Loan (EIDL) program
  • The Employee Retention Credit (ERC)
  • The ability to defer employer payroll tax deposits

Although the buyers and sellers in most industries experienced M&A regressions, interest in certain industries piqued in early 2020. Industries that rely on technology like companies offering workplace solutions, telehealth tools, fitness equipment, and gaming consoles thrived. Essential businesses like delivery and commercial cleaning services also managed to stay afloat. But many more businesses suffered than thrived, which is what led to the overall dip in M&A markets during the height of the coronavirus outbreak.

What Does the M&A Market Look Like Right Now?

The M&A decline didn’t last as long as initially suspected. M&A activity began to pick back up as the summer dragged on, and by the fall, M&A activity had – on average – returned to normal. Lockdowns and government shutdowns are still affecting businesses, but not nearly as many as last summer.Sectors that were more or less unaffected by COVID-19 – like technology companies – continue to make up the lion’s share of M&A transactions. Those in the tech, healthcare, financial services, and transportation sectors are showing more M&A growth than they were at the beginning of 2020. Although other sectors, like energy, communications, and real estate are not back up to speed, the rebound has begun, and economists believe that it’s only a matter of time before M&As in these industries recover.

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How Can Business Owners Incorporate M&A Tax Planning in 2021 and 2022?

If your clients are looking to sell their business in the next couple years, there are a few ways you can help.

Make sure they know how M&As have changed.

The M&A market has recovered in large part thanks to venture capitalists and private equity firms. These investment firms made up 35% of the M&A market in 2020, up 5% from the prior year. These businesses were less likely to have suffered from the pandemic, which means that over the last year, they have been squirrelling away capital and are now looking for places to spend it. Venture capitalists, private equity firms, and other businesses that have capital to spend are looking to invest in companies with strong operations. The pandemic culled many underperforming businesses from the marketplace, and the few quality businesses that remain have plenty of buyers to choose from. If your client is looking to sell their business and – this is key – is reporting positive numbers, they may have their pick of investors.

Discuss how valuation methods have changed.

Even if the worst of the financial crisis is behind us, the effects will be long lasting, and we’ve seen some of those changes reflected in business valuations. As one may guess, there will be more of an emphasis placed on profitability and growth. Businesses that performed well before the pandemic but reported little to no growth in 2020 may not be valued as favorably as they once might have been.

Similarly, buyers will be less willing to pay for a business whose future earnings are uncertain. Valuation multiples will likely drop in businesses whose financial performance has waned in 2020 because buyers cannot predict if or when they will rebound.

Valuations may also be adjusted up or down for COVID-19. Some industries are expected to return to normal operations once the pandemic is fully under control, so it makes sense for those businesses’ COVID-19 setbacks to be disregarded during valuation analyses. As your client’s accountant, you can anticipate at least some of these valuation changes and run reports to give them a better idea how their business will be valued. With tax planning software, you can project different activity scenarios years into the future to see how well your client’s business would perform over time.

Prepare them for the M&A process itself.

Even in a seller’s market, the buyer will perform due diligence, and we anticipate due diligence proceedings will be more involved than in the past. Due diligence is a term that describes the process a buyer will undergo to better understand the selling company’s business. Looking at the financial history and projections is only part of the process; the buyer will also want to gain a more intimate understanding of the company’s operations like how they interact with customers, how invested their employees are, how the business stands up against local competitors, and how they manage vendor relationships.

The financial aspect of due diligence proceedings is where you can add value to your clients. Using tax planning software, you can have tax projections prepared and ready for when the potential buyer requests it. If you have access to your client’s accounting software, you can also help by:

  • Calculating financial ratios
  • Creating accounts receivable/payable aging reports
  • Valuing inventory
  • Finalizing your client’s budget
  • Creating a financial forecast
  • Collecting historical data about debt payoff
  • Calculating the financial effects of new projects

Do Your Clients See the Value of Tax Planning Software?

If you have operated in the background of your client’s business by working as a bookkeeper, accountant, or tax preparer, it’s time you step out of the shadows and show them everything you are capable of. Whether you realize it or not, you can help your clients achieve their big-picture goals. Big aspirations – like mergers or acquisitions – can feel so daunting that business owners shy away from them for years, but with your knowledge and good tax planning tools, you can demystify the process so your client is ready to take that leap into the unknown. Corvee tax planning software can not only help with financial statement forecasts and tax projections, but it can also show your clients how an M&A transaction will affect their personal income taxes. Rely on the tools at your disposal and you will go far. If you’d like to see a demo of how our Corvee tax planning software works, reach out to us today.

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