August 2, 2022   //   Business Consulting Podcast   //   By PKF Mueller Solutions


Join PKF Mueller Partners, Brian P. Sullivan and Drent J. Shields, for insight into what risks companies might face during M&A deals, how to mitigate those risks during these transactions, and the current trends we see in mid-market M&A deals.

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Brian P. Sullivan, CPA
+1 847 649 8846

Drent J. Shields, CPA, MBA, CISA, CITP
+1 847 649 8815

Episode transcript:

[00:00:00] Emily: Hi, everyone. You’re listening to the PKF Mueller podcast, Business. Owner’s Guide: Tips, Trends, and Talks from a CPA. I’m Emily and joining us remotely today are two PKF Mueller Partners, Brian Sullivan, CPA and Drent Shields CPA, MBA, CISA, and CITP to discuss mitigating risks in M&A transactions.

But before we begin, let’s do a quick introduction of our guests.

With over 30 years of experience, Brian leads the PKF Mueller Audit Department, focusing on audit, assurance, and mergers and acquisitions, including due diligence engagements, quality of earnings reporting, Sarbanes Oxley compliance, internal control analysis, accounting, tax planning, and business management strategic planning for U.S. and international clients.

Drent is also an Audit Partner with over 18 years of public accounting experience. In addition to providing audit, review, and compilation services, Drent is the leader of PKF Mueller’s Risk and Controls practice, performing internal control related services for a wide range of clients and industries.

Brian and Drent, thank you so much for joining me on the podcast today.

[00:01:27] Brian: Thank you for having us.

[00:01:29] Drent: Yeah, thank you.

[00:01:30] Emily: Of course. Let’s get into it. First question for you, Drent, is what are the risks of M&A transactions and why are those issue?

[00:01:39] Drent: Yeah. So, there’s many risks when you’re looking at buying or selling a business. You know, there’s financial risk, for overpaying by a buyer, getting underpaid by a seller. Obviously, those are pretty clear. Taxation risk– the structure, the deal can impact, the taxation of the seller of the business, and it can also impact the future tax benefits of the buyer.

In addition to those, there’s, there’s several other risks, including, you know, the risk of lost time. You put a lot of time into these deals. If the deal falls through, you’ve lost all that time. Maybe there’s an opportunity for another deal that you passed up. So, the more, more efficient you can make these the better.

And then, there’s also legal risk, IT risks, the risks of a cultural mismatch, which can definitely lead to significant issues with integration.

[00:02:37] Brian: Yeah. I think you’ve said that really well, Drent. There’s a lot of time and energy that goes into putting these deals together and they can just literally drain you and you can find yourself in, in, you know, a complete failure transaction and have spent a lot of time, and money on accountants and attorneys and, you know, I couldn’t have said that any better.

[00:03:00] Emily: Yeah. And so, with M&A transactions, as you noted, there’s two sides to the story. There’s buyers and sellers. So, Brian, are there different risks associated with both?

[00:03:12] Brian: Yeah. You know, the, the buyer’s primary risk is, is overpaying for the business and it can result from a multiple number of factors, including inadequate due diligence, ineffective integration, and cultural mix analysis and failure to execute and anticipated synergies.

You know, we hear a lot about synergies. It’s gonna be a great synergy if we buy this company. And a lot of times those don’t materialize.

And a seller’s primary risk is the undervaluation of the business and that can result from a lot of different factors, including not being prepared to sell the company.

We go in and we see a lot of transactions where the seller was not ready, financials are not in good condition, the tax returns have not been analyzed, et cetera. So, we go in ahead of time as best we can to try to clean that up.

Taxation you know, the buyer’s taxation risk includes the assumption of potential unidentified liabilities and exposures. We’ve seen that a lot. State and Local Tax issues where they fail to file in other jurisdictions. And even if they’re not subject to that liability, the historical liability, if they buy the assets versus the stock, they still have to look forward to where they have to pay tax and what that’s gonna cost.

And on the seller side, of course, it’s driven by a lot of deal structure. So, whether or not they’re going to get long term capital gains treatment out of that transaction, or if there’s, you know, ordinary tax implications and that can happen a lot. So, there’s a lot of tax planning that the seller needs to do.

When it comes to selling their company and, and maximizing the tax minimization. That’s a terminology I really like. “Maximizing your tax minimization,” I’m gonna have to remember that one.

[00:04:53] Emily: And what are some of the ways or strategies to how these risks can be mitigated?

[00:05:00] Drent: Well, yeah, on the sell-side of things, it’s all about preparation and being prepared to go through this process. You know, unfortunately a lot of, a lot of business owners are busy running their business and they don’t think about what the, the exit strategy is until, you know, ‘Hey, we need to exit.’ You know, the more time you can think about this upfront, you know, five years, you get a five year runway to get things set up and get prepared.

You know, ideally, you’re getting your financials in good order, whether that means moving towards reviewed, followed by audited financial statements. So, a potential reader is confident in your numbers. Can also mean getting your accounting cleaned up. You know, a lot of, especially small business owners, you’re running a lot of you know, dubious business expenses through the, through the GL (General Ledger).

You know, it’s understandable that a lot of small businesses do that. But if you’re looking to position yourself to sell the business, you want your, your record’s clean. The more you can clean that up and say, ‘Hey, this is, there’s a good, solid segregation between what’s business and what’s personal and I’m selling the business, and what you see is what you get.’

And then, if you have multiple companies, obviously you wanna avoid unnecessary intercompany mingling of assets and transactions. Just again, to make sure there’s a good, solid breakout of, ‘Hey, this is the business that’s being sold, versus these are other activities that are unrelated.’

On the financial and tax planning side of things, what you really wanna look at is, a lot of small businesses, for the owner, their business is a large portion of their, their wealth and their assets. So, you really need to look at okay, ‘what, what kind of, what kind of payout do I need, to be comfortable in my lifestyle beyond, beyond selling my business? Does that mean I sell and need to continue to work for a number of years? Can I sell and basically exit out at that time?

Really determine, you know, ‘what’s the current valuation of my company and where do I need to get it to have a number that I’m comfortable with?’ And that also helps take a little bit of the emotion out of an emotional decision.

Selling a business is, you know, it’s, it’s not quite like selling a baby, I guess but you know… a lot of people look at their business as a kid, so it, it’s an emotional decision, but the more, you can take the financial component, or the emotions out of the financial component, the more likely you are not to blow up what could potentially be a good deal.

So, you really wanna understand the value of your company, and understand what you need to get out of your company to, to live, to live the life you wanna lead.

[00:07:50] Brian: You know, a number of years ago, we used to do a seminar called “Waxing the Car,” and it was a great seminar. I think Dave Nissen (CEO) kind of dreamed it up and it was really true.

If you’re trying to sell your car, you would do things like wax it, get it washed and detailed. You do all the things necessary to make that the most attractive car, on the market, at that time. So, there’s a lot to what you just said there to make sure that that car is in perfect working condition when somebody’s gonna come in and kick the tires, and that’s exactly what diligence is.

[00:08:24] Drent: Absolutely. Great, great metaphor. Great analogy.

And then finally, as you’re looking to sell your business, you know, you should probably look at having, having some diligence done on your business, close to when you’re getting ready to exit, because your potential buyers are going to be doing a lot of diligence.

So, the more you can prep and be ready for what they’re going to ask and identify any issues front, the better. Whether that means going through a full financial Q of E (Quality of Earnings) upfront or at least taking a look at, ‘Okay, let’s take a deep dive into EBITDA and working capital and make sure that we understand where the pitfalls are, and that we’re ready to answer all the questions.’

[00:09:08] Brian: You know, Drent, that’s a great point and a modern trend, and I’m really glad to see it, are the sell side diligence examinations. A lot of folks are relying on their existing accounting firm, which is not a big deal. That, that’s fine. Absolutely. You need to rely on them, but they’re very familiar with the company.

Maybe not looking at it the same way that a diligence firm is going to look at that company. So, having a– I’m gonna use the term stranger, but a third party come in and kick the tires as if they’re going to be representing a buyer in that case really turns it on its ear. So, you can anticipate things that maybe you didn’t see before when you, when you take another look at it. So, I think that’s a great idea.

[00:09:50] Drent: Yeah, absolutely. Absolutely, Brian.

And then, just to turn it around real quick on the buy side of things, the, the biggest mistake we see is when business owners try to do their own buy side diligence on, on an acquisition. You know, most business owners have multiple jobs already.

They’re, you know, leading a current business, working on strategy for the current business. They’re most likely doing some work in the current business and, you know, trying to, cut costs by not hiring quality advisors is going to drag out transactions,. and there’ll be a much higher likelihood that the transaction’s not gonna close

[00:10:31] Brian: Great point, and we see a lot of times, the owners are going to try to rely on their controller or their CFO level personnel that has some background in public accounting and maybe a little bit of background in mergers and acquisitions, whether they lived through them or, were involved somehow on one side or the other of the deal.

That’s asking a lot of that person. Even if you have great accounting staff, multiple personnel. That’s asking a great deal of them and puts a lot of pressure and, and risk into the, into the transaction. So, couldn’t agree with you more there.

[00:11:06] Drent: Yeah, absolutely. The other thing that, a lot of companies do is they’ll, they’ll go through the financial diligence component, you know, and maybe pass on the tax diligence, they’ll say, ‘oh, we think we have as it structured and we have the right reps and warranties in place that will be okay.’ But there, there’s a lot of potential exposure on the tax side. So, it’s something, especially if you’re gonna be purchasing the stock of a company that you, you really want to take a close look at, you know, the states are only getting more aggressive.

So, it it’s really something you want to take a look at and consider. And then, beyond financial and tax, you, you need to make, make sure you have the right people in place to look at the IT security of the company, look at the HR and benefits of the company, look at the potential legal aspects of the company. You know, there could be litigation out there that you’re not aware of, and if you don’t do the right due diligence, you’re not gonna find these things.

[00:12:03] Brian: Good points. The decision on selling or buying stock versus assets is an analysis that needs to be done with an open mind, and a lot of folks think that they have to sell the stock or buy the stock.

And the sellers sometimes are pressuring buyers to buy the stock at company, because they think that’s the only way they’re going to get long term cap gain benefits on taxation benefits. So, the, the answer to that is that’s probably untrue. There’s so much goodwill in these deals today, and buying the assets or selling the assets of the company can be beneficial to both parties, and can reduce the amount of long term risk as well.

So, and if I’m the buyer of a company, I certainly wanna be able to get the step up in those assets at the, at the purchase date and recover a lot of my purchase price in, in short order. So, I think an open minded seller, with a, with a savvy buyer is a wonderful thing to have.

Also, you know, we get a lot of transactions from overseas, companies coming in the United States to buy companies. They’re very comfortable buying the stock. We do a lot of diligence for those companies here, and there’s a lot of issues in the United States when it comes to liabilities. There’s a lot of taxing jurisdictions. There’s all kinds of different types of taxes. So, you really have to do this with an open mind.

And one of the other things I wanted to bring up is who you hire, especially on the legal side is gonna be a big deal. You can’t necessarily use the same attorney for a transaction that you have that represents your corporation or even yourself, on a day to day basis. So, you need an M&A specialist.

It’s very specific, you know, this is– I’m not a lawyer. I don’t even play one on TV, although I would take the role if it were offered. But, the fact is that you need somebody who really understands how to navigate these types of transactions and understands where the negotiations can begin and end, where the pitfalls are.

If I sign this particular facet of the deal. If I agree to it, it’s going to potentially lead to this. If you’ve never done that before you don’t see it coming. And a lot of the transactions are, are, you know, predetermined. How that letter of intent is written. You know, a lot of times people are trying to write their own letter of intent.

So, somebody approaches them, ‘let’s buy the company.’ ‘Alright, give me a letter of intent.’ And it’s not helpful when it comes time to write the stock purchase agreement or the asset purchase agreement. And you, you’ve got to plan on the front end. So, having an attorney up front, ready to work with you is going to make the deal a lot easier in the end.

[00:14:45] Emily: Brian, you mentioned the word, “trends,” already in the conversation. But what other trends are you seeing in mid market M&A right now?

[00:14:55] Brian: Yeah. You know, it’s interesting in 2021, transaction activity deal flow was just off the charts. In PKF Advisory, our national practice– obviously there’s PKF Mueller. We have a national practice of our own, but we are also part and parcel to the entire PKF Advisory group throughout the United States.

The second half of 2021, there was no capacity to do diligence engagements. We were just booked solid. Now, it’s softened a little bit now. I think you’re seeing the supply chain issues are starting to ease and companies are, are there’s a little less angst, but unfortunately inflation and interest rates, interest rate hikes are also causing some issues for buyers.

Now, I believe that’ll be priced in at some point here soon. We just don’t know where it’s gonna end, as they’re talking about another, 75 basis point hike. So, we’ll see what happens.

So, that’ll all get priced in. It’s just a matter of time. So, it’s a little softer right now. It’s not, it’s not bad. We’re in the middle of multiple deals. Drent and I are both working on multiple diligence engagements and working with a lot of attorneys. So, there’s a lot happening, there’s a lot of conversations, but it is softer.

Good news is there’s still a lot of capital out there. Balance sheets are still real strong. We are seeing some business owners starting to pull back on that and kind of hold onto their cash. But there’s a lot of PE money out there. There’s a lot of money that needs to be deployed. So, I think that’s gonna keep the M&A market still fairly strong for, for some time to come.

[00:16:22] Drent: Yeah, I would just, I would just add that. You know, there, there was a lot of carryover deals from ’21 going into ’22, which kept the first quarter pretty strong. We did see it slow a bit, but in the last month, I would say we’ve seen a, a, a few more transactions starting to pick up here. And I think as you mentioned, Brian, it’s because some of the supply chain easing, because people feel like they have a grasp on what, how COVID impacted business operations. I think people are starting to move forward, and the larger trends of, you know, lots of cash on the sidelines and aging business owners are still there. So, they’re kind of helping push forward despite some of the economic indicators that there’s, some, some slowdown moving forward.

[00:17:13] Brian: So, what are, what are you seeing else out there, Drent? ESG seems to be a big topic with diligence these days.

[00:17:21] Drent: Yeah. It’s interesting that we’re actually seeing that kind of trickle into the mid-market now. This was for the longest time was a, you know, an SEC issue, big companies. It’s kind of, it’s a, a buzzword.

But we’re actually starting to see that investors are asking about it before they will fund sponsors, that the sponsors and direct investors now want to look into it. And I think a lot of mid-market and small companies are gonna be playing catch up to, first off off say, ‘ okay, what is ESG? And how, how do we measure it and where are we?’

So, that’s definitely something that’s coming up that will need to be addressed and will probably need to be addressed more often.

[00:18:06] Brian: I know that PKF Advisory, is is looking at doing a bigger role there in Environmental, Social, and Governance issues, ESG. So, we’re really glad to have some professionals on staff that can deal with that. Obviously, a brand new trend, right?

[00:18:23] Drent: Absolutely.

[00:18:24] Brian: So, it’ll be interesting to see what the, the price of debt will do once these balance sheets normalize. I hate to use that term “normalize”. But anytime you’re talking about an M&A deal, it feels like I’m always saying normalized adjusted EBITDA. So, I may as well say normal interest rates or balance sheets.

I don’t know what a normal interest rate is anymore, but a normalized balance sheet and what the cash sitting on that balance sheet looks like, and as that normalizes, it’s deploy, how much is this debt gonna cost our, our potential buyers? And how’s that fit into the industry?

[00:18:56] Drent: I would say it’s inter– it will be interesting because technically, you know, we, we’ve seen this huge interest rate increase. We’re expecting another one, but, again, looking at a more broad historical perspective, interest rates are still relatively low looking back, you know, over 10, 20 years. But that may not be the case in six months.

[00:19:20] Brian: Right.

[00:19:22] Emily: Obviously, many of the trends we’re seeing are a lasting result of COVID-19. But what other trends came out of COVID-19 that we haven’t talked about already?

[00:19:32] Drent: Yeah. So, at, at least in the U.S., there’s a lot of firms and a lot of folks that are looking at COVID as a thing of the past, and they feel like they have a grasp on how COVID’s impacted them and they feel that they can measure the impact that it had.

That said, obviously there are some residual issues and still some questions as to whether changes that have occurred are temporary or permanent. So, we have the supply chain issues, which we’ve mentioned are easing a bit, but they’re still there.

Employee shortages, which is a, a big issue everywhere. You know, as, as interest rates go up, supposedly it will drive down demand for employees. We’ll see if that happens. But the, as we mentioned earlier, the, the overall trend of the population in the U.S. at least is we have a lot of older folks retiring, selling businesses.

And up until recently we didn’t have enough younger people replacing them. So, it could be more of a long term trend that we have employee shortage issues.

COVID’s also still impacting places outside the U.S. I mean, China just had a major city shut down for six, eight weeks. Based on their policies that may probably will, continue into the future. So, if you do international operations, it’s still impacting you.

Another impact of COVID is there was, there was a lot of government stimulus and there still is. There are a ton of companies still applying for and receiving large Employee Retention Tax Credits (ERC). So, there’s a lot, a lot of cash coming to companies and they’ll need to deploy that cash. So, one way to deploy it is to buy other companies pushing, M&A activity. Brian, anything to add to that?

[00:21:16] Brian: No, I, I think that you got right back to the heart of the issue with the balance sheet. So, PPP (Paycheck Protection Program) money, ERC money is out there. You know, we’re doing currently doing a lot of ERC deals. That’s a lot of cash and how long will that last? How will it be deployed? What’s the best way to do it?

So, when we’re talking to business owners considering going through the transaction, it’s hire the right professionals, you know, determine what the right pricing is, have a good letter of intent and, and make sure that it fits into your overall strategic plan for the company and yourself. And make sure that, I don’t know exactly how I wanna say this. Make sure that you’re leaving no stone unturned, so to speak. Don’t leave it to the amateurs.

[00:22:03] Emily: If any of our listeners have any questions or would like to learn more about M&A transactions, will you please share how they might be able to reach you?

[00:22:11] Brian: Sure. You can reach me at (847) 649-8846, or email me at That’s M U E L L E

[00:22:24] Drent: Yeah, you can reach me at (847) 649-8815, and my email is

[00:22:36] Emily: Brian and Drent, thank you so much for joining me on the podcast today.

[00:22:40] Brian: Well, thank you.

[00:22:41] Drent: Yeah. Thank you, Emily.

[00:22:43] Emily: And thank you to our listeners. Don’t forget to visit us at to learn more about all of our firm’s services. You can also follow us on social media for more updates, insights, and upcoming events.