Strategies for Small Business Mergers: Navigating Modern Challenges

ARTICLE | October 28, 2024

Introduction

In today's fast-paced and ever-evolving economic landscape, small businesses are increasingly turning to mergers and acquisitions (M&A) as a strategic avenue for growth, diversification, and even survival. The modern M&A environment, however, presents a unique set of challenges for small business owners. From complex due diligence processes influenced by new accounting standards to heightened regulatory scrutiny and rapid technological advancements, navigating a successful merger requires careful planning and strategic foresight. This article explores the current M&A landscape for small businesses and offers strategies to overcome these modern challenges, helping business owners steer their companies toward successful mergers.

Overview of the Current M&A Landscape for Small Businesses

Recent Trends in M&A Activity

The landscape of mergers and acquisitions is experiencing significant momentum, with 2024 marking a particularly active year. By mid-year, M&A deals had reached an impressive $535 billion, representing a nearly 30% increase compared to the same period in the previous year. This surge is primarily driven by emerging opportunities in sectors like artificial intelligence (AI) and renewable energy. Companies across various industries are making strategic acquisitions to stay competitive, spur innovation, and capitalize on new market opportunities.

Industries such as technology, healthcare, energy, finance, and construction are at the forefront of this activity. The technology sector, for instance, is witnessing large-scale acquisitions aimed at enhancing capabilities in AI, cybersecurity, and cloud computing. Meanwhile, the healthcare industry is undergoing consolidation to expand services and streamline operations. The energy sector is focusing on renewable assets to align with sustainability goals, and the finance industry is merging to enhance digital capabilities. Even the construction industry is seeing unexpected growth due to housing market demands, prompting companies to consolidate and expand their offerings.

Economic Factors Influencing M&A

The economic environment in 2024 is characterized by cautious optimism. Stabilized interest rates and inflation have made planning and financing deals more predictable. However, market volatility persists, influencing how mergers are valued and structured. Private equity firms play a significant role, armed with substantial capital reserves that enable them to drive many transactions, including "take-private" deals. For small businesses, this confluence of factors means that while opportunities are abundant, competition is intense, and timely action is essential.

Challenges Facing Small Businesses in M&As

Complex Due Diligence Processes

Recent changes in accounting standards have added complexity to the M&A due diligence process, particularly for small and medium-sized businesses. The implementation of the new lease accounting standard, ASC 842, requires companies to recognize lease obligations on the balance sheet as liabilities, offset by a right-of-use asset. This shift increases the apparent debt levels of businesses, potentially affecting loan covenants and financial ratios.

Similarly, the revenue recognition standard, ASC 606, mandates uniform practices for recognizing revenue, ensuring that it is reported when realized and earned rather than when cash is received. For businesses with long-term contracts or phased projects, this can significantly alter financial statements. These complexities necessitate thorough financial reviews and adjustments to align with generally accepted accounting principles (GAAP), making due diligence more time-consuming and challenging.

Regulatory and Compliance Considerations

The current M&A environment is marked by heightened regulatory scrutiny. Governments and regulatory bodies are increasingly vigilant about antitrust issues, data privacy, and cross-border transactions. High-profile antitrust cases against major corporations highlight the intense oversight that can impact deals. For small businesses, compliance with these regulations is critical. Failure to navigate them effectively can lead to delays, increased costs, or even derailment of a merger.

Impact of Global Economic Policies

Global economic policies play a significant role in shaping local business environments. Changes in trade agreements, tariffs, and international regulations can affect supply chains, costs, and market access. Small businesses engaged in or affected by international trade must stay informed about these policies. Being proactive can help anticipate challenges and leverage new opportunities that may arise from shifts in the global economy.

Evolving Bank Oversight Practices

Banks have eased some lending requirements in recent years, often forgoing the need for audited financial statements in favor of reviews or collateral evaluations. While this can reduce costs in the short term, it presents challenges during mergers, where potential buyers typically require audited financials for due diligence. For businesses unaccustomed to audits, preparing for one can be a significant undertaking, emphasizing the importance of maintaining detailed and accurate financial records well in advance of entering the M&A process.

Strategies for Navigating Modern Challenges in Small Business Mergers

Staying Informed and Prepared

In a rapidly changing environment, knowledge is power. Small business owners should stay abreast of industry trends, regulatory changes, and technological advancements. Engaging with professional networks, attending industry conferences, and subscribing to relevant publications can provide valuable insights. Being informed allows businesses to anticipate shifts, adapt strategies accordingly, and remain competitive during merger negotiations.

Financial Preparedness

Accurate and transparent financial records are essential. Businesses should ensure compliance with GAAP and consider obtaining independent audits or reviews of their financial statements. This includes adhering to new accounting standards like ASC 842 and ASC 606. Clean financial records not only facilitate a smoother due diligence process but also build trust with potential buyers.

It's important to remove any personal expenses from business accounts to present a clear financial picture. Additionally, aligning accounting practices with industry standards can prevent surprises during negotiations and enhance the perceived value of the business.

Building a Strong Team

A capable management team adds significant value to a business during a merger. Investing in leadership development and ensuring that operational responsibilities are well-distributed can reassure buyers of the company's stability post-merger. Succession planning is crucial, especially if the owner plays a central role in operations. Demonstrating that the business can thrive independently of the current owner's day-to-day involvement can make it more attractive to potential buyers.

Leveraging Expert Advice

Engaging experienced professionals is vital in navigating the complexities of M&A transactions. Certified Public Accountants (CPAs), legal advisors, and M&A consultants bring expertise that can help identify risks, structure deals effectively, and ensure compliance with all regulatory requirements.

"An experienced CPA can help you navigate the complexities of M&A, ensuring that your financial statements accurately reflect your business's value and that you are fully prepared for the due diligence process," advises Jamie Miller, CPA and Partner at MBN & Company LLP.

Expert guidance can streamline the merger process, mitigate risks, and potentially enhance the financial outcome of the transaction.

Embracing Technology

Technological advancements offer tools that can improve efficiency, transparency, and competitiveness. Implementing cloud-based accounting systems provides real-time financial data and streamlines processes. Advanced analytics and AI can offer deeper insights into business performance and market trends. Additionally, robust cybersecurity measures are essential to protect sensitive data and comply with privacy regulations. Embracing technology not only enhances operations but also signals to potential buyers that the business is forward-thinking and well-positioned for the future.

Sustainable Business Practices

Sustainability has become a critical aspect of business strategy. Integrating sustainable practices can improve profitability, attract socially conscious consumers, and meet the expectations of investors who prioritize environmental, social, and governance (ESG) criteria.

Businesses can adopt environmental initiatives such as energy-efficient operations and waste reduction. Ethical sourcing and transparent supply chains contribute to social responsibility, while community engagement and a positive corporate culture enhance reputation. These practices not only benefit the planet but also strengthen the business's long-term viability and appeal to buyers.

How MBN & Company LLP Can Help

At MBN & Company LLP, we understand the complexities that small businesses face during mergers and acquisitions. Our comprehensive Client Accounting Services (CAS) are designed to support you through every stage of the process, ensuring that you are well-prepared and positioned for success.

Comprehensive Accounting Support

Our CAS offers the mature structure and processes of a top accounting firm, customized to meet your organization's needs. We provide continuous staff support, access to industry-specific professionals, and the ability to leverage cloud-based applications to streamline your accounting processes. Our team stays up-to-date with new rules and regulations, experienced in handling complex transactions, and aims to deliver potential cost savings by optimizing your accounting functions.

Service Tiers Tailored to Your Needs

We offer services through a customizable, bundled three-tiered structure:

Back Office Accounting provides support with day-to-day transactions, including accounts payable processing, reconciliation of bank transactions, and monthly reviews. This foundational support ensures your financial records are accurate and up-to-date.

Real-Time Accounting builds on the back-office services by implementing cloud-based applications, setting up integrated accounting dashboards, preparing financial statements, and offering quarterly meetings. This tier enhances transparency and provides insights into your financial performance.

CFO and Advisory Services include all services from the previous tiers, plus strategic insights from experienced accounting professionals. Monthly meetings, key performance indicator reporting, and assistance with audits provide high-level support to guide your business decisions during the M&A process.

Expertise in Accounting Technology

Our professionals are knowledgeable in a wide range of accounting software and cloud applications, including QuickBooks, Sage, Intacct, and more. We can help you select, build, and optimize your accounting technology stack, ensuring you make the most of the tools available to enhance efficiency and accuracy.

Consulting and Advisory Services

Beyond accounting support, we offer consulting services to strengthen your business operations. This includes internal control recommendations, financial analysis, customized reporting, and assistance with compliance. Our goal is to provide the expertise and support you need to navigate the merger process confidently and successfully.

Conclusion

Navigating a small business merger in today's challenging environment demands strategic planning, robust financial management, and expert guidance. By staying informed, ensuring financial preparedness, building a strong team, leveraging technology, and adopting sustainable practices, small business owners can effectively overcome the modern challenges of mergers and position their companies for long-term success.

At MBN & Company LLP, we are committed to supporting you through this journey. Our comprehensive services, experienced professionals, and personalized approach aim to help you achieve a successful merger that aligns with your strategic goals and maximizes the value of your business.

About the Expert

Jamie Miller, CPA
Email: jmiller@marketingbynumbers.io

Jamie Miller is a licensed Certified Public Accountant (CPA) and Partner at MBN & Company LLP. With over 15 years of public accounting experience, Jamie specializes in providing tax services and business advisory to construction, real estate, and not-for-profit clients. He is passionate about guiding clients through the complexities of business growth, tax planning, and mergers and acquisitions. Jamie's expertise includes individual income tax, business tax matters, software implementation, and advising clients throughout the business lifecycle.