2021 saw global M&A transactions rise 64% from the previous year and top $5 trillion for the first time. The US alone recorded $2.5 trillion, with many investors, corporations, and other financiers taking advantage of a favorable market, with all sectors seeing growth. This trend is set to continue in 2022 as the economic pattern resulting from the pandemic continues.
Many companies are exploring their options and pursuing M&A deals; however, the value of a deal is defined by more than the transaction alone. Businesses and nonprofits of all sizes benefit from using a strong mergers and acquisitions strategy to maximize their value and improve their overall market position.
New Equation for Value Calculation
Deals of all sizes are increasing, not just those with the highest values. This means more businesses are competing for assets in different ways, using various approaches to calculate their value.
While M&A deals are booming, it is not always easy to calculate a measurable value for these transactions. The success of a transaction relies on business professionals and investors understanding the new equation for value creation in M&A deals. The deal price is not what defines value; but rather, what you can find and create in the business itself that drives growth that defines the deal’s value.
A business’s net income, revenue, and cash flow are essential measurements of its financial health but are not the only factors involved that determine the business’s value. Value calculations also use an equation to determine earnings before interest, taxes, depreciation, and amortization (EBITDA) to get a fuller picture of the company’s financial performance and value.
The importance of the EBITDA calculation in business valuation lies in its benefits for business owners, investors, and buyers. This calculation provides the company’s fair value and its operating profitability. These metrics make it easier to compare with other companies when making a transaction decision. It also more fully demonstrates the business’s worth and future growth opportunities.
Companies also need to focus on additional areas of value that can be harder to calculate but are also crucial for determining their total value. This includes elements such as the company’s mission, purpose, culture, and the digital acumen of its employees. These elements impact future growth and earning potential.
What Windes Sees in Deals
M&A deals in 2022 rely on a strong value creation strategy. This includes adapting business measures to create value not only for now but to help improve your potential for growth in the future. Below are some of the drivers we see that are currently having an impact on deals:
Businesses in many industries are using M&A deals to reevaluate and transform their business models. Some of these transformations are driven by supply chain disruptions and changing customer demands due to the ongoing COVID-19 pandemic.
Others are reinforcing their security and resilience due to the increasing threat of cyber-attacks. This has increased the acquisition of technology companies by non-tech businesses to assess and improve their digital capabilities.
There is an increasing demand for companies offering data analytics to better predict customer behavior. Due to increased demand in online shopping, we will see an increase in investment in fintech, digital banking, and payment processing companies. The healthcare industry is also looking to transform and make its services more efficient and accessible through digital platforms.
While many of these transformations occur through acquisitions, some companies are divesting to adapt. Breakups of larger corporate businesses are finding success in the current market on their own. The trend of transformation is likely to continue through this year.
A major reason for the boom in M&A transactions is the amount of available investment capital. Corporations and private equity firms continue to have a big presence in M&A deals. Private equity firms are continuing to invest in the digital evolution of businesses. This includes acquiring technology and service companies in fields dealing with cybersecurity, artificial intelligence, and other data centers. They are focused on taking established businesses and optimizing their operations and finances for a good return on their investment as they exit.
Special purpose acquisition companies (SPACs) have recently emerged as competitors for private equity firms. SPACs are formed to raise capital for initial public offerings and do not have any commercial operations. While the technology sector is hot for this group, SPAC investments are in many sectors. This ranges from men’s grooming supplies and casual dining investment to electric vehicle manufacturing.
Environmental, science and governmental (ESG) considerations are now necessary in investment decision-making for buyers and sellers. More countries and industries worldwide are introducing environmental policies and efforts to reduce carbon emissions, such as net-zero infrastructure and carbon pricing.
We are seeing more companies create initiatives to combat environmental and social injustices. This includes increasing diversity efforts throughout their workforce and boardrooms. Actions that illustrate the company’s ethics and mission statement can generate more value creation.
How Windes Can Help
Determining what your company is worth, both on paper and its future value is critical for successful M&A transactions. Whether your company or organization is buying, selling, or merging, Windes develops M&A strategies that maximize your company’s value. We understand how the right value creation strategy can improve your business or organization’s prospects for more successful M&A deals.
Our M&A and tax experts partner with your company from the assessment of the company’s finances and calculating value, through the reorganization and restructuring of the business, to the purchase price allocation and the closing of your transaction. Our M&A services include:
Financial and Tax Due Diligence
Our team provides financial and tax due diligence services to improve your company’s accounting policies. Having accurate financial data makes it easier to sell your business.
Cash Flow, Working Capital, and EBITDA Analysis
We analyze and help you manage working capital and quality of earnings to improve the financial health of your company and your overall value. Our team also performs EBITDA analysis to ensure that an accurate and fair company value is provided.
Reorganizing and Restructuring Services
Our team partners with LLCs and S-corps regularly to help set up new business structures, find ways to grow your company through targeted acquisitions, or help your business prepare to liquidate.
We also evaluate companies on the benefits and costs of reorganizing your business before your M&A deal closes. We work to identify the legal and tax implications of company reorganization and determine your company’s most efficient structure.
Purchase Price Allocation and Post-Closing Services
We can guide your business through the tax and financial implications of the purchase price allocation (PPA). Our team analyzes the PPA to ensure accuracy and guide your company through negotiations with your buyer or seller.
After the M&A deal closes, we update your quality of earnings report and assist with any price adjustments. We also help integrate procedures and policies for buyers after acquisition. After the deal, we follow up with buyers and sellers to avoid financial conflicts and assist with taxes.
We tailor our services based on your business’s needs with the goal of achieving the most favorable outcome. Contact us to learn more about how our comprehensive services can help you.