Accounting firms and professionals who handle mergers and acquisitions in the San Diego region anticipate a strong year ahead for such transactions. It seems there are exit signs all around, especially the aging population of business owners, a strong local economy and the expectation of a favorable business climate with the incoming administration.
Aging Ownership
One frequently cited reason is that baby boomers — members of the U.S. population surge that followed the end of World War II — have entered their retirement years. Those who own companies are beginning to sell them or take on partners to handle operations.
“My space is closely held estates,” said Bruce Knowlton, a tax partner at Moss Adams LLP. “From a demographic point of view, the baby boomers are selling their businesses across the board. They’re wanting to cash out and retire.”
Victor Ramsauer, president and shareholder at the LevitZacks accounting firm, has noticed the same trend. Many boomers are looking to diversify their investments and some are bringing in equity partners to dilute their ownership “and take some of their chips off the table.”
Attorney Paul Johnson, co-chair of the mergers and acquisitions practice group for Procopio, Cory, Hargreaves & Savitch LLP, also has observed this trend.
“We are running into that all the time,” he said. “The founder has worked for decades to build the business and maybe the children don’t have an interest in building it. They want to do something with this baby they have been taking care of so long and get something out of it.
“We have seen many companies looking for an exit for their baby-boomer founders,” Johnson added. “No one lives forever so they have to find a transition.”
A Strong Economy
Ken Oppeltz, managing principal of Vanguard Resource Group in Rancho Bernardo, handles evaluations and sales of small- to medium-sized privately held companies.
He said it makes sense for boomers to sell their companies when the right opportunity arises.
Favorable Climate
Another reason for the expectation that mergers and acquisition will increase in San Diego County is the outcome of recent presidential election.
There is a feeling that the new administration will support a federal tax structure that generally is favorable to business.
“I’m sure it’s going to be a factor,” said Johnson. “It’s a bit unpredictable. It remains to be seen exactly what the new president’s policies are going to be. There is some expectation that (business) taxes will go down.”
Knowlton agrees that the election of Donald Trump appears on the surface to be a positive thing for mergers and acquisitions. “We are expecting a lot of impactful changes to the tax system,” he said. “You want to stay informed like never before.”
Structuring a Sale
Knowlton said businesses looking to sell can improve their prospects in 2017 by structuring their sales to attract buyers. That means being financially transparent and having all bookkeeping up to date.
“The first thing that that will kill a deal is not having that in order,” he said. “The due diligence is massive when larger companies come in. They have their own team. They usually are experienced purchasers. (You should) have good forecasts and a good business financial plan, along with making sure that your financial statements are very accurate and materially correct.”
No one wants to buy a business they don’t thoroughly understand. You can expect potential buyers to examine every aspect of your business operations, said Oppeltz. When the buyer is from another industry, due diligence is greatly increased.
What’s in Demand?
Knowlton said the most in-demand businesses in the San Diego region are tech companies that are profitable. Other targets for buyers are healthy food producers and distributors.
Oppeltz foresees a high interest in manufacturing and distribution companies in the year ahead. That’s because such companies are easy to grow and expand without greatly increasing personnel costs, he explained. Such companies may need larger quarters when they grow, but often they can be expanded with a minimal increase in personnel costs.
People who want to sell retail businesses will face challenges because of the rising state minimum wage and increasing costs for commercial leases, Oppeltz said. The minimum wage in San Diego rose to $11.50 at the beginning of 2017 for employers with 26 or more employees.
Who Are the Buyers?
Knowlton said most of the interest in mergers and acquisitions he observes is coming from private equity firms and public companies.
The public companies are doing it as a strategic move “to expand operations in San Diego and other places,” he said. “Private equity firms are looking for financially sound deals where they will get the returns they want and be able to flip (the acquired businesses) in five years.”
There are many reasons for acquiring companies, said Johnson. In a strategic sale, companies are looking to fill a gap in intellectual property, increase their product offerings, or expand their geographical reach. In other cases, the buyer simply is looking for a company that can increase its profits.
Each merger and acquisition is different. All face problems that must be overcome, but the goal generally is to join two companies to create a new entity that is financially or strategically stronger.
In one recent win-win transaction, Johnson’s company represented an education technology client that sold its holdings to a nonprofit entity.
The buyer was able to expand its offerings by adding a product that helped educators teach more effectively and improve student performance on standardized tests. The seller had the satisfaction of seeing its products reach a wider audience.
“The investor made money and the founder fulfilled his vision of having his technology be more widely adopted to facilitate education,” Johnson said.
