Las Vegas is a city with vast potential for growth and opportunity, with close business connections to other metros across the country and internationally. Family-owned businesses have been through a year of upheaval and uncertainty, and as we come to the end of 2020 many are revisiting their long-term plans.
For family-owned businesses, a path forward may fork in many directions. If owners are considering a sale or restructuring, they may be asking themselves questions like: What adjustments or structures are required to keep my business open? Should I diversify and invest in a business fit for this new environment? Should I sell my business, and what does that mean for my family?
THE FAMILY’S FUTURE
The uncertainty around the M&A process and what the outcomes may be often generate the most concern for business owners looking to sell. The inevitable worries may include: “When is the right time? Will I get the maximum value for my business in this environment? What happens to me and my family after the deal is done?”
On either the buy or sell side, a transaction may be the right path to help realize long-term goals. Business owners in this environment must take the first step of considering what their family’s short, medium and long-term goals and aspirations are. This will help guide their path forward, with the lens of how action may impact the business and their family.
For example, funds resulting from a business sale or exit may be put toward a new venture, portfolio structures or other investment goals like a family foundation or philanthropic gifting. The current low interest rate environment also may create an opportunity for long-term wealth planning for family-business owners. High estate tax exemptions and lower valuations for businesses in certain sectors affected most by shutdowns around the pandemic could support taking steps to transfer wealth in 2020.
After a dramatic drop in the second quarter, middle-market M&A activity is rebounding in the sectors that have benefited or substantially recovered from the pandemic and related shutdowns. Today’s buyers seek acquisitions that have both cost and revenue synergies they can leverage. And they’re willing to pay more for attractive targets.
FOR THE BUSINESS
When considering selling the business — and aiming for a pre-pandemic price — owners should be prepared to show buyers the synergistic fit with your company. Make it clear that there’s more to offer than the expense reductions achieved by running two businesses as one. Often, if M&A synergies are negotiated, the focus is on cost synergies: How the sale will save money/reduce operating expenses for the new entity. The value of revenue synergies usually doesn’t get structured into the deal price. Here’s why:
Cost synergies, such as reducing headcount or eliminating duplicate facilities, are easier to anticipate and quantify. Such actions also are within management’s control, so there’s greater probability of achieving results, and in a shorter timeframe after the deal closes.
Revenue synergies are more difficult to quantify, in part because success is heavily dependent on others: the buyer (i.e., post-merger integration success) and various third parties (customers, resellers, competitors). Also, the value of revenue synergies, such as entering new markets, enhancing technological capabilities and adding complementary product sets, typically takes longer to realize. And the longer it takes and the more challenging to achieve, the less likely the seller will receive a share of the potential value.
It will further help you to make your case by understanding how the global crisis is dramatically changing market conditions — forcing many buyers to search for ways to improve the sustainability of their business models, for example, to overcome supply chain disruptions brought on by COVID-19.
• Analyze your company: A quality of earnings analysis performed by a third-party accounting firm, for example, can help you understand your company’s financial picture and profile, and help demonstrate the incremental value of an acquisition to potential strategic buyers.
• Understand your buyer base: Your deal’s success depends on your knowing what a potential buyer is looking for and demonstrating how your company fits within its strategy.
• Assemble your team to focus on post-merger integration (PMI) and work with a buyer to achieve PMI success before a deal closes. Keep in mind: The speed of integration is critical to successful M&A deals. Establishing an integration timeline and developing key performance indicators to monitor PMI ahead of time allow all parties to focus on these objectives on day one.
Sweeping changes to a business during an economic downturn, during a pandemic might seem counterintuitive, but much like the clients we serve, we see tremendous opportunity in the Las Vegas market now and in the years to come. Las Vegas is a resilient city, having experienced both financial and social adversity in the past decade, but has bounced back time after time and will continue to do so. I’m thrilled to be leading this team locally, and committed to partnering with our clients in Las Vegas through the current environment and beyond.
David Garcia is an executive director and head of Las Vegas at J.P. Morgan Private Bank. He leads a team of local professionals who provide wealth management advice, strategies and services to successful individuals, family offices, foundations and endowments throughout the region. The Private Bank’s new office in Las Vegas is part of a larger expansion of J.P. Morgan Private Bank across the United States to increase the connectivity and the level of service to clients across the country’s major metro areas.
